United States: Taxpayer Fails to Catalyze the Tennessee Court of Appeals to Expand the Industrial Machinery Exemption

The Tennessee Court of Appeals in Eastman Chemical Co. v. Chumley, No. M2002-02114-COAR3- CV, 2002 WL 51822, 2004 Tenn. App. LEXIS 17 (Tenn. Ct. App. Jan. 12, 2004), determined that catalysts do not fall within the industrial machinery exemption in § 67-6-102(a)(13)(A) of the Tennessee Code. As a result, Eastman Chemical Company was denied a refund for use tax paid on purchases of catalysts used in the manufacturing process.

Eastman Chemical Company ("Eastman") manufactures chemical products and plastics at its plant in Kingsport, Tennessee. Eastman regularly uses three types of catalysts in its manufacturing process. From January 1995 through December 1997, Eastman paid the State of Tennessee use tax on its purchases of the catalysts. On January 1, 1998, however, Eastman ceased paying the tax after determining the materials were exempt from taxation as either industrial materials or industrial machinery. Eastman filed a claim for refund with the Tennessee Department of Revenue (the "Department"), which the Department denied. Eastman then filed a complaint in the Chancery Court for Davidson County alleging that the catalysts were exempt from use tax under § 67- 6-102(a)(13)(A) of the Tennessee Code and seeking a refund for the taxes it had paid for the years 1995, 1996, and 1997. The trial court determined that Eastman was entitled to a refund of the use taxes it had paid on the catalysts, and the Commissioner appealed.

The Tennessee Court of Appeals noted that the sole issue on appeal was whether the exemption for industrial machinery in § 67-6- 102(a)(13)(A) included catalysts. Taxpayers in Tennessee bear the burden of establishing that they are entitled to an exemption, and any wellfounded doubt as to the existence of the exemption would defeat Eastman’s claim.

The Tennessee Court of Appeals began its analysis by addressing the method for interpreting § 67-6-102(a)(13)(A) and whether the Tennessee General Assembly intended the statute to exempt catalysts from taxation. Under § 67-6-102(a)(13)(A), Eastman could prevail on its claim if (1) its principal business was fabricating or processing tangible personal property for resale and consumption off the premises; (2) the property for which it claimed an exemption was "machinery, apparatus and equipment with all associated parts, appurtenances and accessories," and (3) the property was "necessary to, and primarily for, the fabrication or processing of tangible personal property for resale and consumption off the premises." Eastman easily established the first and third elements of its claim, and the sole inquiry was whether the company could establish the second element. Eastman argued that the dictionary definition of "apparatus" included "chemical operations" and that catalysts were therefore exempt. The Court of Appeals, however, rejected Eastman’s reliance on the dictionary, determining instead that the meaning of statutory terms must ultimately derive from the context of the statute. To help determine whether the legislature intended to exempt catalysts from taxation, the Court reviewed the legislative history of the industrial machinery exemption.

The Court analyzed the history of the amendments to § 67-6-102(a)(13)(A) and, in particular, the legislative history of a 1984 amendment. Prior to 1984, the industrial machinery exemption was limited to "machinery . . which is directly and primarily utilized in fabricating or processing tangible personal property for resale." In 1984, the Tennessee General Assembly amended the exemption to cover "machinery, apparatus and equipment with all associated parts, appurtenances and accessories . . . which is necessary to, and primarily for, the fabrication or processing of tangible personal property for resale and consumption off the premises." The Court of Appeals noted that the sponsor of the 1984 amendment stated that the purpose of the bill was to clarify the definition of "industrial machinery."

Relying on the legislative history of § 67-6- 102(a)(13)(A), the Court determined that the addition of the words "apparatus" and "equipment" by the 1984 amendment did not expand the exemption to include catalysts. Rather, the terms "machinery," "apparatus," and "equipment" are synonymous and include (1) the devices conveying the materials and components from one part of the manufacturing or fabricating process to another; (2) the devices such as stamping machines, presses, cauldrons, vats, vessels, or chambers where the fabricating or processing occurs; and (3) the devices used to convey the finished products to packing or storage. The Court held that the terms do not include catalysts and that the General Assembly could have specifically included an exemption for catalysts if it had so desired. The Court further determined that the "apparatuses" used in Eastman’s manufacturing process included the vessels and other containers in which the plastics and chemical compounds were processed, but not the raw materials and catalysts placed in the vessels and containers. As the party bearing the burden of demonstrating the applicability of an exemption, the Court concluded that Eastman failed to demonstrate that catalysts were exempt from tax and denied the refund claim.

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