MECHANICS LAUNDRY & SUPPLY, Inc., Petitioner,
v.
Indiana Department of State Revenue, Respondent.
Tax Court of Indiana.
*1225 Lawrence A. Jegen, III, Indianapolis, Jay D. McShurly, Somerset, KY, for petitioner.
Pamela Carter, Atty. Gen., David A. Arthur, Deputy Atty. Gen., Indianapolis, for respondent.
*1226 FISHER, Judge.
Mechanics Laundry and Supply, Inc. (Mechanics Laundry) appeals the Indiana Department of State Revenue's (the Department) denial of its claim for refund of Indiana State Gross Retail and Use Taxes (sales taxes) for 1989.
ISSUES
At issue is whether Mechanics Laundry's purchases of: 1) cleaning supplies and products,[1] 2) machinery and equipment,[2] 3) utilities,[3] 4) repair parts,[4] and 5) EPA compliance items[5] are exempt from the sales tax under:
I. IND. CODE 6-2.5-5-3, the equipment exemption;
II. IND. CODE 6-2.5-5-5.1, the consumption exemption;
III. IND. CODE 6-2.5-5-6, the incorporation exemption;
IV. IND. CODE 6-2.5-5-30, the environmental quality exemption.[6]
Also at issue is:
V. Whether the Department failed to rely on previously stated, ascertainable standards when it denied Mechanics Laundry's claim for refund and thereby violated Mechanics Laundry's constitutional right to due process under the Fifth and Fourteenth Amendments of the United States Constitution.
MECHANICS LAUNDRY'S BUSINESS OPERATIONS
Mechanics Laundry is in the business of renting clean textiles including uniform apparel, walk-off mats, shop rags, table linens, bed sheets, and roll towels. Its customers include businesses such as garages, restaurants, and hotels, whose activities typically cause textiles to become heavily soiled. Mechanics Laundry operates ten plants in Indiana at which it performs three main activities: 1) the preparation of uniform аpparel for rental, 2) the laundering of soiled textiles for re-rental, and 3) the decontamination of waste water resulting from the laundering of soiled textiles in order to make that water acceptable for release into municipal sewer systems.
The preparation of uniform apparel for rental is a multi-staged activity. First, Mechanics Laundry selects from its inventory the uniform apparel that each customer requires. Then, it tailors each garment to fit the person who will wear it. Next, it designs, sews, and affixes to the uniform apparel various logos and name tags. Finally, Mechanics Laundry places the uniform apparel in plastic garment bags and loads the uniform apparel onto trucks for delivery to customers.
The laundering of soiled textiles is also a multi-staged activity. To insure that its customers have a continuous supply of clean textiles, Mechanics Laundry periodically delivers clean textiles to, and picks up soiled *1227 textiles from, its customers. When soiled textiles are returned to Mechanics Laundry, they are washed, dried, and pressed. Any damaged textiles are mended and repaired. Then, cleaned and repaired textiles are placed in plastic bags and loaded onto trucks for re-delivery to customers.
The decontamination of waste water is a multi-staged activity, as well. First, Mechanics Laundry routes waste water from its industrial washing machines into waste water treatment equipment. Then, Mechanics Laundry injects various chemicals and acids into the waste water treatment equipment. The chemicals and acids cause contaminants in the water to sink and form a sludge at the bottom of the waste water treatment equipment. Finally, the cleaned water is separated from the sludge and released intо municipal sewer systems.
PROCEDURAL HISTORY
On September 1, 1992, Mechanics Laundry filed a claim for refund of sales taxes paid in 1989 in the amount of $131,900.43. In its claim for refund, Mechanics Laundry asserted that the preparation of uniform apparel and the laundering of soiled textiles constituted "processing" tangible personal property within the meaning of I.C. 6-2.5-5-3, 6-2.5-5-5.1, and 6-2.5-5-6.[7] Therefore, Mechanics Laundry claimed, many of its purchases were exempt from the sales tax. On September 21, 1992, the Department denied Mechanics Laundry's claim for refund on the ground that Mechanics Laundry was not engaged in "production." On December 17, 1992, Mechanics Laundry filed this appeal.
DISCUSSION AND ANALYSIS
Standard of Review
"The court reviews appeals from the Department de novo." Kenny Kent Chevrolet Co. v. Indiana Dep't of State Revenue (1994), Ind.Tax,
I. The Equipment Exemption
Mechanics Laundry contends that when it prepares uniform apparel and launders soiled textiles it is engaged in "processing... other tangible personal property" within the meaning of I.C. 6-2.5-5-3, the equipment exemption. The equipment exemption provides:
Transactions involving manufacturing machinery, tools, and equipment are exempt from the state gross retail tax if the person acquiring that property acquires it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.
I.C. 6-2.5-5-3 (emphases added). Because "processing" is not defined in I.C. 6-2.5-5-3, Mechanics Laundry urges this court to construe the word "processing" in accord with its common dictionary definition. Mechanics Laundry offers several definitions of the word "processing" as found in various dictionaries. Petitioner's Exhibit 1 at 18-27. The Department, however, contends that in the context of the equipment exemption, the *1228 word "processing" has meaning only to the extent that "production" occurs.[8]
When the meaning of a statute's language is reasonably susceptible to more than one interpretation, the court turns to the rules of statutory construction for guidance in construing the statute. Johnson County Fаrm Bureau Coop. v. Indiana Dep't of State Revenue (1991), Ind.Tax,
Mechanics Laundry advances four arguments to support its claim that it is entitled to the equipment exemption. First, Mechanics Laundry argues that one can be engaged in "processing" within the meaning of the equipment exemption without being engaged in "production." Specifically, Mechanics Laundry asserts that because the terms "production," "manufacture," "fabrication," "assembly," "extraction," "mining," "processing," "refining," and "finishing" are separated by commas, the correct "grammatical interpretation" rеquires that they be viewed as separate and distinct not linked to production.
When the meaning of a statute is in doubt, a court may apply the rules of grammar to interpret the statute. Leehaug v. State Bd. of Tax Comm'rs (1991), Ind.Tax,
In the case of the equipment exemptiоn, our supreme court has held that the terms used are not separate and distinct. Indiana Department of State Revenue v. Cave Stone, Inc. (1983), Ind.,
Most significant, however, is the fact that our supreme court held that the terms used in the equipment exemption statute provide a "comprehensive description of the various means of production" and "circumscribe[] all of the operations or processes by which [a] finished product is derived." Cave Stone,
Second, Mechanics Laundry argues that because it acquires soiled textiles from its customers and changes them into cleaned textiles, it is engaged in "processing" within the Department's own regulations. 45 I.A.C. 2.2-5-10(k) provides:
Processing ... is defined as the performance by a business of an integrated series of operations which places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantiаl change. Operations such as distilling, brewing, pasteurizing, electroplating, galvanizing, anodizing, impregnating, cooking, heat treating, and slaughtering of animals for meal or meal products are illustrative of the types of operations which constitute processing ... although any operation which has such a result may be processing... . A processed ... end product, however, must be substantially different from the component materials used.
(Emphases added).
Mechanics Laundry does not place tangible personal property in a form, composition, or character substantially different from that in which it was acquired. Mechanics Laundry acquires clean textiles from its suppliers.[9] The laundering of textiles merely returns the textiles to the same form and causes them to have the same character or composition that they had when they were acquired. Moreover, the laundering of soiled textiles does not result in an "end product" that is "substantially different from the component materials used." 45 I.A.C. 2.2-5-10(k). A shirt remains a shirt even though it is cleaned.
Third, Mechanics Laundry argues that if "processing" requires "production," it is engaged in "production." Mechanics Laundry notes that our supreme court, in order to ensure that the equipment exemption was not improperly narrowed, adopted an expansive definition of the term "production", holding that "[i]n an economic sense, production includes all activity directed to increasing the number of scarce economic goods." Cave Stone,
The supreme court adopted an expansive definition of "production" to ensure that all equipment used in an integral step in the overall production process would qualify for the exemption, regardless of whether that equipment actually effected a change or transformation on the goods or other tangible personal property being produced. Cave Stone,
In this day of concern for the environment, cleaning soiled textiles so that they may be used аgain, rather than thrown away, is a laudable activity. It is not, however, an activity that the legislature contemplated would be eligible for the equipment exemption. Under Indiana law a statute must not be construed so narrowly that it does not give effect to the legislative intent. General Motors,
While the laundering of soiled textiles does not constitute the production of goods or other tangible personal property, the parties, by joint stipulation, agree that Mechanics Laundry "produces or manufactures" over 90 percent of the logos and name Petitioner's Exhibit 1 at 14-15, ¶ 59, ¶ 60 & ¶ 62. Thus, Mechanics Laundry's purchases of "manufacturing machinery, tools, and equipment" used to produce logos and name tags are exempt from the sales tax under I.C. 6-2.5-5-3. See generally Unitog Rental Services, Inc. v. Director of Revenue (1989), Mo.,
Finally, Mechanics Laundry notes that the legislature enacted the equipmеnt exemption to prevent tax pyramiding. See General Motors,
While the legislature did enact the equipment exemption, at least in part, to prevent increases in the cost of goods due to tax pyramiding, Id., the legislature did not intend to preclude all instances of tax pyramiding. It meant to preclude only those instanсes of tax pyramiding that would result if equipment purchased in order to facilitate the "production of goods" was subject to the sales tax. See General Motors,
II. The Consumption Exemption
Mechanics Laundry contends that when it prеpares uniform apparel and launders soiled *1231 textiles it is engaged in "processing" "other tangible personal property" within the meaning of I.C. 6-2.5-5-5.1, the consumption exemption. The consumption exemption provides:
Transactions involving tangible personal property [including electrical energy, natural or artificial gas, water, steam and steam heat] are exempt from the state gross retail tax if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person's business of manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or аrboriculture.
I.C. 6-2.5-5-5.1 (emphases added).
The express language of I.C. 6-2.5-5-5.1 requires that one must be engaged in the production of tangible personal property in order to receive the consumption exemption. Indeed, the consumption exemption is available only to persons who consume tangible personal property "in the direct production of other tangible personal property in the person's business of manufacturing, processing... ." I.C. 6-2.5-5-5.1 (emphasis added). See also Faris Mailing,
Because the laundering of soiled textiles does not constitute the production of goods or other tangible personаl property, Mechanics Laundry is not entitled to the consumption exemption so far as the laundering of soiled textiles is concerned. The parties agree, however, that Mechanics Laundry is engaged in the "production or manufacture" of logos and name tags. Petitioner's Exhibit 1 at 14-15, ¶ 59, ¶ 60 & ¶ 62. Accordingly, Mechanics Laundry is entitled to the consumption exemption to the extent that it directly consumes tangible personal property in the direct production of logos or name tags.
III. The Incorporation Exemption
Mechanics Laundry contends that when it prepares uniform apparel and launders soiled textiles, it "processes" "other tangible personal property" within the meaning of I.C. 6-2.5-5-6, the incorporation exemption. The incorporation exemption provides:
Transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for incorporation as a material part of other tangible personal property which the purchaser manufactures, assembles, refines, or processes for sale in his business.
I.C. 6-2.5-5-6 (emphases added).
At the time of the Cave Stone decision, the incorporation exemption was contained in the same statute as the equipment and consumption exemptions. IND. CODE 6-2-1-39 (repealed, now see I.C. 6-2.5-5-3, 5.1 & 6); Harlan Sprague Dawley,
The exemption provided by this regulation ... applies only to tangible personal property to be incorporated as a material or an integral part into tangible personal property produced for sale by a purchaser engaged *1232 in the business of manufacturing, assembling, refining or processing.
45 I.A.C. 2.2-5-14(b) (emphases added). The regulation affirms the fact that the incorporation exemption is available only to those who produce tangible personal property.
Since the laundering of soiled textiles does not constitute the production of goods or other tangible personal property, Mechanics Laundry is not entitled to the incorporation exemption so far as the laundering of soiled textiles is concerned. The parties agree, however, that Mechanics Laundry is engaged in the "production or manufacture" of logos and name tags. Petitioner's Exhibit 1 at 14-15, ¶ 59, ¶ 60, & ¶ 62. Accordingly, Mechanics Laundry is entitled to the incorporation exemption to the extent that it directly consumes tangible personal property in the direct production of logos and name tags.
IV. The Environmental Quality Exemption
Finally, Mechanics Laundry contends that the preparation of uniform apparel and the laundering of soiled textiles constitutes "processing" within the meaning of I.C. 6-2.5-5-30, the environmental quality exemption. The environmental quality exemption provides:
Sales of tangible personal property are exempt from the state gross retail tax if:
(1) the property constitutes, is incorporated into, or is consumed in the operation of, a device, fаcility, or structure predominantly used and acquired for the purpose of complying with any state, local, or federal environmental quality statutes, regulations, or standards; and
(2) the person acquiring the property is engaged in the business of manufacturing, processing, refining, mining, or agriculture.
I.C. 6-2.5-5-30 (emphasis added).
"Where words are used at one place in an Act, they will be construed as used in the same sense at other places in the Act, unless the clear context of the statute requires a different meaning." State ex rel Gary Taxpayers' Assoc. v. Lake Superior Court (1947),
The environmental quality exemption is part of the same act in which the equipment, consumption, and incorporation exemptions are found. In addition, the language of the environmental quality exemption is nearly identical to the language used in the equipment, consumption, and incorporation exemptions. All four statutes list a variety of means by which goods or other tangible personal property can be produced or derived, and all four statutes contain the term "processing" or "proсesses." Moreover, all four statutes are exemption statutes and set forth the circumstances under which a person is entitled to an exemption from the sales tax. Consequently, nothing about the environmental quality exemption suggests that the term "processing" has a different meaning from the term "processing" or "processes" as used in the equipment, consumption, and incorporation exemptions. The environmental quality exemption must, therefore, be construed in harmony with the equipment, consumption, and incorporation exemptions. See id. Accordingly, the term "processing," аs it is used in the environmental quality exemption, has meaning only to the extent that goods or items of other tangible personal property are produced.
The parties have stipulated that Mechanics Laundry is engaged in the "production or manufacture" of logos and name tags. That fact does not, however, establish that Mechanics Laundry is entitled to receive the environmental quality exemption for its purchases of EPA compliance items. The evidence presented establishes that Mechanics Laundry operates its waste water treatment equipment in сonnection with the laundering of soiled textiles, but not in connection with the production of logos and name tags. Consequently, Mechanics Laundry is not entitled to receive the environmental quality exemption for its purchases of EPA compliance items.
*1233 V. Ascertainable Standards
Mechanics Laundry asserts that the Department failed to rely on previously stated, ascertainable standards when it denied Mechanics Laundry's claim for refund, and thereby violated its constitutional right to due process under the Fifth and Fourteenth Amendments of the United States Constitution. The Department denied Mechanics Laundry's claim for rеfund on the ground that Mechanics Laundry was not engaged in "production."
It is a common law rule of administrative law in Indiana that administrative decisions must be in accord with previously stated, ascertainable standards. Podgor v. Indiana University (1978) Ind. App.,
The exemption statutes at issue today are premised on the production of goods or other tangible personal property and the word "processing" has meaning only to the extent that there is production. The Department, in focusing on whether Mechanics Laundry was engaged in production, relied on a standard established not only by the language of the exemption statutes themselves, but by case law as well. Accordingly, there was no violation of the "ascertainable standards" rule.
CONCLUSION
The laundering of soiled textiles does not constitute the "processing" or production of goods or other tangible personal property. Indeed, "the function of a laundry is to make clothes clean, rather than to make clean clothes." Pellerin Laundry Machinery Sales Co. v. Cheney (1963),
As stipulated by the parties, however, Mechanics Laundry is engaged in the "production or manufacture" of logos and name tags. Therefore, Mechanics Laundry is entitled to exemptions under I.C. 6-2.5-5-3, the equipment exemption, I.C. 6-2.5-5-5.1, the consumption exemption, and I.C. 6-2.5-5-6, the incorporation exemption, for qualifying purchases related to the production of logos and name tags.[13] Accordingly, the Department's final determination of September 21, 1992, is AFFIRMED in part and REVERSED in part.
NOTES
Notes
[1] Cleaning supplies and products include but are not limited to cleaning solutions, dyes, color enhancers, starches, and water.
[2] Machinery and equipment include but are not limited to laundry carts, conveyer lines, compressors, boilers, bagging apparatuses, sewing machines, threads, and pneumatic air hoses.
[3] Utilities include water, gas and electricity.
[4] Repair parts include but are not limited to fuses, gaskets, motors, electrical control panels, and belts.
[5] EPA compliance items include but are not limited to waste water treatment equipment, parts to repair waste water treatment equipment, acids, limes, and other chemicals injected into waste water treatment equipment.
[6] Although Mechanics Laundry did not assert a claim under I.C. 6-2.5-5-30 in its complaint, Mechanics Laundry asserted a claim under I.C. 6-2.5-5-30 in its pretrial list of contentions. Petitioner's List of Contentions at 5 (filed May 5, 1993); Petitioner's First List of Contentions at 14 (filed April 16, 1994). In addition, Mechanics Laundry offered evidence at trial to support its claim undеr I.C. 6-2.5-5-30, Trial Transcript at 50-53, 61-64, and the Department had an opportunity to rebut Mechanics Laundry's claim. Respondent's Brief in Support of its Proposed Findings of Fact and Conclusions of Law at 5; Respondent's Reply Post Trial Brief at 7-8. Accordingly, the court will treat Mechanics Laundry's claim under I.C. 6-2.5-5-30 as if it had been raised in its complaint. See Ind.Trial Rule 15(B); Weisman v. Hopf-Himsel, Inc. (1989), Ind. App.,
[7] Mechanics Laundry's claim for refund was also based on IND. CODE 6-2.5-5-4 and IND. CODE 6-2.5-5-8. Mechanics Laundry, however, presented no evidence that it directly produces any of the machinery, tools, or equipment it uses in its laundry operation. Further, Mechanics Laundry made no mention of I.C. 6-2.5-5-4 in its post trial brief. Consequently, the court determines that I.C. 6-2.5-5-4 is not at issuе in this case. Likewise, I.C. 6-2.5-5-8 is not at issue in this case, for the Department does not contest that Mechanics Laundry's initial purchase of textiles is exempt from the sales tax under I.C. 6-2.5-5-8. Respondent's Brief in Support of Its Proposed Findings of Fact and Conclusions of Law at 6 and 16.
[8] The parties offer the same arguments with respect to the consumption, incorporation, and environmental quality exemptions.
[9] While Mechanics Laundry insists that it acquires soiled textiles from its customers approximately 52 times per year, Mechanics Laundry acquires its textiles only once when it purchases them from its suppliers. See I.C. 6-2.5-5-8.
[10] The court recognizes that the Ohio statutory definition of the term "processing" encompasses the laundry operations of textile rental businesses. Van Dyne Crotty Co. v. Limbach (1990),
[11] If the equipment exemption is to be broadened to include recycling, as perhaps it should be, such action must come from the Indiana General Assembly. Likewise, if the exemptions at issue today are to be broadened to account fоr the much publicized shift from a manufacturing economy to a service or information economy, such action must also come from the Indiana General Assembly.
[12] Although the incorporation exemption uses the term "processes" and the equipment and consumption exemptions use the term "processing," it is a difference without distinction. Indeed, the terms "processes" and "processing" are forms of the verb "process." See Petitioner's Exhibit 1 at 20.
[13] Of course, Mechanics Laundry is entitled to only one exemption per purchase. Mechanics Laundry may not recoup more sales tax than it actually paid.