BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
UNION TANK CAR COMPANY FROM A ) Docket No. 2001-209
DENIAL OF SALES TAX EXEMPTION )
DECISION BY THE EXCISE DIVISION OF )
THE DEPARTMENT OF REVENUE )
FINDINGS OF FACT
CONCLUSIONS OF LAW
DECISION AND ORDER
Lawrence J. Wolfe and Walter F. Eggers, III, Holland & Hart LLP for Petitioner, Union Tank Car Company, Petitioner.
William F. Russell, Assistant Attorney General, for Respondent, Department of Revenue, Department.
This matter came on for hearing on October 22, 2002, by the State Board of Equalization (Board), consisting of Chairman Edmund J. Schmidt, Vice Chairman Roberta A. Coates (Chairman at the time of Decision and Order), and Board Member Sylvia Lee Hackl. Chairman Schmidt and Member Hackl resigned from the Board prior to the Decision and Order. Vice Chairman, Alan B. Minier has considered the matter by reviewing the file, exhibits and transcript and participating in the Decision and Order. This appeal arises from a decision of the Department assessing Petitioner sales tax on power and fuel used in its facility in Evanston, Wyoming.
Upon application of any person adversely affected, the Board is mandated to review final Department actions concerning state excise taxes and to “[h]old hearings after due notice in the manner and form provided in the Wyoming Administrative Procedure Act and its own rules and regulations of practice and procedure.” Wyo. Stat. §39-11-102.1(c)(iv).
The Board is required to “[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions prescribed by the department.” Wyo. Stat. §39-11-102.1(c)(viii). The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department. Rules, Wyoming State Board of Equalization, Chapter 2, § 3. The rules require that appeals be filed with the Board within thirty days of any final administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, § 5(e).
The Petitioner claims it is a manufacturer and processes railroad tank cars because the cars are not legally useable when they arrive at the facility and can be legally used when they leave the facility. Therefore, Petitioner claims an exemption from sales tax for fuel consumed in the facility pursuant to Wyoming Statute Section 39-15-105(a)(iii)(D). Petitioner’s position is that its facility provides an integrated process that transforms unusable railroad tank cars, which are not in compliance with federal law, into tank cars that are ready for use and legal to operate.
The Department counters that Petitioner’s activities are repair activities. If Petitioner does preform repair activities then the fuel is not exempt.
We find the Petitioner’s facility is a repair facility because Petitioner historically represented itself as a repair facility both for tax advantages and in advertising. We also believe the services are repairs because they do not extend the life of the rail cars and the product is a rail car in and a rail car out, not a substantial change or transformation of a product. However, the manufacture of new parts to be used in the repair is manufacturing and the power used in the manufacture and providing lights and heat to the workers to manufacture new parts is exempt if it can be separately accounted.
FINDINGS OF FACT
1. Petitioner’s Evanston, Wyoming facility was dedicated in September 1998. The facility sits on a 52-acre site and consists of three main facilities: a valve building, a mechanical building and a grit blast and paint facility. [Transcript, Vol. I, pp. 43-45, 22-23; Stipulated Updated Summary of Uncontroverted Facts].
2. Petitioner describes the Evanston facility as a “repair and maintenance facility” where “each of the three buildings operate with the latest, most technically advanced equipment in the industry to deliver optimum service . . .. Our capabilities include car cleaning and degassing, along with Acoustic Emission (AE) and hydrostatic tank testing, HM-201 requalification, steel grit blast, painting and stenciling, and a wide range of mechanical repair services.” [Exhibits 103, 503].
3. Petitioner did not charge sales tax for their services prior to July 1, 2000, because they enjoyed an exemption under Wyoming Statute Section 39-15-105(a)(viii)(E), repealed July 1, 2000, by Session Law of Wyoming 2000, Chapter 47, §1. This statute allowed repair facilities for rolling stock to be exempt from sales tax. Only after the statute was repealed, the Petitioner searched for other ways to reduce taxes and decided to apply for an exemption from paying power sales tax by claiming the facility is a “manufacturing” and “processing” facility. [Transcript, Vol. I, pp. 192-193].
4. On August 14, 2001, Petitioner requested a sales tax exemption for the consumption of all the electricity and natural gas used at its Evanston facility, pursuant to Wyoming Statute Section 39-15-105(a)(iii)(D). This statute grants a sales tax exemption for “[s]ales of power or fuel to a person engaged in the business of manufacturing, processing or agriculture when the same is consumed directly in manufacturing, processing, or agriculture.” [Stipulated Updated Summary of Uncontroverted Facts]. The exemption was not claimed until after the Wyoming Legislature repealed the sales tax statute exempting repair services on railway cars on July 1, 2000. [Transcript, Vol. I, p. 192, Vol. II, p. 251].
5. On November 30, 2001, the Department denied Petitioner’s request with one exception. The Department allowed an exemption for the use of natural gas to fuel torches to produce new parts. [Stipulated Updated Summary of Uncontroverted Facts].
6. The Department relied on five sources when it made its decision:
a. This Board’s decision in the appeal titled, In the Matter of the Appeal of American Linen from Sales Tax Exemption Decision by the Excise Division of the Department of Revenue, Docket No. 99-07 (March 29, 2000);
b. The definition of “processing” in the Rules, Wyoming Department of Revenue, Chapter 2, Section 3(p), which defines processing as a transformation of tangible personal property into a different state or form from which it originally existed;
c. The definition of “manufacturer” found in Wyoming Statute Section 39-11-101(a)(xii);
d. A dictionary definition of “manufacturer”; and
e. The Wyoming statute that imposes a sales tax on “repairs, alterations or improvements of tangible personal property”. Wyo. Stat. §39-15-103(a)(i)(J).
[Transcript, Vol. II, pp. 208, 229-230, 234].
7. The Department agreed during the hearing that any fuel used to manufacture new parts and the necessary lights for the manufacturing process, whether electricity or natural gas, would be exempt from taxes. Specifically, the Department agreed that any power or fuel used to create body bolsters, handrails, roll jacket pieces and jacket heads would be exempt. However, the Department did not agree that heat for the workers’ comfort would be exempt. [Transcript, Vol. II, pp. 222, 229-230, 249-256, 261-264].
8. The Department further qualified an exemption for the fuel used directly in manufacturing or processing of new parts if the fuel was separately metered or an engineered calculation could be performed. [Transcript, Vol. II, p. 272]. The Rules, Wyoming Department of Revenue, Chapter 2, Section 8(g)(i) demand that fuel be separately accounted for. [Transcript, Vol. II, p. 286].
9. Petitioner filed a Case Notice for Review/ Notice of Appeal on December 28, 2002. [Exhibit 102].
10. Petitioner’s facility manager testified: “Union Tank Car’s general business is building and leasing tank cars to people that need to haul product, and then they have a nationwide group of shops that keep those cars in usable condition so that the people we lease them to will pay their rent.” [Transcript Vol. 1, p. 23].
11. Petitioner builds railroad tank cars and sells or leases those cars to its customers. Petitioner manufactures new tank cars from raw materials at its plants in Sheldon, Texas, and East Chicago Indiana, not the Evanston facility. [Transcript Vol. I, pp. 89, 106, 194, 195; Exhibit 503].
12. Petitioner maintains a network of shops to repair and maintain its tank cars and other owner’s tank cars. [Transcript Vol. I, p. 23].
13. Approximately two-thirds of the cars that pass through the Petitioner’s facility are owned and leased by Petitioner; the other one-third are owned by companies other than Petitioner. [Transcript Vol. I, p. 37].
14. Petitioner’s facility in Evanston is classified as a Class C Tank Car Facility by the Association of American Railroads (AAR). A Class C facility is certified to repair, alter, convert or qualify tank cars. [Transcript Vol. I, pp. 90-91, 134; Exhibit 508]. A Class A plant can manufacture tank cars and a Class B plant can assemble tank cars but Petitioner is not certified for these activities. [Transcript Vol. I, pp. 91, 134-136; Exhibits 507, 508].
15. The Federal Railroad Administration (FRA), a division of the United States Department of Transportation, has regulations governing the condition of tank cars operating in the United States. In addition to those federal laws, AAR has published industry rules that are designed to ensure that railroad tank cars are in a condition to transport products in a safe manner. [Transcript Vol. I, pp. 30-31]. The federal regulations specify the legal working condition of each part of the railroad tank car.
16. The federal regulations set “qualification periods,” or schedules for inspections and testing of tank cars to determine if the cars are qualified to operate on the nation’s railway system. As a result, even if no defect is apparent on a tank car, the car may still be required to undergo an inspection and testing. [Transcript Vol. I, pp. 32-33]. The life cycle of a tank car is forty-years and the cars are mandated to come into a facility like Petitioner’s Evanston facility every ten years for inspection. [Transcript Vol. I, p. 152].
17. Petitioner consumes approximately $12,000 per month of electricity and up to $18,000 per month of natural gas. The air compressors consume the largest share of electricity. Petitioner’s two boilers consume the largest share of natural gas. [Transcript Vol. I, pp. 99-100, 141].
18. When a car first arrives at Petitioner’s facility, it is inspected to insure it will meet federal regulations and to identify any defects. One of the tests is an acoustic emissions test to locate cracks and other defects. Specially trained employees place transducers on the car in specific locations and the transducers detect the location of cracks or flawed welding points on the car. [Transcript Vol. I, pp. 41-42, 47-48, 50-51, 84].
19. Petitioner cleans the tank cars in a special steam cleaning process. Petitioner cleans the exterior and interior of the cars. Petitioner uses electricity to compress air to run hoists, electricity to run pumps and natural gas to create steam. Less than one percent of the cars are merely cleaned. [Transcript Vol. I, pp. 53-54, 56-57, 59-60, 141].
20. After the tank cars are cleaned, Petitioner moves the cars into the valve building to replace gaskets and rebuild valves. This process uses electricity to run a crane, and compressed air to replace gaskets, repair and test valves. [Transcript Vol. I, pp. 60-61, 64-65, 97; Exhibit 107].
21. The rail car is then moved to the mechanical building. The mechanical building spans approximately one and one-half acres and holds up to eighteen rail cars at one time. [Transcript Vol. I, p. 93].
22. The Petitioner creates handrail ends, running boards and other parts of tank cars using an “ironworker” to cut, press and punch holes in metal. The “ironworker” uses electricity. [Transcript Vol. I, pp. 68-69, 94; Exhibits 103, 107].
23. Petitioner creates hand brakes, handrail reinforcements, running boards and body bolsters using gas powered welding torches, electric-powered welders, and air-powered grinders. Petitioner also uses propane-powered forklifts and electric jacks to move cars and objects in its mechanical building. [Transcript Vol. I, pp. 70-73, 75-77, 97, 139-140; Exhibits 106, 107].
24. Petitioner uses a sheet metal roller in the mechanical building to create new pieces of jackets for tank cars. The new jacket pieces are welded to the side of the car. Both processes use electricity or gas. [Transcript Vol. I, pp. 70-73, 75-77, 97, 139-140; Exhibits 106, 107].
25. Petitioner’s third building is where the cars are grit blasted to prepare them to be painted, then the cars are painted and mandated decals are applied. These processes use electricity for air compressors, lights, and ventilation. Natural gas is used to provide heat to cure the paint. [Transcript Vol. I, pp. 77-80, 83-84, 98-99; Exhibits 106, 107].
26. Petitioner uses diesel-fueled switching locomotives and a diesel-fueled backhoe to move tank cars from one location to another. Petitioner also uses an electric transfer table that pulls the tank cars and locomotives onto tracks. [Transcript Vol. I, pp. 52-53].
27. The cars receive a final inspection and are then delivered to the track for delivery to the customer. [Exhibit 100].
28. When the process is completed the tank car qualifies for use under federal regulations and AAR standards. As the facility manager characterized the process:
The cars that we release are capable of doing the job they were intended to do, the one they were leased to do and they meet all the federal regulations, they meet all of the safety appliance requirements of the FRA and they are ready to be used.
[Transcript Vol. I, pp. 103-104].
29. The facility manager, Mr. Gilbert Olson, stated; “I don’t think we’ve ever claimed to manufacture railcars. . . I don’t think we’ve ever claimed to manufacture new railcars there. I still don’t claim it. . .. We don’t build new railcars from the ground up, not in Evanston.” Mr. Olson agreed that, according to Petitioner’s own accounting document, approximately 96% of the activity at the facility was billed as repairs. [Transcript Vol. I, pp. 107, 132, 135].
30. The Cost for Petitioner’s services averages $2,000. However, some of the major repairs may cost as much as $60,000. [Transcript, Vol. I, pp. 159-160]. From this it may be inferred that the actual work performed on a given tank car varies widely.
31. Any Conclusion of Law set forth below which includes a Finding of Fact may also be considered a finding of fact and is therefore incorporated herein by this reference.
CONCLUSIONS OF LAW
32. The Notice of Appeal in this matter was timely filed and the Board has jurisdiction to determine this matter. Wyo. Stat. § 39-11-102.1(c); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(a).
33. The fuel consumed by an entity is subject to sales tax.
Except as provided by W.S. 39-15-105, there is levied an excise tax upon... [t]he sales price paid to public utilities as defined in W.S. 37-1-101 through 37-3-114 and to persons furnishing gas, electricity or heat for domestic, industrial or commercial consumption;
Wyo. Stat. §30-15-103(a)(i)(E).
34. There is an exemption from sales tax for gas, electricity or heat under certain circumstances:
(a) The following sales or leases are exempt from the excise tax imposed by this article:
(iii) For the purpose of exempting sales of services and tangible personal property consumed in production, the following are exempt:
* * * *
(D) Sales of power or fuel to a person engaged in the business of manufacturing, processing or agriculture when the same is consumed directly in manufacturing, processing or agriculture;
Wyo. Stat. §39-15-105(a)(iii)(D).
35. Petitioner claims it is a manufacturer and processes railroad tank cars because the cars are not legally useable when they arrive at the facility and can be legally used when they leave the facility. Therefore, Petitioner claims an exemption from sales tax for fuel
consumed in the facility pursuant to Wyoming Statute Section 39-15-105(a)(iii)(D). Petitioner’s position is that its facility provides an integrated process that transforms unusable railroad tank cars, which are not in compliance with federal law, into tank cars that are ready for use and legal to operate.
36. The Department counters that Petitioner’s activities are repair activities. If Petitioner does perform repair activities then the fuel is not exempt because we cannot read a repair exemption into the statute. In fact, repair activities are taxable pursuant to Wyoming Statute Section 39-15-103(a)(i)(J).
37. The Rules and Regulations of the Board state in relevant part that:
Except as specifically provided by law or in this section, the Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action. For all cases involving a claim for exemption, the Petitioner shall clearly establish the facts supporting an exemption... (Emphasis added).
Petitioner has the burden of going forward and the ultimate burden of persuasion, to be met by the preponderance of the evidence. Rules, Wyoming State Board of Equalization, Chapter 2 § 20; Wyo. Stat. §16-3-114(c).
38. “The general rule is taxation; exemptions are the exception. There is a presumption created against granting exceptions and in favor of taxation.” State Board of Equalization v. Tenneco Oil Co., 694 P.2d 97, 100 (Wyo. 1985). “As a general rule tax exemptions are given a strict interpretation against an assertion of a taxpayer and in favor of the taxing power.” 3A Sutherland Stat. Const. §66.09, at 42 (5th ed. 1992). Appeal of Chicago & North Western Railway Company, 70 Wyo. 84, 246 P.2d 789, 795 (Wyo. 1952).” Eastern Laramie County Solid Waste Disposal Dist. v. State Bd. Of Equalization, 9 P.3d 268, 271(Wyo. 2000). See also; Wyoming Central Irrigation Co. v. Farlow, 19 Wyo. 68, 114 P. 635, 636 (1911), State Board of Equalization v. Wyoming Auto Dealers Association, 395 P.2d 741, 742 (Wyo. 1964).
39. “A statutory exemption from taxation must be clearly conferred in plain words.” Commissioners of Cambria Park v. Board of Commissioners of Weston County, 62 Wyo. 446, 174 P.2d 402, 405 (Wyo. 1946). A tax exemption must be strictly construed against the one who asserts it, and the party claiming the exemption bears the burden of demonstrating its existence. 68 Am. Jur. 2d Sales and Use Taxes §112, 113 (2000). See also: State v. Capital Coal Co., 88 P.2d 481 (Wyo. 1939). Thus, Petitioner bears the burden of demonstrating the existence of a tax exemption from sales tax on fuel.
Petitioner Operates a Repair Facility
40. Petitioner’s rationale for requesting the exemption at this time and not in earlier years demonstrates the inconsistency of Petitioner’s position. In earlier years Petitioner did not charge their customers sales tax for their services because Petitioner services were exempt under Wyoming Statute Section 39-15-105(a)(viii)(E). This statute exempted from sales tax:
(E) Sales of tangible personal property or services performed for the repair, assembly, alteration or improvement of railroad rolling stock;
Wyo. Stat. §39-15-105(a)(viii)(E).
This statute was repealed effective July 1, 2000, by Session Laws of Wyoming, Chapter 47, §1. It is a paradox for Petitioner to suddenly claim that it in the business of manufacturing, and not repair, after years of availing itself to the competitive advantage of another exemption as a railcar repair facility.
41. The certification that Petitioner’s Evanston facility has from the AAR is a class C certification to repair, alter, convert or qualify tank cars. It cannot manufacture tank cars because that requires a Class A certification and it cannot assemble tank cars because that requires a Class B certification. Therefore, the certification supports the conclusion that the Evanston facility is a repair facility.
42. Petitioner’s own web site, advertising brochure, accounting documents, and AAR certification provide substantial evidence Petitioner’s business is repairing rail tank cars at the Evanston facility. [Exhibits 103, 507, 508].
43. As observed in Rotation Products Corp. v. Department of State Revenue, 690 N.E.2d 795, 801 (Ind. Tax 1998):
In general, repair activity is not within the ambit of the industrial exemptions. This is so because ordinary repair creates no new products and is properly characterized as a service. See Mid-America Energy Resources, 681 N.E.2d at 263. Ordinary repair activity merely perpetuates existing products, see Mechanics Laundry, 650 N.E.2d at 1230, and although ordinary repair activity may impact the number of scarce economic goods by increasing their longevity, it cannot be said that ordinary repair produces scarce economic goods by increasing their longevity. See id at 1229-30. Consequently, the industrial exemptions are properly denied in those cases.
44. Taking into account the evidence in the record and Petitioner’s own past reliance on the repair shop exemption, we can readily conclude that Petitioner’s activity does not create new products. The rail car comes in, the rail car leaves, and Petitioner’s activity does not even extend the rail car’s longevity.
Petitioner’s Activity Is Not Manufacturing or Processing
45. Although our finding in Paragraphs 40 to 44 disposes of the case, we nonetheless consider Petitioner’s other arguments. Petitioner’s claim that it falls within the exemption of Wyoming Statute Section 39-15-105(a)(iii)(D) is based upon its assertion that it manufactures and processes railcars at its Evanston facility by taking tank cars that could not be used under Federal regulations and work on them so they can be used. [Exhibits 102, 502]. To determine that Petitioner is eligible for the exemption it seeks, the Board must first find that Petitioner’s activities at the Evanston facility constitute “manufacturing” or “processing” within the meaning of the exemption statute.
46. In American Linen, the this Board relied upon the definitions of manufacturing and processing found in 68 Am. Jur. 2d Sales and Use Taxes §131, p. 99 (2000), to define our understanding of “manufacturing” and “processing” in Wyoming Statute Section 39-15-105(a)(iii)(D). 68 Am. Jur. 2d Sales and Use Taxes §131, p. 99 (2000), states:
The terms “manufacturing” and “processing” imply a transformation or conversion of material or things into a different state or form from that in which they originally existed, and the actual operation incident to changing them into marketable products. The change in form, composition, or character must be a substantial change and it must result in a transformation of the property into a different product having a distinctive name, nature, and use.
See In the Matter of the Appeal of American Linen, SBOE Doc. No. 99-07(March 29, 2000). The same definition is cited In the Matter of the Appeal of American Linen, SBOE Doc. No. 99-07, para. 21. See also City of Chesterfield v. BBC Brown Boveri, Inc., 238 Va. 64, 380 S.E.2d 890, 893 (Va. 1989), Boston & M.R.R. v. Town of Billerica, 160 N.E. 419, 422 (Mass. 1928), 89 ALR5th 493, 508.
47. The legislature has not defined “manufacturing” or “processing”. Therefore, the Board is bound to interpret the meaning of a statute through application of the ordinary and usual sense of those works used within the statute. “The intent of the Wyoming legislature . . . must be ascertained from the language of the statute which is viewed in light of its object and purpose.” Wyo. Ins. Guar. Assn. v. Woods, 888 P.2d 192, 196-197 (Wyo. 1994). “A statute is construed as a whole with the ordinary and obvious meaning applied to the words as they are arranged in paragraphs, sentences, clauses and phrases to express intent.” Id. at 197. We find the term “manufacturing” to be unambiguous and the term “processing” to be unambiguous when viewed in light of the definition provided by the Rules, Wyoming Department of Revenue, Chapter 2, Section 3(p).
48. The purpose of exempting the sale of power to a manufacturer for use in manufacturing is two-fold. The first purpose is to encourage industrial growth. 68 Am. Jur. 2d Sales and Use Taxes §130 (2000). The first purpose is not met in this case because the legislature demonstrated it was not trying to encourage Petitioner’s facility because it repealed a tax break that the facility had enjoyed in the past. The legislature demonstrated that it was not trying to encourage Petitioner’s industry when it repealed Wyoming Statute Section §39-15-105 (a)(viii)(E), the statute exempting sales tax on the repair of railroad tank cars. The second purpose is to avoid double taxation, tax pyramiding. 68 Am. Jur. 2d Sales and Use Taxes, id., Rotation Products Corp. v. Department of State Revenue, 690 N.E.2d 795, 798 (Indiana 1998). The tax may result in tax pyramiding but the result does not dictate that the activities are manufacturing and processing. In a repair situation, tax pyramiding can occur.
49. Petitioner places heavy reliance on the notion that the tank cars are not legally useable when they arrive at its facility. However, the fact that they can be legally used when they leave the facility is as readily explained by successful repairs as by the claim that they have been manufactured. As the Kentucky Court found in Department of Revenue v. Allied Drum Service, Inc., 561 S.W. 2d 323, 326 (Kentucky 1978):
A process which involves a material having commercial value for its intended use, that merely upgrades the material so as to increase the value obviously would not be manufacturing.
50. Although the legislature has not defined manufacturing, it has defined “manufacturer”:
(xi) “Manufacturer” means any person who purchases, receives or holds personal property for the purpose of adding to the value thereof, by any process of manufacturing, refining, purifying, or by the combination of different materials, and with a purpose to make a gain or profit by sale thereof;
Wyo. Stat. §39-11-101(a)(xi).
51. Petitioner relies on the definition of “manufacturer” to argue that it holds personal property, railcars, and that it adds value to railcars, it conducts “purification” and “combines different materials” and it does the work to make a profit. This Board disagrees with this analysis because, speaking broadly, a profit is not made from the sale of the tank cars but rather services performed on the tank cars.
52. The Department was correct in determining various steps at Petitioner’s facility is not “manufacturing” or “processing”. Except for that portion of the “mechanical” step where new parts are manufactured, the activities performed – cleaning, mechanical, grit blasting, painting, decals, inspection, and delivery – do not constitute manufacturing or processing because they do not transform the tank car into a different state or form from which it originally existed, and they do not transform the tank car into a different product having a distinctive name, nature, and use. Similarly, applying inventoried parts that are made at another facility is not “manufacturing” or “processing”. Applying inventoried parts occurs in the mechanical building, therefore not all of the power used in the mechanical building is exempt. As the Court found in Boston & M.R.R. v. Town of Billerica, 160 N.E. 419 (Mass. 1928) a repair shop for railroad cars may have some manufacture of new parts for the cars but its overall function is to repair, not manufacture.
53. Although we have concluded that Petitioner’s activities are repair activities, we recognize that under some circumstances, work on an existing product may amount to manufacturing. The Petitioner does not create a new product rather a service is provided. There are four factors to consider if taking an existing product and working on it is manufacturing:
The first is an adaptation of the requirement of a substantially different end product; the substantiality and complexity of the work done on the existing article and the physical changes to the existing article, including the addition of new parts. The other two factors derive from the observations of the courts dealing with this issue: a comparison of the article’s value before and after the work, and how favorably the performance of the remanufactured article compares with the performance of newly manufactured articles of its kind. Additionally, this Court concludes that another factor is applicable to this inquiry: whether the work performed was contemplated as a normal part of the life cycle of the existing article. This additional factor will prevent work that merely perpetuates existing products from qualifying for an industrial exemption.
Rotation Products Corp. v. Department of State Revenue, 690 N.E.2d 795, 802-803 (Ind. Tax 1998).
In this case, we believe that the fourth concern is decisive. The work is a mandated part of the rail car’s life cycle. The work must be performed every ten years and, even if the work is exemplary, the life cycle of the rail car is forty years, thus the work does not extend the life of the rail car. We need not address the other three factors.
54. Finally, the Department has defined “processing” as “the transformation of tangible personal property into a different state or form from which it originally existed.” Rules, Wyoming Department of Revenue, Chapter 2 §3(p).
55. When rules have been properly promulgated pursuant to statutory authority, they “have the force and effect of law.” Department of Revenue v. Buggy Bath Unlimited, Inc., 2001 WY 27 ¶19, 18 P.3d 1182, 1188 (Wyo. 2001). Therefore, the Department’s definition of processing has the force and effect of law. Petitioner does not meet this definition.
Manufacture Of Replacement Parts Does Not Result In All Power Used At Facility As Being Exempt
56. Although the Department conceded, and the Board agrees, that the manufacture of replacement parts is manufacturing, this does not lead to the conclusion that the whole process at Petitioner’s plant is manufacturing. It does not meet the test set forth in State Board of Equalization v. Cheyenne Newspapers, 611 P.2d 805,810 (Wyo. 1980) because the manufacturing process is not a contiguous, indivisible process. The manufacturing of the repair parts occurs in one building with limited machines.
57. A second test set forth in Wyoming Statute Section 39-15-105(a)(iii)(D) is that the power must be “consumed directly in manufacturing and processing.” [Emphasis supplied] to be exempt from sales tax. To meet the test of “directly” the Department’s rule provides guidance.
Section 8. Non-Taxable Transactions.
(g) Manufacturing, Processing, Agriculture.
(i) Fuel and Power Purchases of power of fuel for purposes as defined in W.S. 39-15-105(a)(iii)(D), (E), (G), and (H), shall be separately accounted for, or reported as required by the Department, and distinguishable from taxable purchases of same.
Rules, Wyoming Department of Revenue Chapter 2, §8 (g)(i).
58. The Court has not strictly construed “directly” and has found that electricity for lighting for the workers who participate in manufacturing is exempt. State Board of Equalization v. Cheyenne Newspapers, 611 P.2d 805,810 (Wyo. 1980). Similarly in State Board of Equalization v. Stanolind Oil & Gas Co., 94 P.2d 147, 157 (Wyo. 1939), the Court held:
Whether the energy mentioned was used for power to revolve mechanical devices used in manufacturing, or to light the operation and to assist the workmen in carrying out these processes, can make little difference. In either instance the energy was used as directly in manufacturing as the needs could possibly afford. When light was needed it was just as impossible to do the work incident to manufacturing crude oil into gasoline at night without light as it was to provide the necessary power for this purpose.
Therefore, any electricity and gas used to heat, light, and manufacture replacement parts is exempt if the Petitioner can demonstrate that amount.
59. The Department agreed in the hearing and this Board finds that the Department’s determination should be modified to allow an exemption for any separately accounted power that is directly consumed in the manufacturing of new parts. [Transcript, Vol. I, p. 222]. This can include the power to provide heat and lights to the employees who manufacture the new parts.
IT IS THEREFORE HEREBY ORDERED: The Department’s response to Petitioner’s request for a sales tax exemption for use of fuel in manufacturing and processing is reversed in part to allow a sales tax exemption under Wyoming Statute Section 39-15-105(a)(iii)(D) for all power and fuel consumed directly in the manufacturing of new parts including the electricity and gas used to power lights and the heating system that is separately accounted for. The Department’s response is affirmed in all other respects.
DATED this 1st day of April, 2003.
STATE BOARD OF EQUALIZATION
Roberta A. Coates, Chairman
Alan B. Minier, Vice-Chairman
Wendy J. Soto, Executive Secretary