United States: Tennessee Supreme Court Holds Catalysts Fall Within the Scope of the Industrial Machinery Exemption

In the January issue of State Tax Return, we reported that the Tennessee Court of Appeals in Eastman Chemical Co. v. Chumley, No. M2002- 02114-COA-R3-CV, 2004 WL 51822 (Tenn. Ct. App. Jan. 12, 2004), found in favor of the Department of Revenue and determined that catalysts do not fall within the industrial machinery exemption in § 67-6-102(a)(13)(A) of the Tennessee Code. The Department of Revenue’s victory was, however, short lived. Reversing the lower court, the Tennessee Supreme Court (the "Supreme Court") determined that the Court of Appeals’ arguments were "contrary" to its prior holdings, that their reliance on legislative history was "misplaced," and that their application of the definition of "industrial machinery" was "flawed." See Eastman Chemical Co. v. Johnson, No. M2002-02114-SC-R11-CV, 2004 WL 2676531 (Tenn. Nov. 24, 2004). Eastman Chemical Company, the Supreme Court decided, had been right all along.

The Supreme Court’s fundamental disagreement with the Court of Appeals was whether a 1984 amendment to § 67-6-102, which added exemptions for "apparatuses" and "equipment," expanded the industrial machinery exemption. Citing a decision from 1992,¹ the Supreme Court emphasized that it had indicated more than a decade earlier that the 1984 Amendment did indeed expand the scope of the machinery exemption. This issue, the Court was clear, had long been decided.

To determine exactly what was included in the expansion, the Court referred to the dictionary for a definition of the term "apparatus." An "apparatus," it quoted, is the "totality of means by which a designated function is performed or a specific task executed."² A test similar to this "totality of means" test had been applied ten years earlier in Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994). The Court summarized its prior decisions as holding that "all components integral to manufacturing or processing are exempt under the definition of industrial machinery, whether or not they fit the traditional concept or image of ‘machinery,’ or the pre-1984 definition of machinery."³

The Supreme Court then gave three quick slaps-on-the-hand to the Court of Appeals before holding that catalysts were included within the scope of the industrial machinery exemption. First, the Supreme Court noted that the Court of Appeals’ determination that the 1984 legislative amendment to § 67-6-102 did not expand the industrial machinery exemption was directly contrary to Supreme Court precedent. Second, the Supreme Court concluded that the Court of Appeals’ reliance on legislative history was erroneous because decisional law had already ruled § 67-6-102 to be plain and unambiguous

thereby obviating any need to consult legislative history. Finally, the Supreme Court declared that, contrary to the Court of Appeals’ suggestion, the catalysts were not raw materials or ingredients used in the production of goods, but were rather components of the equipment and apparatus used in the manufacturing process. As such, the Court of Appeals should have held that the catalysts were exempt.

The Supreme Court’s decision is a victory for both chemical manufacturing companies and other companies seeking exemptions for machinery that may not fit the traditional concept or image of machinery. For these companies, the Supreme Court’s opinion may provide an avenue for claiming future exemptions from tax.

1 AFG Indus., Inc. v. Cardwell, 835 S.W.2d 583 (Tenn. 1992).

2 Eastman Chemical Co. v. Johnson, No. M2002-02114-SC-R11-CV, at *3 (emphasis added).

3 Id. at *4.

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