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Foster v. Tax Assessor
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MAINE SUPREME JUDICIAL COURT				Reporter of Decisions
Decision:	1998 ME 205	
Docket:		Ken-97-55
Argued:		September 3, 1997
Decided :	August 7, 1998	

Panel:	WATHEN, C.J., ROBERTS,  CLIFFORD,  DANA, and LIPEZ{1}, JJ.

ROBERT H. FOSTER et al. v. STATE TAX ASSESSOR



CLIFFORD, J.
	
	[¶1]	 Robert H. and Caroline M. Foster and Amr and Mary Ismail
appeal from the judgment entered in the Superior Court (Kennebec County,
Alexander, J.) affirming the State Tax Assessor's denial of certain income tax
credits pursuant to the investment tax credit statute, 36 M.R.S.A. § 5219-E
(Supp. 1996).{1}  They contend that the court erred by concluding that a
wastewater pre-treatment facility did not constitute machinery or
equipment eligible for the investment tax credit and by concluding that the
facility was not used directly in the production of tangible personal property.  
Because the facility was not used in the production of tangible personal
property within the the meaning of section 5219-E(1)(C)(2), we affirm the
judgment.  
	[¶2]  The following facts are undisputed.  Robert Foster and Amr
Ismail are shareholders of Maine Wild Blueberry Company (Company).  The
Company owns and operates a plant in Machias where fresh fruit is
processed into individually quick frozen fruit, which is further processed
into various products, including laser-scanned berries, frozen fruit puree,
canned fruit, and infused, air-dried fruit.  The Company uses water to wash,
convey, separate, rinse and freeze the berries; to process the frozen fruit; to
remove frost from the freezing tunnels daily; and to maintain compliance
with sanitation standards set by FDA regulations.
	[¶3]  One of the methods by which the Company disposes of
wastewater is through discharge into the Town of Machias sewer system.  By
late 1990, the Company's operations had tripled and the amount of
wastewater generated had grown proportionately.  As a result, the Town
became concerned that its sewer system could not handle the volume of
wastewater discharged by the Company.  In 1991, the Town and the
Company entered into an agreement imposing restrictions on, inter alia, the
daily gallonage and the amount of solids that the Company could discharge
into the Town's sewer system.  The Company was required to pay
surcharges if it violated the agreement. 
	[¶4]  To comply with the restrictions in the agreement, the Company
hired engineers and contractors to design and construct a wastewater
pre-treatment facility on real estate owned by the Company.  The purpose of
the facility was to "reduce the amount of sugars and other organic material
in the wastewater by screening, filtering, and chemically and organically
treating the water before it entered [the Town's] sewer system."  By the end
of 1991, the facility was substantially completed.  It consists of two partially
underground concrete basins that collect wastewater, six aerators on
floating beds in the basins, and an adjacent concrete block and brick
building containing the control components, various piping, electrical
wiring and fixtures.  The aerators are held in place by guide cables affixed to
the sides of the basins.  Wastewater is constantly conveyed, via floor drains
and pipes, to the facility to allow the continual functioning of the production
processes described above.  A roto-screening device removes solids such as
whole berries from the water before it enters clarification tanks, which are
located in the concrete block and brick building adjacent to the bins.  While
the water is in the clarification tanks, additional pollutants settle to the
bottom.  The overflow is then discharged into two 250,000 gallon aeration
basins where microorganisms digest the remaining biodegradable solids. 
The sludge settles to the bottom and the clarified supernate rises to the top,
is siphoned off, and sent to the Town's wastewater treatment facility.
	[¶5]  On several occasions, the Company exceeded the daily limits in
the discharge agreement and incurred surcharges totalling more than
$100,000.  In 1992, the Company paid contractors to make enhancements
to the facility.  The parties stipulated that these enhancements were
necessitated by design deficiencies in the facility which resulted in the
surcharges. 
	[¶6]  The Fosters and the Ismails filed joint Maine income tax returns
for 1992 and 1993 and claimed investment tax credits with respect to the
facility and the 1992 enhancements.{2}  The Bureau of Taxation disallowed the
credits.   On the taxpayers' petitions for administrative reconsideration, see
36 M.R.S.A. § 151 (Supp. 1997), the Assessor upheld the disallowances. 
Pursuant to 5 M.R.S.A. § 11002 (1989), 36 M.R.S.A. § 151 and M.R. Civ. P.
80C, the taxpayers filed a petition for review in the Superior Court.  The
case was submitted for trial on a stipulated record.  The court concluded
"that the term 'machinery and equipment' cannot include real estate and
fixtures that are part of the real estate," and held that the facility and the
1992 enhancements were items of real estate ineligible for the investment
tax credits.  Alternatively, the court concluded that:
"directly and primarily" used in production of goods to be sold
for final use means machinery and equipment actually used to
make the product for sale.  Excluded from this interpretation
would be machinery, equipment or facilities used to receive,
process, transport and store raw material--here
blueberries--before they are turned into a product for sale. 
	Also excluded would be the pretreatment facility--to the
extent it is not real estate--because it is only indirectly
involved in production.  It did not even exist for the first seven
years of production.  Further, the record indicates that much
of the use of the pretreatment facility results from the
cleaning, storage, and preparation of raw materials for storage
or production before the direct production processing occurs. 
From a judgment in favor of the Assessor, the taxpayers appealed.
	[¶7]  Judicial review of decisions by the Assessor is governed by
36 M.R.S.A. § 151, which provides that the Superior Court "shall conduct a
de novo hearing and make a de novo determination of the merits of the
case."  We therefore review the court's interpretation of the statute directly. 
See Apex Custom Lease Corp. v. State Tax Assessor, 677 A.2d 530, 532 (Me.
1996).  "The meaning and construction of statutory language presents a
question of law."  Community Telecomm. Corp. v. State Tax Assessor, 684
A.2d 424, 426 (Me. 1996).  In the interpretation of a statute, we seek to
effectuate the intent of the Legislature, which is ordinarily gleaned from the
plain language of the statute.  Interstate Food Processing Corp. v. Town of
Fort Fairfield, 1997 ME 193, ¶ 4, 698 A.2d 1074, 1075. 
	[¶8]  We recently affirmed the "well settled principle that 'taxation is
the rule and tax exemption is the exception[.]'"  SST & S, Inc. v. State Tax
Assessor, 675 A.2d 518, 521 (Me. 1996) (quoting Connecticut Bank & Trust
Co. v. City of Westbrook, 477 A.2d 269, 271 (Me. 1984)).  This rule requires
a taxpayer seeking an exemption to establish that the claimed exemption is
"unmistakably within the spirit and intent" of the statute.  Episcopal Camp
Found., Inc. v. Town of Hope, 666 A.2d 108, 110 (Me. 1995).  We see no
reason why this rule of construction should not apply equally to a tax credit
statute.
	[¶9]  The investment tax credit statute allows a taxpayer a credit
against the taxpayer's Maine income tax liability for each taxable year equal
to 1.0% of the taxpayer's investment credit base.  See 36 M.R.S.A. § 5219-
E(2) (Supp. 1997).  The "investment credit base" is defined, in pertinent
part, as "the total original basis, without adjustment, for federal income tax
purposes, of the taxpayer of all machinery and equipment . . . ." Id.
§ 5219-E(1)(B).  The tax credit statute defines "machinery and equipment"
in part as:
machinery and equipment as defined in section 1752,
subsection 7-B, with a situs in the State as of the last day of the
immediately prior taxable year:
	. . . .

(2) That is used directly and primarily in the production
of tangible personal property intended to be sold or
leased ultimately for final use or consumption.
Id.  § 5219-E(1)(C).  The Assessor contends that the pre-treatment facility
is not used in the "production" of tangible personal property, and therefore
does not qualify for the credit.
	For purposes of the tax credit statute, "production" is defined as: 
an operation or integrated series of operations engaged in as a
business or segment of a business which transforms or
converts personal property by physical, chemical, or other
means into a different form, composition or character from
that in which it originally existed.

Production includes manufacturing, processing, assembling
and fabricating operations which meet the definitional
requisites. 
36 M.R.S.A. § 1752(9-B) (1990)).  Pursuant to 36 M.R.S.A. § 112(1) (1990),
the Assessor promulgated the following rule:
"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(A) (effective June 1, 1951).  In SST & S, Inc. v.
State Tax Assessor, 675 A.2d 518 (Me. 1996), we observed that this rule was
an amplification of, and not inconsistent with, the definition of production
contained in section 1752(2-A).  See 657 A.2d at 521.    
	[¶10]  In SST & S, the issue presented was whether icing equipment
and totes used by the taxpayer to maintain the firmness of fish during
transportation from the dock to the taxpayer's processing facility were
exempt from sales and use tax pursuant to 39 M.R.S.A. § 1760(31).  That
section provides an exemption for machinery and equipment "use[d] by the
purchaser directly and primarily  in . . . the production of tangible personal
property . . . ."  Id.   The taxpayer conceded that the icing equipment itself
did not transform or convert the fish into a different form, composition or
character, but argued that the equipment was exempt because it was part of
an integrated process which met the statutory definition of "production." 
We rejected that argument and held that the Assessor rationally could have
determined that the equipment was not used directly in the production of
tangible personal property.{3}  675 A.2d at 522.   We noted that "[t]he process
effected by the equipment does not 'transform[ ] or convert[ ] [the fish] by
physical, chemical, or other means into a different form, composition or
character from which it originally existed'"  Id. (quoting 36 M.R.S.A. §
1752(9-B)) (emphasis added).   
	[¶11]  In Maine Yankee Atomic Power Co. v. State Tax Assessor, 1997
ME 27, 690 A.2d 497, we were presented the issue of whether transformers
used by the taxpayer were used "directly . . . in the production" of
electricity.  Id. at ¶ 8, 690 A.2d at 499.  The transformers adjusted the
voltage and amperage of electricity before distribution to the taxpayer's
customers.   We concluded that the plain language of section 1752(9-B) was
satisfied because the Assessor agreed that the transformers "change the
'form, [composition or charcter]' of the electricity . . . ."  Id. at ¶ 9, 690 A.2d
at 500 (quoting 36 M.R.S.A. § 1752(9-B)).{4} 
	[¶12]  In this case, although the pre-treatment facility might be
viewed as a part of an integrated production process, the facility itself does
not meet the requirement of section 1752(9-B).  Like the icing equipment
in SST & S and unlike the transformers in Maine Yankee, the facility does
not transform or alter the composition of the tangible personal property.{5} 
The sole purpose of the pre-treatment facility in this case is to reduce the
amount of organic material in the wastewater generated by screening and
treating the water before introduction into the Machias sewer system. 
Wastewater is piped to the facility after it is used in the various steps of the
production process.  After clarification, the water is not circulated back into
the Company's production process, but rather is siphoned off and sent to
the Town's wastewater treatment facility.  The facility does not alter or
convert the blueberries into a different form, composition or character. 
Accordingly, the facility is not used in the production of tangible personal
property, within the meaning of 36 M.R.S.A. § 5219-E(C)(2).  See SST & S,
675 A.2d at 522; see also Commissioner of Revenue v. V.H. Blackinton & Co.,
Inc., 649 N.E.2d 160 (Mass. 1995) (holding that pollution control
equipment did not qualify for manufacturing exemption to sales tax absent
determination that equipment effected physical change on property to be
sold); Ohio Ferro-Alloys Corp. v. Kosydar, 296 N.E.2d 533 (Ohio 1973)
(equipment used to weigh metallic ore prior introduction into furnace did
not effect a change in the form of the ore and therefore was not used in
production);  but see Department of Revenue v. State Stone & Contracting
Co., 572 S.W.2d 421 (Ky. 1978) (holding that pollution control equipment
mandated by regulatory authorities was used directly in the production of
asphalt). 
	[¶13]  The taxpayers contend that "production" includes "processing
operations" and the facility is clearly part of the processing of the
blueberries.  This argument, however, overlooks the requirement that
processing operation "meet the definitional requirements" in order to
qualify as "production."  See 36 M.R.S.A. § 1752(9-B).  A reasonable
construction of the statute assumes that "definitional requirements" refers
to the requirement that the operation "transform[ ] or convert[ ] personal
property by physical, chemical or other means into a different form,
composition or character from that in which it originally existed."  36
M.R.S.A. § 1752(9-B). 
	The entry is:
			Judgment affirmed. 

Attorney for plaintiffs: Brent A. Singer, Esq., (orally) Rudman & Winchell, LLC P O Box 1401 Bangor, ME 04402-1401 Attorneys for defendant: Andrew Ketterer, Attorney General Thomas A. Knowlton, Asst. Atty. Gen., (orally) Clifford B. Olson, Asst. Atty. Gen. 6 State House Station Augusta, ME 04333-0006 Attorneys for amicus curiae Maine Chamber & Business Alliance: James G. Good, Esq. Jonathan A. Block, Esq. Pierce Atwood One Monument Square Portland, ME 04101-1110
FOOTNOTES******************************** {*} Justice Lipez sat at oral argument and participated in the initial conference, but resigned before this opinion was adopted. {1} Title 36 M.R.S.A. § 5219-E (Supp. 1997) provides in part: 1. Definitions. As used in this section, unless the context otherwise indicates, the following terms have the following meanings. A. "Directly" has the same meaning as defined in section 1752, subsection 2- A. B. "Investment credit base" means the total original basis, without adjustment, for federal income tax purposes, of the taxpayer of all machinery and equipment placed in service for the first time in this State by the taxpayer or other person during any of the prior 5 taxable years, except in taxable years ending in 1995, the prior 6 taxable years, excluding the basis of machinery and equipment placed in service in this State prior to January 1, 1989. . . . C. "Machinery and equipment" means machinery and equipment as defined in section 1752, subsection 7-B, with a situs in the State as of the last day of the immediately prior taxable year: (1) That was subject to an allowance for depreciation under the Code by the taxpayer as of the last day of the immediately prior taxable year or would have been subject to an allowance for depreciation under the Code by the taxpayer as of that date, but for the fact that the property had been fully depreciated; and (2) That is used directly and primarily in the production of tangible personal property intended to be sold or leased ultimately for final use or consumption. D. "Primarily" has the same meaning as defined in section 1752, subsection 9-A. E. "Production" has the same meaning as defined in section 1752, subsection 9-B. 2. Credit allowed. A taxpayer is allowed a credit against the tax imposed by this Part for each taxable year equal to 1.0% of the investment credit base of the taxpayer. . . . {2} Because the Company is an S corporation, its credits pass through to the shareholders. 36 M.R.S.A. § 5219-E(4) (Supp. 1997). {3} The scope of our review in SST & S was more limited than the review we undertake here. See SST & S, 675 A.2d at 520 (citing 36 M.R.S.A. § 151, as interpreted by Jackson Advertising Corp. v. State Tax Assessor, 551 A.2d 1365, 1366 (Me. 1988)). {4} In UAH-Hydro Kennebec v. State Tax Assessor, 659 A.2d 865 (Me. 1995), we held that bascule gates attached to a dam at the taxpayer's hydroelectric facility were used directly and primarily in the production of tangible personal property. Id. at 867-68. Although we were unpersuaded by the Assessor's contention that the gates were used for storage, and not in production, we did not discuss the language of section 1752(9-B) or how the gates transformed or converted the personal property. See also International Paper Co. v. Halperin, 428 A.2d 1182 (Me. 1981) (holding that four emission stack and breeching systems were used directly and primarily in the production of paper). In International Paper, we did not address the statutory definition of "production" because the parties stipulated that the stack and breeching systems were essential to the production of paper. International Paper, 428 A.2d at 1184. {5} Although the freezing equipment and totes at issue in SST & S and the pre-treatment facility in this case are both important parts of the taxpayers' operations, neither involves a process that meets the statutory definition of production.