In Merchandise Warehouse Co., Inc. v. Indiana Department of State Revenue(Jan. 11, 2017), the Indiana Tax Court rejected a Taxpayer's request for a sales tax exemption for certain freezer equipment and the electricity used to power the equipment. Taxpayer operated a food storage warehouse. Food manufacturers delivered their products to Taxpayer packaged and on pallets. Taxpayer provided customers with either "slow" or "blast" freezing services. (With "slow" freezing, products were placed on pallets to freeze at their own pace in five to twelve days; with "blast" freezing, specialized equipment froze products within two days.)
Taxpayer claimed the freezing phase was the last stage of the food manufacturing process. Therefore, it sought a refund of sales tax paid for the equipment and electricity used in that process in 2009 to 2012. These purchases were exempt, Taxpayer asserted, under the Consumption and Equipment Exemptions. Generally speaking, these provisions exempt from Indiana sales tax transactions involving the purchase of electricity or equipment that is directly used in the manufacturing process. To qualify for the exemption, the Court explained that Taxpayer (a) must "be engaged in the production of other tangible personal property" and (b) "use its electricity and freezer equipment as an essential and integral part of its integrated production process." Opinion, at 6-7.
Taxpayer did not satisfy the "iron-clad rule" that "without production there can be no exemption." Opinion, at 7 (citing Indianapolis Fruit Co. v. Dep't of State Revenue, 691 N.E.2d 1379, 1384 (Ind. Tax Ct. 1998).) "Production," the Court explained, "focuses on the transformation of materials into a new, distinct marketable good." Opinion, at 7 (citations omitted). But here Taxpayer did not engage in production, because it "simply preserves the food products that have already been prepared and packaged by its customers." Opinion, at 8. Through its freezing services, Taxpayer did not increase the number of scarce economic goods in the marketplace – no "new, distinct marketable goods" were created. Opinion, at 9. In addition, the exemptions did not apply because Taxpayer did not use the equipment and electricity as part of its own production process.
The Court held: "Merchandise Warehouse does not produce other tangible personal property in an integrated production process when it freezes its customers' food products." Opinion, at 11. The exemptions were denied.
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