SST & S, INC. v. State Tax Assessor

LIPEZ, Justice,

dissenting, with whom CLIFFORD, J., joins.

I must respectfully dissent. Even under the deferential standard of Jackson Advertising Corp. v. State Tax Assessor, 551 A.2d 1365 (Me.1988), the Assessor could not have concluded rationally that SST & S failed to establish that its icing equipment is exempt from taxation.

Because the Assessor concedes that “the legislature did not mandate that each item ... of machinery and equipment actually transform or convert raw materials” in order for the machinery and equipment to qualify for exemption pursuant to 36 M.R.S.A. § 1760(31), the narrow question presented by this appeal is whether the Assessor could have rationally concluded that SST & S had failed to establish that its ice-making equipment and totes were used “directly” in “an operation or integrated series of operations ... which transforms or converts personal property ... into a different form, composition or character.” See 36 M.R.S.A. §§ 1760(31) (defining exempt machinery); 36 M.R.S.A. § 1752(9-B) (defining production). The word “directly” in section 1760(31) “refers to those activities or operations which constitute an integral and essential part of production ...” 36 M.R.S.A. § 1752(2-A) (emphasis added).

SST &■ S established that the automated grading and cutting equipment used by it is ineffective if the flesh of the herring is not firm enough to permit processing by the equipment. The ice plant and related machinery and equipment lower the temperature of the herring to ensure the necessary firmness. The insulated totes maintain the necessary temperature during the brief time between landing of the fish and processing *523with automated equipment. Failure to use the ice-making equipment would seriously impair the efficiency of the cutting and grading equipment. The icing equipment is indispensable to an integrated series of operations which transform or convert personal property into a different form. The fact that no specific transformation occurs as a result of the icing process itself, or that the icing occurs while the herring is being transported from Lubec to the production site in Prospect Harbor, is irrelevant.

If a particular operation, i.e., icing the fish, is part of a larger, integrated series of operations, ie., processing the fish, that particular operation is included within the meaning of production. As acknowledged at oral argument, the Assessor, along with exempting the cutting and grading equipment, exempted other equipment that worked in tandem with the cutting and grading equipment to produce the canned herring. The exempted equipment included forklifts that transported the fish at the production plant, hoppers that stored the fish awaiting production, and a conveyor system that moved the fish through the production process. The non-exempted icing equipment is indistinguishable from and as much a part of an integrated series of operations as this other equipment exempted by the Assessor. The disputed items operated in combination with admittedly exempt machinery to make an integrated system. The exemption from tax should have been extended to those items, and the Assessor could not have rationally found otherwise.

Moreover, the Assessor’s contention that the use of the ice-making equipment is “simply incidental, convenient or remote to production,” 36 M.R.S.A § 1752(2-A), does not comport with the reality of the process involved. The Assessor contends that if the fish were brought to the cutting and grading equipment shortly after being caught, they could be cut without prior icing and, therefore, the icing process is merely a “convenience” that facilitates SST & S’s processing of the herring at one central processing plant located at Prospect Harbor rather than at Lubec. The record reflects, however, that “it’s not possible for [SST & S] to instantaneously ... process all fish.” Even if SST & S’s canning plant were located at Lubec, there would necessarily be a “holding period” during which temperature conditions would have to be maintained.

Although the Assessor insists that the State is not applying a locational test pursuant to rule 08-125 C.M.R. 303.011 to deny SST & S an exemption, the Assessor’s position belies that contention. Citing Rule 303.01(A), the Assessor contends that its determination should be upheld because the slush from the icing system is used “prior to the start of the fish processing operation” to facilitate the transportation of the fish to the production site, rather than being used directly in production. Thus, when compared with other pieces of equipment exempted by the Assessor, the disqualifying feature of the ice-making equipment and the slurry totes appears to be that they are not at the location of the first production machine. The fact that the ice-making equipment is located at some distance from the processing plant, however, does not diminish the “integral and essential part” that this equipment serves in the overall production process. 36 M.R.S.A § 1752(2-A). Nor does the occurrence of this indispensable icing process during the transport of the herring from Lubec to the production site in Prospect Harbor alter the fact that the icing equipment is used, in the language of section 1760(31), “directly and primarily” in the cutting and grading of the herring. The Assessor’s attempt to use his regulatory definition of production to divide the production process into discrete stages overlooks the possibility that aspects of production may occur away from the first production site and even during transportation. *524The Assessor’s construction is an impermissible gloss on a statutory definition of production that by its terms describes a concept of production involving an integrated series of operations. To the extent that the Assessor’s administrative interpretation of production is inconsistent with the plain meaning of the statute, this Court should accord no deference to that interpretation. Scott Paper Co. v. State Tax Assessor, 610 A.2d 275, 277 (Me.1992).

I conclude on this record that the assessor was compelled to find that SST & S’s icing equipment was used “directly and primarily ... in production” of the processed herring, and, therefore, that the equipment is not taxable.

. The Maine Bureau of Taxation Rule 303.01 defines production as follows:

"Production” referred to in § 1752(9-B) commences with the movement of raw materials to the first production machine after their receipt and storage at production site (after receipt if the raw materials are not stored) and ends with the completion of the finished product. including any packaging operation. The acquisition of raw materials, the transportation of raw materials or goods in process between production sites, and administrative and distributive operations do not constitute production.

Me.Bur. of Tax.Rule 303.01 (June 1, 1951).