Excerpts of the Tax Court's Decision follow:
The parties’ motions for summary judgment present just one issue for the Court to decide: whether Hoosier Roll produces a new good, thereby entitling it to the exemptions previously mentioned, when it grinds and calibrates work rolls. Hoosier Roll claims that it does: it takes a work roll, a tool ground and calibrated for a certain use and, through its grinding and calibration process, creates an entirely new tool for a different use (i.e., a remanufactured work roll). (See, e.g., Pet’r Mem. Supp. Mot. Summ. J. ("Pet’r Br.") at 16-18.) The Department argues, however, that Hoosier Roll does not produce a new good; rather, it provides a repair service that is designed merely to perpetuate the usuable life of the work roll. (See, e.g., Resp’t Br. Supp. Mot. Summ. J. ("Resp’t Br.") at 7, 11.)
In Rotation Products Corporation v. Department of State Revenue, 690 N.E.2d 795 (Ind. Tax Ct. 1998), this Court explained that merely characterizing a process as "remanufacturing" or "repair" is not helpful in determining whether the process actually produces a new product and is thus an exempt activity. See Rotation Prods. Corp. v. Dep’t of State Revenue, 690 N.E.2d 795, 800-02 (Ind. Tax Ct. 1998) (explaining that some repair activities might constitute production while some remanufacturing activities might not). Consequently, in that case, the Court developed four questions, based on its analysis of case law from both Indiana and other jurisdictions, to assist it in determining whether a "remanufacturing" or "repairing" process produces a new product. See id. at 800-03. Here, both Hoosier Roll and the Department agree that the Court can determine whether Hoosier Roll produces a new good when it grinds and calibrates work rolls by using the facts they have presented to answer the questions set forth in Rotation Products. (See, e.g., Pet’r Br. at 16-19; Resp’t Br. at 7-9.)
QUESTION 1: What is the substantiality and complexity of the work done on the existing article and what are the physical changes to the existing article, including the addition of new parts?
In answering this first question, the Court finds that Hoosier Roll makes substantial physical changes to the work rolls it receives from its customers through its complex process of grinding and calibration. Indeed, the surfaces of the work rolls – whether the rolls are new and blank or have been previously ground and calibrated to certain specifications – must be physically altered before the work rolls can be used to produce a specified sheet product. As a result of this physical alteration, the work roll Hoosier Roll returns to its customer is not the same work roll that the customer originally delivered to Hoosier Roll. As Hoosier Roll very convincingly explained, it takes a work roll, a tool ground and calibrated for a certain use and, through its grinding and calibration process, creates an entirely new tool for a different use. (See Pet’r Br. at 16-18.)
The Department acknowledges that while Hoosier Roll’s grinding and calibration process is complex, it "does not substantially change the underlying good" as the process "begins and ends with a giant rolling pin that is used to flatten things." (Resp’t Br. at 7; Hr’g Tr. at 33 (emphasis added).) While it is true that when Hoosier Roll’s process is completed its customer still has a work roll, the Department’s argument fails to recognize that the intended use of that work roll – and thus the form of its physical surface – is very different from the use and form of the work roll when the customer first delivered it to Hoosier Roll. See, e.g., Rotation Prods. Corp., 690 N.E.2d at 804 (explaining that with respect to a remanufactured roller bearing, the new working surface has a very different "geometry" from the original and is therefore a new and different product from the original).
QUESTION 2: How does the article’s value before and after the work compare?
With respect to this second question, the Court finds that Hoosier Roll’s grinding and calibration process adds value to a work roll that was not there when the work roll was first delivered to it. This is evidenced by the fact that at the time a customer brings its work rolls to Hoosier Roll, it can no longer use them for their specified purpose. See, e.g., supra at note 6. Once ground and calibrated to new specifications, however, the customer can use the work roll again, as it has been transformed into a new tool.
Nonetheless, the Department asserts that because work rolls are initially manufactured and sold blank, they must have "an intrinsic value of themselves." (See Hr’g Tr. at 33.) Accordingly, if any value results from Hoosier Roll’s grinding and calibration process, it is "only" use value to Hoosier Roll’s customer which "does not increase the value or marketability of the work roll itself." (Resp’t Br. at 8.) This Court, however, has previously rejected the notion that the term "value" does not encompass use value. See Rotation Prods. Corp., 690 N.E.2d at 802 (recognizing that a manufacturing process converts material "‘having no commercial value for its intended use . . . [to material that] has appreciable commercial value for its intended use’" (emphases added) (citation omitted)).
QUESTION 3: How favorably does the performance of the "remanufactured" article compare with the performance of newly manufactured articles of its kind?
There is no dispute that each time a work roll is ground and calibrated to certain specifications, its performance as a work roll is no less favorable than its performance as a work roll with the previously ground and calibrated specifications. Consequently, the Department has conceded that the answer to this third inquiry weighs in Hoosier Roll’s favor. (See Resp’t Br. at 7; Hr’g Tr. at 28, 35.) (See also Department’s LOF at 7 (acknowledging that "the refurbished rolls perform as well as brand new work rolls").)
QUESTION 4: Was the work performed contemplated as a normal part of the life cycle of the existing article?
In answering the fourth and final question advanced by Rotation Products, the Court finds that Hoosier Roll’s grinding and calibration process is not work that is contemplated as a normal part of a work roll’s life cycle. Indeed, grinding and calibrating work rolls is not "routine maintenance." See Rotation Prods. Corp., 690 N.E.2d at 803 (explaining that the process of cleaning and polishing an item so that it functions more efficiently may be "routine maintenance" or a normal part of its life cycle). Rather, as previously explained, when Hoosier Roll grinds and calibrates work rolls, it physically transforms them into entirely new and different tools that are used by its customers to create entirely new and different sheet products. This finding is further buttressed by the fact that when Hoosier Roll’s customers send their work rolls to Hoosier Roll, they are aware that the work rolls may not even be salvageable in the first instance. (See, e.g., Department’s LOF at 7.)