ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
CORRINE R. FINNERTY STEVE CARTER
McCONNELL & FINNERTY ATTORNEY GENERAL OF INDIANA
North Vernon, IN Indianapolis, IN
LINDA I. VILLEGAS
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
GRAHAM CREEK FARMS, )
) Cause No. 49T10-0007-TA-87
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ON APPEAL FROM A FINAL DETERMINATION OF
THE INDIANA DEPARTMENT OF STATE REVENUE
December 13, 2004
Graham Creek Farms (Graham) challenges the final determination of the Indiana Department of
State Revenue (Department) denying its claim for refund of sales and use tax
paid for the 1993, 1994, and 1995 tax years (years at issue).
The issue for the Court to decide is whether Graham is entitled to
several sales and use tax exemptions for certain items purchased for use in
its farming operation.
FACTS AND PROCEDURAL HISTORY
Graham is a partnership engaged in farming in Jennings County, Indiana. Graham
farms 6,975 acres of land, raising: corn, soybeans, wheat, alfalfa, hay, burley
tobacco, Angus beef cows, and during the years at issue, turkeys. Graham
also operates a shop where it performs repairs and maintenance on its farm
After conducting an audit, the Department determined that Graham had not paid sales
tax on many items it purchased for use in its farming operations.
The Department issued proposed assessments for the years at issue totaling $9,945.82.
Graham protested the assessments; the Department issued a Letter of Findings on August
19, 1999, substantially upholding the assessments. Graham paid the tax and filed
a claim for refund on February 23, 2000. On April 24, 2000,
the Department denied Grahams claim for refund.
Graham initiated an original tax appeal on July 20, 2000. A trial
was held on April 27, 2001, and the Court heard the parties oral
arguments on November 20, 2001. Additional facts will be supplied as necessary.
ANALYSIS AND OPINION
Standard of Review
Final determinations of the Department regarding claims for refund are subject to de
novo review. See Ind. Code Ann. § 6-8.1-9-1(d) (West Supp. 2004).
The Court is therefore not bound by either the evidence presented or the
issues raised at the administrative level. See Snyder v. Indiana Dep't of
State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct. 2000), review denied.
Graham claims that its purchases of the subject farming equipment and supplies are
exempt from sales and use tax. Accordingly, Graham bears the burden of
showing how the items it purchased clearly fall within the exemption statute.
See Foursquare Tabernacle Church of God in Christ v. State Bd. of Tax
Commrs, 550 N.E.2d 850, 854 (Ind. Tax Ct. 1990). While the exemptions
will be strictly construed against Graham, the Court will not read them so
narrowly as to defeat their application to the case if it is rightly
within their ambit. See Tri-States Double Cola Bottling Co. v. Indiana Dep't
of State Revenue, 706 N.E.2d 282, 283-84 (Ind. Tax Ct. 1999).
Indiana imposes sales tax on retail transactions made in Indiana. Ind. Code
Ann. § 6-2.5-2-1(a) (West 2004). Indiana also imposes a use tax
which is the functional equivalent of the sales tax on the acquisition
of certain non-exempt tangible personal property that has escaped sales tax, usually because
the property was acquired in a transaction that occurred outside of Indiana.
See Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044, 1047-48 (Ind.
Tax Ct. 2002).
Indiana Code §§ 6-2.5-5-1 and -2 exempt tangible personal property used in agricultural
production. Specifically, Indiana Code § 6-2.5-5-1 provides:
[t]ransactions involving animals, feed, seed, plants, fertilizer, insecticides, fungicides, and other tangible personal
property are exempt from [sales] tax if:
the person acquiring the property acquires it for his direct use in the
direct production of food and food ingredients or commodities for sale or for
further use in the production of food or commodities for sale; and
the person acquiring the property is occupationally engaged in the production of food
and food ingredients or commodities which he sells for human or animal consumption
or uses for further food and food ingredient or commodity production.
Ind. Code Ann. § 6-2.5-5-1 (West Supp. 2004). Indiana Code § 6-2.5-5-2
Transactions involving agricultural machinery, tools, and equipment are exempt from the [sales] tax
if the person acquiring that property acquires it for his direct use in
the direct production, extraction, harvesting, or processing of agricultural commodities.
Transactions involving agricultural machinery or equipment are exempt from the [sales] tax if:
the person acquiring the property acquires it for use in conjunction with the
production of food and food ingredients or commodities for sale;
the person acquiring the property is occupationally engaged in the production of food
or commodities which he sells for human or animal consumption or uses for
further food and food ingredients or commodity production; and
the machinery or equipment is designed for use in gathering, moving, or spreading
Ind. Code Ann. § 6-2.5-5-2 (West Supp. 2004).
Both of these exemption provisions require a taxpayer to be engaged in production
See footnote ;
however, a taxpayer must also show how the tangible personal property for which
it seeks an exemption is
directly used in its production process.
Indianapolis Fruit Co. v. Indiana Dep't of State Revenue, 691 N.E.2d 1379, 1383
(Ind. Tax Ct. 1998). In other words, the tangible personal property for
which the taxpayer seeks the exemption must be integral and essential to its
production process, a determination that is often made by identifying the points where
production begins and where it ends. Id. at 1383-84. As this
Court has previously explained:
A finding that production is taking place will often lead to a taxpayer
receiving an exemption for activity that, standing alone, does not constitute production.
[Nevertheless], the item itself does not have to have a transformational effect on
the good being produced in order to be exempt from sales and use
tax. It is enough that the item play[s] an integral part of
the ongoing process of transformation.
Id. at 1384 (internal quotation and citation omitted). With these principles in
mind, the Court will now address each of Grahams claims for exemption.
1. Turkey Operation
During the years at issue, Graham raised turkeys. At approximately ten weeks
of age, the turkeys were moved from a starter building to a finishing
building where they remained until loaded in trucks and sent to a processing
facility. (See Trial Tr. at 13-14.) When the turkeys were moved
to the finishing building, the starter building had to be cleaned and disinfected
in order to be ready for another batch of newly hatched turkeys.
(See Trial Tr. at 99.) In the process of disinfecting the starter
building, contaminated floor bedding would be cleared away and a new layer of
bedding would be spread over the floor to ensure that the new batch
of turkeys would not contract disease.
See footnote (Trial Tr. at 100-01.)
Graham first argues that its purchase of rain slickers for its employees is
exempt because people will not stand outside in the rain to load the
turkeys onto the truck for transport to the processing plant. (Trial Tr.
at 90.) (
See also Petr Ex. A at 13-14 (alluding to these
slickers as safety clothing).) The Department argues that because the rain slickers
are not necessary to prevent injury or prevent contamination of the turkeys, they
are taxable. (See Respt Br. at 5.) The Department is correct.
The purchase of [s]afety clothing . . . which is required to allow
a farmer to participate in the production process without injury or to prevent
contamination of the livestock or commodity during production is exempt. Ind. Admin.
Code tit. 45, r. 2.2-5-6(d)(11) (1992) (1996). The purchase of clothing furnished
primarily for the convenience of the workers if the workers are able to
participate in the production process without it[,] however, is taxable. Ind. Admin.
Code tit. 45, r. 2.2-5-4(c) (1992) (1996). While Graham may have been
required to provide rain slickers in order to get workers to load turkeys
in the rain, no evidence was presented indicating that without the rain slickers,
turkeys could not be safely loaded onto the trucks. Therefore, the purchase
of rain slickers is not exempt.
Graham next asserts that a replacement part for a backhoe is exempt because
the backhoe was used to bury dead turkeys and to move contaminated bedding
that had been cleared from the starter house. (See Petr Br. at
3; Petr Ex. A at 21.) More specifically, Graham claims that because
the backhoe is used to haul turkey waste, it qualifies as exempt machinery.
See 45 IAC 2.2-5-4(d)(9) (exempting the purchase of equipment designed to haul
animal waste). Consequently, Graham relies on the Departments regulation that exempts the
purchase of [r]eplacement parts used to replace worn, broken, inoperative, or missing parts
on exempt machinery and equipment. 45 IAC 2.2-5-6(d)(10).
The Department asserts that because the backhoe was not specifically designed to haul
animal waste, and Graham has not demonstrated how it is used in the
direct process of producing marketable turkeys, the backhoe is not exempt. (See
Respt Br. at 6.) Accordingly, the Department claims the purchase of the
replacement part is, likewise, taxable. The Court agrees.
In order for equipment used to haul animal waste to be considered exempt,
the purchaser must be occupationally engaged in agricultural production and use the equipment
directly in direct production of agricultural products. See 45 IAC 2.2-5-4(d)(9).
The parties do not dispute that removing contaminated bedding from the starter house
is part of the process of producing turkeys. Nonetheless, the evidence demonstrates
that the backhoe was only used to move the bedding material after it
had already been removed from the starter house. Indeed, George Corya (Corya),
managing partner of Graham, testified that [t]he backhoe was never used inside of
the building; it was used on the outside, to help out. (Trial
Tr. at 108.) The fact that the backhoe was a convenient way
to move the discarded bedding from one area of the farm to another,
or utilized to bury dead turkeys, does not demonstrate that the backhoe was
directly used during the production process. Therefore, the backhoe does not qualify
as exempt equipment and the repair part is taxable. See also 45
2.2-5-4(e) ([t]he fact that a piece of equipment is convenient, necessary, or essential
to farming is insufficient in itself to determine if it is used directly
in direct production as required to be exempt).
Finally, Graham claims that waste it purchased for use as turkey house bedding
(see footnote 3 supra) is exempt because it is an essential and integral
part of the turkey raising process. The Department does not dispute that
the bedding is used in the process of producing marketable turkeys. Nevertheless,
the Department argues that [t]he waste is not subject to an exemption because
[Graham] has not made a prima facie case that this waste is the
agricultural lime material that he used in the turkey house. (Respt Br.
at 5.) In other words, the Department argues that because Graham indicated
that it also used waste in its barnyard, it cannot be certain that
this waste was solely used for turkey house bedding. (See Respt Ex.
2 at 11.) The Department is incorrect.
At trial, Corya explained that Graham purchased either a mixture of agricultural lime
and gravel called waste or pure agricultural lime (depending on availability) to be
used as turkey house bedding. Corya further testified that waste was purchased
for use as turkey bedding material only, and it was purchased from the
Kentucky Stone Company. (See Trial Tr. at 101-02, 104-05; Petr Ex. A
at 20.) The invoices containing the waste purchases Graham seeks to exempt
are from the Kentucky Stone Company. (See Petr Ex. A at 20.)
Accordingly, the Court concludes that Graham sufficiently proved that the waste purchases
at issue were used solely for bedding in the turkey house. The
Department has presented no evidence contradicting this testimony. Therefore, the Court finds
that Graham is entitled to an exemption for its purchases of waste from
the Kentucky Stone Company. See Hamstra Builders, Inc. v. Dept of Local
Govt Fin., 783 N.E.2d 387, 390 (Ind. Tax Ct. 2003) (a taxpayer present[s]
a prima facie case by submitting probative evidence, i.e., evidence sufficient to establish
a given fact that, if not contradicted, will remain sufficient).
2. Tobacco Operation
Graham produces marketable tobacco by cutting down mature tobacco stalks and
attaching them to fifty-two inch sticks. (See Trial Tr. at 15-16.)
Each stick has approximately five tobacco plant stalks attached, and weighs approximately eighty-pounds
when taken to the tobacco barn. In the tobacco barn, the sticks
are spread out on specially designed rails and dried for two to three
months. (See Trial Tr. at 16.) When dried, the stalks and
leaves are removed from the sticks, producing about one to
one and a half
pounds of marketable tobacco. (See Trial Tr. at 16-17.)
barn has roof vents for ventilation and specially designed shutters along the sidewalls
that can be adjusted to direct the air flow in and out of
the barn. (See Trial Tr. at 27, 30; Petr Ex. B at
1.) Corya testified that if the sticks with the tobacco stalks were
not hung on the rails correctly spaced apart (thereby not receiving the proper
airflow) they would rot immediately (a condition known as house burn). (See
Trial Tr. at 23-24, 27.) Consequently, Graham asserts that the materials and
labor charges it paid to construct its tobacco barn are exempt because the
tobacco barn is integral and essential to the process of producing marketable tobacco.
See 45 2.2-5-6(b) (exempting agricultural equipment used in the direct production .
. . [of] agricultural commodities).
The Department claims that the tobacco barn is not essential to the process
of producing tobacco. Specifically, it asserts that [t]he drying of the tobacco
was not actively induced by the tobacco barn but was merely incidental to
the proper storage of the tobacco. (Respt. Br. at 9.) Therefore,
the Department argues that because the drying process is passive, the tobacco barn
does not directly affect the tobacco and is
not part of the production process.
The evidence demonstrates that in the tobacco drying process, the proper circulation of
air is essential to avoid house burn. (
See Trial Tr. at 27.)
Marketable tobacco is not produced until an eighty-pound stick of tobacco stalks
is dried and essentially reduced to one and a half pounds of marketable
tobacco. (See Trial Tr. at 22.) Clearly, the drying process has
a direct effect on transforming unmarketable tobacco stalks into marketable tobacco; without the
tobacco barns effect, the tobacco stalks would rot and no marketable product would
be produced. See e.g., Gen. Motors Corp. v. Indiana Dept of State Revenue,
578 N.E.2d 399, 404 (Ind. Tax Ct. 1991) (determining that production ended when
taxpayer placed products in their most marketable form), affd, 599 N.E.2d 588 (Ind.
1992). Accordingly, the Court concludes that the tobacco barn is
integral and essential to the production process of producing marketable tobacco, and Graham
is entitled for an exemption for the materials
purchased to remodel its tobacco barn.
3. Rat Bait
Graham claims its purchases of rat bait are exempt because the bait is
used to prevent rats from getting in the seed packages it stores before
use. (See Trial Tr. at 39; Petr Ex. A at 5,
28.) The Department argues that because the rat bait is not used
in the production process, it is not exempt. (See Respt Br. at
10.) The Court agrees.
When the seed is in storage, Graham is producing nothing. Therefore, without
production, Grahams assertion that [t]he rat bait has a direct impact upon the
environment or medium through which production occurs is incorrect. (Petr Br. at
18.) Accordingly, Graham is not entitled to an exemption for its rat
bait purchases. See 45 IAC 2.2-5-4(e) (the fact that an item is
purchased for use on the farm does not necessarily make it exempt .
. . [i]t must be directly used by the farmer in the direct
production of agricultural products). See also Ind. Admin. Code tit. 45, r.
2.2-5-7(d) (1992) (1996) (providing that a grain drying bins storage structure is taxable
because the the storage of grain has no direct and immediate effect upon
4. Grain Leg
Graham claims that items such as paint, stone, and mineral spirits used to
maintain the grain leg of its grain handling operation are exempt. (See
Petr Br. at 9; Petr Ex. A at 6.) The grain leg
is the portion of the grain-drying operation that lifts the grain to the
top of the tower where it is cleaned both at the time it
goes into the grain bin and then again out of the bin for
transport. (See Trial Tr. at 51.) Corya explained that the paint
and mineral spirits were used to repair portions of the grain leg that
had rusted and were no longer painted. (See Trial Tr. at 58,
60.) The stone was used to create a drive where trucks could
pull up to be loaded under the grain spout. (See Trial Tr.
Graham asserts the grain leg and the driveway to the grain system are
integral and essential to the processing of the grain and are therefore exempt.
(Petr Br. at 18.) The Department claims that the paint, stone,
and mineral spirits do not qualify for exemption because they do not have
an immediate effect upon the grain. (Respt Br. at 11.)
The Departments regulations support Grahams contention that the grain leg itself is an
essential part of the process of producing marketable grain. See 45 IAC
2.2-5-7(d) (grain drying accessories of a grain drying bin are exempt, since such
equipment is used to dry wet grain and, therefore, has a direct and
immediate effect upon grain). Nonetheless, the materials used to maintain the grain
leg are not exempt because no evidence was presented demonstrating how the materials
were used in the grain drying process. See 45 IAC 2.2-5-4(d)(7) (exempting
repair parts necessary for the servicing of exempt equipment when the items are
used directly in direct production); 45 IAC 2.2-5-6(e)(3) (1992) (1996) ([m]achinery, tools, and
equipment used in general farm maintenance are taxable. The sale of .
. .  sprays . . . and other tools used in general
cleaning and maintenances are taxable). Similarly, the gravel used to pave the
driveway is not exempt; while a driveway may be convenient for loading the
stored grain into trucks, no production is occurring. See 45 IAC 2.2-5-4(e)
(the fact that a piece of equipment is convenient, necessary, or essential to
farming is insufficient in itself to determine if it is used directly in
direct production as required to be exempt).
5. Cattle Fence and Gates
Graham argues that fencing and gate supplies it purchased to confine its cattle
are exempt. (Petr Br. at 9-10; Petr Ex. A at 7, 8,
22.) Graham also claims that an electric fence used to manage its
pastures and segregate its cattle is also exempt. The Department claims that
Graham failed to demonstrate that these supplies were used for confining cattle, and
not merely for partitioning land.
At trial, Corya explained how Graham uses the fencing to separate newborn calves
from older calves; calving cows from non-calving cows; and finished steers and heifers.
(See Trial Tr. at 62-66.) He also explained how Graham always
utilizes the fencing because its cows are either in the process of breeding,
calving, gestating, or finishing. (See Trial Tr. at 75-76; Petr. Ex. B
at 15-23.) With respect to the electrical fencing, Corya testified how it
is used for intensive grading a process that manages the pasture growth
where the cows feed for more uniform grazing, and to further divide fence-confined
cows. (See Trial Tr. at 67-68, 70-73.)
Grahams evidence sufficiently demonstrates that it uses the fencing and gate supplies in
dispute for managing and confining its cows during the production process.
See footnote Therefore,
Graham is entitled to an exemption for those expenditures.
See Ind. Admin.
Code tit. 45, r. 2.2-5-3(e)(3) (1992) (1996) (providing that the purchase of fences,
fencing materials, gates, posts, and electrical fence charges are exempt it purchased for
use in confining livestock during the production processes of breeding, gestation, farrowing, calving,
nursing, or finishing); 45 IAC 2.2-5-3(e)(4) (exempting purchases of feeding and watering equipment
used in the production process).
6. Bush Hog Power Take-Off
Graham has been a no-till farm since 1959. (See Trial Tr.
at 114.) As a no-till farm, Graham does not use any plows;
it uses a bush hog to knock the stalks down prior to planting
another crop. (Trial Tr. at 114.) It also uses the bush
hog to go over all of [the] pasture fields at least three times
a year to prevent the cows from getting pinkeye disease when grazing.
See Trial Tr. at 114.) Additionally, Graham uses the bush hog on
ground set aside in its land rotation under a Conservation Reserve Program (CRP)
in which it participates. Under the CRP, if Graham sets aside acreage,
it receives governmental price support for the crops produced on the remaining acres.
(Trial Tr. at 117-119.)
Graham claims that the bush-hog power take-off shaft is exempt from sales and
use tax because the bush-hog itself is used to prepare the fields for
no-till planting and to groom pastures where the cattle graze to protect them
from disease. (Petr Br. at 20; Petr Ex. A at 33.)
Because it claims the bush hog is exempt equipment, Graham asserts that the
take off shaft connecting the bush hog to the tractor is also exempt.
See 45 IAC 2.2-5-6(d)(5) (exempting the purchase of agricultural machinery to be
directly used by the purchaser in the direct production, extraction, harvesting, or processing
of  agricultural commodities). The Department asserts that because the bush-hog is
used on land when no crops were planted on it, no production is
taking place, and the purchase of the take-off shaft is therefore subject to
tax. (Respt Br. at 12.)
Preparing the fields for planting is essential to farming. For instance, Corya
explained how Graham could not plant soybeans without first preparing the field with
the bush-hog because when it would later need to combine the soybeans, the
sickle would catch on the stalks if they had not been not cut
down prior to planting. (See Trial Tr. at 114.) Similarly, in
order to protect cattle from pinkeye disease, it is essential that the feeding
pastures are periodically cleared of weeds. Accordingly, Graham is entitled to an
exemption on the purchase of the take-off shaft equal to the percentage of
time it uses the bush hog for clearing its field for planting and
pastures used for feeding cattle. See 45 IAC 2.2-5-4(d)(4) (exempting the purchase
of [i]mplements used in the tilling of land . . . including tractors
and attachments); 45 IAC 2.2-5-6(c) (exempting the purchase of agricultural machinery, tools, and
equipment used directly in the direct production of agricultural commodities or livestock).
Graham, however, is not entitled to
the exemption for the percentage of time it uses the bush hog to
clear fields as required
to participate in the CRP program because no production is taking place.
See 45 IAC 2.2-5-4(e) (the fact that a piece of equipment is convenient,
necessary, or essential to farming is insufficient in itself to determine if its
is used directly in direct production as required to be exempt).
7. Shop Supplies
Graham operates a shop where it performs repairs and maintenance on its farm
equipment. During the years at issue, Graham purchased several tools and repair
parts to use in maintaining its equipment. Graham claims that these purchases
are exempt. See 45 IAC 2.2-5-6(c) (exempting the purchase of agricultural machinery,
tools, and equipment used directly in the direct production of agricultural commodities or
livestock); 45 IAC 2.2-5-4(d)(7) (exempting the purchases of [g]rease and repair parts necessary
for servicing of exempt equipment when the items are used directly in the
direct production of agricultural items). The Department claims that Grahams purchases are
taxable because they are not used in the production process. See 45
IAC 2.2-5-6(e)(3) (stating that the purchase of [m]achinery, tools, and equipment used in
general farm maintenance are taxable transactions).
Specifically, Graham requests exemptions for the purchase of: wrenches, gear-pullers, a
bar set for tires, saw blades, Vise-Grips, wire brushes, air hoses, cable ties,
grease gun, and the cost of a welder repair (collectively, the tools).
(See Trial Tr. at 33-38, 83, 86, 109-10; Petr Ex. A at 5,
11, 13, 15, 24, 27.) With respect to these tools, Corya testified:
Q: [D]o you  use the things in the shop and
the hand tools and so on to do maintenance of the farm equipment
that is used to plant and harvest your various crops?
A: Yes, maam.
Q: [Please] describe . . . how these things are used
in the maintenance, as opposed to just fixing breakdowns of equipment.
A: We have a policy on the farm . . .
[w]e try to do our repairing and our maintenance directly after the equipment
is being used.*****
Q: So the parts that we looked at in the shop are
used primarily for the maintenance of the equipment that you use on your
farm. Is that correct?
A: Yes, maam.
(Trial Tr. at 47-48.)
See footnote In addition, Corya described how the bar set
(four-foot crow bar) was used to change tires in the shop and Vise-Grips
were given to each employee on the farm for minor repairs such as
fixing a strand of broken fence. (
See Trial Tr. at 34, 38.)
8. Miscellaneous Items
Grahams evidence, however, fails to show how production could not have occurred without
the use of the tools. In other words, without demonstrating how the
tools are directly used in the direct production process, Graham is not entitled
to the exemptions it seeks.
See Indiana Dep't of State Revenue v.
Cave Stone, Inc., 457 N.E.2d 520, 526 (Ind. 1983) (holding that equipment was
used in the direct production process when no production could have occurred without
it); 45 IAC 2.2-5-6(c) (exempting the purchase of agricultural machinery, tools, and equipment
used in the direct production of agricultural commodities or livestock).
Graham next requests exemptions for the purchase of fan belts, tire patching supplies,
hydraulic hose repair supplies, and a tractor battery (collectively, the parts). (See
Trial Tr. at 45, 80, 85, 92; Petr Ex. A at 9, 13,
15.) In support of these claims, Corya testified that Graham repair[s] the
[agricultural] machine when the fan belt breaks or when we have the machine
in, doing normal maintenance. If we would see a fan belt
that was showing excessive wear, even before it broke we would replace it.
(Trial Tr. at 45.) Corya also explained how Graham repairs all
of its own hydraulic hoses, which are on corn planters, drills used to
plant soybeans, and combines. (Trial Tr. at 92.)
Grahams evidence has sufficiently demonstrated that it uses the parts to replace worn
and broken parts on exempt machinery. See Indiana Sugars, Inc. v. State
Bd. of Tax Commrs, 683 N.E.2d 1383, 1387 (Ind. Tax Ct. 1997) (finding
that the sworn testimony of a witness constituted sufficient evidence to prove the
matter at hand). The Department presented no evidence contradicting this testimony.
Therefore, Graham is entitled to an exemption for its purchases of these parts.
Graham asserts that the purchase of rope used to tie down tarpaulins on
its tarp buildings is exempt because the tarpaulin protects the hay it stores.
(See Trial Tr. at 94; Petr Ex. A.) Graham claims that
[t]angible personal property used for the purpose of storing work-in-process is not subject
to tax. (Petr Br. at 15.) Graham, however, provides the Court
with no evidence demonstrating how hay is used in any of its production
processes or produced for resale. See 45 IAC 2.2-5-6(d)(7) (stating that [t]angible
personal property used in or for the purpose of storing work-in-process or semi-finished
goods is not subject to tax if the work-in-process or semi-finished goods are
ultimately or completely produced for resale and are, in fact, resold) (emphasis added).
Thus, the exemption is denied in this instance.
b. Tarpaulin Cover for Wagon
Graham asserts that it is entitled to an exemption for a tarpaulin (tarp)
cover used on its bulk seed tender machine (seeding machine), which consists of
a grain auger and seed wagon. (See Trial Tr. at 96-97; Petr
Ex. A at 18; Petr Ex. B at 25.) At trial, Corya
testified that the seeding machine is used to transfer seed into its planter
or grain drill used to plant corn or soybeans. (See Trial Tr.
at 96.) Corya explained that the tarp cover is specifically designed for
the seeding machine and protects the seed from water, dust, and foreign objects
that could obstruct the planter. (See Trial Tr. at 96-98.) The
Department claims the tarp is a convenience and not necessary for Grahams planting
process. (See Respt Br. at 8.) The Department is incorrect.
Graham has presented sufficient evidence demonstrating how the tarp affects the grain in
the planting process. Production cannot occur unless the grain is protected as
it moves from storage to the field, and from the seeding machine to
the corn planter or drill used for planting. See Cave Stone, Inc.,
457 N.E.2d at 526 (finding that because production of aggregate stone could not
occur without the transportation of crude stone from the quarry to the crusher,
and crusher to stockpiles, the transportation equipment had an immediate effect upon the
stone and qualified as exempt). See also 45 IAC 2.2-5-6(d)(9) (exempting [m]achinery,
tools, and equipment used to move exempt items such as seeds . .
. from temporary storage to the location where such will be used in
an exempt process). Consequently, Grahams purchase of the tarp cover for the
seed wagon is exempt from tax.
c. Cordset Rod
Graham claims it is entitled to an exemption for the purchase of a
cordset rod (heavy duty extension cord) used to run a portable grain auger,
which it claims is exempt because the auger is occasionally used to move
grain out of the storage pit if a problem arises in the pit.
(See Trial Tr. at 93; Petr Ex. A at 15; Petr Br.
at 14.) However, Graham presented no evidence indicating how removing grain from
storage with the portable auger is directly used in the grain production process.
Agricultural machinery and equipment are only exempt if the equipment is used
in the direct production . . . of grain. 45 IAC 2.2-5-7(a);
see also 45 IAC 2.2-5-7(d)(2) (providing that an unloading auger is subject to
tax). Thus, Graham is not entitled to an exemption for its purchase
of a cordset rod.
d. Cleaning Supplies
Graham claims it is entitled to exemptions for purchases of cleaning chemicals and
supplies used to clean parts of exempt equipment during the maintenance and repair
thereof. (Petr Br. at 16; see also Petr Ex. A at 5,
13, 24.) The sale of tangible personal property to farmers is taxable
unless the property is directly used in its agricultural production process. See
45 IAC 2.2-5-3(d)(1). Corya explained at trial that when Graham finishes using
a piece of equipment, it is brought in for maintenance and cleaned even
down [to] the tires. (Trial Tr. at 84.) Graham, however, presents
no evidence that this cleaning occurs during any production processes; therefore, it is
not entitled to an exemption for cleaning supplies used in its shop.
See 45 IAC 2.2-5-4(e) ([t]he fact that an item is purchased for use
on the farm does not necessarily make it exempt from tax).
Nevertheless, Graham is entitled to an exemption for the purchase of glass cleaner
it used to keep the windows of its combine clean while harvesting crops.
(See Petr Ex. A at 13; Petr Br. at 16). Corya
Basically, when youre combining soybeans its a very dusty operation, and probably a
half a dozen times a day you have to spray the front windows
and side windows with the cleaner . . . so that you can
see to operate the equipment.
(Trial Tr. at 84-85.) Conclusion
The Court finds such testimony sufficient to conclude that the glass cleaner is
used in the soybean production process. Furthermore, the glass cleaner also has
an immediate effect on the article being produced. See Ind. Admin. Code
tit. 45, r. 2.2-5-13 (g)(1) (1992) (1996) (stating that [t]he consumption of property
has an immediate effect on the commodity being produced or on the machinery,
tools, or equipment engaged in direct production of commodities if the consumption is
an essential and integral part of an integrated process which produces food or
an agricultural commodity). Indeed, without clear windows, the combine cannot be operated
safely and the harvesting of soybeans from the field for further processing cannot
occur. Accordingly, Graham is entitled to an exemption for its purchase of
glass cleaner. See 45 IAC 2.2-5-13(a) (exempting the sale of tangible
personal property as a material which is to be directly consumed in direct
production by the purchaser in the business of producing agricultural commodities).
For the aforementioned reasons, the Court AFFIRMS in part, and REVERSES and REMANDS
in part, the Departments final determination. On remand, the Department is ordered
to refund the amount of sales and use tax Graham paid for the
years at issue, plus any penalties and interest related thereto, consistent with this
Footnote: The parties do not dispute that Graham is occupationally engaged in the
production of food and agricultural commodities for sale.
Footnote: To be directly used . . . in the direct production of
food or agricultural commodities requires that the property in question must have an
immediate effect on the article being produced. Property has an immediate effect
on the article being produced if it is an essential and integral part
of an integrated process which produces food or an agricultural commodity.
Admin. Code tit. 45, r. 2.2-5-1(a) (1992) (1996).
The bedding consisted of a two-inch layer of either agricultural lime or
a mixture of lime and gravel called waste, covered by a three-inch layer
of wood shavings. (
See Trial Tr. at 100-02.)
The Department bases its argument on this Courts holding in
Co. v. Indiana Dep't of State Revenue, 691 N.E.2d 1379, 1385-86 (Ind. Tax
Ct. 1998). In that case, the Court determined that the ripening of
tomatoes did not constitute a part of the process of producing marketable tomatoes
because the taxpayers storage room did nothing to actively induce the ripening.
See Id. The fact that a natural process can happen on its
own, however, does not prevent it from constituting production. Id. at 1385
Graham also seeks an exemption for amounts paid for labor in remodeling
the tobacco barn. Labor, however, is generally not subject to sales and
use tax. The Department has given no reason or authority for its
imposition of tax on the labor, therefore, the Court REVERSES the Departments assessment
of tax on the tobacco barn labor charges.
Footnote: The Department claims that when it conducted the audit and was on
the main farm property, it did not see fencing used to manage cows.
Rather, the Department asserts that the fencing it observed was used primarily
to define general land boundaries. (
See Trial Tr. at 126.) The
Department did concede, however, that it only looked at fencing on approximately forty-three
acres of the 4,775 acres of the Graham farm operation. (See Trial
Tr. at 128,134-35.)
At trial, Corya explained that cattle can develop pinkeye disease problems when
they have to reach through weeds to feed on grass. (Trial Tr.
Footnote: The Court, in allocating Grahams exemption based on the percentage of time
the bush-hog is used for an exempt purpose, incorporates a principle found in
numerous sections of the Departments regulations.
See, e.g., 45 IAC 2.2-5-1(c)(3); Ind.
Admin. Code tit. 45, r. 2.2-5-8(f)(4) (1992) (1996) (providing exemptions corresponding to the
percentage of time an item was used for an exempt purpose).
For example, Corya explained that when Graham is
finished planting corn, it
will take the corn planter in the shop[ and] go meticulously through the
corn planter to see if theres any worn parts on it or if
theres anything out of adjustment, and  will replace or adjust that at
this time. When that planter comes out of the shop . .
. it will go to a storage building, and . . . be
ready . . . next spring[.] (Trial Tr. at 47.) While
this may be a sensible maintenance policy, at the point the planter finished
planting corn, its role in the production process ceased.
The Court finds it worth noting that with respect to the wrenches,
Graham claims they were specialty tools because some of its equipment could only
be serviced with two types of metric wrenches. (
See Trial Tr. at
33,140.) However, no evidence was submitted demonstrating how the wrenches were used
in the direct production process of agricultural commodities; tools are only exempt when
used in the direct production process and have an immediate effect on the
item being produced. See Ind. Admin. Code tit. 45, r. 2.2-5-6(c) (1992)
(1996) (exempting the purchase of agricultural machinery, tools, and equipment used directly in
the direct production of agricultural commodities or livestock).
In its original tax appeal petition, Graham also disputes the Departments imposition
of a negligence penalty.
See Ind. Code Ann. § 6-8.1-10-2.1(a)(3) (West 2004)
(providing that the Department may impose a ten percent (10%) penalty when a
person incurs . . . a deficiency that is due to negligence).
This issue, however, was never addressed by Graham at trial, oral argument, or
in its brief submitted before this Court. Accordingly, Graham is only entitled
to a refund of the penalties and interest imposed against it with respect
to the tax impositions reversed in this opinion. See A.I.C. § 6-8.1-10-2.1(d)
(when a taxpayer can show that the deficiency determined by the Department was
due to reasonable cause and not due to willful neglect, the Department shall
waive the penalty).