Harlan Sprague Dawley, Inc. v. Indiana Department of State Revenue
605 N.E.2d 1222, 1992 WL 385631, 1992 Ind. Tax LEXIS 18 (1992)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Specialized animal breeding operations that involve controlled processes to produce genetically distinct animals for sale qualify as "processing" or "production" under Indiana's industrial and utility sales tax exemptions, given the legislative intent to encourage industrial growth and prevent tax pyramiding.
Facts:
- Harlan Sprague Dawley, Inc. (HSD) is an industry leader in breeding and raising laboratory rats.
- HSD uses specialized techniques to breed and raise rats that are genetically different from naturally occurring relatives, ensuring the development of desired strains for public and private research laboratories.
- HSD maintains pedigree records of its rat colonies and selects breeding groups based on the specific strains of offspring it desires to produce.
- The breeding, gestation, and rearing of the rats take place in a tightly controlled, quarantined environment where air is filtered, temperatures are constant, and specific light/dark cycles are maintained.
- Employees working with the rats undergo a twenty-minute sterilization procedure and wear sterile masks, gowns, and shoes to prevent contamination, and sterilize food, bedding, and water.
- HSD’s efforts yield individual animals that are physically and genetically different from wild rats, unable to thrive outside the laboratory, and bred for particularized characteristics (e.g., one strain for blood pressure testing, another for AIDS testing).
Procedural Posture:
- After a 1986 audit, the Indiana Department of State Revenue (Department) determined Harlan Sprague Dawley, Inc. (HSD) owed sales tax on its purchases of supplies, utilities, and equipment.
- HSD paid the assessed tax to the Department.
- HSD filed a claim for a refund with the Department, which the Department denied.
- HSD brought an original tax appeal to the Indiana Tax Court, where the matter was heard on the parties' several motions for partial summary judgment.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a specialized laboratory rat breeding operation, which controls genetic selection and environmental conditions to produce genetically distinct animals for research, qualify for industrial and utility sales tax exemptions under Indiana law as "manufacturing," "processing," or "production"?
Opinions:
Majority - FISHER, Judge
Yes, Harlan Sprague Dawley, Inc.'s specialized laboratory rat breeding operation qualifies for industrial and utility sales tax exemptions under Indiana law as "processing" or "production." The court, mindful that tax exemption statutes are to be strictly construed against the taxpayer, nonetheless emphasized that the primary goal of statutory construction is to ascertain and give effect to legislative intent. Citing Indiana Dep’t of State Revenue v. Cave Stone, Inc., the court adopted an expansive definition of "production" to include "all activity directed to increasing the number of scarce economic goods," which encompasses natural acts and considers the process "continuous and indivisible." This expansive view departs from the traditional "transformation" definition of manufacturing, which was deemed too narrow. The court identified two key legislative purposes for the industrial exemptions: to encourage industrial growth and to prevent tax pyramiding. HSD's operation of producing specialized, scarce economic goods through controlled processes for human use aligns with the goal of encouraging industrial growth. Furthermore, taxing HSD’s inputs would lead to increased costs passed down to research laboratories and ultimately consumers, resulting in the "tax pyramiding" that the legislature sought to avoid. The Department's own regulations, specifically 45 I.A.C. 2.2-5-10(k), define "processing or refining" to include operations like "impregnating." Since HSD manages and controls its rats' impregnation, gestation, and development, its activities fall squarely within this regulatory definition of processing, to which the court grants judicial deference. The utility exemption, using similar statutory language, is interpreted consistently. The court also addressed HSD’s due process claim regarding the "ascertainable standards" rule, concluding that the Department’s existing regulations provided sufficient notice of the exemption requirements and were adequately specific, thus no violation of the rule occurred.
Analysis:
This case significantly expands the interpretation of "production" and "processing" for sales tax exemptions in Indiana, establishing that sophisticated, controlled biological processes can qualify as industrial activity. The ruling emphasizes legislative intent to encourage economic growth and prevent tax pyramiding over a strict, traditional definition of manufacturing requiring physical transformation. This precedent is crucial for biotechnology, specialized agriculture, and other advanced biological industries, ensuring they can avail themselves of tax incentives previously associated mainly with traditional manufacturing. It highlights the importance of agency regulations in clarifying statutory definitions and reinforces judicial deference to such interpretations.
