STATE OF WISCONSIN
TAX APPEALS COMMISSION
ZIP SORT, INC., d/b/a
FEDERAL MAILING SYSTEMS
277 12th Avenue North
Minneapolis, MN 55401
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708
|DOCKET NO. 96-M-872
DECISION AND ORDER
MARK E. MUSOLF, CHAIRPERSON:
This matter was heard at Milwaukee on October 13, 1998. The parties filed post-hearing briefs. Attorney Barry A. O'Neil represents the petitioner; Attorney Veronica Folstad represents the respondent.
Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:
FINDINGS OF FACT(1)
1. On February 22, 1996, petitioner ("Zip Sort") applied to respondent ("the Department") for classification of its Milwaukee location as "manufacturing property" under Wis. Stat. § 70.995 for the year 1996.
2. The Department denied Zip Sort's request on March 6, 1996, concluding that Zip Sort's operation did "not meet the Statutory definition of a manufacturing establishment as defined in Sec. 70.995, WI Statutes." The Department found that Zip Sort provided "automated mailing services," a non-manufacturing classification in the 1987 Standard Industrial Classification ("SIC") Manual.
3. Zip Sort timely filed an objection with the Department's State Board of Assessors, which upheld the Department's original determination. A timely appeal to this Commission followed.
4. Zip Sort has been doing business under the trade name Federal Mailing Systems at its Milwaukee location since approximately November 1995. Advertisements using both names appeared in the Ameritech Yellow Pages for 1995 and 1996 under "Mailing Services."
5. Zip Sort's primary business is to make mail machine-sortable that would otherwise have to be sorted by hand. This is accomplished by the application of a unique 11-digit barcode ("the barcode") to each piece of mail. Zip Sort's revenues come from charging customers who use its services and from value-added refunds Zip Sort receives from the United States Postal Service ("USPS") for mail that bears a barcode and is properly prepared for shipment or delivery according to the exacting requirements of the USPS.
6. The barcode is created by Zip Sort through the use of multi-line optical character readers ("MLOCR"s). Each piece of mail is fed into an MLOCR, where a camera reads the address and captures its image. The address information is then examined and compared to the USPS national directory to determine if an appropriate barcode can be created for that address. If so, the mail piece proceeds to an inkjet head, which applies the barcode to it, after which the barcode is verified as legible and usable before the mail piece is directed to a specific stacker or pocket on the MLOCR, which sorts the mail to three or five digits. Zip Sort uses additional equipment to band, tag, and otherwise prepare the mail for shipment to the USPS, where machines again read the barcodes and sort the mail to the remaining digits in order to expedite its delivery.
Did the Department properly determine that Zip Sort's property in Milwaukee was not "manufacturing property" under Wis. Stat. § 70.995(1) and (2)?
70.995 State assessment of manufacturing property.
(a) In this section "manufacturing property" includes all lands, buildings, structures and other real property used in manufacturing, assembling, processing, fabricating, making or milling tangible personal property for profit. Manufactur-ing property also includes warehouses, storage facilities and office structures when the predominant use of the warehouses, storage facilities or offices is in support of the manufacturing property, and all personal property owned or used by any person engaged in this state in any of the activities mentioned, and used in the activity, including raw materials, supplies, machinery, equipment, work in process and finished inventory when located at the site of the activity.
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(d) Except for the activities under sub. (2), activities not classified as manufacturing in the standard industrial classification manual, 1987 edition, published by the U.S. office of management and budget are not manufacturing for this section.
(2) FURTHER CLASSIFICATION. In addition to the criteria set forth in sub. (1), property shall be deemed prima facie manufacturing property and eligible for assessment under this section if it is included in one of the following major group classifications set forth in the standard industrial classification manual, 1987 edition, published by the U.S. office of management and budget. For the purposes of this section, any other property described in this subsection shall also be deemed manufacturing property and eligible for assessment under this section:
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(j) 27--Printing, publishing and allied industries.
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(u) 38--Measuring, analyzing and controlling instruments; photographic, medical and optical goods; watches and clocks.
(v) 39--Miscellaneous manufacturing industries.
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(5) Commencing January 1, 1974, and annually thereafter, the department of revenue shall assess all property of manufacturing establishments included under subs. (1) and (2) as of the close of January 1 of each year. ...
CONCLUSION OF LAW
Zip Sort's Milwaukee property is not "manufacturing property" under Wis. Stat. § 70.995(1) and (2), and the Department properly denied classifying it as such.
All property of manufacturing establishments included under § 70.995(1) and (2) is assessed for general property tax purposes by the Depart-ment of Revenue. § 70.995(5). All other property is assessed locally. § 70.05.
"Manufacturing property" is defined generally in § 70.995(1)(a) to include all real property "used in manufacturing, assembling, processing, fabricating, making or milling tangible personal property for profit " and "all personal property" so used when located at the site of the activity.
Zip Sort argues that its Milwaukee facility qualifies under this general definition because it manufactures tangible personal property, namely barcodes, "from the raw material of information that is contained on the piece of mail supplied by Zip Sort's customer."(2)
Throughout its brief, Zip Sort urges us to focus solely on the language in § 70.995(1)(a) and to adopt the rationale of a Minnesota court concluding that Zip Sort manufactured barcodes, which were tangible personal property for purposes of that state's sales tax statutes.(3)
But there is more to the Wisconsin statute than the definition in § 70.995(1)(a). Secs. 70.995(1)(d) and (2) clarify that, to qualify, an activity must either be classified as manufacturing in the 1987 Standard Industrial Classification (SIC) Manual(4) ("the SIC Manual"), or be specifically defined as manufacturing even though not listed as such in the SIC Manual. In light of these additional provisions and the requirement in § 70.995(5), we cannot simply apply § 70.995(1)(a) to make our determination as Zip Sort urges. We must consider and apply all of § 70.995(1) as well as § 70.995(2).
The parties agree that there is no code in the 1987 SIC Manual that perfectly describes Zip Sort's business. Indeed, the technology used by Zip Sort to apply barcodes was not used in Zip Sort's industry until at least 1990. But both parties point to categories in the SIC Manual that might arguably be applied to Zip Sort's operations.
Not surprisingly, Zip Sort identifies SIC manufacturing classifications: "Commercial Printing, Not Elsewhere Classified," which includes "Labels, printed;" "Industrial Instruments for Measurements, Display, and Control of Process Variables; and Related Products," which includes "Computer interface equipment for industrial process control;" and "Miscellaneous manufacturing industries," which includes manufacture of identification tags.
The Department, of course, points to a non-manufacturing category: "Business Services, Not Elsewhere Classified," which includes "Presorting mail service;" and "Direct Mail Advertising Services," which includes "Addressing Service" and "Mailing service."
The Wisconsin Property Assessment Manual ("WPAM"), published pursuant to the mandate in § 73.03(2a), discusses and illustrates accepted assessment methods, techniques, and practices for Wisconsin assessors. WPAM recognizes that the SIC Manual "may not cover every type of business in existence," and instructs that "three questions should be asked" in considering the criteria and general definitions in § 70.995(1)(a) and (b).(5) These questions are discussed below in the order of priority specified in the WPAM.
1. Is the activity more similar to those specifically classified manufacturing by law and the SIC Manual, or more similar to those specifically classified nonmanufacturing by law and the SIC Manual?
As noted above, the parties have staked out their positions on this question by identifying what they consider the most closely related activities identified in the SIC Manual.
The SIC Manual contains a lengthy description for "Manufacturing: The Division as a Whole." It notes that the division "includes establishments engaged in the mechanical or chemical transformation of materials and substances into new products."(6)
Zip Sort claims its activity is similar to printing, publishing and allied industries, and printing of labels in particular. The Department says Zip Sort is more like a business service. The major nonmanufacturing group, "Business Services," is described as including "establishments primarily engaged in rendering services, not elsewhere classified, to business establishments on a contract basis, such as mailing, data processing."(7) Within that major group is "Business Services, Not Elsewhere Classified," which includes "Presorting mail service."(8)
We conclude that, as between these classifications, Zip Sort's activity is far more similar to the nonmanufacturing classification, "Business Services," than to any manufacturing classification advanced by Zip Sort. Zip Sort provides a presorting mail service to its business customers, including the USPS, on a contract basis. This service includes the processing of the data in an address on a piece of mail, creating and applying a unique barcode that is the same address data in a different form, and then presorting the mail for delivery to the USPS, where additional sorting and mail delivery occurs.
Zip Sort's activity is far more similar to this nonmanufacturing business service classification than to any activity described in the SIC Manual as manufacturing, including the printing of labels, which is commercial job printing wholly unlike Zip Sort's barcodes creation and application. Nor do we see any similarity to the manufacture of computer interface equipment for industrial process control or any related category in the SIC Manual.
Because this is the highest priority question, we accord our answer in the Department's favor the greatest weight in reaching our final conclusion.
2. Is the activity more closely aligned with the general description of producing, assembling, fabricating, making or milling by machinery and equipment of a new article with a different form, use and name from existing materials, or is it more aligned with the general activities involved with services as generally described in the SIC Manual, wholesale trade, retail trade, agriculture, or construction?
This question similarly requires a comparative analysis of Zip Sort's activity at its Milwaukee location. Even assuming that the barcode Zip Sort creates is a new article with a different form and name from the addressed envelope, we do not conclude that its use is different than that of the original address, which is to facilitate the sorting and ultimate delivery of a mail piece.
But even assuming we could so find, we would still conclude that, on a comparative basis, the activity conducted at Zip Sort's Milwaukee location, of which barcode creation is one albeit essential part, is more closely aligned with SIC business services classifications such as data processing and mailing than with the general description of producing a new product from machinery and equipment.
3. Does the activity produce products more for wholesalers, interplant transfer, to order for industrial users or more for direct sale to domestic consumers?
This question is more difficult but of much less significance because of our answers to the more important preceding questions.
Petitioner produces barcodes for its customers and for the USPS. The USPS is arguably both a retailer and a wholesaler of its postal services, and petitioner's customers could arguably be considered either retail or industrial consumers. The record doesn't provide a clear answer to this question.
Having determined from the first two WPAM questions that Zip Sort's activity is more similar to a nonmanufacturing business service than to a product-producing manufacturing operation, we conclude that Zip Sort was properly denied manufacturing classification by the Department.
As to the Minnesota court's conclusion heavily relied on by Zip Sort, we decline to embrace it for several reasons. First, we are not obligated to follow a decision of a court of another state. Second, the statute before us is not a sales tax imposition statute but a property tax assessment classification statute. Finally, as discussed above, there is more to our Wisconsin statute than the definition in § 70.995(1)(a). The WPAM recognizes this and instructs how to apply the statute as a whole by making a comparative analysis, which we have done.
Although this analysis requires no determination as to whether the barcodes created by Zip Sort are tangible personal property, we are compelled to point out that at least one Wisconsin case suggests otherwise.
In Janesville Data Center v. Dept. of Revenue, 84 Wis.2d 341 (1978), the Wisconsin Supreme Court ruled on the taxability for sales tax purposes of magnetic tapes and keypunched cards which had been encoded by the seller with data furnished by the buyer. Persuaded by the reasoning of the Supreme Court of Texas(9), the court found that the essence of the transaction was "the purchase of coded or processed data, an intangible." Id. at 346 (emphasis added). This commission has twice applied this characterization of coded or processed data as an intangible for sales tax purposes.(10)
Here, the essence of Zip Sort's contractual agreements with the USPS similarly involves the purchase by the USPS of coded data in the form of a barcode. Given these Wisconsin case holdings, we would not expect barcodes of the type produced by Zip Sort to be characterized as tangible personal property for other tax-related purposes.
We conclude that Zip Sort's activities at its Milwaukee location do not fall within the definition in § 70.995(1) and (2), and therefore cannot be assessed by the Department under § 70.995(5).
The respondent's action on petitioner's petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 17th day of December, 1999.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
(Concurs in result) Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
DON M. MILLIS, COMMISSIONER, CONCURRING:
I concur in the Decision and Order of the Commission to the extent that respondent's determination that petitioner's property is not manufacturing property is affirmed. However, I would reach this result by dismissing the petition for review because the Commission lacks subject matter jurisdiction over the issues raised in the petition for review.
Petitioner seeks to have the subject property classified as manufacturing property pursuant to section 70.995 of the statutes. As I read the statutes, the only classification matters over which the Commission has jurisdiction are objections to changes from assessment under section 70.995 to assessment under section 70.32(1).
Section 70.995(8)(a) provides that the State Board of Assessors is to investigate objections filed under sections 70.995(8)(c) or (d). Section 70.995(8)(c) provides, in part:
All objections to the amount, valuation, tax-ability or change from assessment under this section to assessment under s. 70.32(1) of property shall be first made in writing on a form prescribed by the department of revenue and filed with the state board of assessors within the time prescribed in par. (b). ... [Emphasis supplied.]
Section 70.995(8)(d) provides a similar appeal right for municipalities:
A municipality may file an objection with the state board of assessors to the amount, valuation or taxability under this section or to the change from assessment under this section to assessment under s. 70.32(1) of a specific property having a situs in the municipality, whether or not the owner of the specific property in question has filed an objection. ... [Emphasis supplied.]
In each section quoted above, the italicized portion was added by 1991 Wisconsin Act 269 and became effective with assessments on or after January 1, 1991. While before January 1, 1991, it may have been assumed that any classification issue came within the jurisdiction of the State Board of Assessors, it very clear that, since this date, the only classification issues over which the State Board of Assessors has subject matter jurisdiction are those in which respondent changes the assessment from section 70.995 to section 70.32(1).
Section 73.01(5)(a) of the statutes provides that, with regard to the determinations of the State Board of Assessors, the Tax Appeals Commission has jurisdiction over those determinations under section 70.995(8). Since under section 70.995(8) the State Board of Assessors has subject matter jurisdiction over only objections to changes in assessment from section 70.995 to section 70.32(1), the jurisdiction of the Tax Appeals Commission is similarly circumscribed. In this case, there was no change by respondent from assessment under section 70.995 to section 70.32(1). Rather, it was petitioner who sought to change the assessment.
Therefore, I would dismiss the petition for review because the Commission lacks subject matter jurisdiction over the petition for review.
Don M. Millis, Commissioner
January 14, 2000 Appealed to Dane County Circuit Court (Case No. 00CV121).
January 20, 2000 Amended to decision issued (original updated).