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Merchandise Warehouse Co., Inc. v. Indiana Department of State Revenue

Supreme Court of Indiana

December 13, 2017

Merchandise Warehouse Co., Inc., Petitioner,
v.
Indiana Department of State Revenue Respondent.

         On Petition for Review from the Indiana Tax Court, No. 49T10-1302-TA-09 The Honorable Martha Blood Wentworth, Judge

          Attorneys for Petitioner Donald F. Foley Tony H. Abbott David S. Klinestiver Foley & Abbott Indianapolis, Indiana

          Attorney for Amici Curiae Global Cold Chain alliance & Park 100 Foods, Inc. Bryan H. Babb Bose McKinney & Evans LLP Indianapolis, Indiana

          Attorneys for Respondent Curt is T. Hill, Jr. Indiana Attorney General Evan W. Bartel Patricia C. McMath Deputy Attorneys General Indianapolis, Indiana

          GOFF, JUSTICE.

         Petitioner submitted refund claims to the Department of State Revenue for sales tax paid on blast freezing equipment and the electricity used in operating said equipment. The Department partially denied the refunds and the Tax Court affirmed, holding that the Petitioner did not engage in "direct production" and, therefore, could not qualify for exemptions under the relevant statutes. We grant review and reverse.

         Factual and Procedural History

         The parties stipulated to the following facts. Merchandise Warehouse Company, Inc., ("MWC") operates a freezing and storage facility in Indianapolis, Indiana. MWC's customers ("Depositors") prepare perishable food products like meat, bread, vegetables, chili, or soup at their facilities and then transport the products to MWC for freezing and storage before releasing them to their own customers or common carriers. MWC offers two freezing options-slow or blast freezing-and Depositors may contract for either freezing method for their products.

         Depositors send their food products to MWC stacked on pallets. The food arrives in varying temperatures. Upon arrival, MWC takes the internal temperature of the food on each pallet.

         If a Depositor designates a product for slow freezing, then MWC places those pallets in the freezer storage area. Depending upon various factors, slow freezing may take five to twelve days. Slow freezing food products increases metabolic changes that may negatively affect the food's quality and shelf-life.

         If a Depositor designates a product for blast freezing, then MWC places those pallets in its completely separate blast freezing area in order to utilize its Quick Freeze Refrigeration ("QFR") system. MWC began using the QFR system for blast freezing in October 2011. From 2008 to October 2011, MWC conducted blast freezing in the same freezer storage area where it placed food products for slow freezing. MWC then accomplished blast freezing by placing large industrial fans next to the designated pallets of food. This blast freezing process took four to six days to complete.

         Since that time, MWC has made a significant investment in its QFR system to expedite the blast freezing process. MWC's new, and greatly improved, QFR consists of 660 individual blast cells, three pallet slots high. To blast freeze a product, MWC places the pallet in one individual blast cell. The cell forces air on multiple sides of the pallet through spacers that separate each layer of food. The pallet remains in the individual cell until MWC verifies the food has been frozen to an internal temperature of zero degrees Fahrenheit. Using this QFR system, MWC can blast freeze products in forty-eight hours. Unlike slow freezing, blast freezing extends product shelf life.

         Once a food product is blast frozen, MWC shrink wraps the pallets in accordance with the Depositor's contract. The shrink-wrapped, blast-frozen pallets are then placed in storage racks in the freezer area where they may remain for two to twenty-nine days, until the Depositor releases them. MWC bills Depositors based on the freezing method required by the contract and the storage space used.

         In 2011 and 2012, MWC filed two Forms ST-200 ("Utility Sales Tax Exemption Applications") and three Forms GA-110L ("Claims for Refund") with the Indiana Department of State Revenue ("the Department"), seeking refunds for sales tax paid on electricity and equipment used during the freezing process. Citing the industrial exemptions found at Indiana Code sections 6-2.5-5-5.1(b) and 6-2.5-5-3, MWC asserted the electricity and equipment it used during blast freezing should be exempt from sales tax because "[t]he freezing of the food constitutes the last stage in the [food's] manufacturing process." The Department denied MWC's refund claims, concluding that MWC "does not manufacture tangible personal property for sale but rather provides a service."

         MWC timely protested those denials, but after administrative hearings in which MWC presented evidence and argument, the Department denied the protest in part and sustained it in part, pending a supplemental audit. Following the audit, the Department granted MWC a 15% refund for the electricity purchased and used during the freezing stages, but it denied any refund for the freezing equipment.

         MWC filed a verified petition for judicial review in the Indiana Tax Court, appealing the Department's determinations that MWC did not use the specified electricity or equipment for manufacturing or production. The Department moved for summary judgment, arguing that MWC's relevant electricity and equipment purchases did not qualify for exemptions under Indiana Code sections 6-2.5-5-5.1(b) and 6-2.5-5-3 as a matter of law. In response, pursuant to Indiana Trial Rule 56(B), MWC also requested summary judgment, arguing that the same statutory language, as applied to these facts, entitled it to the requested relief as a matter of law.

         The Tax Court granted the Department summary judgment, finding that MWC's "retail transactions were not exempt from Indiana sales tax under Indiana Code [sections] 6-2.5-5-3 and … 6-2.5-5-5.1." Merchandise Warehouse Co., Inc. v. Ind. Dep't. of State Revenue, 67 N.E.3d 666, 667 (Ind. Tax Ct. 2017). Specifically, the Court determined that MWC's "freezing services do not culminate in the production of new, distinct marketable goods. Accordingly, its purchase of electricity and freezer equipment do not qualify for the . . . [e]xemptions." Id. at 671. The Tax Court went on to explain that a "taxpayer who purchases the ...


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