Aztec Partners, LLC v. Indiana Department of State Revenue
2015 Ind. Tax LEXIS 29, 35 N.E.3d 320 (2015)
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Rule of Law:
Electricity consumed to power equipment used to hold and preserve prepared food items is exempt from Indiana sales tax if such use is an essential and integral part of an integrated production process that results in a new, marketable tangible personal property, even if the electricity does not directly cause a chemical transformation.
Facts:
- Aztec Partners, LLC operates nineteen Qdoba Mexican Restaurants in Indiana.
- Aztec's employees prepare various food items, such as salsa, chicken, chorizo, eggs, rice, lettuce, and tortilla chips.
- Aztec uses deluxe food warmers, hot food cabinets, food bar heating/cooling systems, walk-in coolers, and chip warmers (collectively, the electrical equipment).
- The electrical equipment holds and preserves the prepared food items at specific temperatures until they are combined into the entrées served to customers.
- Aztec does not use any of the electrical equipment to cook food.
Procedural Posture:
- In June 2011, Aztec filed twelve refund claims with the Indiana Department of State Revenue, seeking a refund of sales tax paid on electricity.
- The Department denied Aztec’s refund claims, determining the electricity was taxable.
- Aztec protested the Department’s refund claim denials.
- On August 24, 2012, after holding a hearing, the Department issued a Memorandum of Decision denying Aztec’s protest.
- On October 24, 2012, Aztec initiated an original tax appeal as a small tax case in the Indiana Tax Court.
- On July 12, 2013, the parties tried the case before the Indiana Tax Court.
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Issue:
Does electricity used to power equipment that holds and preserves prepared food items, which are subsequently combined into marketable entrées, qualify for Indiana's sales tax consumption exemption as being directly consumed in the production of tangible personal property?
Opinions:
Majority - Wentworth, J.
Yes, electricity used to power equipment that holds and preserves prepared food items, which are then combined into marketable entrées, does qualify for Indiana's sales tax consumption exemption. The court first established subject matter jurisdiction, dismissing the Department's argument that Aztec failed to exhaust administrative remedies by not precisely naming the exemption during the administrative process. The court clarified that subject matter jurisdiction does not depend on the sufficiency of pleadings. Addressing the consumption exemption under Indiana Code § 6-2.5-5-5.1, the court applied a three-part test: engagement in production, existence of an integrated production process, and the electricity being essential and integral to that process. The court found Aztec was engaged in production because its preparation and combination of individual food items into new, marketable entrées created products with a different character and form, distinguishing from cases requiring chemical transformation for certain food items and aligning with others like Indianapolis Fruit Co. where physical alteration sufficed. The court then determined Aztec had an integrated production process, starting with food preparation and ending with the completed, marketable entrée, and that the holding/preserving step was integral to this process since the prepared items were not sold separately. Finally, the court concluded the electricity was essential and integral to the production process, clarifying that the 'immediate effect' required by Indiana Dep’t of State Revenue v. Cave Stone, Inc. means necessity for the final product, not direct transformation. The court rejected the Department's misinterpretation of Trump Indiana, Inc., stating that warming or cooling is not per se excluded, and emphasized that without the electricity to preserve food at proper temperatures, Aztec could not produce its entrées. Thus, the Department's denial was reversed.
Analysis:
This case clarifies and potentially broadens the interpretation of 'production' and 'essential and integral' for sales tax exemptions in Indiana, particularly for businesses in the food service industry. It signals that physical alteration or combination resulting in a new marketable product can constitute 'production' even without a chemical change, and that intermediate steps like temperature control, if critical to the final product's creation, are part of the integrated production process. This ruling provides a precedent for other industries where preserving or holding materials at specific conditions is necessary for a final assembled or processed good, potentially allowing more businesses to qualify for consumption exemptions on utilities used in their operational chains.
