AFG Industries, Inc. v. Cardwell

Citations: 835 S.W.2d 583; 1992 Tenn. LEXIS 429

Court: Tennessee Supreme Court; June 8, 1992; Tennessee; State Supreme Court

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AFG Industries, Inc. filed a lawsuit against the Tennessee Commissioner of Revenue to recover over $65,000 in sales and use taxes paid under protest for the years 1984 through 1987. AFG argued that the molten tin used in its manufacturing process qualifies as tax-exempt industrial machinery under T.C.A. 67-6-206(a), and that certain electricity used to heat elements in contact with the glass is exempt under T.C.A. 67-6-206(b)(3). The chancellor ruled against AFG on both claims. AFG produces flat glass at its facility in Greenland, Tennessee, employing a float process where molten glass is shaped while floating on molten tin in a bath that is 180 feet long and holds 180 tons of tin. While the tin is chemically inert and not consumed in the process, about 1-3 tons must be replaced annually. The court noted that the interpretation of tax exemption statutes requires strict construction against the taxpayer, who bears the burden of proof for entitlement to the exemption. The definition of industrial machinery under T.C.A. 67-6-102(12) includes machinery and equipment necessary for the fabrication or processing of tangible personal property for resale.

The chancellor determined that the tin used in the tin bath does not qualify as industrial machinery under the applicable statute. This conclusion was based on the precedent set in Tibbals Flooring Co. v. Olsen, which examined similar machinery definitions and exemptions. In Tibbals, a metal building (pre-dryer) and dust collectors were assessed, with the court finding that the pre-dryer was a structure rather than machinery, and the dust collectors were primarily storage structures, not pollution control equipment. 

The statute in question, T.C.A. 67-6-102(8), defines industrial machinery as equipment directly utilized in fabricating or processing tangible personal property for resale, or primarily for air pollution control, used by those engaged in such activities as their principal business. Although the definition has since expanded to include 'apparatus and equipment with all associated parts,' the chancellor concluded that the tin bath fits this broadened definition. The tin bath was found to be an apparatus integral to shaping and cooling molten glass, with the molten tin serving multiple functions and acting as both an accessory and part of the apparatus.

Furthermore, the commissioner argued against the tin's exemption, labeling it as 'industrial material' not consumed within twenty-five days, referencing T.C.A. 67-6-102(22)(E) and Rule 1320-5-1-.40(2), which stipulates that materials must be consumed within that timeframe to qualify for tax exemption. Although the tin does not become part of the finished glass product, it does come into direct contact with the glass during production.

Direct contact in manufacturing processes is compared to the use of rollers and conveyance systems prior to the adoption of the tin bath technology. In the case of Phillips, Buttorff Mfg. Co. v. Carson, the court ruled that fire brick and clay used in furnaces and ladles were not exempt as industrial materials because they were considered part of the machinery. Similarly, in the current situation, tin is deemed an accessory to the tin bath apparatus, and its classification as industrial machinery negates any need for classification under industrial materials.

Regarding the exemption for electricity under T.C.A. 67-6-206, a tax is imposed on energy sources used by manufacturers, but an exemption exists for substances used directly in manufacturing processes, provided they come into contact with the product. The chancellor determined that electricity powering silicon carbide heating elements did not meet this exemption because it did not directly contact the glass being processed. AFG argued that since electricity generates heat, it should be considered as coming into contact with the glass. However, the distinction was made that electricity is not heat but a form of energy that must be converted into thermal energy through heating elements. The heating elements act as an intermediary, preventing the electricity from directly contacting the glass, consistent with prior rulings regarding the necessity of direct contact without any intervening objects.

Electrical heating units have largely replaced fossil fuels in manufacturing processes that require direct heat. However, the exemption under T.C.A. 67-6-206(b)(3) specifies that a substance must come into direct contact with the article being processed to qualify for exemption. Electricity, as energy, does not meet this criterion unless it directly contacts the article. The chancellor correctly denied the exemption claim for the electricity used in silicon carbide heating elements. The exemption requires that manufacturers obtain a certificate from the commissioner, confirming their eligibility, as outlined in T.C.A. 67-6-206(b)(2). The process for challenging the commissioner’s decision is limited to a petition for common law certiorari in Davidson County, meaning attempts to claim the exemption retroactively through tax refund suits are not permissible. The absence of a certification application for the tax periods in question invalidates the exemption claim. Therefore, while the tin used in AFG's glass manufacturing is exempt from sales and use taxes, AFG is not entitled to a full exemption for the electricity used in its heating process. The appeal costs will be shared equally, and the trial court costs will be determined by the chancellor. The case is remanded for calculating the refund plus interest for the tin taxes and any associated fees under T.C.A. 67-1-1803(d).