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Maine Yankee v. Tax Assessor
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MAINE SUPREME JUDICIAL COURT				Reporter of Decisions
Decision: 1997 ME 27
Docket: Ken-96-472
Argued January 6, 1997
Decided February 20, 1997

Panel:WATHEN, C.J., and GLASSMAN, CLIFFORD, RUDMAN, DANA, and LIPEZ, JJ.

MAINE YANKEE ATOMIC POWER COMPANY v. STATE TAX ASSESSOR

GLASSMAN, J.  
	[¶1]  The State Tax Assessor appeals from a summary judgment
entered in the Superior Court (Kennebec County, Atwood, J.) in favor of
Maine Yankee Atomic Power Company (Maine Yankee) vacating the
Assessor's determination on reconsideration and ordering a refund to Maine
Yankee of the use taxes assessed on its purchase of two transformers.  The
Assessor contends the court erred by concluding that two "step-up"
transformers qualified for the production exemption provided by 36 M.R.S.A.
§ 1760(31) (1990).{1}  We disagree and affirm the judgment.  
	[¶2]  The relevant facts are not in dispute.  Maine Yankee owns an
atomic power plant in Wiscasset that produces electricity for ten customers. 
The customers take delivery of the electricity from Maine Yankee at a
switchyard not owned by Maine Yankee but located on its property in
Wiscasset.  Maine Yankee's contract with its customers requires that the
electricity be delivered to the switchyard at 345,000 volts.  The customers
distribute the electricity acquired by them in bulk to their own service area
using downstream transformers to "step-down" the high voltage electricity
to lower voltages suitable to the requirements of the general public.  Maine
Yankee does not participate in this redistribution.  
	[¶3]  Two phases are required to produce the electricity at the
required 345,000 volts. The first phase, performed by the reactor or main
generator creates or generates electricity at 22,000 volts which has very
little commercial value because it cannot be efficiently transmitted.  The
second phase, performed by the two transformers located on Maine
Yankee's property near the turbine building that houses the main generator,
alters the electricity received from the main generator by increasing the
voltage to 345,000 and decreasing the amperage.  Following this process,
the electricity is in the transmittable form required by Maine Yankee's
customers.  
	[¶4]  In July 1993, Maine Yankee paid under protest the use tax
assessed on its June 1993 purchase and installation of two transformers to
replace two older units.  Following the Assessors denial of its request for
reconsideration and for a refund of the tax, Maine Yankee filed the present
complaint seeking a de novo determination of the issue by the Superior
Court, pursuant to 36 M.R.S.A. § 151 (Supp. 1996), 5 M.R.S.A. § 11002
(1989) and M.R. Civ. P. 80C.  Following a hearing on the parties' cross-
motions for a summary judgment, the court concluded that the transformers
were used "directly and primarily in . . . the production" of tangible personal
property and were within the exemption provided by section 1760(31). 
From the judgment vacating the Assessor's determination on
reconsideration and ordering a refund to Maine Yankee of the assessed taxes
with interest, the Assessor appeals.  
	[¶5]  In reviewing the grant of a motion for a summary judgment, we
examine the evidence in the light most favorable to the nonprevailing party
to determine whether the trial court committed an error of law.  Enerquin
Air, Inc. v. State Tax Assessor, 670 A.2d 926, 928 (Me. 1996) (citation and
quotation omitted).  
	[¶6]  Section 1760(31) provides an exemption from both sales and use
taxation on those "[s]ales of machinery and equipment for use by the
purchaser directly and primarily in . . . the production of tangible personal
property, which property is intended to be sold or leased ultimately for final
use or consumption . . . ." The word "directly" is statutorily defined as
follows: 

"Directly" when used in relation to production of tangible
personal property, refers to those activities or operations which
constitute an integral and essential part of production, as
contrasted with and distinguished from those activities or
operations which are simply incidental, convenient or remote to
production.  

36 M.R.S.A. § 1752(2-A) (1990).  "'Primarily', when used in relation to
production means more than 50% of the time." 36 M.R.S.A. § 1752(9-A)
(1990).  "Production" is defined as follows: 

"Production" means 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.  

Production does not include biological processes, wood
harvesting operations, the severance of sand, gravel, oil, gas or
other natural resources produced or severed from the soil or
water, or activities such as cooking or preparing drinks, meals,
food or food products by a retailer for retail sale.  The foregoing
are examples of activities that are not included within the term
"production." 

36 M.R.S.A. § 1752(9-B) (1990).  
	[¶7]  Pursuant to the statutory authority provided by 36 M.R.S.A. §
112(1) (Supp. 1996),{2} 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 good in process between production sites, and administrative
and distributive operations do not constitute production.  

08-125 C.M.R. 303.01(A) (Bur. of Tax., effective June 1, 1951).  
	[¶8]  It is undisputed that electricity is tangible personal property, 36
M.R.S.A. § 1752(17) "intended to be sold . . . ultimately for final use or
consumption." 36 M.R.S.A. § 1760(31).  It is also undisputed that the
"primarily" requirement is satisfied because the only function of the
transformers is to transform electricity from 22,000 volts to 345,000 volts,
for which they are used more than 50% of the time.  36 M.R.S.A. § 1752(9-
A).  The sole issue before us is whether the transformers are used "directly .
. . in . . . the production" of the electricity.  
	[¶9]  The Assessor first contends that the trial court erred by
concluding that the transformers are directly involved in the production of
electricity because the production process stops when the electricity leaves
the main generator and, accordingly, the transformers are used in the
distribution of electricity, not the production.  We find the Assessor's
contention unpersuasive.  By agreeing that the transformers change the
"form, character or composition" of the electricity, the Assessor concedes
that the plain language of the statutory definition of production is satisfied. 
See 36 M.R.S.A. § 1752(9-B); cf. SST & S, Inc. v. State Tax Assessor, 675
A.2d 518, 522 (Me. 1996) (where equipment did not transform fish into
different form, composition or character, the production exemption did not
apply).  Moreover, the Assessor's rule defining production states that the
production process begins with the "movement of raw materials to the first
production machine . . . and ends with the completion of the finished
product, including any packaging operation." Rule 303.01(A).  Maine Yankee
does not have a finished product ready for its customers until the
transformers process the electricity to the required 345,000 volts.  
	[¶10]  The Assessor next contends that the transformers are not
directly involved in production because they are not an "integral and
essential part of production" of electricity as required by section 1752(2-A). 
We disagree.  The only product Maine Yankee produces for sale is bulk
electricity at 345,000 volts.  Because this product could not be produced
without the transformers, they are both an integral and essential part of the
production process.  See UAH-Hydro Kennebec v. State Tax Assessor, 659
A.2d 865, 867 (Me. 1995) (gates necessary to efficient functioning of
hydroelectric facility essential to production); International Paper Co. v.
Halperin, 428 A.2d 1182, 1183-84 (Me. 1981) (boiler stacks necessary to
keep boilers operating efficiently are directly involved in production of
paper).  Accordingly, we agree with the trial court that the two transformers
are within the exemption provided by 36 M.R.S.A. § 1760(31).  
	The entry is:
						Judgment affirmed. 


Attorney for plaintiff: Michael S. Wilson, Esq. (orally) Pierce, Atwood One Monument Square Portland, ME 04101-1110 Attorneys for defendant: Andrew Ketterer, Attorney General Thomas A. Knowlton, Asst. Atty. General (orally) 6 State House Station Augusta, ME 04333-0006
FOOTNOTES******************************** {1} 36 M.R.S.A. § 1760(31) provides an exemption from sales and use tax for: Sales of machinery and equipment for use by the purchaser directly and primarily in either the production of tangible personal property, which property is intended to be sold or leased ultimately for final use or consumption, or the production of tangible personal property pursuant to a contract with the United States Government or any agency thereof. {2} Section 112(1) provides in part: "The State Tax assessor shall administer and enforce the tax laws . . ., and may adopt rules . . . ."