State Bar of Wisconsin Return to Wisconsin Tax Appeals Commission





P.O. Box 510035

New Berlin, WI 53151-0035




P.O. Box 8907

Madison, WI 53708


DOCKET NO. 99-S-122



This matter was heard at Madison on May 24, 2000. The parties had earlier filed a partial Stipulation of Issues and Facts. Attorney James R. Lowe represents the petitioner ("Winco"). Attorney Linda M. Mintener represents the respondent ("the Department").

Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:


We find the following facts, including those that were stipulated by the parties,(1) omitting references to exhibits:

Jurisdictional Facts

1. The Department issued a sales/use tax assessment against Winco on November 9, 1998, in the amount of $27,064.86 for the period of 1994-1997 ("the period under review").(2)

2. On or about January 8, 1999, Winco filed a petition for redetermination of the sales/use tax assessment. On April 30, 1999, the petition for redetermination was denied. Winco received the notice of action of the denial on May 10, 1999.

3. On June 16, 1999, Winco filed a petition for review with the Tax Appeals Commission.

Objections and Conceded Adjustments

4. Winco objects only to: (a) imposition of the sales/use tax and related interest on its 1997 purchases of Industriever 12000T Vertical Lift Systems from Wisconsin Office & Data Systems, Inc., for $52,619.20 and $78,928.80, respectively; and (b) imposition of the 25% negligence penalty.

5. Winco does not object to the Department's other adjustments for sales tax, to the adjustment related to the forklift in the audit report, or to the calculations of the dollar amount of the adjustments in the audit report.

Background Facts about Winco

6. Winco was organized under the laws of Wisconsin in 1978 and has done business in Wisconsin since that date. Its principal place of business is currently located at 2815 South Calhoun Road, New Berlin, Wisconsin. During the period under review, Winco's president was John Winkler and its vice president was Mark Winkler, John's son. John Winkler and Ann Winkler each held 50% of Winco's stock.

7. Winco was in the business of manufacturing business tools and tooling components for sale to other manufacturers and distributors, and the importing, exporting, and wholesale distributing of metric and inch standard clamping and operating elements.

8. Winco held Wisconsin sales tax permit no. 451768 for the entire period under review.

Facts Related to the "Industrievers"

9. On May 30, 1997, Winco purchased from Wisconsin Office & Data Systems, Inc., of Milwaukee, 10 Vertical Lift Storage Units ("Industrievers") that were manufactured by Kardex Systems, Inc. ("Kardex'). Winco is not contesting additional purchases of Industrievers that the Department has assessed, since Winco used them solely for the distribution segment of its business.

*10. In its promotional literature and Industrievers operator's manual, Kardex repeatedly refers to the Industrievers as being for "storage."

11. Winco stocks raw material parts for its manufacturing operation on the subject Industrievers after delivery from its suppliers. Some work in progress is also put on the Industrievers after Winco performs some manufacturing function on them, but Winco does not know the percentage of the work in progress of the total materials on the subject Industrievers. No finished goods are placed on the subject Industrievers.

12. In order to stock the parts on the subject Industrievers, an employee of Winco enters into the Industrievers' computer keyboard the location on the Industrievers where the part is to be placed. The computer tells the extractor (vertical lift/conveyor) to retrieve the pan in that location and deliver it to the employee, who then places the part in the bin and pushes the 'return pan' button on the computer keyboard to return the pan to its location on the Industrievers.

13. The Industrievers' same moving parts were used to stock raw materials on the Industrievers as were used to retrieve raw materials from the Industrievers.

14. Winco keeps information (on a computer system which is not connected to the Industrievers) regarding the part identification number, quantity, location, and description of the various items of raw material and work in progress that have been placed on the Industrievers. In order to manufacture a finished product, Winco's computer system generates a kit order, which is an instruction sheet that sets out the various components of raw material and/or work in progress items and the procedures required to assemble those components into the finished product. The kit order also includes the Industrievers' location code for each of the required components. After obtaining the kit order, Winco's manufacturing associate inputs the location code from the kit order for each of the required components on the Industrievers' control panel. The Industrievers then deliver the pans which contain each of the components to the manufacturing associate, who then takes the various components from the Industrievers and either carries them to a work station or places them on a wheeled cart and pushes it to a work station.

*15. Each of the Industrievers at issue here contained 42 pans.

*16. The Industrievers at issue are not part of a synchronized system of manufacturing tangible personal property.

17. Winco does not have statistical information or data regarding the percentage of use for holding of raw materials in the Industrievers versus retrieval from the Industrievers for manufacturing, nor for stocking versus retrieval.

18. The subject Industrievers helped Winco reduce its storage space by more than 93%.

19. The Industrievers did not produce any physical change in the raw materials placed on them.

Facts Related to the Negligence Penalty

20. No portion of the penalty assessed relates to the purchases of the subject Industrievers.

21. Winco had no system for the reporting of use tax during the period under review.

22. Winco claims that at the time it presented any sales/use tax exemption certificate to purchase tangible personal property during the period under review, the "Single Purchase" box was checked on the certificate and not the "Continuous" box.

23. On its annual sales/use tax returns for the period under review, Winco reported and paid no use tax. Winco stated that it had zero purchases subject to use tax, although it had purchased such items as books, stools and chairs, badges, 12 framed certificates, 1,000 anniversary seals, a carton opener, a knife, freight charges, and additional Industrievers from in-state and out-of-state vendors without paying sales or use tax on them.

*24. On its Wisconsin Franchise/Income Tax Returns for each year in the period under review, Winco answered "no" to the question, "Did you purchase any taxable tangible personal property or taxable services for storage, use, or consumption in Wisconsin without payment of a state sales or use tax?"

25. Winco used "P.O. Box 51025, New Berlin, WI 53151" as its mailing address for the period January 1994 through at least October 1996, and "P.O. Box 510035, New Berlin, WI 53151" from November 1996 through the present. From November 1996 through at least October 1997, any mail addressed to Winco at the P.O. Box 51025, New Berlin, WI 53151 address was placed in P.O. Box 510035 by the post office.

26. The Department preprinted Winco's correct post office address on each of Winco's blank sales tax returns for the period under review, prior to mailing the blank returns to Winco at the address thereon. Winco received each of the blank returns, with the correct preprinted address thereon, at the post office address.

27. On the first day of the audit, the Department's auditor went to the address on Winco's seller's permit application, 16334 West Glendale Drive, New Berlin, WI, which was Winco's former address. The auditor then called Winco to obtain its current business address on Calhoun Road, New Berlin, which was a few blocks away.

28. During the period under review, outside accounting firms performed some of Winco's accounting services and prepared its income/franchise tax returns. Winco prepared its annual sales/use tax returns in-house.

*29. Respondent mailed sales/use tax returns, with instructions, and various publications with sales and use tax information to Winco at its various post office addresses.

Stipulated Issues

30. The parties agree that the only issues to be decided by the Commission in this matter are:

(1) Whether Winco has used the subject Industrievers exclusively in manufacturing so as to entitle Winco's purchase of them to the sales/use tax exemption in Wis. Stat. § 77.54(6)(a); and

(2) Whether the Department properly imposed the 25% negligence penalty under Wis. Stat. § 77.60(3).


77.54 General exemptions.

* * *

(6) The gross receipts from the sale of and the storage, use or other consumption of:

(a) Machines and specific processing equipment and repair parts or replacements thereof, exclusively and directly used by a manufacturer in manufacturing tangible personal property and safety attachments for those machines and equipment.

* * *

(6m) For purposes of sub. (6)(a) "manufacturing" is the production by machinery of a new article with a different form, use and name from existing materials by a process popularly regarded as manufacturing. "Manufacturing" includes but is not limited to:

* * *

(6r) The exemption under sub. (6) shall be strictly construed.

* * *

77.60 Interest and penalties.

* * *

(3) If due to neglect an incorrect return is filed, the entire tax finally determined shall be subject to a penalty of 25%, or 50% in the case of returns under s. 77.61(1)(c), of the tax exclusive of interest or other penalty. A person filing an incorrect return shall have the burden of proving that the error or errors were due to good cause and not due to neglect.


Chapter Tax 11


Tax 11.39 Manufacturing.

(1) DEFINITION. Manufacturing means an operation complete in itself, or one of a series of operations, whereby, through the application of machines to tangible personal property by a process popularly regarded as manufacturing, a new article of tangible personal property with a different form, use and name is produced.


(a) Manufacturing includes the assembly of finished units of tangible personal property and packaging when it is a part of an operation performed by the producer of the product or by another on the producer's behalf and the package or container becomes a part of the tangible personal property as the unit is customarily offered for sale by the producer. It includes the conveyance of raw materials and supplies from plant inventory to the work points of the same plant, conveyance of work in progress directly from one manufac-turing operation to another in the same plant and conveyance of finished products to the point of first storage on the plant premises. It includes the testing or inspection throughout the scope of manufacturing.

(b) Manufacturing does not include storage, delivery to or from the plant, repairing or maintaining facilities or research and development.

11.40 Exemption of machines and processing equipment.


(a) ... "Exclusively", as used in s. 77.54(6)(a), Stats., and in this section, means that the machines and specific processing equipment and repair parts or replacements thereof are used solely by a manufacturer in manufacturing tangible personal property to the exclusion of all other uses, except that the sales and use tax exemption will not be invalidated by an infrequent and sporadic use other than in manufacturing tangible personal property. This exemption is to be strictly construed.

(b) Section 77.54(6m), Stats., provides "For purposes of s. 77.54(6)(a) 'manufacturing' is the production by machinery of a new article with a different form, use and name from existing materials by a process popularly regarded as manufacturing."

(c) In determining whether a particular machine or piece of processing equipment is included in the exemption under par. (a), s. 77.54(6)(a) and (6m), Stats., must be considered together.

* * *

(3) OTHER EXAMPLES OF THE EXEMPTION. Other examples of application of the exemption are as follows:

* * *

(d) The exemption does not apply to machines or processing equipment used in whole or in part by a manufacturer before the manufacturing process has begun or after it has been completed.

Example: Machines or equipment used for storage, delivery to or from a plant, repair or maintenance of facilities or equipment, research, or crating or packaging of tangible personal property for shipment are not exempt.


1. The subject Industrievers were not used "exclusively" by Winco in manufacturing tangible personal property so as to entitle Winco's purchase of them to the sales/use tax exemption in Wis. Stat. § 77.54(6)(a).

2. The Department properly imposed the 25% negligence penalty, pursuant to Wis. Stat. § 77.60(3).


Industrievers Sales/Use Tax Exemption

The parties have stipulated that the issue before us with respect to Winco's Industrievers is whether they were used "exclusively" in manufacturing. Because the § 77.54(6)(a) exemption language requires their use both "exclusively" and "directly," we take this to mean that "directly" is not at issue between the parties, and we will therefore not address it.

Winco would have us apply the "integrated plant facility test" articulated by the Court of Appeals in Manitowoc Co., Inc. v. Sturgeon Bay, 122 Wis. 2d 406 (Ct. App. 1984), where the issue was the manufacturing property tax exemption provided in Wis. Stat. § 70.11(27). Under the integrated plant test, machinery that is integrated into a synchronized system of manufacturing is used directly in manufacturing whether or not it actually causes a physical change in raw materials. Id., at 417.

Applying this test, the Court found that two graving docks, in which ship construction and repair occurred, were exempt from the property tax because they were used "directly" in manufacturing as an "integral part of the assembly line" used in ship construction, operating like a conveyor belt to move ships to and from the assembly line.

The fallacy in Winco's reasoning is that the integrated plant test was applied in Manitowoc Co., Inc., to determine if the machines were used directly in manufacturing, not to determine if they were used exclusively in manufacturing. 122 Wis. 2d at 417-418. The Court of Appeals discussed the exclusivity requirement in an entirely separate section entitled "Exclusive Use." Id., at 413-415. Nowhere in this section is the integrated plant test mentioned. The Court simply concluded that the exclusivity requirement was not destroyed by the graving dock's "incidental use" for a purpose other than manufacturing.(3) Id., at 414-415.

In Fort Howard Paper Co. v. WDOR, 11 WTAC 1241 (1988), nonacq., the Tax Appeals Commission applied the integrated plant test for the first time to the definition of manufacturing for purposes of the sales tax manufacturing exemption. The Commission, citing the Manitowoc Co., Inc., case, concluded that Fort Howard's lime-handling and conveying equipment were integrated into a synchronized system and were therefore an integral part of Fort Howard's chlor-alkalai plant and used exclusively and directly in manufacturing paper and paper products. The Commission indirectly addressed the "exclusively" requirement by concluding, in language reminiscent of that in Manitowoc Co., Inc., that "[a]ny short term storage of lime that occurred in the property at issue was merely incidental to the function of the equipment to feed the lime slaking machines at the required rate." Fort Howard Paper Co., supra, at 1254.

The Department argues that the integrated plant test was eliminated when the legislature changed the manufacturing property tax exemption in § 70.11(27) in 1989 and 1991 inasmuch as the Manitowoc Co. casewas decided before the revisions. This argument is not germane to the dispute before us. Our decision here must be based on the sales tax exemption language in § 77.54(6)(a) and its related administrative rules, not the more detailed propertytax exemption language in Chapter 70. In any event, the sales tax manufacturing exemption in § 77.54(6) must be strictly construed. § 77.54(6r), supra.

For the Industrievers to be exempt from the sales tax under § 77.54(6), they must be used "exclusively" in manufacturing tangible personal property even if they are "directly" used. Unlike the property tax exemption statute,(4) § 77.54(6) does not define "used exclusively." However, the Department's sales tax administrative rule, Tax 11.40, supra, defines "exclusively" as "to the exclusion of all other uses except an infrequent and sporadic use other than in manufacturing tangible personal property." A companion administrative rule, Tax 11.39, provides that manufacturing "does not include storage."

These rules are consistent with the Court of Appeals decision in Manitowoc Co. (property tax exemption) and the Commission's decision in Fort Howard Paper (sales tax exemption), both of which held that an incidental use for a purpose other than manufacturing, such as incidental storage, would not disqualify the manufacturing use from being considered "exclusive."

Applying the above-cited applicable statutory language, case law and administrative rules, we conclude that the Industrievers were not used exclusively in manufacturing because they were used more than incidentally for storage.

The facts show that storage of raw materials prior to manufacturing was an important and not incidental function of the Industrievers. Even when raw materials were being retrieved from an Industriever by a manufacturing associate, the Industrievers' other pans were still being used to store raw materials.(5) Each of the Industrievers at issue here contains 42 pans, so at any one time only one of the pans, or 2.4% of the Industrievers' capacity, would even arguably be used in manufacturing, with the balance being used for storage with some pans being temporarily empty. This does not even approach exclusive manufacturing use under Wis. Stat. § 77.54(6).

Two other facts reinforce this conclusion. First, the Industrievers were repeatedly promoted in their manufacturer's literature as "storage systems" and referred to as such in the Industrievers operator's manual. Second, the subject Industrievers helped Winco reduce its storage space by more than 93%.(6)

Finally, although we are not called upon to determine if the Industrievers were "directly" used in manufacturing, the record indicates that they would likely fail this test as well. There is no evidence in the record showing that the Industrievers were part of a synchronized system of manufacturing. Synchronization involves a precisely timed operation. See, definitions of "synchronize" and "synchronous" in Webster's Ninth New Collegiate Dictionary (1991). The videotape presented by petitioner showed anything but a precisely timed, synchronous process conducted by the manufacturing associate, who hesitated at several points in her manufacturing activities, which were principally of a manual nature.

Imposition of Negligence Penalty

Under Wis. Stat. § 77.60(3), Winco has the burden of showing that its failure to report and pay the taxes assessed by the Department was "due to good cause and not due to neglect." Winco has shown no such good cause.

A number of factors figured in the Department's decision to assess the penalty. First, although Winco had been in business for about 20 years, it was not conversant with the requirements of the sales and use tax law. Second, Winco had no system in place to report use tax. Third, Winco falsely answered on its Wisconsin Forms 5 that it had no purchases on which use tax was owed. Fourth, Winco issued exemption certificates to its vendors on items it did not use as claimed on the certificate. Fifth, the measure of use tax assessed was such that Winco should have been aware of the need for a system to report the tax. Sixth, Winco received various bulletins and reports from the Department with information on correct sales and use tax reporting requirements.

Winco disputes some of these factors. First, Winco maintains that the penalties assessed for each year are minor when compared to its volume of business.(7) Second, Winco admits it made mistakes but argues this does not amount to negligence. Third, Winco's chief financial officer testified that he did not receive any tax bulletins or reports from the Department during the period under review. Fourth, Winco disputes that it used exemption certificates improperly.

None of Winco's evidence or arguments show that its use tax reporting failures were due to good cause rather than neglect. Knowing and complying with the tax laws is the responsibility of every citizen, including a "good corporate citizen." Even for a good corporate citizen, ignorance of the law does not constitute good cause for failing to comply with specific tax reporting and payment requirements.

We reject Winco's argument that its failure was "minor" in relation to its total sales. The penalty imposed was based on Winco's failure to report $263,177.71 of purchases(8) clearly subject to use tax. This amount is not "minor." Winco's failure to report the purchases in spite of more than adequate opportunity to do so, while representing on both its sales/use tax and corporate franchise tax returns that it had no such purchases, was clearly "neglect"(9) within the meaning of Wis. Stat. § 77.60(3).

Nor is it relevant that Winco may not have received some of the Department's informational mailings during the period under review. Surely some were received during the 20 years Winco was in business. It appears they were either ignored or not brought to the attention of Winco's owners and officers. In any event, it was neglect for Winco's owners and officers to fail to inform themselves over this 20-year period concerning the sales and use tax law applicable to such transactions, and it was neglect for them to fail to report and pay use tax on those transactions subject to tax. See, Wimmer Construction, Inc. v. WDOR, Wis. Tax Rep. (CCH) ¶400-391 (WTAC 1998).

In summary, none of Winco's evidence showed that its failure to report and pay the use tax expressly imposed by the statutes was due to good cause rather than neglect.

None of this is to say that Winco was not or is not a good corporate citizen. That was never an issue here. Winco made mistakes of neglect, as we all do. In this case those mistakes were subject to a statutory penalty, which the Department properly imposed.


The Department's action on Winco's petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 23rd day of March, 2001.



Mark E. Musolf, Chairperson


Don M. Millis, Commissioner

Thomas M. Boykoff, Commissioner




I concur in the result reached by the majority. I write separately because I would not have commented on the issue of whether Industrievers were "directly" used in manufacturing. The Commission opines on issues that are not before it at its great peril. In this case, the parties have gone so far as to stipulate to the issues before the Commission. The issue of whether the Industrievers are directly used in manufacturing is clearly not before us.

To its credit, the majority has been careful to note that these comments are premised on the record that was presented. But herein lies the rub. Because the parties stipulated to the issues in advance, it is reasonable to believe that both sides would present additional evidence pertaining to the directly-used-in-manufacturing issue. Thus, I fear future litigants will be tempted to imprudently rely upon this dictum.

Respectfully submitted,

Don M. Millis, Commissioner

1 Additional facts determined from the record are indicated by asterisk (*).

2 All facts refer to the period under review unless otherwise stated or the context requires otherwise.

3 The trial court found that 95% of the dock's use was for manufacturing activity.

4 "`Used exclusively' means to the exclusion of all other uses except for other use not exceeding 5% of total use." § 70.11(27)(a)8.

5 Some of the pans may have been empty, pending a re-stocking of raw materials removed for manufacturing.

6 Finding of Fact 18, supra (stipulated).

7 1994 sales were $3.6 million, penalty was $165.88; 1995 sales were $4.3 million, penalty was $383.93; 1996 sales were $4.5 million, penalty was $1,888.14; 1997 sales were $5.4 million, penalty was $921.86.

8 An additional $1,200 in sales were assessed sales tax and the penalty as well.

9 "to give little attention or respect to" "to leave undone or unattended to, esp. through carelessness", Webster's Ninth New Collegiate Dictionary (1991).