Weiss v. Chem-Fab Corp.

Annabelle Clinton Imber, Justice. This is a case of first impression that involves the interpretation of the Arkansas Gross Receipts Act of 1941, as amended. The chancellor ruled that Chem-Fab Corporation’s initial and replacement purchases of certain chemicals used in manufacturing aircraft parts were exempt from the Arkansas Gross Receipts Tax. We affirm in part and reverse in part. The taxpayer, Chem-Fab Corporation, is a Flot Springs manufacturer of aluminum and titanium aircraft parts. These parts have unique shapes and contours and cannot be made with traditional machinery. Rather, a chemical milling process that uses several different chemicals shapes and forms the aircraft parts. Annealing chemicals physically alter the metal’s grain structure in order to bend and form the parts. These annealing chemicals do not require replacement because their useful life is indefinite. A chemical etching bath mills away excess metal through direct chemical action in order to form the requisite intricate contouring. Fifty percent of the chemical etching bath used to mill aluminum parts must be replaced, while the entire chemical etching bath used on titanium parts is discarded and replaced. These replacements occur every seven to ten days at a cost of roughly $12,000.00 for each replacement. Finally, two different chemicals are sprayed on the aircraft parts in order to check for the presence of cracks. These testing chemicals are completely consumed during this process and, thus, require replacement after each use. On October 19, 1994, and August 25, 1995, Chem-Fab requested a refund from the Department of Finance and Administration (DF&A) for sales and use taxes paid on these chemicals, claiming they were machinery or equipment used direcdy in manufacturing and were exempt from taxation under Ark. Code Ann. § 26-52-402 and Arkansas Gross Receipts Tax Regulation GR-55. This request was denied by DF&A. Chem-Fab then brought suit in the Garland County Chancery Court for a refund of $13,823.59 plus interest. There was no dispute that Chem-Fab is a manufacturer. Nor was there any dispute that the annealing, etching, and testing chemicals were essential to and used directly in the manufacturing process. The chancellor ruled that these chemicals were equipment as that term is used in Ark. Code Ann. § 26-52-402 and that Chem-Fab was entitled to an exemption from the Arkansas Gross Receipts Tax for its initial purchases of those chemicals. While the chancellor found that replacement purchases of annealing chemicals were not exempt due to their infinite useful life, he concluded that Chem-Fab’s weekly purchases of etching and testing chemicals were exempt under Ark. Code Ann. § 26-52-402(a)(2)(A) and 26-52-402(a)(2)](B) as purchases of replacement equipment, reasoning that the replacement chemicals performed more efficiently than the old, saturated chemicals they replaced. Finally, the chancellor found that the replacement of fifty percent of the old etching chemicals with new etching chemicals qualified as a “substantial” replacement. DF&A now appeals the chancellor’s findings and conclusions. We review tax-exemption cases de novo on appeal and do not set aside the findings of the chancellor unless they are clearly erroneous. Aluminum Co. of America v. Weiss, 329 Ark. 225, 946 S.W.2d 695 (1997); Martin v. Riverside Furniture Corp., 292 Ark. 399, 730 S.W.2d 483 (1987). There is a presumption in favor of the taxing power of the state, and all tax-exemption provisions must be strictly construed against the exemption. Aluminum Co. of America, supra. The claimant has the burden of establishing the right to an exemption beyond a reasonable doubt and “to doubt is to deny [the exemption].” Aluminum Co. of America, supra; Pledgor v. Baldor Int’l., Inc., 309 Ark. 30, 827 S.W.2d 646 (1992). Chemicals as Equipment Under Ark. Code Ann. § 26-52-402 Arkansas Code Annotated § 26-52-402(a) (1) provides an exemption for equipment and machinery used to create or expand processing or manufacturing plants. In relevant part, the section provides: (a) There is specifically exempted from the tax imposed by this act, the following: (1)(A) Gross receipts or gross proceeds derived from the sale of tangible personal property consisting of machinery and equipment used directly in producing, manufacturing, fabricating, assembling, processing, finishing, or packaging of articles of commerce at manufacturing or processing plants or facilities in the State of Arkansas . . . but only to the extent that the machinery and equipment is purchased and used for the purposes set forth in this subdivision .... (B) The machinery and equipment will be exempt under this subdivision if it is purchased and used to create new manufacturing or processing plants or facilities within this state or to expand existing manufacturing or processing plants or facilities within this state .... Chem-Fab asserts that the chemicals it uses to manufacture aircraft parts are “equipment” as that term is used in the above provision and are thus exempt from taxation. We agree and affirm the chancellor’s holding on this issue. Equipment is an exceedingly elastic term, the meaning of which should be determined from context. Pledger v. C.B. Form Co., 316 Ark. 22, 871 S.W.2d 333 (1994); Ragland v. Dumas, 292 Ark. 515, 732 S.W.2d 119 (1987). In Dumas, supra, we stated that the term equipment as used in this particular statute means “implements, tools or devices of some degree of complexity and continuing utility.” Although neither party refers to this definition in their briefs, we shall adhere to the definition of equipment adopted in Dumas. Consequently, any item falling within that definition will be considered “equipment” for purposes of qualifying for the exemption found in Ark. Code Ann. § 26-52-402(a)(1)(A). Our first inquiry under Dumas must be to determine whether the chemicals here constitute “implements, tools or devices of some degree of complexity.” An “implement” is “an article serving to equip; a device used in the performance of a task; one that serves as an instrument or tool.” Merriam Webster’s Collegiate Dictionary, 583 (10th ed. 1997). The chemicals used by Chem-Fab in their manufacturing process clearly meet the definition of “implement” because they serve as instruments or tools to soften metal or to mill away excess metal. Further, these chemicals are by their very nature complex substances. We thus conclude that the chemicals here constitute “implements, tools, or devices of some degree of complexity.” Turning to the second inquiry under Dumas, we must also determine whether the chemicals used by Chem-Fab possess continuing utility. In Dumas, we found that gravel used for site preparation and road construction was not equipment because it became fully integrated into a temporary road, the utility of which ended upon the termination of each individual oil-extraction project. See Dumas, supra. By contrast, the chemicals here are not fully integrated into some other object, the utility of which is confined to an individual project. Rather, these chemicals are used directly in the process of manufacturing a number of aircraft parts and, thus, have continuing utility. For the above reasons, we conclude that the chemicals used by Chem-Fab in its manufacturing process come within the definition of equipment as that term is used in Ark. Code Ann. § 26-52-402. This conclusion is also supported by DF&A’s definition of equipment in Tax Regulation GR-55: “tangible personal property other than machinery which is directly used in the manufacturing process.” Agency interpretations of a statute, while not conclusive, are highly persuasive. Aluminum Co. of America, supra. These chemicals clearly qualify as equipment according to DF&A’s own definition of that term. Thus, we affirm the trial court’s holding that Chem-Fab proved beyond a reasonable doubt that its chemicals were equipment and that Chem-Fab was entided to an exemption from the Arkansas Gross Receipts Tax for its initial purchases of those chemicals. Replacement Purchases of Chemicals Under Ark. Code Ann. § 26-52-402 DF&A’s second point on appeal is that Chem-Fab’s replacement purchases of chemicals are taxable purchases which are not exempt under Ark. Code Ann. § 26-52-402(a)(2)(A). That section provides: (2) (A) Machinery purchased to replace existing machinery and used directly in producing, manufacturing, fabricating, assembling, finishing, or packaging of articles of commerce at manufacturing or processing plants or facilities in this state will be exempt under this subdivision. . . . The next section of the statute articulates two requirements which must be met before replacement purchases of machinery and equipment qualify for an exemption. More specifically, it provides that: (B)(i) “Machinery purchased to replace existing machinery” means that substantially all of the machinery and equipment required to perform an essential function is physically replaced with new machinery that performs the essential function more efficiently or with a longer useful life than the old machinery being replaced. . . . Thus, replacement machinery or equipment must: (1) be a substantial replacement; and (2) must either be more efficient or have a longer useful life than the equipment replaced. DF&A contends that the chancellor erred when he found that the replacement chemicals were exempt because they worked more efficiently than the old, saturated chemicals at the time of replacement. According to DF&A, the efficiency of the chemicals being replaced should be determined at the time those chemicals were originally purchased and not at the time of replacement. At the outset, it should be noted that Ark. Code Ann. § 26-52-402(a)(2)(B) does not specify a particular point in time when the efficiency or useful life of new equipment should be compared to that of old equipment, i.e., whether to compare the old and new equipment at.the time of replacement or at the time of purchase. Chem-Fab argues that the comparison must be made at the time the old equipment is replaced in order to be consistent with the intent of the General Assembly set forth in Ark. Code Ann. § 26-52-402(a) (2) (C): (2) (C) It is the intent of subsection (a) (2) of this section to provide the foregoing exemptions as incentives to encourage . . . the modernization of existing manufacturing plants in Arkansas through the replacement of old, inefficient, or technologically obsolete machinery and equipment .... DF&A, on the. other hand, asserts that replacement equipment must be compared with old equipment as of the time each was purchased. To do otherwise, that is, to make the comparison at the time of replacement, would result in a broad exemption for all replacement equipment. DF&A further asserts that the statutory provision requiring more efficiency or a longer useful life would be rendered meaningless under the interpretation suggested by Chem-Fab, because new equipment is always more efficient or longer lasting than old equipment when the comparison is made at the time of replacement. Under our well-settled rules of statutory construction, tax-exemption provisions must be strictly construed and if there is any doubt concerning their application, the exemption must be denied. Aluminum Co. of America, supra. In this case, Chem-Fab and DF&A each urge a different statutory interpretation. Although both statutory interpretations are reasonable, doubt remains as to which interpretation is correct. Under these circumstances, we must deny the exemption, because “to doubt is to deny.” Id. Thus, we agree with DF&A’s determination that Chem-Fab failed to establish its entitlement to the exemption for replacement chemicals beyond a reasonable doubt, and because a tax-exemption provision must be construed against the exemption, we reverse the chancellor’s ruling that Chem-Fab was entitled to the exemption. Affirmed in part and reversed in part. Corbin and Thornton, JJ., concur in part and dissent in part. Smith, J., not participating.