67 N.E.3d 666
Ind. T.C.2017Background
- Merchandise Warehouse Co., Inc. stores and provides freezing (slow and blast) services for customers’ prepackaged food products in Indianapolis from Oct 2009–Sep 2012.
- Products arrive already prepared, packaged, and marketable; Merchandise Warehouse never takes title and returns goods on the same pallets.
- Merchandise Warehouse purchased freezer equipment and electricity to operate freezers and claimed sales-tax exemptions/refunds, arguing freezing is the final stage of customers’ manufacturing.
- The Indiana Department of Revenue denied most refund claims but granted a 15% refund for electricity during administrative review; Department denied exemption for freezer equipment.
- Merchandise Warehouse appealed; Department moved for summary judgment contending the purchases do not qualify for the Consumption Exemption (I.C. § 6-2.5-5-5.1) or the Equipment Exemption (I.C. § 6-2.5-5-3).
- The Tax Court granted summary judgment for the Department, holding Merchandise Warehouse does not engage in production of tangible personal property when freezing customers’ goods and therefore is not entitled to the exemptions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether freezing services constitute "production" for sales-tax exemptions | Freezing creates a new, distinct marketable good (frozen product) and thus is production | Freezing merely preserves already-marketable goods; no new distinct marketable product is created | Not production; exemption unavailable |
| Whether electricity used to run freezers qualifies under the Consumption Exemption | Electricity is directly consumed in the final production step of freezing, so exempt | Electricity is used in a service that does not produce tangible personal property for the purchaser | Electricity purchases do not qualify under the Consumption Exemption |
| Whether freezer equipment purchases qualify under the Equipment Exemption | Freezer equipment is used directly in customers’ integrated production process (final step) | Equipment is used by Warehouse in providing a storage service, not in the Warehouse’s own production | Equipment purchases are not exempt under the Equipment Exemption |
| Applicability of the double-direct standard (taxpayer must use items in its own production) | Warehouse contends it performs final step of customers’ integrated processes, so double-direct satisfied | Department argues double-direct bars exemption because Warehouse is performing another party’s process | Double-direct not satisfied; Warehouse’s use is not its own production process |
Key Cases Cited
- Aztec, LLC v. Indiana Dep’t of State Revenue, 35 N.E.3d 320 (Ind. Tax Ct. 2015) (requirements for equipment/consumption exemptions)
- Indiana Dep’t of Revenue v. Interstate Warehousing, 783 N.E.2d 248 (Ind. 2003) (production focuses on creation of a new, distinct marketable good)
- Harlan Sprague Dawley, Inc. v. Indiana Dep’t of State Revenue, 605 N.E.2d 1222 (Ind. Tax Ct. 1992) (definition of production under exemptions)
- Indiana Waste Sys. of Indiana, Inc. v. Indiana Dep’t of State Revenue, 633 N.E.2d 359 (Ind. Tax Ct. 1994) (double-direct standard: claimant must use items in its own production)
- Mechanics Laundry & Supply, Inc. v. Indiana Dep’t of State Revenue, 650 N.E.2d 1223 (Ind. Tax Ct. 1995) (distinguishing production from perpetuating already-produced goods)
- Faris Mailing, Inc. v. Indiana Dep’t of State Revenue, 512 N.E.2d 480 (Ind. Tax Ct. 1987) (combining customers’ products does not create new marketable goods)
- Indianapolis Fruit Co. v. Dep’t of State Revenue, 691 N.E.2d 1379 (Ind. Tax Ct. 1998) ("without production there can be no exemption")
- Rotation Prods. Corp. v. Dep’t of State Revenue, 690 N.E.2d 795 (Ind. Tax Ct. 1998) (extension of life/marketability may not equal production)
- General Motors Corp. v. Indiana Dep’t of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991) (integrated production process ends with product actually marketed)
- Brandenburg Indus. Serv. Co. v. Indiana Dep’t of State Revenue, 60 N.E.3d 300 (Ind. Tax Ct. 2016) (discussion of consumption exemption standard)
- Alloy Custom Prods., Inc. v. Indiana Dep’t of State Revenue, 26 N.E.3d 1078 (Ind. Tax Ct. 2015) (relationship between exclusion for electricity and exemption analysis)