The Sherwin-Williams Company v. Commissioner of Revenue (May 9, 2003)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


THE SHERWIN-WILLIAMS COMPANY	v.	COMMISSIONER OF REVENUE

Docket No. C259901				Promulgated:
							May 9, 2003


	This is an appeal filed under the formal procedure pursuant to G.L. c. 58, § 2 from the decision of the Commissioner of Revenue denying The Sherwin-Williams Company's application for classification as a manufacturing corporation as of January 1, 2001. 
	Commissioner Gorton heard the appeal and was joined in the decision for the appellant by Chairman Burns and Commissioner Rose.
	These findings of fact and report are made at the request of the appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	William E. Halmkin, Esq., John A. Panno, Esq., and Michael T. Cummins, Esq., for the appellant.

	Timothy R. Stille, Esq., for the appellee.

FINDINGS OF FACT AND REPORT
	In January 2001, The Sherwin-Williams Company ("the appellant" or "Sherwin-Williams") filed with the Commissioner of Revenue ("Commissioner") a Form 355Q, Statement Relating to Manufacturing Activities, applying for classification as a foreign manufacturing corporation.  By letter dated April 5, 2001, the Bureau of Desk Audit of the Department of Revenue's ("the Department") Audit Division notified Sherwin-Williams that it proposed to deny the application.   On April 19, 2001, the Commissioner sent to the Boards of Assessors, pursuant to G.L. c. 58, § 2, a list of all corporations classified as manufacturing corporations.  The list did not include Sherwin-Williams.
On May 11, 2001, within thirty days of the issuance of the Commissioner's list of manufacturing corporations, Sherwin-Williams filed an appeal with the Appellate Tax Board ("the Board") contesting the Commissioner's denial of Sherwin-Williams's application for manufacturing classification.  On the basis of these facts, the Board found that it had jurisdiction over the subject appeal.
	Sherwin-Williams is a foreign corporation, organized under the laws of the State of Ohio, engaged in the business of manufacturing paint and paint-related products for sale at the wholesale and retail level.  Mr. Douglas Sharpe testified on behalf of Sherwin-Williams.  Mr. Sharpe has been employed by Sherwin-Williams since 1984 and is currently the Sales Manager for Boston.  Mr. Sharpe testified that Sherwin-Williams used to manufacture all of its products, "base" paint and colored paints, at a single centralized factory.  In the 1960s, Sherwin-Williams changed its process by having its retail stores mix colorants with base paint to create colored paints at locations closer to the end users.  Mr. Sharpe explained that the decentralization of the manufacturing process allowed Sherwin-Williams to offer its customers a greater selection of products, a virtually endless assortment of colored paints.  
At all material times, Sherwin-Williams operated thirty-nine retail stores located throughout the Commonwealth.  Each of the stores maintained an inventory of over 100 varieties of base paint and numerous liquid colorants.  The base and liquid colorants are used by the retail store employees to produce the variety of paint colors available for sale.  Mr. Sharpe explained the process as follows.  
A customer seeking to make a purchase from Sherwin-Williams first selects a color for the paint.  This is done by reviewing the appellant's color selector display, located in all stores, that showcases the more than 2000 colors that the stores have on computer file.  The employee then enters the color code into the color machine which provides the formula, including the type of base paint and the relative amounts of the various liquid colorants necessary to produce the desired color of paint.   Alternatively, a customer may seek to have a customized color produced.  In this case, the customer presents a color swatch to the store employee who places it over the "eye" of a spectrographic machine.  The spectrographic machine then generates the appropriate formula of base paint and liquid colorants required to produce the desired color of paint.  The Sherwin-Williams employee then enters the formula into the tinting machine.
	The Sherwin-Williams employee then places a can of the appropriate base into the tinting machine.  All cans of base paint are deliberately filled at the factory to less than full capacity to allow for the addition of the liquid colorants at the retail stores.  Using either the computer retrieved formula or the formula generated by the spectrographic machine, the tinting machine disburses into the can of base paint the appropriate shades and amounts of liquid colorants necessary to produce paint of the desired color.    
The store employee then reseals the filled can containing the correct base and colorant additives and takes it to the shaker machine.  This machine spins and shakes the can for a pre-determined time.  The spinning velocity and duration depends on both the type of base that is used and the desired color.  This last step of the process is done to agitate the base and colorants causing a chemical change, which melds together the materials and produces a can of uniformly colored paint.  Without proper mixing, the paint could be the wrong color or not have color consistency throughout the can.  Once blended together, the can of colored paint cannot again be segregated out into its initial components of base and colorants. 	
Mr. Sharpe testified that approximately 77% of Sherwin-Williams sales are from the sale of paint, and that 80-90% of those sales are sales of colored paint produced at the retail stores.
On the basis of Mr. Sharpe's testimony, which the Board found credible, the Board found and ruled that the appellant's production of colored paint effects a sufficient degree of physical change in the raw materials, base paint and colorant additives, to constitute "manufacturing" within the meaning of G.L. c. 58, § 2.  Accordingly, the Board issued a decision for Sherwin-Williams.

OPINION
The issue in the present appeal is whether the appellants production of colored paint, performed at its retail stores located throughout the Commonwealth, qualifies Sherwin-Williams for manufacturing corporation classification pursuant to G.L. c. 58, § 2, for the tax year commencing January 1, 2001.  The terms "manufacture" and "manufacturing" are not susceptible to an exact or precise definition.  "'[M]anufacturing' is chameleon-like in the different definitions given to it."  William F. Sullivan v. Commissioner of Revenue, 413 Mass. 576, 578-579 (1992)(quoting Southeastern Sand & Gravel, Inc. v. Commissioner of Revenue, 384 Mass. 794, 795 (1981)).  The words themselves, "'engaged in manufacturing' . . . are words of flexible meaning."  Commissioner of Revenue v. Houghton Mifflin Company, 423 Mass. 42, 44-45 (1996)(citations omitted).  
Recognizing the difficulty in defining the terms, Courts have consistently applied the basic concept of the term "manufacturing" as: "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."  Noreast Fresh, Inc. v. Commissioner of Revenue, 50 Mass. App. Ct. 352, 355 (2000).  Accord Houghton Mifflin, 423 Mass. at 46; Sullivan, 413 Mass. at 579; Joseph T. Rossi Corp. v. State Tax Comm'n, 369 Mass. 178, 180 (1975); Mobil Oil Corporation v. Commissioner of Revenue, 25 Mass. App. Tax Bd. Rep. 722, 728 (2000) ("Mobil Oil").  
"While simple to state, the concept is elusive in application, yielding an abundance of reported decisions.  [citations omitted] . . . the proper mode of analysis is of the 'case-by-case, analogical' variety."  Noreast Fresh, 50 Mass. App. Ct. at 355 (quoting Sullivan, 413 Mass. at 581).
In Mobil Oil, relying on the numerous cases which have attempted to define "manufacturing" and the working definition that has emerged, the Board found that Mobil Oil's activities of treating "base" gasoline with additives, and creating a new grade fuel by blending together gasoline of different octane, constituted manufacturing.  See Houghton Mifflin, 423 Mass. at 50 (holding that a book publisher's "compilation of information, photographs, and text, into proofs, edited, refined and ultimately transferred to disk or CD ROM" constituted "the process of manufacturing books," qualifying the taxpayer for manufacturing classification); Sullivan, 413 Mass. at 577, 581 (concluding that a taxpayer, who collected, separated, cut and compressed various types of scrap metal qualified as a manufacturer for classification purposes, focusing on the "degree of change and refinement to the source material").  See also Rossi, 369 Mass. at 182 (concluding that a corporation, which cut down standing timber and, through the use of specialized machinery and the application of human skill and knowledge, converted it into cut lumber of different sizes, a product more refined and specialized in use than the raw material, qualified as a manufacturing corporation). 
In Mobil Oil, the Board found that Mobil took an "original substance, base fuels and gasoline vapors, and transformed them into something different [additized gasoline]."  Mobil Oil, 25 Mass. App. Tax Bd. Rep. at 728.  The Board concluded that the additized gasoline, which contains dissolved chemical detergent additives, had a "different nature than the base fuel" and helps to "protect engine parts, improve driveability and fuel economy, and decrease maintenance costs."  Id. at 728.  The Board further found that the "additized fuel is substantially different than the base fuel received because . . . it has been converted into a marketable product with new properties."  Id. at 728-729.
The Commissioner argued that Mobil's activities did not constitute manufacturing, but that it was a simple case of "gasoline in, gasoline out."  Mobil Oil, 25 Mass. App. Tax Bd. Rep. at 729.  The Board disagreed, citing the Supreme Judicial Court's holding in Assessors of Boston v. Commissioner of Corporations and Taxation, 323 Mass. 730 (1949) that: "1) adding chocolate to milk to make chocolate milk; 2) blending, roasting and grinding coffee beans to make coffee; and 3) mixing syrups and juices with carbonated water to make soft drinks, all constituted manufacturing."  Mobil Oil, 25 Mass. App. Tax Bd. Rep. at 729-30.  Accordingly, the Board concluded that even though the "raw ingredient and the finished product are both fuel, [] they have been so altered using a multiplicity of processes that they have a new use, as a marketable and useable product."   See also The Kendall Company v. Commissioner of Revenue, 11 Mass. App. Tax Bd. Rep. 5 (1989)(finding that bleaching gauze fundamentally altered the raw ingredient so as to constitute manufacturing).
Similarly, in Noreast Fresh, the Appeals Court found that the taxpayer's activities of "cutting, chilling, combining, and packaging vegetables" grown by unrelated third parties, qualified as "manufacturing."  50 Mass. App. Ct. at 354-355.  Recognizing that "the words 'engaged in manufacturing' are not to be given a narrow or restrictive meaning," the Appeals Court found that the vegetables went through a "metamorphosis" and that there were "changes brought about through chemical sanitation."  Id. at 355-357.  The Commissioner argued that the taxpayer's activities did not qualify as manufacturing because the vegetables are edible even before processing and that they are still the same vegetables thereafter.  Noreast, 50 Mass. App. Ct. at 357.  
The Appeals Court, however, ruled that the similarity between the beginning and end products is not a controlling factor.  
First, if they were, the canning of peas and corn, the making of jellies and jams, and the curing of bacon and hams would not have qualified as manufacturing.  Second, if identifiability were the test, then the processing of wood in Rossi [] and of metal in Sullivan [] would not pass.

Noreast Fresh, 50 Mass. App. Ct. at 357.  The Court concluded, "'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 is still retained.'"  Id. (quoting Assessors Boston v. Commissioner of Corps. & Tax'n., 323 Mass. at 742.)  
The Supreme Judicial Court and this Board have observed that manufacturing activities typically involve a "multiplicity of processes."  See Sullivan, 413 Mass. at 580; Mobil Oil, 25 Mass. App. Tax. Bd. Rep. at 729.  "[S]o long as they constitute an essential and integral part of a total manufacturing process," the process will "be deemed 'manufacturing' for the purposes of [] tax exemption."  Sullivan, 413 Mass. at 579-580.  In the present appeal, Sherwin-Williams uses a multiplicity of processes, beginning at its out-of-state primary factories with the production of various base paints and ends at its retail stores located in the Commonwealth with the addition of liquid colorants to produce a can of colored paint. 
The above-cited analysis and decisions cited herein support the Board's conclusion that Sherwin-Williams's activities qualify the corporation for manufacturing classification pursuant to G. L. c. 58, § 2.  Sherwin-Williams's activities fall within the broad definition ascribed to manufacturing of "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."  Sherwin-Williams took base paint and added to it various liquid colorants, as specified by a computer-generated formula.  The raw ingredients were then melded together through high speed mixing and shaking.  The Board found that this agitation process altered the chemical makeup of the base by blending it, cohesively, with the tinting colorants.  The end result was something new and different, a can of colored paint which, like the     ready-to-eat vegetables in Noreast Fresh, the additized gasoline in Mobil Oil, and the chocolate milk, coffee and soft drinks in Assessors of Boston, was different from the original can of base paint.
Similar to his arguments in Mobil Oil and Noreast Fresh, the Commissioner argued in the present appeal that Sherwin-Williams's activities do not constitute manufacturing, as the product is "paint when it enters Massachusetts, and it is paint after the Taxpayer adds the tint and shakes the can."  However, the fact that the raw ingredient and the finished product bear the same name is not controlling; more important is the creation of a new article with a new marketability.  Noreast Fresh, 50 Mass. App. Ct. at 357; Mobil Oil, 25 Mass. App. Tax Bd. Rep. at 728  
Accordingly, the Board found that the base paint has been so altered with the addition of liquid colorants, using a multiplicity of processes, that it has transformed into something new, a can of colored paint with a different use and marketability.  Accordingly, the Board ruled that Sherwin-Williams's process of creating colored paint at its retail stores located throughout the Commonwealth constituted manufacturing, and was also an "essential and integral part of a total manufacturing process," and that Sherwin-Williams qualified for manufacturing corporation classification.
	
					      APPELLATE TAX BOARD

					By:						
					   Abigail A. Burns, Chairman


A true copy,

Attest:					
	    Clerk of the Board

ATB 2003-200