Case Name: The BUNKER HILL COMPANY, a Delaware corporation; and Bunker Limited Partnership, an Idaho limited partnership, Plaintiffs-Respondents, v. STATE of Idaho, ex rel. STATE TAX COMMISSION, Defendant-Appellant
Court: Idaho Supreme Court
Jurisdiction: Idaho
Decision Date: 1986-08-28
Citations: 111 Idaho 457
Docket Number: No. 15789
Parties: The BUNKER HILL COMPANY, a Delaware corporation; and Bunker Limited Partnership, an Idaho limited partnership, Plaintiffs-Respondents, v. STATE of Idaho, ex rel. STATE TAX COMMISSION, Defendant-Appellant.
Judges: DONALDSON, C.J., and BISTLINE, J., concur.
Reporter: Idaho Reports
Volume: 111
Pages: 457–470

Head Matter:
725 P.2d 162
The BUNKER HILL COMPANY, a Delaware corporation; and Bunker Limited Partnership, an Idaho limited partnership, Plaintiffs-Respondents, v. STATE of Idaho, ex rel. STATE TAX COMMISSION, Defendant-Appellant.
No. 15789.
Supreme Court of Idaho.
Aug. 28, 1986.
Rehearing Denied Aug. 28, 1986.
Jim Jones, Atty. Gen. and Theodore V. Spangler, Jr., Deputy Atty. Gen., Boise, for defendant-appellant.
William F. Boyd, Kellogg, James P. Keane, Coeur d’Alene, and Charles L.A. Cox, Kellogg, for plaintiffs-respondents.
1986 opinion no. 11, issued January 24, 1986, is hereby withdrawn and this opinion is substituted therefor.

Opinion:
ON DENIAL OF PETITION FOR REHEARING
HUNTLEY, Justice.
This appeal raises the issue as to whether certain purchases of tangible personal property by Bunker Hill are subject to the payment of a 3% tax under the Idaho Sales Tax Act, Title 63, Chapter 36 of the Idaho Code. Specifically at issue are four categories of purchases: (1) materials utilized in the construction of two steel-reinforced concrete smoke stacks, 610 and 715 feet in height; (2) ties, spikes, plates and rails used to construct an intraplant railway (surface rail); (3) oxygen and acetylene welding gases consumed in the repair of production equipment; and (4) safety clothing and equipment issued to employees.
I. BACKGROUND
An audit of the Bunker Hill Company conducted by the State Tax Commission audit staff resulted in the issuance of a notice of deficiency determination for the period of January 1, 1975 through December 31, 1977. At the conclusion of the administrative proceedings, the Tax Commission ruled that there was due $149,936 in unpaid taxes, interest of $70,844, and penalty of $7,497, for a total of $228,277. Bunker Hill filed a timely complaint in district court which resulted in a decision that none of the taxes were due, the court holding that the purchases were exempt under I.C. § 63-3622(d). This appeal followed. We discuss the appropriate treatment of each of the four categories of purchases in turn.
II. THE "TALL STACKS"
During the audit period, Bunker Hill constructed two tall stacks, one for its zinc plant and the other for its lead smelter, which were affixed to the real estate on large foundations. The stacks were over 610 feet and 715 feet tall, respectively. Construction was done with a continuous pour of concrete in a "slip form" that rose vertically as the concrete in the form set sufficiently to sustain weight, the materials utilized being primarily reinforcing steel bars and the ingredients of the concrete. Bunker Hill provided its suppliers with exemption certificates and, thus, the sales tax was not collected by the vendors of the tangible personal property.
I.C. § 63-3619 (1975-77) provides in pertinent part:
An excise tax is hereby imposed upon each sale at retail at the rate of three per centum (3%) of the sales price of all property subject to taxation under this act____
The terms "retail sale" and "sale at retail" are defined in I.C. § 63-3609 (1975-77) which reads in pertinent part:
63-3609. Retail sale — Sale at retail. — The terms "retail sale" or "sale at retail" means a sale of tangible personal property for any purpose other than resale of that property in the regular course of business or lease or rental of that property in the regular course of business where such rental or lease is taxable under section 63-3612(h) of this act.
(a) All persons engaged in constructing, altering, repairing or improving real estate, which includes construction of prefabricated buildings as defined in section 63-3606A, are consumers of the material used by them; all sales to or use by such persons of tangible personal property are taxable whether or not such persons intend resale of the improved property.
Bunker Hill's purchases of the materials for the tall stacks clearly come within the provisions of I.C. § 63-3609(a), since the stacks were real estate and that Bunker Hill was, by definition, the consumer of the material used to construct the stacks. Bunker Hill was, then, required to pay the sales tax at the time it purchased the materials.
Bunker Hill urged before the trial court, and urges before this Court, that this transaction is subject to the so-called "production exemption" contained in I.C. § 63-3622(d) (1975-77) , arguing that the stacks have become production equipment which is used to produce the products at the mine and smelter. Such is a novel, and rather tortured, interpretation of the act. The Sales Tax Act imposes a tax only on tangible personal property, and the exemptions are exemptions of tangible personal property which would otherwise be subject to the tax. The stacks as such are real property and therefore are not in the class of "tangible personal property" exempted in I.C. § 63-3622(d). In other words, the literal language of the production exemption is that it applies to tangible personal property used or consumed in the production process. Thus, we reject the novel argument that the "use" of the stacks is the taxable event, rather than the purchase of the materials which went into the construction of the stacks, since the purchases clearly are the taxable event involved under the plain wording of I.C. § 63-3609.
On petition for rehearing, Bunker Hill asserts that we have misconstrued the statute by " . choospng] a different date to determine the exemption than the date of the taxable event." That is, that the date of the purchase of the materials (cement, rebar, etc.) from which the stacks were built, is the taxable event and that this court used the time of status as completed stacks to determine the applicability of the exemption. Such a characterization of the analysis is incorrect. We apply the date of purchase of the materials for both analyses. On the date of purchase, the materials were not being used to produce anything under the exemption statute— they were purchased for incorporation into real estate.
The rationale for imposing the sales tax on tangible personal property used to construct or improve real estate is well stated in the report of the House Revenue and Taxation Committee on House Bill 222, which implemented the tax. In referring to I.C. § 63-3609, the report stated:
Section 9(a) is intended to ensure that there will be a tax imposed on the sale of building materials and other items that will be used to erect buildings or otherwise improve real property. The process of construction is regarded as a service, and sale of materials to the contractor is taxed without regard to resale intentions. This insures that a tax will be collected. Since the sale of the building or other real property will not be taxed, sale of the materials which are used to erect or improve it must be taxed if a tax is to be imposed on consumption of this property.
Accordingly, we must reverse that portion of the ruling of the trial court which exempts from taxation the purchase of the materials and supplies later incorporated into the tall stacks.
Bunker Hill, in its petition for rehearing, correctly notes that our remand should permit the trial court to rule on the applicability of the pollution control exemption of I.C. § 63-3622(e) to a portion of the materials incorporated into the tall stacks. The trial court memorandum opinion noted:
The parties agreed that the cost of materials incorporated into the stacks is the sum of $4,390,392. A portion of these materials were [sic] purchased after July 1, 1977, the effective date of a statutory exemption commonly called the "pollution exemption." The cost of the materials after July 1, 1977, was $1,231,352.
Bunker Hill's request is well taken. Accordingly, on remand, the trial court will determine what portion of the $1,231,352 expenditure, if any, qualifies for such exemption.
III. SURFACE RAILROAD
Bunker Hill owns and operates a surface railroad system at its facility consisting of 8.4 miles of track. One mile of that track is used for shipping the finished product which is ready for marketing either directly to market or to storage areas awaiting marketing. It is the tax on the materials utilized to construct the remaining 7.4 miles that is in dispute, those materials having a value of $2,095. Since Bunker Hill purchased the track, spikes, and ties for "constructing, altering, repairing, or improving real estate," the purchase of those materials was subject to tax under I.C. § 63-3609, keeping with the analysis utilized with respect to the tall stacks.
IY. OXYGEN AND ACETYLENE
The oxygen and acetylene purchases at issue involve purchases totaling $38,059, the gases having been utilized in the welding and repair of production process equipment. Again, Bunker Hill seeks to exempt these purchases under the production exemption of I.C. § 63-3622(d).
The Tax Commission asserted a tax on the oxygen and acetylene used to perform repair work on production equipment since the welding work does not directly contribute to the producing of tangible personal property for resale. The production exemption statute specifically excludes from the production exemption equipment which is merely used to "maintain" production equipment. It reads:
. This exemption does not include . materials and supplies used in a manner that is incidental to the manufacturing . operations such as maintenance and janitorial equipment and supplies____
The district court believed that the legislature intended to make a distinction between "maintenance" and "repair," concluding in its memorandum opinion:
It does appear that the legislature intended to draw a line of distinction between maintenance and repair. In any given case or process this is going to be a very difficult line of demarcation. Some examples would seem to be easily distinguished such as oil or grease regularly put upon machinery bearings to prevent their deterioration which would clearly be maintenance. On the other hand, if the bearing breaks and needs to be replaced or welded to restore its integrity it would seem to be repair.
It is the Court's conclusion that applying the foregoing criteria to the facts of this case that the oxygen and acetylene were in fact used as repair for broken parts. Therefore, the production exemption should be applicable.
No authority for this conclusion and no language relating to any distinction between "maintenance" and "repair" appears in the statute. To create an arbitrary distinction between "maintenance" and "repair" in order to exempt materials used in one activity, while taxing materials used in another, is not justified under the language of the statute.
No case brought to our attention has made a distinction like the one made by the district court below. Instead, those courts which have considered the application of the sales tax production exemption to repair equipment have concluded that such equipment is subject to taxation. See Dain Mfg. Co. v. Iowa State Tax Commission, 237 Iowa 531, 22 N.W.2d 786 (1946), involving a drill grinding machine which was used to service the machinery directly used in production. Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978), held taxable the machinery and tools, including a crane and hoist unit, used to maintain and repair production machinery. In General Motors Corp., Fisher Body Division v. Bowers, 169 Ohio St. 361, 159 N.E.2d 739 (1959), the court held taxable the machine tools and equipment bought and used for the building of fixtures and other parts of metal working presses used to stamp automobile panels.
The Idaho legislature's requirement that materials be primarily and directly used or consumed in a production activity, and that the exemption not include materials and supplies which are used incidentally to the production activity (even though it might be necessary and essential to the conduct of that activity), requires that there be some limitation to the scope of the exemption. It cannot be facilely expanded to include everything that is necessary and essential to the operation. The decisions cited above have restricted the exemption, under similar statutory language, in such a manner as to exclude from exemption those activities which constitute repairs to production equipment.
In Richardson v. State Tax Commission, 100 Idaho 705, 604 P.2d 719 (1979), this court, having under consideration the application of the production exemption to a fire safety sprinkler system, noted:
It is our conclusion that although the sprinkler system may be necessary and essential to the continued operation of the taxpayer's business, it is not integrated with or directly related to the sawmill operation. (100 Idaho at 709, 604 P.2d at 723.)
Here, the oxygen and acetylene are not "primarily and directly used or consumed in or during such . processing operations .," but rather, their use is incidental to and not directly related to the production process.
Accordingly, we hold that the purchases of oxygen and acetylene constitute taxable transactions which are not subject to the production exemption.
V. SAFETY EQUIPMENT
Bunker Hill, by amendment of its complaint in August of 1983, asserted for the first time a claim to a refund for sales taxes paid on the purchase of safety equipment during the calendar years 1975, 1976, and 1977. The equipment included such items as protective shoes and boots, hardhats, goggles, earmuffs, respirators, protective clothing, and mine safety equipment such as safety belts and safety ropes.
The trial court awarded Bunker Hill a refund of the taxes paid on those items, from which order and judgment the Tax Commission appeals. The Tax Commission asserts that the trial court erred in awarding the refund for two reasons: (1) No timely claim for refund was ever filed; and (2) the production exemption is not applicable or available to such purchases, in any event. We need not reach the timely claim issue because the second issue is dispositive. Our case of Richardson v. State Tax Commission, 100 Idaho 705, 604 P.2d 719 (1979) is determinative of this issue. There we had under consideration the application of the sales tax production exemption to a fire safety sprinkler system, this Court stating:
We are, however, unable to agree with the trial court's conclusion that the sprinkler system installed by the taxpayer in his lumber mill was equipment directly used in the milling operation. The sprinkler system itself is a type of standby safety equipment which we believe is properly characterized as being incidental to the manufacturing process and therefore not within the sales tax exemption provided in I.C. § 63-3622(d). That section provides in part that:
"This exemption does not include machinery, equipment, materials and supplies used in a manner that is incidental to the manufacturing, processing, mining, farming or fabricating operations such as maintenance and janitorial equipment and supplies,____"
It is our conclusion that although the sprinkler system may be necessary and essential to the continued operation of the taxpayer's business, it is not integrated with or directly related to the sawmill operation. See, e.g., Consolidation Coal Co., Hannah Coal Co. Division v. Kosydar, 42 Ohio St.2d 189, 326 N.E.2d 864 (1975) (standby mine safety equipment held not directly used or consumed in the production of property for sale); Indiana Dept. of State Revenue, Sales Tax Division v. R.C.A. Corp., 160 Ind.App. 55, 310 N.E.2d 96 (1974) (air conditioning equipment used to rigidly control the quality of the air in a color television picture tube plant held not to be directly used in the production of the tubes, although the equipment was an essential part of the process). Richardson, 100 Idaho at 709, 604 P.2d at 723.
Again, it is clear that the safety clothing and equipment is not "primarily and directly used or consumed" in the production process. In Indiana Dept. of State Rev. v. Harrison Steel, 402 N.E.2d 1276 (1980), the court stated:
We, thus, determine that the use of safety equipment in the production process is not a "direct use" as it does not have a positive effect and active causal relationship to the production of a product. Safety equipment is for the protection of workers not the creation of a product. We, therefore, reverse and remand on this issue. (Emphasis supplied). (402 N.E.2d at 1278.)
Accordingly, we hold that the purchases of the safety clothing and equipment are not exempt from the sales tax.
VI. CONCLUSION
For the reasons hereinabove stated, the judgment of the trial court overruling the deficiency determination asserted by the Tax Commission is reversed and the case is remanded to the trial court for entry of judgment consistent herewith. The trial court, in light of its decision in favor of the taxpayer, did not resolve the issues raised by Bunker Hill as to the appropriateness of the penalty and interest determinations by the Tax Commission, and thus those issues and the effect of the pollution control equipment exemption should be determined on remand. We have considered the additional matters raised by Bunker Hill's petition for rehearing and find them either to be without merit or disposed of in the above and foregoing analysis.
Costs to the appellant. No attorney fees awarded on appeal.
DONALDSON, C.J., and BISTLINE, J., concur.
. 63-3622. Exemptions. — There are exempted from the taxes imposed by this act the following:
(d) Receipts from the sale, storage, use or other consumption in this state of tangible personal property which will enter into and become an ingredient or component part of tangible personal property manufactured, processed, mined, produced or fabricated for ultimate sale at retail within or without this state, and tangible personal property primarily and directly used or consumed in or during such manufacturing, processing, mining, farming, or fabricating operations by a business or segment of a business which is primarily devoted to such operation or operations, provided that the use or consumption of such tangible personal property is necessary or essential to the performance of such operation. Chemicals, catalysts, and other materials which are used for the purpose of producing or inducing a chemical or physical change or for removing impurities or otherwise placing a product in a more marketable condition are included within this exemption, as are other articles of tangible personal property used in the actual manufacturing, processing, mining, farming or fabricating operations. This exemption does not include machinery, equipment, materials and supplies used in a manner that is incidental to the manufacturing, processing, mining, farming or fabricating operation such as maintenance and janitorial equipment and supplies, and hand tools with a unit purchase price not in excess of one hundred dollars ($100); nor does it include tangible personal property used in any activities other than the actual manufacturing, processing, mining, farming or fabricating operation such as office equipment and supplies, equipment and supplies used in selling or distributing activities, in research, or in transportation activities; -
. 63-3622. Exemptions. — There are exempted from the taxes imposed by this act the following:
(e) The sale, use or purchase of tangible personal property, which property is pollution control equipment required in order to meet air and water quality standards of a state or federal agency having authority to regulate and set air and water quality emission standards. This exemption does not include motor vehicles required to be licensed by the laws of this state, without regard to the use to which such motor vehicles are put.