Indiana Department of State Revenue v. Cave Stone, Inc.
1983 Ind. LEXIS 1060, 457 N.E.2d 520 (1983)
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Rule of Law:
Equipment used for essential transportation of unfinished materials between stages of a continuous production process is directly used in direct production and thus exempt from state sales tax, even if no physical transformation of the product occurs during the transportation itself.
Facts:
- Cave Stone, Inc. and Meshberger Stone, Inc. are engaged in the business of selling sized aggregate stone removed from their respective quarries.
- Their production procedure involves stripping, drilling, blasting, and loading crude stone into trucks, which is then hauled from the blasting area to a primary crusher (the "hauling crude stone" activity).
- After being crushed, separated, washed, and screened, the graded stone is loaded onto trucks which carry it to separate stockpiles (the "stock out" activity).
- Stockpiling serves the dual purpose of preserving the grading of stone, preventing commingling, and allowing moisture to drain and evaporate to reduce moisture levels to a standard generally acceptable to purchasers.
- The trucks used for hauling crude stone and stock out activities are specialized, not licensed for public highways, and used almost exclusively for these internal transport purposes.
- Cave Stone and Meshberger Stone never sold crude stone directly from the quarry, as there was no market or commercial use for it; the stone became a marketable product only after further steps of crushing, screening, washing, sizing, and stockpiling.
- The hauling crude stone and stock out steps constituted transportation of unfinished work in process in a continuous flow from one production step to another within the companies' integrated operations.
Procedural Posture:
- Cave Stone, Inc. and Meshberger Stone, Inc. filed separate complaints in the trial court (court of first instance) seeking refunds for sales tax paid on certain equipment.
- The trial court consolidated the cases for trial and entered separate judgments in favor of Cave Stone, Inc. and Meshberger Stone, Inc., finding their equipment exempt from sales tax and no penalties due.
- The Indiana Department of State Revenue filed separate motions to correct errors, both of which were overruled by the trial court.
- The Indiana Department of State Revenue appealed the trial court's judgments to the Court of Appeals, Second District.
- The Court of Appeals reversed the judgment of the trial court in part (with Judge Buchanan dissenting), concluding that the equipment was not exempt from the imposition of Indiana Gross Retail Tax.
- Cave Stone, Inc. and Meshberger Stone, Inc. filed a petition to transfer the cause from the Court of Appeals to the Supreme Court of Indiana.
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Issue:
Does equipment used to transport unfinished materials between stages of a continuous production process, where no physical transformation occurs during transit but the transportation is essential to creating a marketable product, qualify for a sales tax exemption as being "directly used by the purchaser in the direct production, manufacture, mining, processing or finishing of tangible personal property" under Indiana Code § 6-2-1-39(b)(6)?
Opinions:
Majority - Prentice, Justice
Yes, equipment used for hauling crude stone and stock out activities qualifies for the sales tax exemption under Ind.Code § 6-2-1-39(b)(6). The Court found that the statutory exemption provisions are not mutually exclusive but rather provide a comprehensive description of various means of production, with terms that often overlap. The production or processing of the stone is a continuous and indivisible process, beginning at the initial quarrying and ending at the time the stone is stockpiled. The transportation equipment (trucks, fuel, parts) was essential to transforming crude stone into marketable aggregate stone, playing an integral part in this ongoing transformation. The Court rejected the Court of Appeals' narrow interpretation that required a 'transformational effect' (physical change) to occur during the transportation itself, stating that whether specific transformation occurred during transit is irrelevant, as the transportation is elementary to the creation of a marketable product. This interpretation is consistent with previous appellate decisions, such as State Department of Revenue v. Calcar Quarries, Inc., Department of Revenue v. U.S. Steel, and Indiana Department of Revenue v. American Dairy of Evansville, Inc., which emphasized the 'integral operation' of equipment and its 'immediate link' to the product during production, rather than solely focusing on a contemporaneous physical change.
Analysis:
This case significantly broadens the interpretation of 'direct use' in production-related sales tax exemptions, moving away from a rigid requirement of physical transformation during every stage of a process. By emphasizing the 'integral operation' and the necessity of equipment for the overall, continuous flow of production, the ruling clarifies that essential internal transportation can qualify for exemption. This precedent is crucial for industries with multi-stage production processes, particularly those involving the movement of materials that undergo later transformations, ensuring that equipment vital to the entire process is not unduly burdened by sales tax, provided it has an 'immediate link' to the product.
