Foster v. State Tax Assessor
1998 ME 205, 716 A.2d 1012, 1998 Me. LEXIS 207 (1998)
Rule of Law:
For purposes of Maine's investment tax credit, machinery and equipment must be used 'directly and primarily in the production of tangible personal property,' which requires the equipment to transform or convert the personal property itself into a different form, composition, or character.
Facts:
- Robert H. Foster and Amr Ismail were shareholders of Maine Wild Blueberry Company (Company), which operated a plant in Machias processing fresh fruit into various products.
- The Company used significant amounts of water for washing, conveying, rinsing, and freezing berries, and to maintain FDA sanitation standards, generating a proportionate amount of wastewater.
- By late 1990, the Company's operations had tripled, and the Town of Machias became concerned its sewer system could not handle the increased volume of wastewater discharged by the Company.
- In 1991, the Town and the Company entered an agreement imposing restrictions on the daily gallonage and amount of solids the Company could discharge into the Town’s sewer system.
- To comply with these discharge restrictions, the Company designed and constructed a wastewater pretreatment facility on its property.
- The facility's purpose was to screen, filter, and chemically and organically treat the wastewater to reduce sugars and other organic material before it entered the Town's sewer system.
- On several occasions in 1992, the Company exceeded daily discharge limits and incurred over $100,000 in surcharges, leading to enhancements to the facility necessitated by design deficiencies.
- The Fosters and the Ismails filed joint Maine income tax returns for 1992 and 1993, claiming investment tax credits with respect to the facility and its enhancements.
Procedural Posture:
- Robert H. and Caroline M. Foster and Amr and Mary Ismail (taxpayers) claimed investment tax credits on their 1992 and 1993 joint Maine income tax returns for a wastewater pretreatment facility and its enhancements.
- The Bureau of Taxation disallowed these claimed credits.
- The taxpayers petitioned for administrative reconsideration with the State Tax Assessor, who upheld the disallowances.
- The taxpayers filed a petition for review in the Superior Court (Kennebec County, Alexander, J.), submitting the case for trial on a stipulated record.
- The Superior Court concluded that the facility was either ineligible as real estate and fixtures, or alternatively, that it was only indirectly involved in production, and affirmed the Assessor's disallowance.
- The taxpayers appealed the Superior Court's judgment to the Supreme Judicial Court of Maine.
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Issue:
Does a wastewater pretreatment facility, designed to reduce organic material in wastewater generated by a blueberry processing plant before discharge, qualify as 'machinery and equipment ... used directly and primarily in the production of tangible personal property' for purposes of the Maine investment tax credit?
Opinions:
Majority - Clifford, Justice
No, a wastewater pretreatment facility does not qualify as 'machinery and equipment ... used directly and primarily in the production of tangible personal property' for investment tax credit purposes because its function does not involve the transformation or conversion of the tangible personal property being produced. The court, in interpreting 36 M.R.S.A. § 5219-E(1)(C)(2) and the definition of 'production' in § 1752(9-B) and Rule 303.01(A), held that 'production' requires an operation that 'transforms or converts personal property by physical, chemical, or other means into a different form, composition or character from that in which it originally existed.' The facility's sole purpose is to treat wastewater after it has been used in the blueberry production process and before its discharge into the municipal sewer system; it does not alter or convert the blueberries themselves. This situation is akin to the icing equipment in SST & S, Inc. v. State Tax Assessor, which did not transform fish, and contrasts with the transformers in Maine Yankee Atomic Power Co. v. State Tax Assessor, which physically changed the form of electricity. Therefore, despite its importance for regulatory compliance and overall company operations, the wastewater pretreatment facility does not meet the strict statutory definition of being used directly in the production of tangible personal property.
Analysis:
This case establishes a narrow and literal interpretation of 'production' for tax credit eligibility, underscoring that for equipment to qualify, it must directly effect a physical or chemical transformation of the tangible personal property being manufactured for sale. It clarifies that ancillary or post-production processes, even those crucial for regulatory compliance or the overall efficiency of an operation, will not qualify if they do not directly alter the product's form, composition, or character. This precedent has significant implications for businesses seeking tax incentives for environmental control equipment, safety systems, or other support infrastructure, potentially limiting their eligibility unless a direct product transformation can be demonstrated, thereby restricting the scope of such economic development tools.
