N.C. Dep't of Revenue v. Tri-State Scrap Metal, Inc.

N.C. Dep’t of Revenue v. Tri-State Scrap Metal, Inc., 2019 NCBC 41.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
WAKE COUNTY 18 CVS 10357

N.C. DEPARTMENT OF REVENUE,

Petitioner,

v. ORDER AND OPINION ON
PETITION FOR JUDICIAL REVIEW
TRI-STATE SCRAP METAL, INC.,

Respondent.

N.C. DEPARTMENT OF REVENUE,

Petitioner,

v.

BILTMORE IRON & METAL
COMPANY, INCORPORATED,

Respondent.

N.C. DEPARTMENT OF REVENUE,

Petitioner,

v.

TT&E IRON & METAL, INC.,

Respondent.

1. THIS MATTER is before the Court on the Petition for Judicial Review

filed by Petitioner North Carolina Department of Revenue (“Petitioner”) on August

17, 2018. (ECF No. 3.) Petitioner seeks review of the Final Decision by Summary
Judgment (“Final Decision”) issued by the Office of Administrative Hearings (“OAH”)

on July 20, 2018 pursuant to N.C.G.S. §§ 150B-43, -45, and -46. (Official Rec. on Jud.

Rev. 1130–40, (ECF Nos. 14, 15) [“Bus. Ct. R.”].)1 On April 17, 2019—after the Court

received the Official Record on Judicial Review (“Official Record”), (ECF Nos. 14, 15),

Petitioner’s Brief, (ECF No. 16), Respondents Tri-State Scrap Metal, Inc. (“Tri-

State”); Biltmore Iron & Metal Company, Inc. (“Biltmore”); and TT&E Iron and

Metal, Inc.’s (“TT&E”) (collectively, “Respondents”) Response Brief, (ECF No. 21), and

Petitioner’s Reply Brief, (ECF No. 22)—the Court held a hearing on the Petition for

Judicial Review at which all parties were represented by counsel. For the reasons

set forth below, the Court hereby AFFIRMS in part, REVERSES in part, and

REMANDS these consolidated matters to the OAH for further proceedings.

North Carolina Department of Justice, by Ronald D. Williams, II, for Petitioner
North Carolina Department of Revenue.

Brooks, Pierce, McLendon, Humphrey & Leonard LLP, by Kimberly Marston
and Howard L. Williams, for Respondents Tri-State Scrap Metal, Inc., Biltmore
Iron & Metal Company, Inc., and TT&E Iron and Metal, Inc.

Robinson, Judge.

1 Due to its size, the Official Record on Judicial Review was filed in two parts on the Court’s

e-filing system. Accordingly, citations to the Official Record appear across two electronic
filing numbers. (ECF Nos. 14, 15.) For reference, pages 1–600 of the Official Record appear
in Part 1, (ECF No. 14), and pages 601–1171 of the Official Record appear in Part 2, (ECF
No. 15).
I. INTRODUCTION

2. This is an action for judicial review of the Final Decision on July 20,

2018 in the matters of Tri-State Scrap Metal, Inc. v. N.C. Dep’t of Revenue, OAH File

No. 17 REV 5627, Biltmore Iron & Metal Company, Inc. v. N.C. Dep’t of Revenue,

OAH File No. 17 REV 5628, and TT&E Iron and Metal, Inc. v. N.C. Dep’t of Revenue,

OAH File No. 17 REV 5629. The matter before the Court involves a dispute between

Petitioner and Respondents regarding whether Respondents, who are secondary

metal recyclers, are entitled to the lower one percent (1%) rate of privilege tax (the

“Privilege Tax”) on their purchases of certain machinery, parts, and accessories used

in their operations at their respective facilities. Respondents purchase and collect

scrap metal, consisting of both ferrous and non-ferrous metals, and use a variety of

processes to transform the scrap metal into products that can be sold to its customers

for use in their own manufacturing facilities.

3. In order for Respondents to convert the raw materials into products that

its customers will purchase, Respondents use several pieces of equipment and

accessories, which Respondents classified for tax purposes as mill machinery, parts,

or accessories pursuant to N.C.G.S. § 105-187.51, thereby paying a Privilege Tax at

a rate less than otherwise payable by North Carolina companies for their purchases

of similar tangible personal property. Petitioner audited each Respondent’s records

for its equipment purchases over various time periods (the “Audit Periods”) and

decided, with one exception, that Respondents were not engaged in manufacturing

and that, as a result, most of their purchases were not subject to the Privilege Tax.
Accordingly, Petitioner issued to each Respondent a Notice of Final Determination,

which found each Respondent liable for additional State and applicable local rates of

sales and use tax on its purchases.

4. On August 22, 2017, Respondents filed Petitions for Contested Case

Hearings with the OAH seeking review of their respective Notices of Final

Determination issued by Petitioner. After consolidating Respondents’ cases, and the

parties’ filing of cross motions for summary judgment, the OAH issued the Final

Decision denying Petitioner’s motion and granting summary judgment in favor of

Respondents. Petitioner now petitions this Court to reverse the Final Decision

believing the OAH’s Final Decision to be erroneous.

5. The issues to be decided in this action are (a) whether Respondents’

operations at their respective facilities are manufacturing, and if so, (b) whether the

ALJ erred in failing to engage in a purchase-by-purchase analysis when determining

that Respondents’ purchases are mill machinery, parts, or accessories within the

meaning of N.C.G.S. § 105-187.51.

II. FACTS AND PROCEDURAL BACKGROUND

6. The parties stipulated on the record that there is no dispute of material

fact, (Bus. Ct. R. 953), and accordingly, the Court takes the facts as they are presented

in the Official Record. Respondents are three secondary metal recyclers operating in

North Carolina. (Bus. Ct. R. 337, 347, 357.) Tri-State, operating under the trade

name Mountain Metal Recycling, is an S-corporation that operates a facility in

Asheville, North Carolina. (Bus. Ct. R. 631, 636.) Biltmore is a C-corporation that
also operates a facility in Asheville, North Carolina. (Bus. Ct. R. 624–25.) Finally,

TT&E is a C-corporation that operates a facility in Garner, North Carolina. (Bus. Ct.

R. 707.) Petitioner North Carolina Department of Revenue is the governmental

entity responsible for assessing and collecting sales and use taxes. See N.C.G.S. §

105-164.2. Petitioner examined Respondents’ records, leading ultimately to the

issues before this Court.

7. As secondary metal recyclers, Respondents purchase ferrous scrap

metal, nonferrous scrap metal, and electronic scrap (collectively referred to as “Scrap

Metal”) from various sources. (Bus. Ct. R. 283–84.) Scrap Metal includes everything

from structural steel to aluminum cans to IT and telecom equipment. (Bus. Ct. R.

283–84.) The Scrap Metal is then transported to Respondents’ respective facilities

where, after Respondents take inventory of the materials, the Scrap Metal will

undergo one or more operations, including:

Stripping – the use of specialized machinery to strip coating and
insulation from copper wire;

Baling – the use of large equipment to crush and compact material into
highly condensed bales in specific sizes.

Torching – the use of acetylene or oxygen torches to cut metallic
materials to various specifications.

Shearing – the use of large stationary guillotine shears and shears
mounted on mobile equipment, such as a crane or excavator, to cut and
separate raw materials, typically larger items.

(Resp. Br. 4, ECF No. 21; Bus. Ct. R. 284–90, 296–302, 308–14.)

8. Respondents all use essentially the same aforementioned processes to

convert the Scrap Metal into final products capable of being sold to their customers
with one exception: TT&E uses an operation called shredding, which requires the use

of a granulator (the “Granulator Shredding Operation”). The Granulator Shredding

Operation uses large stationary equipment (including a granulator) to shred

materials into smaller sizes and separate them into different grades of metal. (Bus.

Ct. R. 357–58.)

9. Through these operations, Respondents produce finished products (such

as bare brite copper, baled aluminum used beverage cans, baled wire, or #1/2 Steel

Bundles, #1 Heavy Melt Steel, Prepared Plate and Structural Steel) that are then

sold to manufacturers, who in turn melt or refine the products for use in their own

manufacturing. (Bus. Ct. R. 284–90, 296–302, 308–14.) The products are made by

Respondents to meet specifications provided by either the customer or industry

standards set by the Institute of Scrap Recycling Industries Scrap Specifications

Circular (“ISRI Specifications”). (Bus. Ct. R. 342–43.)

10. During the Audit Periods, Petitioner conducted examinations of each

Respondent’s records for purchases of equipment and accessories used in one or more

of the above operations. As to Tri-State, during Petitioner’s Audit Period from April

1, 2007 to March 31, 2013, Tri-State purchased, among other goods, a material

handler, generator, baler, can flattener, stripper, shear logger, magnets, shears,

loaders, and roll off containers, as well as other equipment, parts, supplies,

equipment fluids, and fuel. (Bus. Ct. R. 632–33.) Petitioner reviewed these purchases

and on October 23, 2013 issued a proposed Notice of Sales and Use Tax Assessment

assessing Tri-State for tax on the purchase of these items at the general State and
applicable local rates of tax. (Bus. Ct. R. 631, 650.) Petitioner determined that none

of the operations conducted by Tri-State were manufacturing and thus none of Tri-

State’s purchases during the Audit Period were eligible for the lower Privilege Tax.

(Bus. Ct. R. 631, 636.) Tri-State objected to the proposed tax assessment and timely

requested a Departmental review. (Bus. Ct. R. 631.) On June 29, 2017, after an

attempt to resolve Tri-State’s objections, Petitioner issued its Notice of Final

Determination upholding its proposed tax assessment and assessing Tri-State for

additional tax of $99,111.23, interest of $35,613.37, and penalties of $59,466.75.

(Bus. Ct. R. 651.)

11. As to Biltmore, during Petitioner’s Audit Period from February 1, 2009

to January 31, 2012, Biltmore purchased, among other goods, a Sennebogen material

handler, a 2009 Magnum, a Volvo excavator, and a roll off container, as well as other

equipment, parts, supplies, equipment fluids, and fuel. (Bus. Ct. R. 597.) Petitioner

reviewed these purchases and decided that none of the operations conducted by

Biltmore qualified as manufacturing. (Bus. Ct. R. 601.) Accordingly, Petitioner

issued a proposed Notice of Sales and Use Tax Assessment on February 20, 2013

assessing Biltmore tax on the purchase of these items at the general State and

applicable local rates of tax. (Bus. Ct. R. 597, 620.) Biltmore objected to the proposed

tax assessment and timely requested a Departmental review. (Bus. Ct. R. 597.)

Thereafter, unable to resolve Biltmore’s objections to the tax assessments, Petitioner

issued a Notice of Final Determination upholding the original tax assessment and
assessing Biltmore for additional tax of $61,870.41, interest of $20,960.46, and

penalties of $16,967.60. (Bus. Ct. R. 624.)

12. As to TT&E, during Petitioner’s Audit Period from August 1, 2009 to

July 31, 2012, TT&E purchased, among other goods, a granulator, cranes, shears,

torches, heavy duty containers, repair parts for equipment, operating supplies,

computer equipment, as well as other equipment, parts, supplies, equipment fluids,

and fuel. (Bus. Ct. R. 632.) Petitioner reviewed these purchases, determined that

TT&E’s operations did not qualify as manufacturing, and issued a proposed Notice of

Sales and Use Tax Assessment assessing TT&E tax on these purchases. (Bus. Ct. R.

632–33, 706.) TT&E objected to the proposed tax assessment and timely requested a

Departmental review. (Bus. Ct. R. 633.) During the Departmental review, Petitioner

changed its prior position, and concluded that the Granulator Shredding Operation

was in fact properly considered “manufacturing.” Accordingly, TT&E’s purchase of

the granulator was subject to the Privilege Tax. (Bus. Ct. R. 633.) Otherwise,

Petitioner did not determine that TT&E’s other operations qualified as

manufacturing. (Bus. Ct. R. 633, 710.) On June 29, 2017, Petitioner issued a Notice

of Final Determination adjusting the proposed tax assessment to reflect its

determination, assessing TT&E for additional tax of $99,720.81, interest of 31,701.15,

and penalties of $24,930.21. (Bus. Ct. R. 707.)

13. On August 22, 2017, Respondents filed Petitions for Contested Case

Hearings with the OAH seeking review of their respective Notices of Final

Determination. On November 29, 2017, the OAH issued an Order of Consolidation,
which consolidated the matters for hearing pursuant to N.C.G.S. § 150B-26. On April

13, 2018, the parties filed cross motions for summary judgment, which were heard on

April 25, 2018 before the Honorable Melissa Owens Lassiter, Administrative Law

Judge (“ALJ”). On July 20, 2018, the OAH issued the Final Decision. ALJ Lassiter

concluded that Respondents proved by a preponderance of the evidence that their

recycling businesses involved manufacturing, and that, therefore, Petitioner acted

erroneously when determining that Respondents were not entitled to remit the

Privilege Tax. (Bus. Ct. R. 1137–38.) Accordingly, the OAH granted Respondents’

motions for summary judgment, denied Petitioner’s motion for summary judgment,

and reversed Petitioner’s Notices of Final Determination. (Bus. Ct. R. 1130.)

14. On August 17, 2018, Petitioner submitted its Petition for Judicial

Review, which is now before this Court. (ECF No. 3.) The parties thereafter filed the

Official Record on November 1, 2018 pursuant to Business Court Rule 13.3. (ECF

Nos. 14, 15.) On December 3, 2018, Petitioner filed a brief in support of its Petition

for Judicial Review. (ECF No. 16.) Respondents filed their consolidated response

brief on February 1, 2019. (ECF No. 21.) Petitioner filed a reply brief on February

14, 2019. (ECF No. 22.)

15. The Petition for Judicial Review came before the Court for oral

argument on April 17, 2019, at which all parties were represented by counsel, and is

now ripe for determination.
III. ANALYSIS

A. Standard of Review

16. The task before this Court is to “determine whether the petitioner is

entitled to the relief sought in the petition based upon [a] review of the final decision

and the official record.” N.C.G.S. § 150B-51(c). The appeal of a final decision of the

OAH in a contested case “arising from [a] summary judgment order[ ] [is] decided

using a de novo standard of review.” Midrex Techs. v. N.C. Dep’t of Revenue, 369 N.C.

250, 257, 794 S.E.2d 785, 791 (2016). Accordingly, the Court will “make a de novo

determination of whether [the ALJ] correctly granted summary judgment in favor of

the [Respondents] and against [Petitioner].” Id. “Under the de novo standard of

review, the [Court] consider[s] the matter anew and freely substitut[es] its own

judgment for [that of the lower court].” Id. (alterations in original) (citations and

quotation marks omitted). Summary judgment is appropriate where there is no

factual dispute and only questions of law remain. Wal-Mart Stores E. v. Hinton, 197

N.C. App. 30, 37, 676 S.E.2d 634, 638 (2009).

17. “In reviewing a final decision allowing . . . summary judgment, . . . [i]f

the order of the court does not fully adjudicate the case, the court shall remand the

case to the [ALJ] for such further proceedings as are just.” N.C.G.S. § 150B-51(d).

18. The facts of this case are not in dispute. Instead, Petitioner contends

that the ALJ erred (1) in concluding that Respondents’ operations are manufacturing

as applied to the undisputed facts of this case, and (2) by failing to engage in a

purchase-by-purchase analysis to determine if Respondents’ purchases during the
respective Audit Periods were mill machinery, parts, or accessories used during the

manufacturing process entitled to the Privilege Tax. Accordingly, the questions

before this Court involve statutory interpretation and are therefore questions of law.

Parkdale Am., LLC v. Hinton, 200 N.C. App. 275, 278, 684 S.E.2d 458, 461 (2009).

Petitioner contends that the ALJ’s decision is contrary to North Carolina case law

and Petitioner’s own published interpretations of tax statutes, and consequently, if

the proper interpretation of N.C.G.S. § 105-187.51 is applied to the undisputed facts,

Respondents are not entitled to the Privilege Tax on the items purchased during the

respective Audit Periods.

B. At Least Some of Respondents’ Operations are Properly Considered
Manufacturing

19. The Court first addresses whether Respondents are manufacturers

eligible for the Privilege Tax. Section 105-187.51, effective during the Audit Periods

and therefore the statute that controls the Court’s decision in this matter, provides

that a privilege tax of one percent (1%) is imposed on “[a] manufacturing industry or

plant that purchases mill machinery or mill machinery parts or accessories for

storage, use, or consumption[.]” N.C.G.S. § 105-187.51. The Privilege Tax is a partial

exemption from State and local sales and use tax on tangible personal property. Id.

The taxpayer bears the burden of showing, by a preponderance of the evidence, that

it is eligible for the lower rate of taxation and entitled to remit the 1% Privilege Tax

rather than the general State and local rates of tax. See Piedmont Canteen Serv., Inc.

v. Johnson, 256 N.C. 155, 163, 123 S.E.2d 582, 587 (1962).
20. Accordingly, in order for Respondents’ purchases to be considered “mill

machinery or mill machinery parts or accessories” subject to the Privilege Tax, the

Court must first determine whether Respondents are engaged in manufacturing. The

undisputed material facts in this case reveal that at least some of the processes and

operations used at Respondents’ respective facilities support a finding that

Respondents are manufacturers and were engaged in manufacturing during the

Audit Periods.

21. Neither N.C.G.S. § 105-187.51 specifically nor N.C.G.S. § 105-164.3 (the

definitional section in Article 5 of the Revenue Act) includes a definition of

“manufacturer” or “manufacturing.”2 Accordingly, the Court looks to North Carolina

case law to determine the definition of these terms within the meaning of the taxing

statutes. In Duke Power v. Clayton, our Supreme Court defined manufacturing “as

the producing of a new article or use or ornament by application of skill and labor to

raw materials.” 274 N.C. 505, 514, 164 S.E.2d 289, 295 (1968). In order for an item

to be considered manufactured, “the labor must result in a new and different article

with a distinctive name, character or use.” Id. at 513, 164 S.E.2d at 295. The Court

in Duke Power also noted, however, that “[t]he word manufacture is not susceptible

of an accurate definition that is all-embracing or all-exclusive, but is susceptible of

many applications and many meanings.” Id. (emphasis in original) (internal

quotation marks omitted). Accordingly, while Duke Power provides, in a general

2 The Court however notes, though not controlling of the Court’s decision herein, that in 2016,

the Legislature amended section 105-187.51B to explicitly extend the Privilege Tax to
secondary metal recyclers engaged in the same or similar operations as Respondents. N.C.
Sess. Law 2016-94, § 38.2(b).
sense, the “usual connotation” for manufacturing, id. at 514, 164 S.E.2d at 295, the

Duke Power definition of manufacturing must be considered in light of the specific

industry, products produced, and the customer market at issue.

22. Here, the undisputed facts show that Respondents transform Scrap

Metal that is no longer usable for its intended purpose into new products that have

distinct names, characteristics, and uses. (Bus. Ct. R. 285–90, 296–302, 308–14.)

Looking at Respondents’ customer base, Respondents’ customers are willing and able

to purchase Respondents’ final products but have no use for the Scrap Metal before it

undergoes Respondents’ transformation processes. (Bus. Ct. R. 352.) For example,

scrap steel such as beams or trusses are transformed into “Prepared Plate and

Structural,” which, to qualify as such, must meet specific composition, density, and

size requirements set by the ISRI specifications or other specifications provided by

the customer. (Bus. Ct. R. 352–53, 510.)

23. Furthermore, looking at the products produced, and comparing those to

the original products from which they are derived, there is no question that

Respondents have created “a new and different article[.]” Duke Power, 274 N.C. at

513, 164 S.E.2d at 295. For example, Respondents may purchase a vehicle that, for

some reason or another, can no longer be driven (and therefore has lost its intended

purpose and value). Respondents thereafter perform various operations on that

vehicle to turn it into a product (or products) that can now be used by a mill or refinery

at its facilities. What was once an unmarketable, post-consumer product has new

meaning and new value because of Respondents’ efforts and labor. This is exactly
what Duke Power contemplates. The same is true for post-consumer aluminum

beverage cans: cans that once contained, for instance, beer or carbonated beverage

products and have now been discarded as trash are entirely different from Baled

Aluminum Used Beverage Can (“UBC”) Scrap, which is created only after

Respondents dry and clean, flatten, and bale the used cans to a density of 22 pounds

per cubic foot and bind them with steel bands. (Bus. Ct. R. 500.) UBC Scrap, but not

individual post-consumer beverage cans, will be purchased by Respondents’

customers for use at their facilities. (Bus. Ct. R. 342–43.) In essence, Respondents

create new life and new purpose for products that have been discarded and have lost

their intended value—this is entirely consistent with the Duke Power definition of

manufacturing.

24. Moreover, even though Respondents do not change the intrinsic

composition of the Scrap Metal (i.e. the aluminum beverage can is still aluminum

after undergoing Respondents’ operations), the Court believes this has no effect on

whether a new and different product with a distinctive use has been created. See,

e.g., Brandenburg Indus. Serv. Co. v. Ind. Dep’t of State Revenue, 60 N.E.3d 300, 307

(Ind. Tax. Ct. 2016) (“Logic dictates that a copper wire encased within a cement block

is different from a copper wire without the encumbrance of debris, that sorted metal

is different from unsorted metal, and that long lengths of metal are different from

shorter, cut lengths of metal.”).

25. The Court also believes that Respondents’ operations are analogous to

operations already considered by Petitioner to be manufacturing. According to
Petitioner’s own Sales & Use Tax Bulletin, Petitioner classifies persons in the

business of ginning cotton (which requires only the separation of seeds from cotton

fibers), water purification plants (which transforms untreated water into purified

water), and persons who transform water into ice, as manufacturers. (Bus. Ct. R.

1108, 1111, 1115.) The Court concludes that the transformation of water into purified

water, of water into ice, or the removal of seeds from cotton is no more an act of

“manufacturing” than the transformation undertaken in Respondents’ operations. In

each instance, the manufacturer removes, separates, or otherwise changes the

properties of the old product to produce a new product capable of use by its customers.

Just as Respondents’ customers here will not purchase used loose aluminum cans for

use at its facilities, textile manufacturers will not purchase cotton fibers with seeds,

consumers will not use liquid water to cool their beverages, and persons will not

consume unpurified water.

26. Petitioner relies on Duke Power not only for the definition of

manufacturing (which remains good law) but also for its underlying facts. There, our

Supreme Court considered whether crushed coal was in an “unmanufactured state.”

Duke Power, 274 N.C. at 513, 164 S.E.2d at 295. At the time of the Supreme Court’s

decision in 1968, there was no guiding precedent in North Carolina as to whether the

crushing of coal constituted manufacturing within the meaning of taxing statutes.

See id. at 514, 164 S.E.2d at 296. Accordingly, the Supreme Court analogized the

crushing of coal to the crushing and screening of quarried rock and recognized that

“[t]he majority of jurisdictions . . . [at that time had held] that quarrying and crushing
stone is not manufacturing.” Id. at 514–15, 164 S.E.2d at 296. Accordingly, the

Supreme Court held that crushing coal is not a manufacturing process and crushed

coal was purchased in “an unmanufactured state.” Id. at 516, 164 S.E.2d at 297.

Petitioner now contends that crushing coal is no different from Respondents’

operations here.

27. Based on the Court’s review of the Duke Power decision, it appears that

Petitioner at that time had not given much guidance regarding its position on what

was or was not manufacturing to aid the courts of this State in their analysis. See id.

at 514, 174 S.E.2d at 296. As a result, and in the absence of case or statutory law in

North Carolina interpreting North Carolina taxing statutes, the Supreme Court was

required to look to the law of other states in order to assess the meaning of

“manufacturing.” Under those circumstances, the Supreme Court in Duke Power

provided a definition for manufacturing and applied it strictly to the facts of that case.

However, more than fifty years have passed since the Supreme Court’s conclusion in

Duke Power. Over that time, Petitioner has been called on to determine whether

specific processes in differing contexts satisfy the requirements for manufacturing as

defined in Duke Power and has, on a number of occasions, determined that such

processes are, in fact, manufacturing. (See Bus. Ct. R. 1100–16 (listing specific

industries that are considered manufacturers by Petitioner).) Notably, Petitioner has

determined that “[q]uarries . . . regularly operated for the production of stone, sand,

clay, marble, granite, gravel, crushed stone and similar products for commercial

purposes are deemed to be manufacturing plants and industries[.]” (Bus. Ct. R.
1109.) The subsequent determinations by Petitioner are arguably at odds with the

Supreme Court’s analysis in Duke Power. However, attempting to harmonize

Petitioner’s position with the Supreme Court’s decision in Duke Power leads to the

inescapable conclusion that at least some of the processes engaged in by Respondents

are manufacturing.

28. Lastly, and most importantly as to this first issue, the record reveals

that Petitioner concluded in its Notice of Final Determination as to TT&E, that

TT&E’s Granulator Shredding Operation qualified as manufacturing. (Bus. Ct. R.

710.) The Court is unpersuaded that there is any meaningful difference between this

process and the other processes used by Respondents. Petitioner’s position would

have the Court find that using strippers and sheers (tools purchased by Respondents

for which the Privilege Tax is claimed but Petitioner rejected) to create bare brite

copper is not manufacturing but achieving the same end product through use of a

granulator (the machine purchased by TT&E which was permitted by Petitioner to

carry the lower tax rate) is manufacturing. Respondents argue in their response brief

that “[t]he relevant inquiry . . . is whether a new and different product is created—

not how that product is created.” (Resp. Br. 19 (emphasis original).) The Court

agrees. As Petitioner itself concedes, manufacturing is defined in terms of the final

product produced: Duke Power defines manufacturing “as the producing of a new

article or use or ornament by application of skill and labor to raw materials.” 274

N.C. at 514, 164 S.E.2d at 295 (emphasis added).
29. Accordingly, based on the foregoing, the Court concludes that

Respondents are engaged in manufacturing and that the ALJ did not err in reaching

such a conclusion in the Final Decision.

C. The ALJ Erred in Failing to Engage in a Purchase-by-Purchase Analysis

30. Although the ALJ correctly determined that Respondents are engaged

in manufacturing, the Court concludes that the ALJ nevertheless erred as a matter

of law by not conducting a purchase-by-purchase analysis of each Respondent’s items

purchased during the Audit Periods to determine if each item was “mill machinery or

mill machinery parts or accessories” used in the manufacturing process.

31. Based on a clear reading of N.C.G.S. § 105-187.51, while being a

manufacturer is a prerequisite to being eligible for the Privilege Tax, not all items

purchased by a manufacturer are entitled to the lower rate of taxation. Rather,

N.C.G.S. § 105-187.51 requires a two-step analysis: first, there must be a

determination that the purchaser is a “manufacturing industry or plant[,]” and

second, there must be a determination that the purchases are of “mill machinery or

mill machinery parts or accessories[.]” N.C.G.S. § 105-187.51(a)(1). Furthermore,

N.C.G.S. § 105-187.51(b) provides that the Privilege Tax is “one percent (1%) of the

purchase price of the machinery, part, or accessory purchased.” Therefore, when

assessing whether the Privilege Tax is applicable, a purchase-by-purchase analysis

must be done. It would be in error, based on the plain meaning of the statute, to

assume all items purchased by a manufacturer are subject to the Privilege Tax.
32. Respondents each purchased numerous items during the respective

Audit Periods for which the Privilege Tax was claimed. It appears to the Court that

the parties did not provide sufficient evidence (or arguments to the contrary) to the

ALJ of the use of each individual item purchased by Respondents during the Audit

Periods and, accordingly, that the ALJ could not and did not analyze in the Final

Decision whether each item purchased by each Respondent was an item used in the

manufacturing process. The Court believes this was in error, and accordingly,

remands these consolidated matters to the OAH for further proceedings to conduct a

purchase-by-purchase analysis.

33. In doing so, the Court believes that the ALJ should determine whether

the items purchased were used in the production phase of manufacturing. Pursuant

to Petitioner’s interpretation of the Privilege Tax statute, only those items used in

the “production” phase of manufacturing qualify for the Privilege Tax. (Bus. Ct. R.

1083.) During the respective Audit Periods at issue, 17 North Carolina

Administrative Code 07D.0102(a)(1), which controls determination of the

applicability of the Privilege Tax to individual purchases, provided that:

“[P]urchases by a manufacturing industry or plant of machinery, and
parts and accessories therefore for use in production . . . are classified
as mill machinery, and mill machinery parts and accessories . . . .
Production does not include any activity connected with the movement of
raw materials or ingredients into inventory . . . . Sales to manufacturing
industries and plants of machinery, parts and accessories to such
machinery, or other items of tangible personal property which are used
in the movement of raw materials or ingredients into inventory or . . .
which are used for other similar purposes are subject to the applicable
statutory state and local sales or use tax.”

17 N.C. Admin. Code 07D.0102(a)(1) (emphasis added).
34. Accordingly, based on the Administrative Code, purchases of items used

for the movement of raw materials into inventory are not subject to the Privilege Tax.

The Court finds no other authority contrary to this position, nor have Respondents

presented the Court with an alternative position. In fact, the record reveals that

counsel for Respondents “concur[red] . . . that items used in the gathering and

bringing [of] materials to the [manufacturing facility] under the statute for this

period do not qualify” for the Privilege Tax. (Bus. Ct. R. 945.)

35. The Final Decision by the ALJ lacks any analysis as to whether each of

the purchases at issue were in fact used by Respondents in manufacturing (and

specifically in the production phase of manufacturing). Rather, it appears that the

ALJ assumed, without proof, that all claimed purchases were entitled to the lower

Privilege Tax because the ALJ concluded as a matter of law that Respondents were

manufacturers. (See Bus. Ct. R. 1138, Conclusion of Law No. 29.) The record before

the ALJ, however, reveals that purchases for which the lower Privilege Tax was

claimed include products which were seemingly used for purposes other than

manufacturing. For instance, Respondents claimed the Privilege Tax was applicable

to purchases of computer equipment and printer ink cartridges. (See, e.g., Bus. Ct.

R. 666, 709.)

36. As a result, finding Petitioner’s interpretation of N.C.G.S. § 105-187.51

instructive, and giving Petitioner deference in this regard, only those items used in

the production phase of manufacturing are subject to the Privilege Tax. Because the

ALJ did not limit her conclusion to items used in the production phase of
manufacturing or conduct a purchase-by-purchase analysis to determine whether

each of the items at issue purchased by Respondents was utilized in this way, the

Court remands these consolidated cases to the OAH to determine whether each item

purchased by Respondents during the Audit Periods is properly considered mill

machinery, parts, or accessories used during the production phase of manufacturing

and thus entitled to the Privilege Tax rate.

IV. CONCLUSION

37. For the reasons set forth above, the Court concludes that the Final

Decision granting summary judgment in Respondents’ favor, denying Petitioner’s

motion for summary judgment, and reversing Petitioner’s Notices of Final

Determination, should be AFFIRMED to the extent the ALJ determined that

Respondents are manufacturers. However, the Court REVERSES the Final

Decision to the extent the ALJ concluded that all items purchased by Respondents

are subject to the Privilege Tax. The Court orders that these consolidated matters be

REMANDED for further proceedings and a determination by the OAH, based on a

purchase-by-purchase analysis, as to whether each item purchased by Respondents

during the respective Audit Periods was used during the production phase of

manufacturing.

SO ORDERED, this the 8th day of July, 2019.

/s/ Michael L. Robinson
Michael L. Robinson
Special Superior Court Judge
for Complex Business Cases