Norandal USA, Inc. operates an aluminum manufacturing plant where it uses two multi-ton roll grinders, originally deemed exempt from sales tax as 'industrial machinery' by the Tennessee Department of Revenue in 1987. However, a 1995 audit reclassified the roll grinders as 'equipment used for maintenance,' leading to a sales tax assessment on supplies purchased from 1995 to 1998. Norandal paid the assessed tax under protest and subsequently filed a lawsuit to recover these payments. The trial court upheld the Department's reclassification, determining the roll grinders fit the 'equipment used for maintenance' exception to the industrial machinery exemption. The Court of Appeals affirmed the trial court's decision, confirming that roll grinder supplies are subject to sales tax. The opinion was delivered by Judge Holly M. Kirby, with concurrence from Judges W. Frank Crawford and Alan E. Highers. Legal representation included Gerald B. Kirksey and Timothy H. Nichols for Norandal, and Paul G. Summers, Michael E. Moore, and Michael W. Catalano for the State.
Aluminum sheeting is regularly reground by roll grinders after being wound into coils, cooled, and stored. Initial processing occurs at the 911 Sheet Mill, where cold rolling reduces the thickness of the aluminum by approximately 50% per pass. The rolling process can be interrupted by heat treatment to alter the grain structure. The 911 Mill utilizes four rolls: two work rolls that compress the aluminum and two larger back-up rolls that support them, all featuring microscopic grooves. These grooves, known as 'peaks and valleys,' are essential for ensuring proper lubrication and preventing metal slippage during processing. Both work and back-up rolls must undergo periodic regrounding, with caster rolls requiring regrounding every two to four weeks, work rolls every 60 to 72 hours, and back-up rolls every three to four months. Rounding may also occur to correct surface defects or meet specific finish requirements. The roll grinders, located near the maintenance area, do not touch the finished product. The entire process from molten aluminum to the final product spans roughly four to six weeks. Under Tennessee law, 'industrial machinery' is exempt from sales tax, defined to include all machinery necessary for the fabrication or processing of tangible personal property for resale. The roll grinders produce between 60 to 320 grooves per inch, influencing the final product's finish quality, with the 922 Mill rolls yielding the smoothest results due to having the most grooves.
Tenn. Code Ann. 67-6-102(a)(14)(A) outlines exceptions to the industrial machinery exemption from sales tax, specifying that equipment used prior to or after certain industrial machinery, as well as machinery for maintenance or worker comfort, is taxable. Norandal has maintained that roll grinding equipment qualifies as exempt industrial machinery since 1984 and has not paid sales tax on related supplies. Following a compliance audit in 1987, the Tennessee Department of Revenue disallowed Norandal's tax exemptions for roll grinding supplies, though an Assistant Commissioner later affirmed their exempt status. This reliance on the 1987 letter continued until a 1995 audit led to a contradictory position from the Department, which classified roll grinding supplies as maintenance items subject to tax. After a series of communications and a letter ruling in 1997 reaffirming that roll grinders were not exempt, Norandal received a Notice of Assessment in January 1999, resulting in a total tax and interest amount of $50,038 owed, of which $4,926.87 was attributed to roll grinding materials. Norandal subsequently filed a lawsuit on April 19, 2001, to recover the disputed tax for the period of May 1, 1995, to April 30, 1998.
Cross-motions for summary judgment were filed by both parties, who agreed on the undisputed material facts and the issue at hand being statutory construction. They submitted a Joint Statement of Undisputed Material Facts, along with evidentiary exhibits that remained unchallenged. Each party also provided a Supplemental Statement of Undisputed Material Facts without objections. On October 31, 2002, the trial court heard oral arguments and took the matter under advisement. On January 31, 2003, the court denied Norandal's motion and granted the Commissioner's motion, determining that the roll grinders and their supplies were 'equipment used for maintenance' and thus taxable. The court found that the roll grinders were too distant from industrial machinery to qualify for the sales tax exemption. It reasoned that the exemption for 'equipment used for maintenance' includes machinery or apparatus that prepares another item for service and efficiency. Since the roll grinders facilitate the readiness of rolls for service, they met the definition of maintenance equipment. Their location adjacent to the maintenance area further indicated their intended use for maintenance rather than manufacturing. The court concluded that roll grinding supplies also did not qualify for exemption as they were not necessary for the operation and maintenance of industrial machinery. Norandal appealed, arguing that the trial court erred in classifying roll grinders as maintenance equipment instead of industrial machinery and contending that the original 1987 decision to exempt roll grinder supplies was correct. Norandal asserted that the primary function of roll grinders was manufacturing rather than maintenance and criticized the trial court's reliance on their proximity to the maintenance shop. In response, the Commissioner argued that, regardless of the trial court's classification, Norandal was not entitled to an exemption as roll grinders are also considered machinery used in the manufacturing process. The review of the summary judgment will be de novo, focusing on legislative intent in statutory construction without expanding its scope.
The 'natural and ordinary meaning' of statute language is to be applied unless ambiguity necessitates further interpretation of legislative intent. Tax statutes favor the taxpayer, but in cases where a taxpayer claims an exemption from taxation, the interpretation is strictly against the taxpayer, who bears the burden of proving the exemption. The presumption is against exemptions, and these cannot be implied into taxing statutes. Norandal contends that the Commissioner's 1987 classification of roll grinders as industrial machinery aligned with legislative intent and remained unchallenged until 1995. They argue that the Department's long-standing interpretation should be followed unless it is clearly erroneous, especially since the statute did not change during that period. Conversely, the Commissioner asserts that the legislative history and 1984 amendment to the definition of 'industrial machinery' were intended to clarify and standardize the interpretation, expanding it beyond previous limitations. The 1984 amendment broadened the definition to include machinery necessary for fabrication or processing without the requirement of physical contact with the finished product, as noted by Senator Milton Hamilton, who sought to create uniform standards for industries in Tennessee.
The amendment to the definition of exempt industrial machinery has broadened its scope but also established exclusions, specifically for 'equipment used for maintenance' and 'machinery, apparatus, and equipment used prior to or after' the defined timeframe. Legislative discussions cited by Norandal do not address these exclusions, indicating that they do not inform the current case's issues. The Commissioner’s 1987 interpretation of the statute, while noted, is not binding despite its longevity. Referencing Carr v. Chrysler Credit Corp., the Tennessee Supreme Court clarified that administrative interpretations can be changed without altering the statute's wording, emphasizing that prior interpretations serve only as aids in discerning legislative intent. The Court found the statute ambiguous and upheld the interpretation that denied the exemption. Tennessee Code Annotated, 67-1-108, allows the Department to modify its taxability stance, applicable only prospectively, which the Commissioner followed by assessing sales tax on roll grinder supplies after 1995 due to a change in the interpretation of 'industrial machinery'. Norandal contends that roll grinders should not fall under the 'equipment used for maintenance' exclusion, arguing that roll grinders are classified as 'machinery,' which the statute specifically excludes from this maintenance exception. Thus, Norandal claims the legislature intended to limit the maintenance exception solely to equipment.
In the case discussed, the court established that the terms 'machinery,' 'apparatus,' and 'equipment' are essentially synonymous, referencing the definition of 'equipment' from Tibbals Flooring Co. v. Olsen, which includes physical resources like machinery used in operations. The court assessed whether roll grinders used by Norandal qualify as 'equipment used for maintenance' under an industrial machinery exemption. It concluded that the roll grinders, which prepare and maintain caster and mill rolls for production, fit the definition of 'equipment' as they keep the rolls in a state of readiness. The court noted that the statute does not require machines to contact the finished product to be classified as industrial machinery. It also clarified that maintenance encompasses keeping machinery in working condition, akin to sharpening tools. Thus, the roll grinders are considered 'equipment used for maintenance' and are subject to sales tax. The trial court's decision was affirmed, with costs taxed to Norandal USA, Inc.
