THE SHERWIN-WILLIAMS COMPANY, Aрpellee, v. IOWA DEPARTMENT OF REVENUE, Appellant.
No. 07-1534.
Supreme Court of Iowa.
Oct. 8, 2010.
789 N.W.2d 417
The new test developed by the majority may be easy and beneficial to defendants, but it is a step back both for victims and for the progress made in addressing domestic violence over the last decade. The only way victims of domestic abuse with a history of counseling will be able to ensure the confidentiality of their private counseling records is to not report domestic abuse. The law should be able to do better.
Bruce W. Baker of Nyemaster, Goode, West, Hansell & O‘Brien, P.C., Des Moines, and John A. Panno, Joseph F. Timmons, and Laura T. Gorjanc of The Sherwin-Williams Company, Cleveland, Ohio, for appellee.
The appellee, The Sherwin-Williams Company, paid Iowa use tax on certain machines used in its Iowa retail outlets to mix base paint with colorant. The appellant, Iowa Department of Revenue, denied Sherwin-Williams’ refund claim for these taxes, refusing to apply the so-called manufacturing exemption set forth in
I. Background Facts and Proceedings.
Sherwin-Williams is an Ohio-based company that manufactures, distributes, and sells paint and paint-related products. It owns and operates thirty-eight retail outlets in Iowa and, in addition, sells its products to independent retail stores such as Menards, Home Depot, and Lowes. Since the 1960s, Sherwin-Williams has used a decentralized manufacturing process that requires retailers to mix colorants with a base liquid according to precise formulas to create usable paint.2
To implement this process, each Sherwin-Williams retail location must have a spectrographic color-matching machine that determines the mixing formula to achieve the precise color desired; a dispensing/tinting machine, known as a mini accutinter, to insert the colorant into the base; and a mixer/shaker to combine the colorant and base. The base is a thick liquid composed of binders and resins. The colorant, which contains additives such as glycol and water, gives the base paint flow and leveling abilities. Neither the colorant nor the base is salable at retail or usable by itself.
This legal proceeding began when Sherwin-Williams filed a refund claim for use taxes it paid from July 1, 1992, through December 31, 2000, on the machinery used to produce paint in its Iowa stores. It contended it had no liability for use tax, relying on a manufacturing exemption contained in
The department then issued a notice of tax due in the amount of the original rеfund plus interest, which was followed by a notice of assessment. Sherwin-Williams
II. Applicable Statutes and Administrative Rules.
It is helpful to provide a context for our discussion of this case by first reviewing the applicable statutes and agency rules. At the time relevant to this lawsuit,
Prior to 1997, certain sales of machinery and equipment were exempted from use tax, including
[t]he gross receipts from the sale ... of industrial machinery, equipment and computers ... if the following conditions are met:
a. The industrial machinery, equipment and computers shall be directly and primarily used in the manner described in section 428.20 in processing tangible personal property or in research and development of new products or processes of manufacturing, refining, purifying, combining of different materials or packing of meats to be used for the purpose of adding value to products....
....
b. The industrial machinery, equipment and computers must be real property within the scope of section 427A.1, subsection 1, paragraph “e” or “j“.
A person who purchases, receives, or holds personal property of any description for the purpose of adding to its value by a process of manufacturing, refining, purifying, combining of different materials, or by the pаcking of meats, with a view to selling the property for gain or profit, is a “manufacturer” for the purpose of this title.
A manufacturing establishment is a business entity in which the primary activity consists of adding to the value of personal property by any process of manufacturing, refining, purifying, the packing of meats, or the combination of different materials with the intent of selling the product for gain or profit.
During the 1997 legislative session,
The gross receipts from the sale or rental of computers, machinery and equipment ... if such items are any of the following:
(1) Directly and primarily used in processing by a manufacturer.
A comparison of the pre and pоstamendment versions of this statute reveals two notable changes effected by the amendment. First, the requirement that the items sold “be real property,” i.e., “used in manufacturing establishments,” was eliminated. Second, the amendment changed the interplay between the manufacturing exemption and
The department‘s primary argument in support of its position that the amended exemption does not apply under the facts of this case is that Sherwin-Williams is not a “manufacturer” for purposes of machinery used in its retail operation.3 The department relies in part on its administrative rule defining the term “manufacturer“:
“Manufacturer” means any ... corporation that purchases, receives, or holds personal property for the purpose of adding to its value by any process of manufacturing, refining, purifying, combining of different materials, or by packing of meats with an intent to sell at a gain or profit.
Those who are in the business of printing, newspaper publication, bookbinding, lumber milling, and production of drugs and agricultural supplies are illustrative, nonexclusive examples of manufacturers. Construction contracting; remanufacture or rebuilding of tangible personal property (such as automobile engines); provision of health care; farming; transportatiоn for hire; and the activities of restaurateurs, hospitals, medical doctors, and those who merely process data are illustrative, nonexclusive examples of businesses which are not manufacturers. See As
sociated General Contractors of Iowa v. State Tax Commission, 255 Iowa 673, 123 N.W.2d 922 (1963) and River Products Co. v. Board of Review of Washington County, 332 N.W.2d 116 (Iowa Ct.App.1982). The term “manufacturer” includes a contract manufacturer. Ordinarily, the word does not include those commercial enterprises engaged in quarrying or mining.
Id.
Before we consider whether the department correctly decided that Sherwin-Williams was not entitled to the manufacturing exemption for equipment used in its retail outlets, we must determine the appropriate standard of review.
III. Scope of Review.
Our review of this agency decision is governed by Iowa Code chapter 17A. See
The court shall reverse, modify, or grant other appropriate relief from agency action, including equitable or legal and declaratory relief, if it determines that substantial rights of the person seeking judicial relief have been prejudiced because the agency action is any of the following:
....
l. Based upon an irrational, illogical, or wholly unjustifiable interpretation of a provision of law whose interpretation has clearly been vested by a provision of law in the discretion of the agency.
Id. § 17A.19(10)(l) (emphasis added). Relying on this standard of review, the department claims its interpretation of section 422.45(27)(a)(1)—the manufacturing exemption—can be overturned only if it is “irrational, illogical or wholly unjustifiable.” Id.
Sherwin-Williams argues only an agency‘s “official” interpretation of a statute is entitled to deference, and here, the department has no rule on point to which deference could be given. On the latter point, we agree. The application of the manufacturing exemption in this case turns initially on whether Sherwin-Williams is a “manufacturer” for purposes of its use of the equipment at issue. With a few insignificant changes, the department‘s rule defining the term “manufacturer” simply parrots the statutory definition of this term, and consequently, the rule does not interpret the statute. See Webster‘s Third New International Dictionary 1182 (unabr. ed.2002) (defining “interpret” as “to explain or tell the meaning of“). The text that follows the rule‘s paraphrasing of the statutory definition lists examples of businesses that do and do not fall within that definition. In our view, this part of the rule represents the department‘s illustrative application of the statutory definition to specific businesses. We conclude, therefore, that the department has not further explained—by rule—the meaning of the term “manufacturer.”
We consider, then, whether only an agency‘s interpretation of a statute as embodied in an agency rule is entitled to deference or whether an agency‘s interpretation of a statute in a specific matter pending before it can also be accorded deference. In addressing this question, we turn first to the relevant language of section 17A.19(10)(l), which focusеs on the agency‘s “interpretation of a provision of law whose interpretation has clearly been vested by a provision of law in the discre
We have recently clarified and refined our analysis for deciding when an agency has been granted interpretative authority with respect to a statute. See Renda v. Iowa Civil Rights Comm‘n, 784 N.W.2d 8, 10-14 (Iowa 2010). In the absence of an express statement by the legislature granting interpretive authority to an agency, we review “the precise language of the statute, its context, the purpose of the statute, and the practical considerations involved” to determine whether the interpretation of a statute has beеn clearly vested in the discretion of the agency. Arthur E. Bonfield, Amendments to Iowa Administrative Procedure Act, Report on Selected Provisions to Iowa State Bar Association and Iowa State Government 63 (1998) [hereinafter “Bonfield, Amendments to Iowa Administrative Procedure Act“]. This search for legislative intent focuses on the specific statutory provision or language at issue. Renda, 784 N.W.2d at 12. Indications that an agency has interpretive authority include rule-making authority, decision-making or enforcement authority that requires the agency to interpret the statutory language, and the agency‘s expertise on the subject or on the term to be interpreted. Id. at 12-14.
With respect to the department of revenue, the legislature has granted the department “the power and authority to prescribe all rules not inconsistent with the provisions of [chapter 422], necessary and advisable for its detailed administration and to effectuate its purposes.”
Notwithstanding these indications of interpretive discretion, it is difficult to find a clear legislative delegation of interpretive authority with respect to the precise statutory term at issue here—“manufacturer.” Significantly, the dispute here does not center on an interpretation of the manufacturing exemption in general or even on an interpretation of the statutory definition of “manufacturer.” The issue here is simply whether a retail establishment can be considered a “manufacturer” under the statutory definition of that term. The in
Because the legislature has not clearly vested the interpretation of the word “manufacturer” in the discretion of the agency, the deferential standard of review in section 17A.19(10)(l) does not apply. Accordingly, we review the agency decision on this issue to determine whether it was “[b]ased upon an erroneous interpretation of a provision of law.” See id. § 17A.19(10)(c).
IV. Parties’ Positions.
Sherwin-Williams contends the statutory definition of “manufacturer” is unambiguous and clearly encompasses the equipment used in its retail stores to produce usable paint. It asserts:
Sherwin-Williams holds personal property for the purpose of adding to its value by a process of combining different materials, specifically precisely measured base and colorants, with a view to selling the newly created colored paint for a gain or profit.
Notably, the director similarly opined in his decision, “It is true that Sherwin-Williams may hоld property, mix materials, and sell the combined product for a profit.”
Nonetheless, the department contends that only equipment used by one whose principal business is manufacturing is exempt. It suggests two reasons for this result: (1) the term “manufacturer” is ambiguous, and ambiguous terms in a tax exemption statute must be interpreted in favor of taxation; and (2) allowing the exemption to be applied to a retail establishment would produce the absurd result of including “as manufacturers restaurants, bars, lemonade stands, and various home-improvement stores.” To avoid such a broad and absurd interpretation of this tax exemption, argues the department, the word “manufacturer” must be interpreted consistently with its common meaning, encompassing only those whose principal business is manufacturing. Because the equipment at issue here is used in establishments whose principal business is retail sales, the department argues the manufacturing exemption does not apply.
In considering the parties’ arguments, we keep in mind that “‘[t]ax exemption statutеs are construed strictly, with all doubts resolved in favor of taxation.‘” Dial Corp. v. Iowa Dep‘t of Revenue, 634 N.W.2d 643, 646 (Iowa 2001) (quoting Heartland Lysine, Inc. v. State, 503 N.W.2d 587, 588 (Iowa 1993)). Sherwin-Williams, as the party relying on the exemption, bears the burden of proving it is entitled to the benefit of the exemption. See id.
V. Discussion of “Manufacturer” Definition.
We commence our discussion by determining whether the term “manufacturer” is ambiguous. “A statute is ambiguous if reasonable minds could differ or be uncertain as to the meaning of the statute.” Carolan v. Hill, 553 N.W.2d 882, 887 (Iowa 1996); accord 2A Norman J. Singer & J.D. Shambie Singer, Statutory Construction § 46:4, at 179 (7th ed.2007) [hereinafter “Sutherland Statutory Construction“] (“A statute is ambiguous when it is capable of being understood by reasonably well-informed persons in two or more different senses.“).
It is significant that the legislature has chosen to define the word “manufacturer” as used in the manufacturing exemption. “We recognize the legislature ‘may act as its own lexicographer.’ When it does so, we are normally bound by thе legislature‘s own definitions.” State v. Fischer, 785 N.W.2d 697, 702 (Iowa 2010) (quoting Henrich v. Lorenz, 448 N.W.2d 327, 332 (Iowa 1989)). Under these circumstances, “‘the common law and dictionary definitions which may not coincide with the legislative definition must yield to the language of the legislature.‘” Hornby v. State, 559 N.W.2d 23, 25 (Iowa 1997) (quoting State v. Steenhoek, 182 N.W.2d 377, 379 (Iowa 1970)). Therefore, this court is obligated to apply the statutory definition of “manufacturer” as written, absent an ambiguity in that definition.
The department has not directed this court to any language in the statutory definition that is capable of being reasonably understood to require that a “manufacturer” be principally engaged in the business of manufacturing. Rather, it relies on this court‘s decision in Associated General Contractors of Iowa v. State Tax Commission, 255 Iowa 673, 123 N.W.2d 922 (1963), in which we held the term “manufacturer” as used in
In Associated General Contractors, the tax commissioner sought to impose a use tax on a paving contractor‘s mixing of asphaltic concrete that it then used to pave the roadbed. 255 Iowa at 674, 123 N.W.2d at 922-23.
At that time, the term “manufacturer” was defined in
The commissioner argued the legislature used the term “manufacturer” in
We do not find our conclusion that the term “manufacturer” was ambiguous as used in
Perhaps the most support for the department‘s position found in the Associated General Contractors opinion is the following statement by this court regarding an agency rule that referred to a “manufacturer“: “The word ‘manufacturer’ as used in [the agency rule] is used in the sense of one whose principal business is manufacturing.” 255 Iowa at 679, 123 N.W.2d at 925. The basis for this conclusion is not apparent from our opinion.7 More importantly, however, this statement was not pertinent to our resolution of the statutory interpretation issue in that case, which depended on whether one could be a
Although the department has not demonstrated an ambiguity arising from the language of the statutory definition of “manufacturer,” an ambiguity may arise from the general scope of the statute when it is considered in its entirety. As noted earlier, the department claims a literal interpretation of the statutory definition of “manufacturer” would result in application of the manufacturing exemption to businesses that typically are not viewed as being engaged in manufаcturing. The department suggests such a broad application of the exemption is absurd.
This court has said that, “[w]here the language is of doubtful meaning, or where an adherence to the strict letter would lead ... to absurdity, or to contradictory provisions, the duty of ascertaining the true meaning devolves upon the court.”8 Case v. Olson, 234 Iowa 869, 872, 14 N.W.2d 717, 719 (1944) (emphasis added); accord Sutherland Statutory Construction § 45:12, at 101 (“It is fundamental, however, that departure from the literal construction of a statute is justified when such a construction would produce an absurd and unjust result and would clearly be inconsistent with the purposes and policies of the act in question.“). Nonetheless, we are mindful of the cautionary advice of one commentator that “the absurd results doctrine should be used sparingly because it entails the risk that the judiciary will displace legislative policy on the basis of speculation that the legislature could not have meant what it unmistakably said.” Sutherland Statutory Construction § 45:12, at 105-07. The Hawaii Supreme Court articulated the proper balance in such situations when it stated:
[E]ven in the absence of statutory ambiguity, departure from literal construction is justified when such construction would produce an absurd and unjust result and the literal construction in the particular action is clearly inconsistent with the purposes and policies of the act.
Pac. Ins. Co. v. Or. Auto. Ins. Co., 53 Haw. 208, 490 P.2d 899, 901 (1971).
As noted, the department contends application of the manufacturing exemption to establishments whose principal business is retail sales produces an absurd result. The absurdity of this result is not self-evident, however. Although it may appear counterintuitive, we will not ignore clear legislative language merely because it leads to a result that seems contrary to the court‘s expectations. See State ex rel. Miller v. Cutty‘s Des Moines Camping Club, Inc., 694 N.W.2d 518, 524-25 (Iowa 2005) (relying on statutory definition, even though it was counterintuitive).
The department points out a potential contradiction, however, observing the same definition of “manufacturer” at issue here applies to property-tax issues. See generally Sutherland Statutory Construction § 46:4, at 188-89 (“Even when a statute appears unambiguous on its face it can be rendered ambiguous by its interaction with and its relatiоn to other statutes.“). Under the agency rules applicable to property taxes, the agency classifies as industrial only “manufacturing establishments.”
[a] manufacturing establishment is a business entity in which the primary activity consists of adding to the value of personal property by any process of manufacturing, refining, purifying, the packing of meats, or the combination of different materials with the intent of selling the product for gain or profit.
Id. (emphasis added). In contrast, the department‘s classification rules provide that “commercial real estate” includes land and structures “which are primarily used or intended as a place of business where goods, wares, services, or merchandise is stored or offered for sale at wholesale or retail.” Id. r. 701—71.1(5) (emphasis added). Sherwin-Williams’ retail stores are assessed for property-tax purposes as commercial real estate, not industrial real estate.
The primary-use requirement employed in classifying property as industrial or commercial makes sense because the entirety of the real estate (land, improvements, and structures) is subject to property tax. Therefore, the whole must be classified as either industrial or commercial; it cannot be both. See id. r. 701—71.1(1) (“There can be only one classification per property. An assessor shall not assign one classification to the land and a different classification to the building or separate classifications to the land or separate classifications to the building (dual classification).“). It makes sense, then, that the classification of the whole would depend on the primary use of the property.
But for purposes of taxing the use of equipment located on the property, it is not absurd or illogical to impose the tax based on the use of the specific equipment as opposed to the taxpayer‘s use of the premises as a whole. See Heartland Lysine, Inc., 503 N.W.2d at 589 (stating “the propriety of a use tax assessment or exemption turns largely on the specific use made of the property“). Consequently, we are not convinced it would be absurd for the legislature to accord a retailer a manufacturer‘s exemption when specific equipment is used by the retailer in the same manner and for the same purpose as such equipment would be used by a taxpayer whose principal business is manufacturing.9
We have also examined four cases cited by the department in support of its position and conclude they are readily distinguishable. See Blue Line Distrib., 202 Ariz. 266, 43 P.3d 214; HED, Inc. v. Powers, 84 N.C.App. 292, 352 S.E.2d 265 (1987); McDonald‘s Corp. v. Okla. Tax Comm‘n, 563 P.2d 635 (Okla.1977); Dairy Queen of Okla., 205 Okla. 473, 238 P.2d 800. In each of these cases, retail establishments, Little Caesar‘s Pizza, Hardee‘s, McDonald‘s, and Dairy Queen, were
In the Massachusetts administrative proceeding, the appellate tax board ruled that Sherwin-Williams’ retail stores in that state qualified as “manufacturing corporations” based on their business of “mix[ing] colorants with base paint to creatе colored paints” for sale. 2003 WL 21040567, at *1, *5. The facts before the board showed that “77% of Sherwin-Williams’ sales are from the sale of paint, and that 80-90% of those sales are sales of colored paint produced at the retail stores.” Id. at *2. The board stated these activities
fall within the broad definition ascribed to manufacturing of “change wrought through the application of forces directed by the human mind, which results in the transformation of some preexisting substance or element into something different, with a new name, nature or use.”
Id. at *5 (quoting Assessors of Boston v. Comm‘r of Corps. & Taxation, 323 Mass. 730, 84 N.E.2d 129, 136 (1949)).
In the New York tax commissioner‘s advisory opinion, Sherwin-Williams asked whether its “mixing and blending machinery and equipment, and related computer equipment, used in the paint tinting process” in its company-owned retail stores were exempt from sales and use tax. 1999 WL 304816, at *1. It relied on an exemption for “‘[m]achinery or equipment for use ... directly and predominantly in the production of tangible personal property ... by manufacturing, processing....‘” Id. at *2 (quoting N.Y. Tax Law § 1115(a)(12)). The commissioner opined that “the Color Matching Systems, Automatic Colorant Dispensers, Shakers and related computer equipment [were] used directly in the production of paint for sale” and, therefore, were exempt from sales and use tax. Id. at *4.
In the Arizona case, the exemption applied to sales of “‘[m]achinery, or equipment, used directly in manufacturing, [and] processing ... operations. The terms “manufacturing” [and] “processing” ... as used in this paragraph refer to and include those operations commonly understood within their ordinary meaning.‘” Blue Line Distrib., 43 P.3d at 215 (emphasis added) (quoting
The North Carolina exemption considered in the HED, Inc. case applied to “manufacturing industries and plants.” 352 S.E.2d at 266. Like the Arizona statute, the North Carolina statute did not define these terms, so the court applied the common meaning of these words. Id. The North Carolina court reviewed decisions from other jurisdictions that had considered whether a restaurant qualifies as a manufacturer, and observed:
One discernible pattern is that when the statutes do not provide a definition of manufacturing, as is the case in North Carolina, courts tend to apply a common sense approach and conclude that a restaurant is not a manufacturer. On the other hand, when the statute does provide a definition, that definition is mechanically applied and courts conclude that a restaurant is a manufacturer.
Id. at 267. Relying on the common meaning of “manufacturing,” the North Carolina court concluded a Hardеe‘s restaurant was not a “manufacturing” industry or plant. Id.
In Oklahoma, the manufacturing exemption is more explicit. It allowed an exemption for the use of certain machinery and equipment “‘used by persons in the operation of manufacturing plants.‘” McDonald‘s Corp., 563 P.2d at 636 (quoting Okla. Stat. tit. 68, § 1305(p) (1971)). The Oklahoma statute further states: “‘The term “manufacturing plants” shall mean those establishments primarily engaged in manufacturing or processing operations, and generally recognized as such.‘” Id. (emphasis added) (quoting Okla. Stat. tit. 68, § 1305(p)). Clearly, the Oklahoma court‘s decisions in McDonald‘s Corp. and Dairy Queen of Oklahoma, Inc. are readily distinguishable given the clearly expressed legislative intent that the exemption only be given to businesses primarily engaged in manufacturing. The comparable Iowa statute simply does not contain that limitation.10
When the legislature amended the manufacturing exemption in 1997, however, it had the stated intent to broaden its applicability. To achieve this purpose, the legislature removed the reference to
Accordingly, we reject the department‘s contention that only those taxpayers who are primarily engaged in manufacturing are eligible for the exemption. The department‘s interpretation of
VI. Direct Use of Spectrographic Color-Matching Machine.
In addition to concluding Sherwin-Williams was not a “manufacturer,” the department‘s director ruled the spectrographic color-matching machine did not qualify for the exemption because it was not “directly and primarily used in processing” as required by
A. Standard of Review. The director‘s decision turned on whether the color-matching machine was used “directly” in processing. The term “directly” is not defined in the statute, but is definеd in an agency rule. Sherwin-Williams does not question the agency‘s definition of this term. Rather, the dispute between the parties with respect to the color-matching machine is the director‘s application of that definition to the facts of this case.
In a contested case such as the one before us, the agency has discretion in its application of the law to the facts. Iowa Ag Constr. Co. v. Iowa State Bd. of Tax Review, 723 N.W.2d 167, 174 (Iowa 2006) (holding application of law to facts in proceeding in which taxpayer sought refund of sales/use tax was vested in the discretion of the agency); see also Drake Univ. v. Davis, 769 N.W.2d 176, 183 (Iowa 2009) (holding workers’ compensation commissioner had discretion to apply the law to the facts in contested-case proceeding under workers’ compensation statute). Therefore, the appropriate standard of re
The court shall reverse, modify, or grant other appropriate relief from agency action, equitable or legal and including declaratory relief, if it determines that substantial rights of the person seeking judicial relief have been prejudiced because the agency action is any of the following:
....
m. Based upon an irrational, illogical, or wholly unjustifiable application of law to fact that has clearly been vested by a provision of law in the discretion of the agency.
A decision is “irrational” when it is “not governed by or according to reason.” Webster‘s Third New International Dictionary 1195. A decision is “illogical” when it is “contrary to or devoid of logic.” Id. at 1127. A decision is “unjustifiable” when it has no foundation in fact or reason. See id. at 2502 (defining “unjustifiable” as “lacking in ... justice“); id. at 1228 (defining “justice” as “the quality or characteristic of being just, impartial or fair“); id. (defining “just” as “conforming to fact and reason“). One commentator has suggested that the “irrational, illogical, or wholly unjustifiable” standard of review is substantively similar to “the unreasonable, arbitrary, capricious, and abuse of discretion standards.” Bonfield, Amendments to Iowa Administrative Procedure Act 69.
B. Discussion. As noted, the department asserts the spectrographic color-matching machine does not qualify for the tax exemption because it is not “directly and primarily used in processing” as required by
The Spectrograph machine does not come into contact with the base or final product being purchased by the customer in any way. This machine does not change the substance or color of the paint. Instead, this color eye only provides Sherwin-Williams with a formula for the color of paint desired by the customer. Consequently, ... the Spectrograph machine is one step removed from processing and would not qualify for the exemption from Iowa sales tax under this statute.
- The physical proximity of the property in question to the activity in which it is used;
- The proximity of the time of use of the property in question to the time of use of other property used before and after it in the activity involved; and
The active causal relationship between the use of the property in question and the activity involved.
Id. Rule 701—18.58(1) also states: “The fact that a particular piece of property may be essential to the conduct of the activity because its use is required either by law or practical necessity does not, of itself, mean that the property is directly used.” The agency‘s definition is consistent with the dictionary meaning of “directly“: “without any intervening space or time: next in order.” Webster‘s Third New International Dictionary 641; see Iowa Ag Constr. Co., 723 N.W.2d at 176 (noting department‘s definition of “directly” as used in the
Applying the agency rule and the factors deemed relevant to determining when property is “directly used” in processing, we conclude the agency‘s decision that the color-matching machines do not qualify for the manufacturing exemption is wholly unjustifiable. In contrast to the machinery and equipment considered in the cases cited by the department, which we discuss below, the color-matching machine plays an integral role in the actual processing of usable paint. This machine initiates the in-store process of manufacturing usable paint by selecting the formula for the customer‘s desired color. The color-matching machine is integrated with the mini accutinter, sending the formula directly to the mini accutinter where the proper type and amount of colorant is dispensed into the can of base paint. The color-matching machine is located in physical proximity to the mini accutinter and the mixer/shaker. The time of use of the color-matching machine is immediately prior to the tinting of the base paint. In addition, the color-matching machine has an active causal connection to the processing of the paint, dictating the type and amount of colorant and base paint used in that process. We are convinced the director‘s contrary conclusion does not conform to the facts and is an unreasonable application of the agency rule.
We have studied the four cases upon which the department relies to support the director‘s determination that the color-matching machines are not “directly used” in processing paint and find them distinguishable. In Iowa Ag Construction Co., we affirmed the denial of an exemption for a mower used to cut grass around hog confinement centers and associated sewage lagoons because it was not used directly in the production of livestock, as required by the exemption. 723 N.W.2d at 180-81. The mower was not part of the process of raising the livestock; it simply supported the ancillary environment for that process, a very different situation than that presented in the case before us.
In Heartland Lysine, this court affirmed the department‘s denial of an exemption for electrical equipment that regulated the flow of electricity in a lysine plant to ensure the production equipment provided the environment necessary for the manufacture of lysine. 503 N.W.2d at 590-91. The exemption at issue in that case required that the equipment “‘be directly and primarily used in the manner described in section 428.20 in processing tangible personal property.‘” Id. at 590 (quoting
A third case cited by the department, Dial Corp., 634 N.W.2d 643, involved an exemption that also had the sаme language as the statute at issue in the present appeal: “directly and primarily used in ... processing.” 634 N.W.2d at 647 (quoting
Finally, in Dain Manufacturing Co. v. Iowa State Tax Commission, 237 Iowa 531, 22 N.W.2d 786 (1946), we held a drill grinding machine “used to service the machinery or equipment that was being ‘directly’ used in the actual act of processing property” was not within an exemption for equipment “directly used” in manufacturing. 237 Iowa at 538, 22 N.W.2d at 790-91. We noted the drill grinding machine “did not come in physical contact with the property that was being made salable or ... take any part in the actual processing of that property.” Id. at 538, 22 N.W.2d at 791 (emphasis added). This case is also clearly distinguishable from the case before us in which the color-matching machine played an integral part in the actual processing of the paint.
While these cases provide some illumination of the meaning of “directly used,” the department‘s own rule on this subject is the most pertinent to our analysis. Focusing on that rule, we conclude the department‘s application of its rule to the facts of this case to reach a conclusion that the color-matching machines are not “directly used” in processing salable paint has no foundation in fact or reason and is, therefore, wholly unjustifiable. Accordingly, we reverse the department‘s decision holding the color-matching machines are not eligible for the manufacturing exemption.
VII. Conclusion and Disposition.
We hold Sherwin-Williams qualifies for an exemption from use tax for the spectrographic color-matching machines, dispensing/tinting machines, known as mini accutinters, and the mixers/shakers used in its retail stores to process base paint and colorant into usable, salable paint. The decision of the court of appeals and the judgment of the district court are affirmed. We remand this case to the district court for remand to the department for further proceedings consistent with our opinion.
DECISION OF COURT OF APPEALS AND JUDGMENT OF DISTRICT COURT AFFIRMED; CASE REMANDED.
All justices concur except WIGGINS, J., who takes no part.