35 N.E.3d 320
Ind. T.C.2015Background
- Aztec Partners, LLC operates 19 Qdoba restaurants in Indiana and prepares food items (e.g., chicken, salsa, rice) which employees later combine into made-to-order entrées.
- Between Jan. 1, 2010 and Mar. 31, 2011 Aztec used electricity to power equipment (food warmers, hot cabinets, food bar heating/cooling, walk-in coolers, chip warmers) that held and preserved prepared food; none of the equipment cooked food.
- Aztec paid sales tax on that electricity, filed refund claims in June 2011, and the Department denied the refunds after an administrative hearing.
- Aztec pursued both administrative refund and protest routes and then filed a Tax Court appeal after the Department issued an adverse final determination.
- Central legal question: whether the electricity was exempt from sales tax under Indiana’s consumption exemption as being consumed in an integrated production process and essential and integral to production.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the Tax Court have subject-matter jurisdiction? | Aztec contends it obtained a final determination and properly appealed. | Dept. argues Aztec sought an "exclusion" not the consumption "exemption" at admin level, so remedies not exhausted. | Court: Jurisdiction exists—Aztec exhausted remedies and specificity of grounds at admin stage does not defeat jurisdiction. |
| Was Aztec "engaged in production"? | Aztec: preparing, holding, and combining food items creates marketable entrées and thus constitutes production. | Dept.: Combining cooked components does not substantially transform items; no production for exemption purposes. | Court: Aztec was engaged in production because its preparation and combination substantially changed items into marketable entrées. |
| Did Aztec have an integrated production process that included holding/preserving? | Aztec: process includes preparing, holding/preserving (with electricity), and combining into final entrées; items are not sold separately. | Dept.: Production ends when items are cooked; holding/preserving is a post-production service. | Court: There was an integrated production process that encompassed the holding/preserving step; electricity was consumed within that process. |
| Was the electricity "essential and integral" to the integrated production process? | Aztec: preserving food at proper temperatures was necessary to produce entrées—electricity had an immediate, essential effect. | Dept.: Electricity merely preserved items (no chemical change) and is analogous to warming/cooling equipment previously found not exempt. | Court: Electricity was essential and integral (not required to chemically transform goods); exemption applies and refund must be granted. |
Key Cases Cited
- Indianapolis Fruit Co. v. Dep't of State Revenue, 691 N.E.2d 1379 (Ind. Tax Ct. 1998) (taxpayer bears burden; production requires substantial change and integrated process analysis)
- Trump Indiana, Inc. v. Indiana Dep't of State Revenue, 790 N.E.2d 192 (Ind. Tax Ct. 2003) (warming/cooling equipment not exempt where no evidence of substantial transformational effect)
- General Motors Corp. v. Indiana Dep't of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991) (integrated production process ends with the marketable finished product actually marketed)
- Indiana Dep't of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520 (Ind. 1983) (equipment need not transform property if it is essential and integral to production)
- Sproles v. State, 672 N.E.2d 1353 (Ind. 1996) (explains administrative exhaustion paths to obtain a final determination)
- Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012) (useful for defining beginning/end of an integrated production process)