TAX
APPEALS COMMISSION
PMFC HOLDING, LLC,
DOCKET NO. 16-S-079
Petitioner,
vs.
WISCONSIN
DEPARTMENT OF REVENUE,
Respondent.
RULING AND ORDER
DAVID D. WILMOTH, COMMISSIONER:
This case comes before the
Commission for a decision on cross-motions for summary judgment. The Petitioner, PMFC Holding, LLC, of Green
Bay, Wisconsin (“PMFC”), is represented in this matter by Attorneys Daniel C.
W. Narvey and Timothy C. Smith, both of Godfrey &
Kahn, S.C. The Respondent, the Wisconsin
Department of Revenue (“the Department”), is represented by Attorney
Julie A. Zimmer.
The parties filed a Partial Stipulation of Facts
with the Commission, along with Cross-Motions for Summary Judgment, accompanied
by Affidavits and supporting Briefs.
Each party also filed a Brief in opposition to the other’s Motion. For the reasons set forth below, we grant
PMFC’s Motion for Summary Judgment.
FACTS
Jurisdictional
Facts
1.
After conducting a
field audit of PMFC for the years 2008 through 2011 (the “Audit Period”), the
Department issued a Notice of Field Audit Action, dated November 14, 2014,
assessing $92,642.68 of additional use tax, $24,776.42 in regular 12% interest,
$29,174.66 in delinquent 18% interest, and $23,160.68 in negligence penalty,
for a total of $169,754.44. The
assessment related to PMFC’s purchase of fuel and electricity for air makeup
units at its Green Bay and Oshkosh plants during the Audit Period. (Partial Stipulation of Facts (“Stip.”) ¶ 10; Ex. 1.)
2.
By letter dated
January 13, 2015, PMFC timely petitioned the Department for a redetermination
of the assessment in the Notice of Field Audit Action. (Stip.
¶ 11; Ex. 2.)
3.
On March 11, 2015,
PMFC made an agreed-to payment in the amount of $12,160.94 to cover tax and
interest only for certain items adjusted in the Notice of Field Audit Action,
which fully and finally resolved those items.
(Stip. ¶ 12.)
4.
On February 9,
2016, the Department denied PMFC's Petition for Redetermination for the
remaining items. (Stip. ¶ 13; Ex. 3.)
5.
On April 8, 2016, PMFC
timely filed a Petition for Review with the Tax Appeals Commission appealing
the Department’s action on its Petition for Redetermination. PMFC objected to (1) the assessment of use
tax on its purchase of fuel for its air intake units during the Audit Period,
(2) the delinquent interest assessment, and (3) the negligence penalty
assessment. (Stip. ¶ 14; Ex. 4.)
6.
On October 15,
2016, PMFC placed $183,333.40 on deposit pending the outcome of its appeal,
pursuant to Wis. Stat. § 77.59(6)(c).
(Stip. ¶ 15.)
7.
On May 23, 2017,
PMFC and the Department settled the delinquent interest and negligence penalty
assessments under mutually agreeable terms.
Those issues are no longer in dispute.
(Stip. ¶ 16.)
8.
Still at issue is
the $149,037.06 remaining on deposit which represents the amount of use tax and
regular interest assessed on PMFC's purchase of fuel
for its air makeup units at its Green Bay and Oshkosh plants during the Audit
Period. (Stip.
¶ 17.)
Evidentiary
Facts
9.
PMFC is a holding
company that owns and conducts its business through its wholly-owned
subsidiary, Pioneer Metal Finishing, LLC, which is a disregarded entity for
both Wisconsin income tax and sales/use tax purposes. (Stip. ¶ 1.)
10.
During the Audit
Period, PMFC provided metal finishing services to its customers, including
anodizing, painting, powder coating, metal plating, pretreating metals, and
mechanically finishing metals. (Stip. ¶
2.)
11.
PMFC conducted its
metal finishing operations throughout the United States, including at its
Wisconsin plants in Green Bay and Oshkosh.
(Stip. ¶ 3.)
12.
During the Audit
Period, PMFC's metal finishing operations inside its Green Bay and Oshkosh
plants released fumes, vapors, mists, and dusts into the air. (Stip. ¶ 4.)
PMFC’s Green Bay operations involved dipping parts into chemical
baths. (Affidavit
of Attorney Daniel C. W. Narvey (“Narvey Aff.”) ¶ 2, Ex. A, p. 13.)[1] The baths, many of which were heated,
released toxic fumes into the air. (Narvey Aff. Ex. A, p. 17.) The operations at PMFC’s Oshkosh facility
primarily involved painting. (Narvey Aff. Ex. A, p. 25.) These painting operations also resulted in
fumes being released into the plant environment. (Narvey Aff. Ex. A, p. 28.)
13.
PMFC was required
by the federal Environmental Protection Agency and the Wisconsin Department of
Natural Resources to clean or scrub certain contaminants from the air at its
Green Bay plant before releasing it into the environment. The air scrubbers used for this purpose and
the electricity used to run them are exempt from sales and use tax and are not
at issue in this case. (Stip. ¶ 5.)
14.
Pursuant to
federal Occupational Safety and Health Administration ("OSHA")
standards, PMFC was also required to ventilate the air in both its Wisconsin
plants to reduce the levels of potentially hazardous contaminants to which its
employees were exposed. This was done by
exhausting the contaminated air out of the plants and replacing it with fresh
outside air through the use of exhaust ventilation in conjunction with air
scrubbing (in Green Bay) and filtration (in Oshkosh). (Stip. ¶ 6.)
15.
The exhaust
ventilation and air treatment systems (“EVAT Systems”) which performed this
function were overseen by PMFC’s senior process and
systems engineer, Karsten Nielsen, with the
assistance of outside contractors. (Narvey Aff. Ex. A, p. 5.) Mr. Nielsen is an engineer with a master’s
degree in material science and engineering.
(Narvey Aff. Ex. A,
p. 8.)
During the Audit Period, he was responsible for the company’s capital
equipment, including purchases, analysis, and modification of equipment. He was also responsible for ensuring the
equipment was designed and engineered correctly. (Narvey Aff. Ex. A, pp. 6-7.)
16.
The purpose of the
EVAT Systems was to control worker exposure to airborne toxic chemicals or
flammable vapors by exhausting contaminated air from the work area and
replacing it with clean air, and to filter or scrub the air before releasing it
into the environment. (Affidavit of Karsten Nielsen (“Nielsen Aff.”)
¶ 4.)
17.
The EVAT Systems
installed in PMFC’s Green Bay and Oshkosh plants had six basic elements:
·
Exhaust hoods, which capture the fumes at the
source;
·
Ducting from the hoods, which carry the fumes to
air scrubbers (in Green Bay) or through a filtration system (in Oshkosh);
·
Fans, which move the air through the system and
discharge it outdoors;
·
Air scrubbers (in Green Bay) and the filtration
units (in Oshkosh), which remove the contaminants from the fumes in compliance
with EPA regulations before they are released into the environment;
·
Exhaust stacks, which are directly attached to the
fan discharge to meet discharge requirements; and
·
Air makeup units, which are balanced to supply air
to replace the dispelled air.
(Narvey Aff. ¶ 3, Ex. B, No. 5; Nielsen Aff.
¶ 6.)[2]
18.
The EVAT Systems
functioned differently at the Green Bay and Oshkosh plants because of the
different nature of their plant operations.
To protect the health of the workers from the fumes from the baths used
at the Green Bay plant, PMFC provided ventilation through ductwork sitting
immediately behind the tanks. (Narvey Aff. Ex. A, p. 18.) The ductwork drew in the fumes and exhausted
to the outside. In accordance with EPA
and DNR regulations, the fumes must be cleaned with air scrubbers before being
discharged to the outside. (Id.) At the Oshkosh plant, the contaminated air
from the painting operations was ventilated through paper filters that cleaned
the air before it was exhausted out of the plant. (Narvey Aff. Ex. A, p. 29.)
In both plants, the air that was dispelled through the EVAT Systems had
to be replaced by air drawn in by air makeup units. (Narvey Aff. Ex. A, p. 20.)
19.
PMFC’s EVAT
Systems operated on the principle that air moves from areas of high pressure to
areas of low pressure. (Nielsen Aff. ¶ 5.) The EVAT
Systems installed in the Green Bay and Oshkosh plants were designed by
professional engineers to create a slightly negative pressure in the plants,
meaning that more air was dispelled than supplied via the air makeup
units. (Narvey
Aff. Ex. A, pp. 62, 63; Ex. B, No. 7.) This design ensured that emissions were drawn
through the EVAT Systems instead of seeping out through uncontrolled openings
in the plants. (Narvey
Aff. Ex. A, pp. 62, 63.)
20.
If not for the
replacement air supplied by the air makeup units, the plants would experience
too much negative pressure. This in turn
would hinder the EVAT Systems from drawing the contaminants out of the plant,
which could result in unintended worker exposure to hazardous contaminants and
fumes. (Nielsen Aff.
¶ 8.)
21.
Federal and state
regulations also required PMFC's plants to be heated in the winter months to at
least 60-65 degrees for the comfort and safety of its employees. (Stip. ¶ 7.)
During the winter months, the air makeup units in the Green Bay and
Oshkosh plants heated the outside air as it was drawn into the plants when the
indoor air temperature fell below 60 degrees Fahrenheit. (Stip. ¶ 8.)
22.
The purpose of
preheating the air drawn into the plants was not to heat either the Green Bay
or Oshkosh plant, as the Green Bay building was substantially heated by the
amount of heat generated by the baths, and the Oshkosh building typically had
an excess of heat due to large ovens used to cure the paint. (Narvey Aff. Ex. A, pp. 22, 32.)
Rather, the purpose of preheating was to comply with applicable
law. Further, if the air was not
preheated, the air makeup units could blow snow into the plant. (Narvey Aff. Ex. A, p. 32.)
23.
While PMFC was
required to preheat the air supplied by the air makeup units, the air makeup
units provided heat in a much costlier and less efficient manner than using
conventional heat methods. (Nielsen Aff. ¶ 10.) The
Green Bay and Oshkosh plants therefore have conventional heating systems that
are used in the rare instances when additional heat is required, such as when a
plant is not operating and there is no need to run the EVAT System, or when
there are outages of the air makeup units.
(Narvey Aff. Ex. A,
p. 56; Affidavit of Department Attorney Julie A. Zimmer (“Zimmer Aff.”) ¶ 2, Ex. 15, No. 8.)[3]
24.
When PMFC
purchased the Oshkosh plant, it lacked sufficient air makeup units, resulting
in unbalanced air pressure and fumes not being exhausted properly, which in turn
created exposure problems to workers.
Additional air makeup units were therefore installed to the EVAT Systems to provide proper balance to the
systems. (Narvey
Aff. Ex. A, p. 31.)
25.
PMFC's air makeup
units at both its plants required natural gas and electricity to operate. During the Audit Period, PMFC did not pay
Wisconsin use tax on its purchase of the gas and electricity used to fuel its
air makeup units. (Stip. ¶ 9.)
26.
PMFC's air makeup
units are not physically connected to its air scrubbers, except for one air
scrubber in Green Bay that was connected by electrical wires to one air makeup
unit so that when that air scrubber was shut off, the
connected air makeup unit would also shut off.
(Zimmer Aff. ¶ 3, Ex. 16, pp. 21-22, 50-51.)[4]
27.
Whether or not the
air blown into the plants by the makeup units was heated did not matter for
purposes of fume abatement. (Zimmer Aff. ¶ 3, Ex. 16, pp. 45-46.)
APPLICABLE
LAW
Summary Judgment
A motion for summary judgment will be granted if
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as a matter of
law. Wis. Stat. § 802.08(2). The effect of counter-motions for summary
judgment is an assertion by the parties that the facts are undisputed, that in
effect the facts are stipulated, and that only issues of law remain. Healthcare
Services Group, Inc. v. Dep't of Revenue, Wis. Tax Rptr.
(CCH) ¶ 402-086 (WTAC 2016).
Burden of
Proof
Assessments made by the Department are presumed to be
correct, and the burden is on the petitioner to prove by clear and satisfactory
evidence in what respects the Department erred in its determination. Puissant
v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶
202-401 (WTAC 1984).
Applicable
Statutes and Administrative Rules
77.54 General exemptions. There are exempted
from the taxes imposed by this subchapter:
…
(26) The sales price from the
sales of and the storage, use, or other consumption of tangible personal
property . . . which becomes a component part of an industrial waste treatment
facility that is exempt under s. 70.11 (21) or that would be exempt under s.
70.11 (21) if the property were taxable under ch. 70 . . . . The exemption includes replacement parts therefor,
and also applies to chemicals and supplies used or consumed in operating a
waste treatment facility . . . .
Wis.
Stat. § 70.11(21)
70.11 Property exempted from taxation.
…
(21) Treatment plant and pollution
abatement equipment.
(ab) In this subsection:
…
3. “Used
exclusively" means to the exclusion of all other uses except any of the
following:
a. For other use not exceeding 5 percent of total
use.
…
(am) All property purchased
or constructed as a waste treatment facility used exclusively and directly to
remove, store, or cause a physical or chemical change in industrial waste or
air contaminants for the purpose of abating or eliminating pollution of surface
waters, the air, or waters of the state . . . .
Wis. Admin. Code § Tax 12.40(3)(a)4
"Waste treatment facility" means tangible
property that is built, constructed or installed as a unit so as to be
readily identifiable as directly removing, altering or storing leftover,
superfluous, discarded or fugitive material.
DECISION
During the Audit Period, PMFC conducted metal
finishing operations inside plants in Green Bay and Oshkosh, Wisconsin. Those operations released fumes, vapors,
mists, and dusts into the air. Federal
OSHA regulations required PMFC to ventilate the air in both plants to reduce
the levels of potentially hazardous contaminants to which its employees were
exposed. PMFC was also required by both
federal and state environmental laws to filter or scrub certain contaminants
from the air before releasing it into the environment.
To meet these requirements, an EVAT System was
designed and installed in each plant. The EVAT Systems ventilated the plants by
exhausting the contaminated air out of the plants and replacing it with fresh
outside air. The air ventilated from
the Green Bay plant was exhausted through air scrubbers, while the air
ventilated from the Oshkosh plant was exhausted through air filters.
In ventilating the plants, PMFC used a series of air
makeup units to draw air in from the outside to replace the contaminated air
that had been exhausted. The EVAT
Systems in the plants were designed to create a slightly negative pressure,
meaning that more air was dispelled than supplied via the air makeup
units. Without sufficient replacement
air supplied by the air makeup units, there would be too much negative
pressure. This, in turn, would cause the
EVAT System to draw air less effectively from the emission sources, which could
result in unintended worker exposure to hazardous contaminants and fumes. Pursuant to federal and state regulations,
the temperature in the plants was required to be at least 60-65 degrees. Thus, during the winter months, the air
makeup units preheated the outside air as it was drawn into the building to
maintain the temperature in the plant.
This case presents the question of whether PMFC’s
purchase of the fuel and electricity used to power the air makeup units in the
Green Bay and Oshkosh plants during the Audit Period was exempt from Wisconsin
sales and use tax under Wis. Stat. § 77.54(26).
The answer to this question turns on whether the air makeup units were
part of a “waste treatment facility” under the meaning of Wis. Stat. § 70.11(21).[5] During the Audit Period, PMFC did not
pay sales tax on the electricity and natural gas used to operate the air makeup
units, taking the position that the units were part of a waste treatment
facility because the EVAT Systems in the plants would not work properly without
them. The Department disagrees.
The Department’s first argument is based on the
language of Wis. Admin. Code § Tax 12.40(3)(a)4,
specifically, the definition of a “waste treatment facility” as “tangible property that is built, constructed or installed as a unit.” The Department notes that, in response to its
discovery request asking for the date of the purchase of each of the Green Bay
plant air scrubbers and air makeup units, PMFC could identify 1992 as the
purchase date of four of the six scrubbers and three of
the six air makeup units but could not provide a purchase date for one of
the scrubbers and three of the air makeup units. As for the Oshkosh plant, PMFC stated that,
when it purchased the Oshkosh facility, air filtration and air makeup units
were already installed and operating, and they had no information on the
purchase or installation dates of the existing equipment. PMFC did, after purchase, install two
additional air makeup units because the existing unit was not creating
sufficient negative air pressure to allow all contaminants to be cleared from
the plant. Based on these discovery
responses, the Department argues that “PMFC simply cannot meet its burden to
show that its air makeup units were built, constructed or installed along with
the components of its local exhaust ventilation and air scrubbing and
filtration system ‘as a unit.’”
PMFC’s senior process and systems engineer, who along with
outside contractors is responsible for the operation and management of the EVAT
Systems, testified at deposition that the system at the Green Bay plant was
engineered and installed in 1992, and the purchase dates provided in response
to the Department’s discovery requests would appear to support that testimony,
at least for four of the six scrubbers and three of the six air makeup
units. He also stated that the other
scrubbers and air makeup units were installed sometime earlier, before he
started with the company. In Oshkosh,
seven filtration units and one air makeup unit were installed and working when
PMFC purchased the plant. Two additional
air makeup units were engineered and installed, one in 2008, and the other
first used in 2014, when PMFC determined that the existing air makeup unit was
not providing sufficient negative air pressure to clear contaminants from the
plant.
The Department’s argument
is that, even if the scrubbers, filters, air makeup units,
ducting, fume hoods, fans, exhaust stacks, and other components of its EVAT Systems worked during the
Audit Period as a unit to remove contaminants from its Green Bay and Oshkosh
plants, the air makeup units cannot qualify as part of a “waste treatment
facility” under the meaning of Wis. Stat. § 70.11(21)
because PMFC cannot show that they were all “built, constructed or installed”
at the same time as the other components of the EVAT Systems. Taking the Department’s argument to its
logical conclusion, a waste treatment facility, once constructed and installed
as a unit, would be a static thing for tax purposes. It is an exempt waste treatment facility
unless and until the taxpayer adds some component to the unit, perhaps to make
it more effective in accomplishing its goal, perhaps to make its operation more
cost effective, perhaps to accommodate growth in plant size or production, or
perhaps to bring the facility into compliance with changing regulatory
requirements. At that point, under the
Department’s view, even though the equipment continues to operate as a unit to
eliminate contaminants, the added component cannot qualify as part of the
“waste treatment facility.”[6]
We do not believe this is
a reasonable reading of Wis. Stat. § 70.11(21). The statute provides that “All property
purchased or constructed as a waste treatment facility” is exempt. We do not believe that the legislature
intended that the exemption exclude improvements made to the facility after its
initial purchase or construction. To the
extent that the language of Wis. Admin. Code § Tax 12.40(3)(a)4 could be read
to require that a waste treatment facility be built, constructed or installed
as a unit, all at the same time, it
is inconsistent with the statute which contains no such requirement.[7]
The Department’s second
argument is that the air makeup units were not, functionally, part of the waste
treatment facilities in PFMC’s Green Bay and Oshkosh plants because, quoting
language in Wis. Stat. § 70.11(21), they “were not used directly
‘to remove, store, or cause a physical or chemical change in industrial waste or
air contaminants for the purpose of abating or eliminating pollution of
surface waters, the air, or waters of the state.’” Citing Wisconsin Dep't of Revenue v. Parks-Pioneer Corp., 170 Wis. 2d 44,
49, 487 N.W.2d 63 (Ct. App. 1992), the Department states, “Wisconsin Courts
have said that equipment is ‘directly used’ in a process if it performs an ‘integral function’ in that process.”
Here, the Department
makes three principal points. First, PMFC's
air makeup units were not physically connected to its air scrubbers or filters,
except for one air scrubber in Green Bay that was connected by electrical wires
to one air makeup unit. Second, in
response to specific questions from the Department at deposition, PMFC’s senior process and systems engineer acknowledged that
PMFC's air makeup units were upstream of the air contaminants in the plants,
did not remove air contaminants from the air, did not treat or scrub air
contaminants from the air, did not cause a physical or chemical change to the
air contaminants, and did not store air contaminants. Third, the Department states that the purpose
of the air makeup units was to replace the contaminated air that had been
exhausted from the plants and that “The air contaminant abatement had already
been accomplished by the exhaust ventilation and air scrubbing/filtration
systems; the air makeup units did nothing more than bring fresh air back into
the plants.”
This final statement is
wholly inconsistent with the uncontroverted facts presented in this case and
demonstrates the weakness of the Department’s argument that the air makeup
units were not used directly to remove air contaminants for the purpose of
abating pollution. As noted above, the
EVAT Systems at the Green Bay and Oshkosh plants were designed by professional
engineers to create a slight negative pressure in the plants. This design ensured that emissions were drawn
through the EVAT System instead of seeping out through uncontrolled openings in
the plants. A lack of sufficient
replacement air would cause the EVAT System to draw too little air from the
emission sources and could result in employee exposure to hazardous
contaminants and fumes. In short, the
air makeup units, in the parlance of the Parks
Pioneer case, performed an ‘integral function’ in the process of removing
contaminants from the air. It is simply
not the case, as the Department claims, that the contamination abatement had
already been accomplished before the air makeup units brought fresh air into
the plants.
Acknowledgments by the
PMFC senior process and systems engineer that the air makeup units did not
remove, scrub, or treat air contaminants from the air, did not cause a physical
or chemical change to the air contaminants, and did not store air contaminants
is not conclusive as to whether the air makeup units were functionally part of
a system that did just that. Certainly,
the air makeup units did not, in and of themselves, remove, scrub, or treat air
contaminants any more than any other single component of the EVAT Systems in
the plants. All the components of these
systems, including the air makeup units, must function together to effectively
remove harmful contaminants from the plants.
The fact that the air makeup units were not physically connected to
other components does not mean that they were not a part of the EVAT
Systems. In what was largely a closed
system, the air makeup units were essential to effectively exhaust contaminants
from the plant. Consequently, they were
used directly in the removal of air contaminants and were part of a waste
treatment facility under the meaning of Wis. Stat. §
70.11(21).
The Department’s final
argument is that because the air makeup units heated the air drawn into the
plants during cold weather, a specific function which did nothing to remove
contaminants, neither the air makeup units nor the EVAT Systems of which they
were a part, qualify as a “waste treatment facility” under Wis. Stat. §
70.11(21), as they were not used exclusively
to remove air contaminants. The statute
provides that “used exclusively” means to the exclusion of all
other uses except other use not exceeding 5 percent of total use. The Department contends that heating the air
brought into the plant during winter months “certainly exceeded the de minimis standard in the statute.”[8]
PMFC argues that the air
makeup units were not installed or used to heat the plants. The plant operations themselves generated
excess heat, through the heated chemical baths in Green Bay and the paint
curing ovens in Oshkosh. In the rare
event one of the plants was not in operation (in which case the EVAT System was
not in operation since there were no air contaminants being released), the
plants had conventional heating equipment to provide sufficient heat.
When an EVAT System was
in operation during cold weather, the warm air otherwise generated in the plant
was exhausted and cold outside air was drawn into the plant. If not preheated by the air makeup units, the
cold replacement air would cause the temperature in the plant to fall well
below acceptable temperatures and could allow snow to blow into the plant. Indeed, federal and state regulations
required the temperature in the plants to be maintained to at least 60-65
degrees for the comfort and safety of the employees. Thus, when the EVAT Systems removed warm air
from the plants and replaced it with fresh air from outside, the failure to
preheat cold air would be a violation of state and federal law. PMFC argues that the EVAT Systems should not
lose their exemptions simply because they were designed and operated to comply
with federal and state law.
The Department, however,
counters by contending that the plain language of the statute requires that the
property be used exclusively for pollution abatement and provides no exception
for any non-de minimis uses, even if
mandated by other applicable law. The
Department states, “Regardless of why
there is another use for the air makeup units, the fact that there is another significant use violates the
exclusive use requirement of the exemption statute.”
In support of its
position, the Department cites and discusses Wausau Paper v. Wisconsin Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶ 400-375 (Cir. Ct. 1998), which considered the
application of a tax credit for sales and use tax paid on electricity consumed
in manufacturing. In that case, the
circuit court upheld the decision of the Commission denying a credit for
electricity used in operating a paper mill's wastewater treatment plant. The taxpayer argued that because it was
required by law to clean the waste water generated by its mill, the waste water
treatment plant should be considered “manufacturing” for purpose of the tax
credit since the mill could not legally operate without it. The court stated:
Water has always been a necessary and
essential part of the manufacturing process. The water at issue here, however,
is water that has already made its contribution to the
papermaking process. The cleaning of that water may be necessary for Wausau
Paper to stay in business due to State and Federal environmental laws but other
business functions—marketing, transportation, human resources and general
administration—are also essential to a successful manufacturing process yet are not considered to be a part of the
manufacturing process. Before the environmental protection laws
the wastewater was simply that, unwanted waste that was discharged into the
Wisconsin River. While these laws have helped keep the Wisconsin River clean
and safe, they have not improved either the papermaking process or the paper
products manufactured by that process. Today it is still feasible, even if
unlawful, to turn the wastewater treatment plant “off” without any affect upon
either the manufacturing process or the quality of the paper products.
The Department concludes, while PMFC may be required
by state and federal law to maintain a particular temperature in its plants for
the comfort and safety of its employees, that is irrelevant to whether the air
makeup units, and the EVAT Systems as a whole, meet the exemption's express
requirements.
This case, however, is
distinguishable from Wausau Paper. In Wausau
Paper, the court, in characterizing the position of the Department and the
holding of the Commission stated, “Essentially, they concluded that the
electricity used in the wastewater treatment plant has nothing to do with the
actual paper manufacturing process and that the paper manufacturing process is
complete before the wastewater is collected and treated.” And in its quote above, the court concluded
that the water at issue “has already made its contribution to the papermaking
process.” Thus, the Commission and the
court viewed the process of treating the waste water as a separate and distinct
process that occurred when the manufacturing process had been completed.
Here, air was not heated
separately and apart from, or after completion of, the pollution abatement
process. The air was heated in the
process itself. The purpose of heating
the air brought into the plant by the air makeup units was not to heat the
plant – the plant was adequately heated before the EVAT System was powered
up. The purpose was to replace the heat
the EVAT System necessarily removed from the plant as part of the pollution
abatement process. The burners in the
air makeup units simply allowed the EVAT System, as a whole, to operate
consistently with employee safety laws, much like safety devices required on
manufacturing or agricultural equipment.
The addition of a legally mandated press
brake safety system to an industrial punch press does not disqualify the press
as exempt manufacturing machinery, even though the press could be used in the
manufacture of products without it. The
sole purpose of the press brake safety system is to assure employee safety as
required by law. But this does not mean
that the press is no longer used exclusively in manufacturing. The system simply conforms the equipment to
law.
Again,
the EVAT Systems were not designed and installed in PNFC’s plants to provide heat. The plants were adequately heated by the
plant operations and, when necessary, by conventional heating systems. The EVAT Systems were designed, engineered,
and installed solely for the purpose of exhausting the contaminated air out of the plants and
replacing it with fresh outside air using exhaust ventilation and air scrubbing
or air filtration equipment. In colder
months, the process created a potential employee safety and comfort issue in
violation of federal and state laws.
Preheating the outside air as it was drawn into the plant by the air
makeup units addressed the safety and comfort issue and allowed the system to
operate consistently with applicable law.
During the Audit Period,
the EVAT Systems in PMFC’s plants qualified as exempt waste treatment
facilities under the clear language of Wis. Stat. § 70.11(21). We do not believe that disqualifying the EVAT
Systems from exemption because they incorporated a component that allowed them
to operate in compliance with the state’s own employee safety and comfort laws
would be consistent with the legislature’s intent.
CONCLUSIONS OF LAW
1.
There being no material facts in dispute, the stipulated facts
and the facts presented through affidavits are sufficient to support a ruling
as a matter of law.
2.
The air makeup units in PHFC’s Green Bay and Oshkosh plants were,
during the Audit Period, components of a “waste treatment facility” under the
meaning of Wis. Stat. § 70.11(21).
3.
PMFC’s purchase of fuel and electricity used or consumed in operating
the air makeup units in its Green Bay and Oshkosh plants during the Audit
Period was exempt from Wisconsin sales tax pursuant to Wis. Stat. § 77.54(26).
ORDER
Based
on the foregoing, the Commission orders as
follows:
1.
PMFC’s Motion for Summary Judgment
is granted.
2.
The Department’s Motion for Summary Judgment
is denied.
3.
The Department’s assessment is reversed.
Dated at Madison,
Wisconsin, this 29th day of January, 2018.
WISCONSIN
TAX APPEALS COMMISSION
Lorna Hemp Boll, Chair
David D.
Wilmoth, Commissioner
David
L Coon, Commissioner
ATTACHMENT: NOTICE
OF APPEAL INFORMATION
July 23, 2018 - Order for Judgment and Judgment filed
by Dane County Circuit Court, Branch 17, Case No. 18-CV-0530,
“Therefore, IT IS HEREBY
ORDERED that judgment shall be entered in favor of Respondent, PMFC Holding,
LLC, affirming the
January 29, 2018 Ruling and
Order rendered by the Tax Appeals Commission and dismissing the amended
petition for judicial review filed by
Wisconsin Department of Revenue. THIS JUDGMENT
SHALL BE A FINAL ORDER FOR PURPOSES OF APPEAL.”
(Honorable Peter C. Anderson).
[1] Exhibit A to the Narvey Affidavit are portions of the transcript of the January 27, 2017 deposition of PMFC senior process and systems engineer Karsten Nielsen.
[2] Exhibit B to the Narvey Affidavit is a copy of PMFC’s responses to the Department’s First Set of Interrogatories.
[3] Like Exhibit B to the Narvey Affidavit, Exhibit 15 to the Zimmer Affidavit is a copy of PMFC’s responses to the Department’s First Set of Interrogatories.
[4] Like Exhibit A to the Narvey Affidavit, Exhibit 16 to the Zimmer Affidavit are portions of the transcript of the January 27, 2017 deposition of Karsten Nielsen.
[5] The Department and PMFC both note that PMFC did not claim the air makeup units as exempt property under Wis. Stat. § 70.11(21) during the Audit Period. The Department has not argued that the failure to claim the property as exempt precludes a claim of the sales tax exemption.
[6] In this case, the Department has argued only that the air makeup units are not part of the exempt waste treatment facilities in PMFC’s Green Bay and Oshkosh plants, even though it also makes the point that PMFC has not shown that the scrubbers, filtration units, ducting, fume hoods, fans, exhaust stacks, and other components of the EVAT Systems were purchased or installed at the same time.
[7] As noted by the Department in its brief, Wis. Admin. Code § Tax 12.40(3)(a)4 was repealed in 2014.
[8] The Department makes this statement without further explanation. Neither party presented evidence which would allow the Commission to determine whether the operation of the heaters in the air makeup units exceeded 5 percent of the “total use” of the EVAT Systems. While it might be the case that the fuel and electricity used to operate the heaters in the air makeup units was more than 5 percent of the fuel and electricity used by the EVAT Systems, we note that the “exclusive use” requirement does not appear in Wis. Stat. § 77.54(26), which exempts fuel and electricity, but in Wis. Stat. § 70.11(21), which defines and provides an exemption for waste treatment facilities.