Alcoa, Inc. appealed a decision from the Blount County Property Assessor regarding the assessment of ad valorem taxes on raw materials used to fabricate aluminum sheets at its Blount County facility. The Chancery Court upheld the assessment, which was also affirmed by the State Board of Equalization and the Blount County Board. Alcoa argued that it qualified for tax exemptions under Article II, Sections 28 and 30 of the Tennessee Constitution, which exempt "the direct product of the soil in the hands of the producer" and "manufactured produce of this State in the hands of the manufacturer" from taxation. The court found that Alcoa did not meet its burden of proof for these exemptions. The opinion, delivered by Judge Herschel Pickens Franks, affirmed the trial court's judgment, concluding that the assessments were valid under the relevant constitutional provisions and Tennessee Code Annotated § 67-5-216, which outlines similar exemptions for growing crops and manufactured articles.
The Final Decision and Order from the Board’s Assessment Appeals Commission outlines the tax assessment issues concerning Alcoa's manufacturing plants in Tennessee. Alcoa, required to list tangible personal property by March 1, was audited for tax years 2001 and 2002, resulting in back assessments for omitted raw materials, primarily alumina, which Alcoa believed were exempt as products of the soil under the Tennessee Constitution. A similar assessment occurred for 2003, prompting Alcoa to appeal for all three years. A hearing in January 2006 led to an Initial Decision affirming that the raw materials were taxable personal property and that the exemption did not apply as the materials were imported. This ruling was upheld by the AAC on June 4, 2008, and a Certificate of Assessment was issued on July 24, 2008. Alcoa's subsequent Petition for Judicial Review filed on September 19, 2008, was heard by the Chancery Court, which ruled in favor of the Board and County on December 9, 2009. The Chancellor emphasized that statutory interpretation should reflect legislative intent and that exemptions must be strictly construed against the taxpayer. The court determined that the raw materials had undergone significant refinement and were thus not "direct products of the soil," referencing two Tennessee Supreme Court cases to support this conclusion.
The Trial Court ruled that Alcoa did not qualify for the "products of the soil" tax exemption under Article II, Section 28 of the Tennessee Constitution or Tenn. Code Ann. § 67-5-216, stating that the raw materials were not "in the hands of the producer or immediate vendee." It determined that these raw materials were not "direct products of the soil," making it unnecessary to decide if the statute discriminated against foreign products. Additionally, the Court held that Alcoa was not entitled to a tax exemption for the raw materials under Article II, Section 30 of the Tennessee Constitution, citing Morgan v. Hamilton Co. v. City of Nashville, which indicated that the materials were not manufactured by Alcoa. Alcoa appealed the Chancellor’s Order, raising several issues: whether the Trial Court correctly ruled that the materials were not "direct products of the soil," whether Alcoa was the "producer" or "immediate vendee," if the assessment violated constitutional provisions, and whether the materials were improperly assessed as they were not "manufactured articles." Alcoa contends that the Trial Court erred in its interpretation of the relevant constitutional provisions regarding taxation of these materials.
Tenn. Code Ann. § 67-5-216 exempts all growing crops, including timber, nursery stock, and articles manufactured from such produce, from taxation when in the hands of the producer or manufacturer. The interpretation of "direct product of the soil" is critical, as it determines the applicability of this tax exemption. Courts aim to ascertain legislative intent through the ordinary meaning of the language used and must interpret statutory provisions within the context of the entire statutory scheme. Tax statutes should not extend beyond their explicit language, and ambiguities are resolved in favor of taxpayers, while tax exemptions are construed against taxpayers, who must demonstrate eligibility for such exemptions.
In this case, Alcoa is challenging the denial of ad valorem tax exemptions for its raw materials, arguing that materials like alumina and coke qualify as "direct products of the soil." The Trial Court found these materials did not qualify due to significant human refinement processes, referencing prior Tennessee Supreme Court rulings that established that products altered by human intervention, such as ground wheat or processed tobacco, lose their exemption status. Alcoa contends that this legal interpretation is erroneous.
The Supreme Court clarified the interpretation of "direct product of the soil" in Article II, Sections 28 and 30 of the Tennessee Constitution. Wheat is considered a direct product of the soil and is thus exempt from certain taxes under Section 28. In contrast, flour, made from wheat, does not qualify as a direct product of the soil and is only exempt from taxation under Section 30. Similarly, tobacco is exempt under Section 28 while in its raw form; however, once it is processed into products like chewing or smoking tobacco, it falls under Section 30's exemption. The Court emphasized that for a product to qualify for exemption, it must be a direct product of the soil and must be in the possession of the producer or their immediate vendee. The Trial Court affirmed that Alcoa's raw materials do not qualify for such exemption, as they do not meet the criteria established by the Constitution. The definition of "direct" implies that the exemption applies only to products that come directly from the soil without substantial human alteration. Therefore, if the product is not a direct product of the soil, there is no need to evaluate its possession status for tax exemption purposes.
Tenn. Code Ann. § 67-5-216 provides an exemption from taxation for all growing crops, including timber and other products directly from the soil, in the possession of the producer or their immediate vendee. The court's primary inquiry is whether Alcoa's raw materials qualify as "direct products of the soil." The definition of "direct" emphasizes that only original, unprocessed products qualify for the exemption. The court references prior decisions by the Tennessee Supreme Court, asserting that raw materials must not be processed beyond certain limits to qualify as products of the soil.
Evidence indicates that Alcoa's raw materials have undergone extensive processing, exceeding that of converting wheat to flour or tobacco into smoking products. Each raw material has changed significantly in name, appearance, and consistency during processing, confirming that they do not meet the definition of products of the soil. Consequently, the Trial Court's conclusion that these raw materials are not exempt from ad valorem taxation is upheld.
Alcoa’s alternative argument suggests that if the raw materials are not considered products of the soil, then they are "manufactured articles" improperly assessed under the Tennessee Constitution and the relevant statute. Article II, Section 30 of the Tennessee Constitution and Tenn. Code Ann. § 67-5-216 state that manufactured articles derived from state produce should not be taxed beyond inspection fees.
The Trial Court ruled that various raw materials and byproducts, including alumina, coke, pitch, scrap metal, pot lining, and alloying metals, do not qualify for tax exemption as manufactured articles under Tennessee law. It was established that the alumina in question is derived from bauxite, which is mined globally but not in North America. The Court referenced the precedent set in Morgan v. Hamilton Co., which determined that materials awaiting conversion into a manufactured product do not qualify for tax exemption until the conversion process begins. The Court clarified that the exemption applies only to products that have been transformed into something different from the original material purchased for manufacturing.
In this context, the Court rejected Alcoa's claim that materials produced by its subsidiary AWA should be considered as manufactured by Alcoa itself, emphasizing the legal independence of the two entities. Although the Tennessee Constitution does not explicitly define "manufacturer," the Court cited previous cases to clarify that a manufacturer is someone who alters the value of raw or semi-finished materials through a production process. The Court confirmed that Alcoa is recognized as a manufacturer of aluminum products, specifically aluminum sheets for beverage cans, but noted that neither Alcoa nor its subsidiaries manufactured the raw materials in question. Consequently, the Court found no error in its conclusion that these items are not exempt from ad valorem taxation under the applicable constitutional provisions or state statute.
Alcoa did not directly produce or refine alumina from bauxite or fluoride from fluorspar; however, some of these materials were manufactured by AWA, its subsidiary. On appeal, Alcoa contended that AWA should be disregarded when determining whether it was the manufacturer, asserting that AWA was simply an instrumentality of Alcoa and thus Alcoa should qualify for a tax exemption. Despite acknowledging AWA as a separate legal entity, Alcoa argued that AWA's operations were entirely controlled by Alcoa employees, who made all manufacturing decisions without AWA having its own staff or payroll. Alcoa claimed that failing to recognize AWA as an instrumentality would result in "significant injustice," although it did not clarify the nature of this injustice or the rationale for AWA's subsidiary status.
Tennessee courts emphasize the importance of honoring corporate structures, and the corporate veil can only be pierced under specific conditions: the parent corporation must have complete control over the subsidiary, this control must be used to commit wrongful acts, and the injury must directly result from that control. The precedent established by prior cases illustrates that while the corporate form is generally respected, exceptions exist when it serves to evade clear legislative purposes.
The evidence supports that the first element required for a legal finding is met; however, there is no evidence to substantiate the second and third elements. Specifically, there is no indication that Alcoa's control over its subsidiary, AWA, was used to perpetrate fraud or wrongdoing, nor that such control resulted in injury or unjust loss to any third party. Therefore, the Trial Court's decision not to pierce the corporate veil to attribute the manufacturing of aluminum and fluoride produced by AWA to Alcoa is upheld. Furthermore, the Trial Court’s conclusion that the raw materials used by Alcoa in Tennessee do not qualify as "products of the soil" under the relevant Tennessee constitutional and statutory provisions is affirmed. The same applies to the determination that these materials were not manufactured by Alcoa. Consequently, the Trial Court's affirmation of the tax assessment by the Blount County Assessor is upheld. Additionally, the Court will not address other constitutional issues raised by Alcoa in the appeal, as the case is decided on different grounds. The Judgment of the Trial Court is affirmed, and the case is remanded, with appeal costs assigned to Alcoa, Inc.
