DANIEL A. SWARTZSee footnote 1               JEFFREY A. MODISETT
President, Colonial Brick Corp.            Attorney General of Indiana
Cayuga, Indiana
                             ANGELA L. MANSFIELD
Deputy Attorney General
                            Indianapolis, Indiana

COLONIAL BRICK CORP.,                                                     )
            Petitioner,                                                            )
v.                                                                             ) Case No. 84T10-9609-SC-00117
DEPARTMENT OF STATE REVENUE,                                                ) 
            Respondent.                                                            )


January 14, 1998


    Colonial Brick Corp. (Colonial Brick) appeals a final determination of the Department of

State Revenue (Department) denying it a refund for sales and use tax paid for the tax years 1990 through 1992. At issue in this case is whether two of Colonial Brick's New Holland loaders are exempt from sales and use tax.

    Colonial Brick manufactures bricks. Part of its brick manufacturing process is to “burn” the bricks in kilns. Colonial Brick uses a mixture of sawdust and coal to fuel the kilns. The purpose of using the coal and sawdust mixture (as opposed to coal alone) is that the addition of sawdust provides a better “burn” for the brick, reduces fuel costs, and makes the coal ash much easier to remove from the kiln. Colonial Brick uses two New Holland loaders to mix the sawdust and coal and feed the mixture into the kiln. One loader (New Holland Number 2) mixes the coal and sawdust;See footnote 2 the other loader (New Holland Number 3) feeds the mixture into the kilns. Colonial Brick contends that the two New Holland loaders are exempt from sales and use tax because they are part of an integrated process that produces tangible personal property, i.e, the bricks. The Department contends that the mixing of the coal and sawdust and the feeding of the mixture into the kiln are properly characterized as pre-production activities and therefore, the equipment used to perform such activities is not exempt from sales and use tax.
    The Department assessed Colonial Brick for $16,164.30 in unpaid sales and use taxes for the years at issue. Colonial Brick did not dispute the majority of this assessment and paid the tax. Subsequently, Colonial Brick filed a claim for refund for the amount of tax it did dispute.

See Ind. Code Ann. § 6-8.1-9-1(a) (West Supp. 1997). The Department denied the claim, and Colonial Brick initiated this original tax appeal as a small tax claim on September 20, 1996. In its appeal, Colonial Brick claims that it is entitled to a refund of $1,749.22 for sales and use tax paid on the two New Holland loaders. The parties tried this case on October 15, 1997.

Standard of Review
    This Court reviews the Department's final determinations de novo and is bound by neither the evidence nor the issues raised at the administrative level. See Ind. Code Ann. § 6- 8.1-9-1(d) (West Supp. 1997); ANR Pipeline Co. v. Department of State Revenue, 672 N.E.2d 91, 93 (Ind. Tax Ct. 1996).
Discussion and Analysis
    Indiana taxes tangible personal property stored, used, or consumed in this state. See Ind. Code Ann. § 6-2.5-3-2 (West Supp. 1997); Mid-America Energy Resources, Inc. v. Department of State Revenue, 681 N.E.2d 259, 261 (Ind. Tax Ct. 1997), review denied. A variety of exemptions from this tax are available. See Ind. Code Ann. §§ 6-2.5-5-1 to -38.2 (West 1989 & Supp. 1997). One of these exemptions is the equipment exemption:
    Transactions involving manufacturing machinery, tools, and equipment are exempt from     the state gross retail tax if the person acquiring that property acquires it for his direct use     in the direct production, manufacture, fabrication, assembly, extraction, mining,          processing, refining, or finishing of other tangible personal property.

Id. § 6-2.5-5-3(b) (West Supp. 1997).See footnote 3

    Tax exemptions are strictly construed against the taxpayer, and the taxpayer bears the burden of demonstrating entitlement to the exemption. See Harlan Sprague Dawley, Inc. v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct. 1992). However, [w]hen construing an exemption, . . . the court must always bear in mind the legislature's intent to avoid reading the exemption so narrowly its application is defeated in cases rightly falling within its ambit.” Id.
    Colonial Brick argues that it is entitled to the equipment exemption because the New Holland loaders are an integral part of its manufacture of bricks and therefore part of the production process. At trial, Colonial Brick referred this Court to Cave Stone, Inc. v. Department of State Revenue, 457 N.E.2d 520 (Ind. 1983) and Ind. Admin. Code tit. 45, r. 2.2- 5-8 (1996).
    In Cave Stone, the Indiana Supreme Court evaluated a predecessor (Ind. Code § 6-2-1- 39(b)(6) (1976) (repealed 1981)) to the current equipment exemption. In Cave Stone, the court determined that trucks used to haul crude stone to a crusher were exempt from sales and use tax. The court rejected a narrow construction of the statute and embraced a comprehensive definition of the exemption provision. Id. at 524. Rather than focusing on whether the particular activity, such as hauling stone, had a transformational effect on the product, the Cave Stone court asked whether the activity was an essential and integral part of the production of a final product. Id. See also Ind. Admin. Code tit. 45, r. 2.2-5-8(e) (property exempt from sales and use tax if an “essential and integral part of an integrated process which produces tangible personal property”).
    The issue here is whether mixing the sawdust with the coal and subsequently placing the mixture into the kiln are an integral and essential part of the production of bricks. The

Department's position is that those activities are pre-production activities rather than production activities.
    In essence, the Department is asking this Court to find that the production process begins after the coal and sawdust mixture is placed into the kiln. It is true that many activities can be characterized as pre-production. For example, in general, the storage of raw materials (as opposed to the storage of semi-finished goods during the production process) is properly characterized as pre-production. See Ind. Admin. Code tit. 45, r. 2.2-5-8(e). However, the mixing of the coal and the sawdust is more than storage; it is an integral and essential part of the process of making bricks. It sets into motion the whole process by which Colonial Brick “burns” its bricks. It lowers fuel costs by giving the bricks a better “burn” and leaves the ash in a condition so that it may be easily removed from the kiln.
    Colonial Brick's production process, for purposes of the exemption, begins with the mixing of the coal and the sawdust. To hold otherwise would be requiring the “mills of justice to grind too fine.” Cave Stone, 457 N.E.2d at 524 (quoting Cave Stone v. Department of State Revenue, 409 N.E.2d 690, 699 (Buchanan, J., dissenting)). The exemption provision “circumscribes all of the operations or processes by which the finished product is derived.” Id. For that reason, the exemption is not to be restricted by artificial limitations on when an integrated process begins. Rather, the exemption is to apply to the whole process by which the finished product is created. See General Motors Corp. v. Department of State Revenue, 578 N.E.2d 399, 402 (Ind. Tax Ct. 1991), aff'd, 599 N.E.2d 588 (Ind. 1992). Any explanation of how Colonial Brick makes bricks would be incomplete without a reference to the important steps of adding sawdust to the coal and subsequently placing the mixture into the kiln. (This is to be

contrasted with the storage of the coal and sawdust.) Similarly, the failure to hold that Colonial Brick's production process begins with mixing the sawdust and coal would apply the exemption to less than the whole process. Therefore, Colonial Brick is entitled to the exemption it seeks.

    For the reasons stated above, this Court now enters judgment for Colonial Brick and against the Department.

Footnote:     1Mr. Swartz, a non-attorney, represented Colonial Brick. See Ind. Small Claims R. 8(C); Ind. Tax Ct. R. 16.
Footnote:     2New Holland loader Number 2 also mixes the ash from the kiln with raw clay. This mixture is turned into bricks.
Footnote:     3The gross retail tax exemptions in chapter 6-2.5-5 of the Indiana Code apply to the tax imposed by section 6-2.5-3-2. See Ind. Code Ann. § 6-2.5-3-4(a)(2) (West 1989).

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