Pledger v. Noritsu America Corp.

Citations: 320 Ark. 371; 896 S.W.2d 595; 1995 Ark. LEXIS 257Docket: 94-1289

Court: Supreme Court of Arkansas; May 1, 1995; Arkansas; State Supreme Court

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Noritsu America Corporation (Noritsu) contested a use tax assessment by the Department of Finance and Administration (DF&A) for sales made between 1983 and 1988, claiming that their automated equipment, or 'minilabs', qualified for a manufacturing exemption under Ark. Code Ann. 26-53-114. The Chancellor ruled in favor of Noritsu, stating the equipment was exempt. However, the appellate court reversed this decision, asserting the equipment did not produce 'articles of commerce.' The court reviewed the case de novo, noting that the taxpayer must prove entitlement to a tax exemption beyond a reasonable doubt, and that tax exemptions are to be narrowly interpreted. The relevant statute exempts machinery used directly in producing articles of commerce. Previous rulings established that common operations like printing and photography do not constitute manufacturing. Noritsu argued its equipment fell under an exemption for photographic processes incidental to printing, but did not prove that photographs processed were incidental to printing. In a related case, the court had denied an exemption for equipment used to convert raw metal into finished products, emphasizing that the result did not meet the definition of an 'article of commerce.' The appellate court concluded Noritsu failed to demonstrate that its equipment qualified for the exemption.

The Chancellor's ruling was supported by evidence indicating that the appellant does not hold a stock of finished goods for public sale but rather creates custom products for individual customers based on specific orders. These products are tailored to customer specifications and are not generally marketable. The ruling referenced the Western Paper Co. case, which discussed the definition of 'retail to the general public,' and clarified its implications regarding whether custom printing qualifies as 'articles of commerce.' The General Assembly has not modified the requirement that to qualify for a tax exemption, manufacturing equipment must be used to produce articles of commerce, as specified in subsection 26-53-114(a). It was determined that, consistent with precedents like C. C Machinery, Inc. and Western Paper Co., the appellant failed to demonstrate that the processed products were available for retail sale. Consequently, Noritsu did not satisfy the burden of proof necessary for a tax exemption, leading to the case being reversed and remanded for further orders. 

In a supplemental opinion, the court addressed appeals concerning the nature of the articles produced, confirming that the testimony indicated the machines were utilized solely for custom photo finishing, which does not constitute 'articles of commerce.' The court denied the petition for rehearing, upholding that the argument regarding whether the photographic equipment produced 'articles of commerce' was relevant and had been previously considered. The ruling cited the Western Paper Co. case, which emphasized that manufactured articles are typically those intended for retail sale to the general public. Despite Noritsu's contention that this specific legal point was not argued on appeal, the court found it had been sufficiently addressed.

Section 26-53-114(a)(1)(A) establishes the fundamental exemption for manufacturing equipment that Noritsu must utilize as the basis for its exemption claim. Even if certain arguments regarding this subsection were not presented, they cannot be overlooked in an exemption case. Noritsu references case law, Cummings v. Boyles and Ford v. Ford, to assert that unmade arguments on appeal are waived; however, the court finds no waiver here. The issue was sufficiently raised through testimony regarding the nature of the produced items and relevant case law definitions, despite Noritsu's lack of a response in its brief.

Noritsu challenges the argument by detailing evidence that its machines produce various items, including baseball cards, business cards, greeting cards, enlargements, and mini-posters, with a production capacity of 1,200 prints per hour. However, the court finds no evidence suggesting that these items qualify as 'articles of commerce.' While the mention of baseball cards initially raised some concern, further review of testimony clarified that these are custom photo products. Ultimately, the court concludes there is no evidence indicating that Noritsu's equipment produces anything beyond custom photo finishing, which does not satisfy the criteria for 'articles of commerce.' The request for rehearing is denied.