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03/21/88 DEPARTMENT REVENUE v. KIMBALL

Filed: March 21, 1988.

DEPARTMENT OF REVENUE, STATE OF INDIANA, APPELLANT (DEFENDANT BELOW)
v.
KIMBALL INTERNATIONAL, INC., APPELLEE (PLAINTIFF BELOW)



APPEAL FROM THE DUBOIS CIRCUIT COURT, The Honorable Hugo S. Songer, Judge, Cause Nos. C-86-72, C-86-73 and C-86-74.

Hoffman, J., Shields, P.j., and Robertson, J., Concur.

Author: Hoffman

HOFFMAN, J.

The Department of Revenue, State of Indiana, (the Department) appeals a decision allowing an exemption from the State Gross Retail Tax. IND. CODE § 6-2.5-1-1 et seq. (1982). The trial below was a consolidation of three cases and the trial court's ruling permitted the appellee Kimball International, Inc. (Kimball) to claim exemptions on a variety of items. The Department has elected to appeal only a portion of these items and thus the issue on appeal is: whether Kimball's spray booths, air make up units and their associated component parts are exempt from the State Gross Retail Tax.

As pertinent here, Kimball is in the business of manufacturing finished wood products and components, including pianos, speaker cabinets and furniture. Through the concerted efforts of its several divisions, Kimball's manufacturing process extends from milling the uncut logs to shipping the ultimate product.

The spray booth and air make up units come into play during the final phase of the manufacturing process, when the finish is applied. After the wood products are assembled and prepared, they are moved by conveyor into finishing rooms. The finishing rooms are isolated from the rest of each plant by separate walls and positive air pressure. The spray booths and air make up units are found inside the finishing rooms.

The spray booths are three-sided structures and also include fans, water baths and duct work. The spray booths are designed so that overspray and evaporated solvents are exhausted from the finishing rooms through the water baths and duct work to the outside.

The air is exhausted from the finishing rooms at a rate of 120,000 cubic feet per minute, thus creating a need for an air in-take system. This is the function of the air make up units which include fans, filters, heaters and duct work. In addition to bringing in outside air, the air make up units heat the air and control its humidity.

Also at issue in this appeal is the spray booth coating and paint deflocculent. The spray booth coating is essentially a specialized removable paint applied to the spray booth walls and designed to promote collection of excess spray. The paint deflocculent is a chemical added to the water baths that holds the excess spray in suspension and also promotes its removal.

At trial, the Department did not introduce any evidence; however, Kimball, through expert testimony and exhibits, demonstrated that the spray booths and air make up units serve a variety of roles in the manufacturing process. The air make up units are responsible for maintaining the finishing room's positive air pressure, which prevents dust and other particles from entering the rooms and settling on the freshly applied finish. The air make up units also control the temperature and humidity in the room, which increases the air's capacity to absorb the excess solvents. Without the temperature and humidity controls a condition called "blushing" would occur where the finish becomes cloudy and the product unsaleable.

It was undisputed that collecting and removing the excess spray by use of the spray booths, spray booth coatings, water baths, and paint deflocculents is critical from a safety standpoint. The chemicals Kimball uses are highly flammable and without constant cleansing, the air in the finishing rooms would quickly become explosive.

It was also uncontroverted that the combination of the air make up units and the spray booths creates an airflow that is essential to the manufacturing process. This air movement promotes drying of the newly applied finish. Without this predrying a condition called "blistering" would occur during the later oven drying stage whereby trapped solvents would create bubbles in the finish. The airflow is also responsible for controlling sags and runs in the newly applied finish by improving the uniformity of the spray.

The transactions involved here occurred between 1976 and 1978, and the statutory exemption in effect at the time was IND. CODE § 6-2-1-29(b)(6).[Footnote 1] In pertinent part, this section provided that the State Gross Retail Tax would not apply to:

"(6) Sales of manufacturing machinery, tools and equipment to be directly used by the purchaser in the direct production . . . ...


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