King Crusher Inc. v. Commissioner of Revenue (January 15, 2008)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


KING CRUSHER INC.   		v.   COMMISSIONER OF REVENUE


Docket No. C278113	           	 Promulgated:
							 January 15, 2008


	This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 58 § 2 from the refusal of the appellee Commissioner of Revenue ("appellee" or "Commissioner") to classify the appellant as a manufacturing corporation for the tax year ending December 31, 2005
	Chairman Hammond heard the appeal.  Commissioners Scharaffa, Egan, Rose, and Mulhern joined him in the decision for the appellee. 
	These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.

	Phillip Bonner, pro se, for the appellant.

	Brett Goldberg, Esq., for the appellee.

FINDINGS OF FACT AND REPORT 
Appellant King Crusher Inc. ("appellant") filed this appeal from the Commissioner's denial of its application for classification as a manufacturing corporation for the tax year 2005 ("tax year at issue").  Pursuant to 831 CMR 1.31, the parties filed a statement of agreed facts and submitted the case on briefs with no hearing.  On the basis of the statement of agreed facts, the Appellate Tax Board ("Board") made the following findings of fact.
On August 3, 2004, appellant applied to the Commissioner for classification as a manufacturing corporation by filing Form 355Q, Statement Related to Manufacturing Activities.  By letter dated September 3, 2004, the Commissioner denied appellant's application.  On April 25, 2005, the Commissioner forwarded to the boards of assessors of all municipalities in the Commonwealth the list of corporations classified as manufacturing corporations as required under G.L. c. 58, § 2.  The appellant was not classified as a manufacturing corporation on the Commissioner's April 25, 2005 list and, on May 2, 2005, appellant filed its appeal with this Board.  On the basis of these facts, the Board found and ruled that it had jurisdiction over this appeal.
Appellant was organized as a Massachusetts corporation in 1978 with a principal place of business in Lancaster, Massachusetts.  At all material times, appellant operated a mobile automobile crushing business.  In the conduct of its business, appellant purchased automobiles from salvage yards, brought its mobile equipment to the salvage yards where the automobiles were located, and then crushed the automobiles using a machine known as an "Al-jon Impact V Car Crusher" ("Impact V").  The crushed automobiles were then loaded on appellant's trailer and taken to an unaffiliated company which shredded and separated the metals ("shredding company").
In most cases, appellant's employees removed and discarded the vehicles' batteries, gas tanks, and tires prior to crushing.  After appellant removed these items, appellant loaded the vehicle to be crushed on the crushing bed of the Impact V using a front-end loader equipped with forks instead of a bucket.  The Impact V used a four-post guide system that distributed 150 tons of crushing force to the four corners of the crushing lid.  Once the vehicle was placed on the crushing bed of the Impact V, the crushing lid was lowered and the vehicle was ultimately crushed to a height of eighteen inches.  Once crushed, the vehicles were referred to as "flats."
This crushing process was repeated until there were four flats on the Impact V.  The four flats were then removed by the front end loader and placed on appellant's trailer for transport to the shredding company.
Appellant sold and transported the flats to two shredding companies, WTE Recycling located in Greenfield Massachusetts and Prolerized New England Co., located in Everett, Massachusetts.  The shredding companies were not affiliated with appellant.  The shredding companies shredded the flats and used magnets to separate the ferrous from the non-ferrous metal.  The shredding companies then bundled and shipped the ferrous metal to both U.S. and foreign purchasers to be melted and eventually molded into other products.  In some cases, the shredding companies also bundled and sold the non-ferrous metals for processing into other products.  Any remaining non-saleable material, known as "shred," was then discarded by the shredding companies. 
Most of the vehicles processed by the shredding companies were crushed, either by entities like appellant or the shredding companies themselves, prior to shredding.  However, the shredding process did not require the vehicles to be crushed prior to shredding.  If a vehicle was not crushed prior to shredding, the shredding companies generally removed the gas tank and the battery to avoid the possibility of explosions and to minimize damage to the shredding equipment.  Removal of tires prior to shredding was not required, although the shredding companies preferred their removal to minimize the amount of material to be discarded at the end of the process.  The parties further stipulated that the shredding companies also operated their own crushing equipment and crushed some vehicles as part of their operations.
The record indicates that the shredding companies paid approximately $50 more per ton for flats that had the batteries, gas tanks, and tires removed.  The main reason for the higher sale price appears to be the reduction in processing required of the shredding companies and in the amount of material the shredding company had to discard on site. 
On the basis of these facts, and for the reasons detailed in the following Opinion, the Board found and ruled that appellant's activities did not cause a sufficient degree of change and refinement to a source material to constitute "manufacturing."  Moreover, the Board found and ruled on this record that appellant's activities did not constitute an essential and integral part of the manufacturing process.  Accordingly, the Board issued a decision for the appellee in this appeal. 

OPINION
The issue presented in this appeal is whether appellant is "engaged in manufacturing" for purposes of G.L. c. 63, § 38C and therefore entitled to classification as a manufacturing corporation under G.L. c. 58, § 2.  The lack of a statutory definition of the term "manufacturing" has led to a plethora of litigation before the Board and reviewing courts, as the nuances of certain industries and businesses have been analyzed in light of precedent and comparison to similar industries.  See, e.g., William J. Sullivan v. Commissioner, 413 Mass. 576 (1992).  
Although the lack of a statutory definition has resulted in a "chameleon-like" (Southeast Sand & Gravel, Inc. v. Commissioner, 384 Mass. 794, 795 (1981)) and "flexible" (Joseph T. Rossi Corp. v. State Tax Comm'n, 369 Mass. 178, 181 (1975)) definition of "manufacturing," the basic concept first articulated in Boston & Me. R.R. v. Billerica, 262 Mass. 439, 444-45 (1928) has remained constant: manufacturing requires "change wrought through the application of forces directed by the human mind, which results in the transformation of some preexisting substance or element into something different, with a new name, nature or use."  
In Sullivan, the taxpayer purchased scrap metal --consisting of pipe, boilers, plumbing fixtures, farm machinery, industrial scrap chips, automobile parts, I-beams, air conditioners, refrigerators, washing machines, and stoves -- and processed the scrap into various-sized pieces or cubes of a particular type and grade of metal to meet its customers' specifications.  Sullivan, 413 Mass. at 577-78.  The taxpayer first separated and graded the waste metal it received by metallic content and then separated ferrous and non-ferrous metal, for the most part by using "electromagnetic separation."  Id. at 577.  It also used a wire-stripping machine to remove the insulating jacket from metal cable.  Id. at 578.  
Once isolated by content, size and grade, the metal was either compressed into a cube or otherwise prepared for sale to its steel mill or foundry customers.  Id.  Each customer specified the grade of scrap to be purchased using standard industry specifications regarding size and metallurgical content; non-conforming scrap was either downgraded and sold at a reduced price or rejected.  Id.  
Although it acknowledged that the taxpayer's process "falls close to the line between manufacturing and nonmanufacturing activities," the court in Sullivan held that there was a sufficient degree of change and refinement in the source material to qualify as manufacturing.  Id. at 581.  In reaching this result, the court observed that an important consideration in determining whether an activity is manufacturing is the "multiplicity of processes" employed by the purported manufacturer.  Id. at 580 (citing Assessors of Boston v. Commissioner of Corps. and Taxation, 323 Mass. 730, 748 (1949)).
In contrast to the taxpayer in Sullivan, appellant did not perform the activities of separation, grading and processing of the scrap source material into a new product; rather, it simply crushed and transported the scrap material to unaffiliated shredding companies, which performed activities similar to those performed by the taxpayer in Sullivan.  At most, appellant performed a small portion of what the taxpayer in Sullivan did by removing the unusable products like batteries, gas tanks and tires, and compressing the metal into a smaller size.  The activities that effected the principal degree of change to the raw material in Sullivan - the initial separation and grading of the scrap, segregation of ferrous and non-ferrous metals, and preparation of cubes of metal that met the specifications of its customers - were not performed by appellant.
Moreover, although processes which themselves do not produce a finished product for sale are still deemed to be "manufacturing" if they constitute an "essential and integral" part of the manufacturing process (see Rossi, 369 Mass. at 181-82), "merely providing raw materials to a manufacturer" is not a "step" in the overall manufacturing process entitling the provider of the raw material to manufacturing-corporation status.  Tilcon-Warren Quarries Inc. v. Commissioner of Revenue, 392 Mass. 670, 674 (1984).
In Tilcon, the taxpayer quarried rock, generally by excavation and blasting, and transported the extracted rock to its processing plant.  At the plant, the taxpayer produced crushed stone by crushing the rock into smaller stones of varying sizes for sale to customers for use in road paving, leaching fields and septic systems.  Id. at 671.  The taxpayer also produced sand by mixing the residue from its stone-crushing operation with water, separating the sand into eleven gradations in its "classifier chamber," and then blending the gradations into two basic sizes of sand for use in making asphalt and concrete.  Id.
On these facts, the court held that "extracting pieces of rock from the ground and crushing them into usable sizes does not compel the conclusion that the process fits within the natural and ordinary meaning of 'manufacturing.'" Id. at 672-73.  Further, the court held that the taxpayer was not performing an essential and integral step in the manufacturing process, but that it "simply provides two of the raw materials, crushed stone and sand, needed for the manufacture of asphalt."  Id. at 674.
Appellant's activities are even less transformative, and less essential and integral to the manufacturing process, than those found to fall short of manufacturing in Tilcon.  Appellant's two-step process - which included the optional removal of batteries, gas tanks, and tires, and crushing vehicles into flats - is legally insufficient when analyzed in the context of the processes at issue in Tilcon, which resulted in a final product transformed from its raw material to a significantly greater degree than the flats at issue in this appeal.  Despite the more elaborate processes and the greater degree of transformation to the source material in Tilcon than is present here, the court still ruled that simply reducing the size of raw material is not sufficient to constitute manufacturing.  See also Alcan Aluminum Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1997-288 (ruling that cutting metal coils, flat sheets, bars, rods and angles to the sizes specified by customers does not constitute manufacturing). 
Moreover, the evidence of record in this appeal clearly established that appellant's activities were not even necessary, much less essential or integral, to the manufacturing process: the crushing of vehicles into flats was not necessary to shredding; the shredding companies themselves crushed vehicles and removed batteries, gas tanks, and tires; and the shredding companies paid more for flats with batteries, gas tanks, and tires removed, suggesting that flats with these items included could be sold.  
Further, not "every process comprising the first step, or a step, in the transformation of some source material into a finished product qualifies as a process which is an essential and integral part of the total manufacturing process."  Sullivan, 413 Mass. at 581.  In order to constitute an essential and integral part of the manufacturing process, the "process under study must effect the kind of change and cause a correlative degree of refinement in the source material as exemplified in [Assessors of Boston 323 Mass. at 736-37 (multi-step wool-scouring process involving de-burring, combing, chemical treatment, bleaching, drying and bagging)], Rossi, and now, Sullivan's scrap processing operation." Sullivan, 413 Mass. at 581.  Accordingly, even if the Board were to rule that appellant's activities were, as a practical matter, a necessary part of the overall manufacturing process, the activities would not be "essential and integral" because there is an insufficient change and refinement to the source material.  
Two other cases involving the cutting of raw materials to a smaller size, Rossi and Noreast Fresh, 50 Mass. App. Ct. 352 (2000), also provide no support for appellant's position.  In Rossi, the taxpayer cut down trees, hauled the logs by truck to its saw mill, stripped the logs of bark, sawed and resawed the logs into lumber of various sizes, and packaged the lumber for shipment and sale.  Rossi, 369 Mass. at 179.  The taxpayer also sold bark, woodchips and sawdust that were produced in its sawmill operation.  Id. 
The court held that the taxpayer's use of "specialized machinery and the application of human skill and knowledge" to convert the raw material of standing timber into cut lumber, a "product more refined and specialized in use than the raw material" constituted manufacturing.  Id. at 182.  In so ruling, the court emphasized that the taxpayer's "process of converting the logs into lumber is more than the mere extraction, packaging and transportation of a raw material." Id. at 182 (emphasis added).
In contrast, appellant here is essentially facilitating the transportation of raw material to the shredding companies.  Appellant's mobile crushing and transportation equipment allow it to gather vehicles from various salvage yards and crush them into a compact "package," thereby facilitating transportation to, and processing by, the shredding companies.  Such activity did not result in a "new product, different in character and more useful and marketable, than the raw material;" rather, it resulted in the mere packaging and transportation of the raw material itself, which does not constitute "manufacturing" under Rossi.  Id. 
Similarly, Noreast Fresh does not support a finding that appellant's operations constituted manufacturing.  The taxpayer in Noreast Fresh produced, from raw vegetables grown by others, a variety of prepackaged and ready-to-eat salads, coleslaw, and vegetables such as spinach, celery hearts, carrot sticks and broccoli and cauliflower florets.  Noreast Fresh, 50 Mass. App. Ct. at 353.  Using a "highly mechanized production process," the taxpayer: removed unwanted parts of the vegetables by coring, peeling, or cutting; shredded or cut the vegetables into small, uniform pieces; plunged the vegetable pieces into a cold-water bath to which chlorine and citric acid had been added to kill bacteria; mixed the vegetable pieces with other vegetable pieces to make the various salads offered by the taxpayer; spun the pieces or salads in a centrifugal drier "flushed with nitrogen gas;" weighed the pieces or salads on a "computerized scale;" enclosed the pieces or salads in bags it fabricated from breathable plastic film designed to extend the product shelf-life; passed the packaged product through metal detectors; and packed the product in ice for shipping.  Id. at 353-54.
Reviewing prior cases that considered the "output of various foodstuffs," the court viewed the change to the raw vegetables at issue to be "between the two poles" represented by those cases: "[w]hile not as transformative a process as making sausages from livestock or bread from flour, Noreast's efforts produce far more of a metamorphosis than appears in the restaurant cases."  Id. at 355.  The court concluded that Noreast's activities sufficiently transformed the raw materials to constitute manufacturing: "'we think the transformation wrought by [its] processes has, as a practical matter, resulted in a new article and a new use, even though the name of the raw material still is retained.'"  Id. at 357 (quoting Assessors of Boston, 323 Mass. at 742). 
In reaching this conclusion, the court specifically rejected the analogy to Tilcon, where the court rejected the taxpayer's claim that its quarrying and crushing of rock into smaller sized stones and sand was manufacturing.  Noreast Fresh, 50 Mass. App. Ct. at 356-57.  The court in Noreast Fresh dismissed the argument that, like the taxpayer in Tilcon, Noreast merely cut raw materials into smaller sizes and, like Tilcon's blending of various gradations of sand, merely mixed them, because "it ignores critical features of Noreast's procedures, such as the excision of parts of the raw materials unsuitable for use, the changes brought about through chemical sanitation, and the manufacturing of special packaging for the final product."  Id. at 357.
In the present appeal, the "change wrought" by appellant was the mere crushing of vehicles into a smaller size.  Appellant produced no special packaging and it caused no chemical or other change to occur to the vehicles other than compacting them into a size more easily transported to the shredding companies.  Although appellant's optional removal of the batteries, gas-tanks, and tires is somewhat akin to Noreast's "excision of parts of the raw materials unsuitable for use" (Id.), the removal and crushing activities alone do not produce a sufficient transformation, under Noreast or any of the above cases, to constitute manufacturing.  
Accordingly, the Board issued a decision for the appellee in this appeal.


					  The APPELLATE TAX BOARD



				By: __________________________________
				    Thomas W. Hammond, Jr., Chairman




				
A true copy,


Attest: ________________________________
              Clerk of the Board				
       
      

 Unless explicitly stated otherwise, all factual findings relate to the tax year at issue.

ATB 2008-38