Company must pay sales tax on electricity, freezer equipment

An Indiana food storage warehouse must pay sales tax on electricity and freezer equipment it purchased because such purchases are not used in the production of new, marketable goods, Indiana Tax Court Judge Martha Wentworth ruled Wednesday.

In 2011 and 2012, Merchandise Warehouse Co. Inc., a food storage warehouse in Indianapolis, filed two utility sales tax exemption applications and three claims for refund, asserting that electricity it purchased to operate its freezer equipment and the purchase of certain freezers should be exempt from Indiana’s sales tax because “(t)he freezing of the food constitutes the last stage in the (food’s) manufacturing process.”

The Indiana Department of State Revenue initially denied all three of the company’s refund claims, then later determined after multiple hearings and an audit that it was entitled to a 15 percent refund on the electricity purchases. However, the department maintained its denial of Merchandise Warehouse’s claims for refund on the freezer purchase.

The company appealed to the Indiana Tax Court in Merchandise Warehouse Co., Inc. v. Indiana Department of State Revenue, 49T10-1302, and the Revenue Department moved for summary judgment, arguing that neither the purchase of the electricity nor the freezer equipment were exempt from sales tax under Indiana Code 6-2.5-5-5.1, the Consumption Exemption, or 6-2.5-5-3, the Equipment Exemption.

Wentworth awarded summary judgment to the Department of Revenue, writing that in order to qualify under either of those exemptions, Merchandise Warehouse was required to “be engaged in the production of other tangible personal property” and “use its electricity and freezer equipment as an essential and integral part of its production process.”

The definition of “production” is the key to determining whether a company qualifies under the consumption and equipment exemptions, Wentworth wrote, and that definition is specific to the facts of an individual case. Merchandise Warehouse argued that its work did constitute production because when it freezes its customers’ food, it does create “new, distinct marketable goods” because the food, once frozen, has a longer shelf life.

Wentworth conceded that the warehouse’s work does constitute a physical transformation of the food, but “when it provides freezing services, Merchandise Warehouse is engaged in an activity that, while transformative, simply preserves the food products that have already been prepared and packaged by its customers.”

Merchandise Warehouse further argued that because the food products that are marketed are frozen, its use of electricity and the purchase of the freezer equipment is “essential and integral to the overall integrated production process.”

But Wentworth wrote that such an argument overlooked one critical point – that is, both exemptions employ a “double direct” standard that requires the taxpayer who purchases the electricity or equipment in question to use the purchased items as part of its own process to produce other tangible personal property, “not as part of an alleged process of another taxpayer.”

“Merchandise Warehouse does not produce other tangible personal property in an integrated production process when it freezes its customers’ food products,” the Tax Court judge wrote.