High Court reverses Tax Court ruling in Goff’s first opinion

December 13, 2017

In the first opinion written by Indiana’s newest Supreme Court justice, the high court struck down Wednesday a Tax Court ruling that found an Indianapolis food freezing company did not engage in direct production of new tangible personal property.

In 2011 and 2012, Merchandise Warehouse Co., Inc. filed for refunds for sales tax it paid on electricity and equipment it used during its blast freezing process, which involves more specificity and additional steps not associated with a typical freezing process. Specifically, the company cited Indiana Code section 2.5-5-5.1(b) and 6-2.5-5-3 to support its assertion that blast freezing the food “constitutes the last stage in the (food’s) manufacturing process.”

After initially denying the request refunds, the Indiana Department of Revenue granted a 15 percent refund for only the electricity purchased and used during the freezing process. Refunds for the actual freezing equipment were once again denied.

MWC then filed for judicial review in the Indiana Tax Court, and both parties moved for summary judgment. Tax Court Judge Martha Wentworth ruled in favor of the department in January, writing that Merchandise Warehouse’s freezing process “(does) not culminate in the production of new, distinct marketable goods” as is required to qualify for the exemptions. The Tax Court also determined taxpayers must use purchased items such as electricity or freezer equipment “as part of its own process to produce other tangible personal property.”

But after granting review in a Wednesday opinion, the Indiana Supreme Court reversed the Tax Court’s opinion and entered summary judgment in favor of MWC in Merchandise Warehouse Co., Inc. v. Indiana Department of State Revenue, 49S10-1712-TA-735.

Justice Christopher Goff, writing in his first majority opinion since he joined the high court last summer, first said in the Wednesday opinion that under the Consumption and Equipment exemptions cited by MWC, the company would only be entitled to refunds if it used the equipment in question for the “direct production of other tangible personal property.” Indiana law defines direct product as “a process that substantially changes tangible personal property, transforming it into a distinct marketable good,” Goff said.

Indiana caselaw holds that the production process ends when it yields the most marketable good, rather than a potentially marketable product, Goff continued. Under that definition, Merchandise Warehouse’s blast freezing process constitutes direct production because it increases the food’s shelf life, thus creating a distinct product that is marketed to consumers, he said.

“Without MWC here, there is no blast-frozen food for MWC’s (customers) to sell to their own customers,” the justice wrote, likening the case to Indianapolis Fruit v. Indiana Department of State Revenue, 691 N.E.2d 1379, 1383 (Ind. Tax Ct. 1998).

Goff went on to strike down the Tax Court’s reading of the exemption statutes as requiring taxpayers to be engaged in their own production process to qualify for the exemptions. Rather, the plain language of those statutes “simply requires that the equipment be directly used in direct production,” which MWC did when it used its blast freezing process to increase the shelf life of its customers’ food products, he said.

All justices concurred.


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