Department of Revenue v. Kimball International, Inc.

Citations: 520 N.E.2d 454; 1988 Ind. App. LEXIS 168; 1988 WL 24462Docket: 49A02-8705-CV-210

Court: Indiana Court of Appeals; March 21, 1988; Indiana; State Appellate Court

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The Indiana Court of Appeals addressed an appeal by the Department of Revenue regarding a trial court decision that allowed Kimball International, Inc. to claim exemptions from the State Gross Retail Tax for certain equipment. Specifically, the appeal focused on whether Kimball's spray booths and air make up units, integral to their manufacturing of finished wood products, were exempt. Kimball's manufacturing process, which spans from milling logs to shipping products like pianos and furniture, includes a final phase where finishes are applied in isolated finishing rooms equipped with spray booths and air make up units.

The spray booths are designed to manage overspray and evaporated solvents, utilizing fans, water baths, and duct work to exhaust air at a significant rate. The air make up units maintain positive air pressure in the finishing rooms, preventing dust from contaminating the fresh finish, while also regulating temperature and humidity to avoid defects in the finish, such as "blushing." Kimball's expert testimony established the critical safety role of this equipment, particularly in controlling flammable chemicals and ensuring proper airflow essential for the manufacturing process. The Department did not present evidence to counter Kimball's claims during the trial.

Air movement is essential for drying newly applied finishes, preventing "blistering" during oven drying, and controlling sags and runs by enhancing spray uniformity. The transactions in question occurred between 1976 and 1978, under the statutory exemption IND. CODE. 6-2-1-39(b)(6), which exempted sales of manufacturing machinery, tools, and equipment directly used in producing tangible personal property. Tax exemptions are generally construed in favor of taxation, placing the burden on the taxpayer to demonstrate qualification for the exemption. The trial court found evidence supporting Kimball's entitlement to the exemption, but on appeal, the Department argued that Kimball was not entitled based on legal interpretation rather than factual disputes. The Department's argument referenced Ind. Dept. Rev. v. RCA Corp., where the court ruled that environmental control equipment was not exempt as it did not directly operate on the product. The Department asserts that this reasoning applies to Kimball's spray booths and air units. However, the case law is broader, with Indiana Dept. of State Revenue v. Cave Stone clarifying that equipment must have an "immediate link" to the production process to qualify for exemption. Cave Stone found that equipment transporting quarried stone met this criterion, emphasizing that the exemption does not require the equipment to perform a specific transformation on the final product. The court distinguished RCA by noting that the environmental control equipment was not integral to the production process, as picture tubes could still be made without it.

RCA's interpretation aligns with Cave Stone, but the Department argues it encompasses more, claiming environmental control equipment is never exempt as it directly affects the environment rather than the product. The Department also asserts that equipment must positively impact the product to qualify for an exemption, which contradicts the Supreme Court's ruling that emphasizes the entire manufacturing process rather than the transformation of the product. This inconsistency in RCA has caused confusion regarding the exemption statute. Thus, RCA is overruled where it conflicts with Cave Stone. 

The determination of equipment's exemption status depends on its integral role in the manufacturing process. In this case, the trial court needed to assess whether Kimball’s spray booths and related equipment were essential to the process of turning raw wood into finished products. Evidence showed that these components were critical for operational functionality and safety, leading to the conclusion that Kimball qualified for the exemption despite the Department's economic arguments. The trial court's decision is affirmed, with concurrence from SHIELDS, P.J. and ROBERTSON, J.