Opinion ID: 1676311
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Heading: The Processing Exemption.

Text: Iowa's use tax is an excise tax designed to supplement and protect sales tax. North Star Steel Co., 380 N.W.2d at 680; Northern Natural Gas Co. v. Lauterbach, 251 Iowa 885, 887, 100 N.W.2d 908, 909 (1960). The tax is imposed on a person's use of tangible personal property in Iowa under Iowa Code section 423.2, with use defined in section 423.1(1) (1985). (Citations are to the 1985 Iowa Code because there have been no amendments to the cited statutes which affect this case.) That statutory definition, however, excepts property used in processing. Section 423.1(1) in pertinent part provides: Use means and includes the exercise by any person of any right or power over tangible personal property incident to the ownership of that property, except that it shall not include processing, or the sale of that property in the regular course of business. Property used in processing within the meaning of this subsection shall mean and include (a) any tangible personal property including containers which it is intended shall, by means of fabrication, compounding, manufacturing, or germination, become an integral part of other tangible personal property intended to be sold ultimately at retail.... Statutory exceptions are construed strictly against the taxpayer North Star Steel Co., 380 N.W.2d at 680; Iowa Auto Dealers Association v. Iowa Department of Revenue, 301 N.W.2d 760, 762 (Iowa 1981). Consequently, Atlantic Bottling had the burden of proving that its use of plastic bags for container return fell within the processing exemption of section 423.1(1). See Southern Sioux County Rural Water System, Inc. v. Iowa Department of Revenue, 383 N.W.2d 585, 587 (Iowa 1986); Kartridg Pak Co., 362 N.W.2d at 561. Atlantic Bottling relies heavily on our decision in Zoller Brewing Co. v. State Tax Commission, 232 Iowa 1104, 5 N.W.2d 643 (1942). In that case our court held that the cartons, kegs and bottles used to transport beer brewed by Zoller Brewing were exempt from tax under the statutory predecessor to Iowa Code section 423.1(1). Id. at 1108-09, 5 N.W.2d at 645. We found that the bottles, cartons and bags were an integral part of other tangible personal propertythe beer itself which Zoller Brewing intended to sell at retail. Id. Our court reasoned: Without a container there would be no means for the sale or disposition of a liquid. A container necessarily becomes an integral part of the manufactured beer intended to be sold ultimately at retail. It is our judgment that when a purchase of a bottle of beer is made the integral parts of such other personal property are the bottle and the contents thereof. This is likewise true as to a keg of beer. In the case of the cartons the integral parts thereof are the cartons, the bottles, and the beer. Id. The use of the plastic bags in the instant case is categorically different than the use of beer containers in Zoller Brewing. In that case we emphasized that the containers were used to transport the manufactured product to the retailer. Without the containers there could be no sale at retail. Atlantic Bottling's plastic bags serve an altogether different purpose. The bags are not needed or used to transport Atlantic Bottling's products to its retail customers. The bags simply are used to facilitate the return of empty bottles and cans to Atlantic Bottling. Although the return of those containers is required by Iowa Code chapter 455, the presence of that legal requirement does not in and of itself create an exemption. See Revco Discount Drug Centers, Inc. v. Lindley, 6 Ohio St.3d 172, 176, 451 N.E.2d 1206, 1209 (1983) (fact that prescription label was required by law did not exempt typewriters used to type the labels); United States Steel Corp. v. Bowers, 170 Ohio St. 558, 563-64, 167 N.E.2d 87, 91 (1960) ([T]he fact that [essentials to the operation of an industry] are required by law ... does not except their sale or use from tax unless it can also be found that they are used or consumed directly in the manufacturing or processing.). Cf. Southern Sioux County Rural Water System, Inc., 383 N.W.2d at 587 (electricity used to transport water to and from treatment plant not within processing exemption). The statutory exemption for processing only applies if the plastic bags become an integral part of other tangible personal property intended to be sold ultimately at retail. § 423.1(1). The plastic bags, though important to the overall beverage distribution business of Atlantic Bottling, were not an integral part of the manufactured product sold at retail, carbonated beverages in containers.