FILED November 1, 2017 No. 16-0903 – Pratt & Whitney Engine Services v. Steager released at 3:00 p.m. EDYTHE NASH GAISER, CLERK SUPREME COURT OF APPEALS LOUGHRY, Chief Justice, joined by WORKMAN, Justice, dissenting: OF WEST VIRGINIA
The Freeport Amendment to the West Virginia Constitution, both in its
language and intent, plainly provides an exemption from taxation for personal property
which is stored or maintained for a period of time within the State insofar as it
substantially maintains its character upon departing the State. The majority disregards
the plain language of the Amendment and its analysis is devoid of even the most
rudimentary exercise in logic. Most importantly, however, the majority disregards fully
the Legislature’s edict that the Amendment is to be liberally construed in favor of
exemption. Therefore, I dissent to the majority’s conclusion that the component engine
parts housed by the petitioner Pratt & Whitney Engine Services (hereinafter “Pratt”) in
aid of their repair services are subject to ad valorem tax.
It is undisputed herein that Pratt operates a jet engine repair and service
facility; to conduct this business it is necessary that it maintain an inventory of
replacement parts. Jet engines needing repair are shipped to Pratt and these same engines
leave repaired. Pratt engages in absolutely no manufacturing of jet engines or any other
product. The repair parts it maintains are used solely to affix or utilize in servicing jet
engines in need of repair.
The Freeport Amendment provides that tangible personal property which is
either 1) moving in interstate commerce through or over the territory of the State of West
Virginia; or 2) consigned from outside the State to a warehouse within the State for
storage in transit to a destination outside the State, is exempt from ad valorem tax. W.
Va. Const. Art. 10, § 1c; see also W. Va. Code § 11-5-13. Critically, the Amendment
expressly states that such property remains exempt even if “while in the warehouse the
personal property is assembled, bound, joined, processed, disassembled, divided, cut,
broken in bulk, relabeled, or repackaged for delivery, unless such activity results in a new
or different product, article, substance or commodity, or one of different utility.”
(emphasis added); see also W. Va. Code § 11-5-13(b). West Virginia Code § 11-5
13a(b) further clarifies that such warehoused goods are exempt from taxation provided
“no substantial alteration takes place” at the place of holding (emphasis added).
Clearly, the repair parts housed by Pratt can be fairly characterized as
having been “assembled, bound, [or] joined” inasmuch as they are affixed to or integrated
into a jet engine for purposes of repairing it. Id. The question then becomes—did such
assembly, binding, or joining, of the repair parts create a “new” or “different” product?
In a true manufacturing plant, the answer would be unquestionably “yes”: the assembly
of a variety of components ordinarily creates a new product, article, substance or
commodity as such is the very nature of manufacturing. However, in Pratt’s repair
facility, the component parts are merely “assembled, bound, [or] joined,” to an existing
product of discrete and unaltered utility: a jet engine. Replacing or otherwise utilizing a
grommet or counterweight in a jet engine to repair it substantially alters neither the
engine nor the component part itself. Neither the jet engine nor the component part has a
differing utility upon leaving the facility: the jet engine serves the same function, as do
its component parts. At best, it can be said that the component parts have now fully
realized their intended utility, rather than sitting unused in a box. Therefore, they are
exempt from ad valorem tax pursuant to the Freeport Amendment.
Despite this relatively effortless reasoning, the majority concludes that the
inoperable jet engine and the warehoused component parts magically transform in
character upon leaving Pratt’s facility. In an exchange that the majority and the circuit
court inexplicably deemed critical, Pratt’s supply chain logistics manager agreed during
his testimony with the profoundly obvious conclusion that a jet engine is a different
product and has a different utility than an individual repair part such as a grommet or
counterweight. Based upon this comically self-evident testimony alone, the majority
concludes that the property is not exempt from taxation. (“Because Mr. Tucker testified
that a repaired, functional jet engine is a different product with a different utility than the
individual repair parts, we agree . . . that the repair parts are not exempt[.]”).
The logical fallacy in this analysis, however, is that it presupposes that the
component part—the personal property at issue—“becomes” the jet engine when it leaves
the Pratt facility and therefore is a “different” product, having a “different” utility. A
component part, of course, does not transform into a jet engine upon leaving Pratt’s
facility; it remains the same component part. Nor does the jet engine which enters Pratt’s
facility leave a “new” or “different” product with differing utility—it is still a jet engine
and in fact the same jet engine which entered the facility, maintaining the same use and
purpose.
In scraping to reach its ultimate conclusion, the majority alternatively
suggests that because a jet engine arrives inoperable and leaves functional, it therefore
becomes a “different” product with a “different” utility in the process. This obtuse
reasoning perhaps best reveals the majority’s result-oriented handling. A broken jet
engine is still a jet engine. A jet engine—operable or inoperable—has the same utility or
purpose: to provide thrust for an airplane. The majority’s desperate attempt to liken the
limited manipulation of the personal property at issue—which is expressly permitted
under the statute—to something tantamount to full-scale manufacturing fails under the
weight of its own strained semantical logic.1
1 In fact, the majority blithely refers to the repair of the engines on multiple occasions as a “manufacturing process . . . [that] results in a finished product” as though such a characterization is remotely accurate. This mischaracterization is a poorly disguised attempt to render its ultimate conclusion unassailable.
Perhaps the majority’s most fundamental misunderstanding of the scope of
the Freeport Amendment is its apparent belief that nothing short of pure, “hands-off”
warehousing qualifies for the tax exemption. (“[O]ne of the purposes of the Freeport
Amendment is to promote the warehousing industry in West Virginia. It is clear that
Pratt is not engaged in the warehousing business.”) However, the language of the
Amendment itself belies this conclusion. Providing tax exemption to goods temporarily
housed in the State which are not “substantial[ly] alter[ed]” during that time is the
intended goal of the Amendment as per West Virginia Code § 11-5-13a(b). Nevertheless,
it delineates a list of activities which presumptively do not substantially alter the goods
and therefore does not destroy the exemption: assembly, binding, joining, processing,
disassembling, dividing, cutting, breaking in bulk, relabeling, or repackaging for delivery.
W. Va. Const. art. 10, §
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FILED November 1, 2017 No. 16-0903 – Pratt & Whitney Engine Services v. Steager released at 3:00 p.m. EDYTHE NASH GAISER, CLERK SUPREME COURT OF APPEALS LOUGHRY, Chief Justice, joined by WORKMAN, Justice, dissenting: OF WEST VIRGINIA
The Freeport Amendment to the West Virginia Constitution, both in its
language and intent, plainly provides an exemption from taxation for personal property
which is stored or maintained for a period of time within the State insofar as it
substantially maintains its character upon departing the State. The majority disregards
the plain language of the Amendment and its analysis is devoid of even the most
rudimentary exercise in logic. Most importantly, however, the majority disregards fully
the Legislature’s edict that the Amendment is to be liberally construed in favor of
exemption. Therefore, I dissent to the majority’s conclusion that the component engine
parts housed by the petitioner Pratt & Whitney Engine Services (hereinafter “Pratt”) in
aid of their repair services are subject to ad valorem tax.
It is undisputed herein that Pratt operates a jet engine repair and service
facility; to conduct this business it is necessary that it maintain an inventory of
replacement parts. Jet engines needing repair are shipped to Pratt and these same engines
leave repaired. Pratt engages in absolutely no manufacturing of jet engines or any other
product. The repair parts it maintains are used solely to affix or utilize in servicing jet
engines in need of repair.
The Freeport Amendment provides that tangible personal property which is
either 1) moving in interstate commerce through or over the territory of the State of West
Virginia; or 2) consigned from outside the State to a warehouse within the State for
storage in transit to a destination outside the State, is exempt from ad valorem tax. W.
Va. Const. Art. 10, § 1c; see also W. Va. Code § 11-5-13. Critically, the Amendment
expressly states that such property remains exempt even if “while in the warehouse the
personal property is assembled, bound, joined, processed, disassembled, divided, cut,
broken in bulk, relabeled, or repackaged for delivery, unless such activity results in a new
or different product, article, substance or commodity, or one of different utility.”
(emphasis added); see also W. Va. Code § 11-5-13(b). West Virginia Code § 11-5
13a(b) further clarifies that such warehoused goods are exempt from taxation provided
“no substantial alteration takes place” at the place of holding (emphasis added).
Clearly, the repair parts housed by Pratt can be fairly characterized as
having been “assembled, bound, [or] joined” inasmuch as they are affixed to or integrated
into a jet engine for purposes of repairing it. Id. The question then becomes—did such
assembly, binding, or joining, of the repair parts create a “new” or “different” product?
In a true manufacturing plant, the answer would be unquestionably “yes”: the assembly
of a variety of components ordinarily creates a new product, article, substance or
commodity as such is the very nature of manufacturing. However, in Pratt’s repair
facility, the component parts are merely “assembled, bound, [or] joined,” to an existing
product of discrete and unaltered utility: a jet engine. Replacing or otherwise utilizing a
grommet or counterweight in a jet engine to repair it substantially alters neither the
engine nor the component part itself. Neither the jet engine nor the component part has a
differing utility upon leaving the facility: the jet engine serves the same function, as do
its component parts. At best, it can be said that the component parts have now fully
realized their intended utility, rather than sitting unused in a box. Therefore, they are
exempt from ad valorem tax pursuant to the Freeport Amendment.
Despite this relatively effortless reasoning, the majority concludes that the
inoperable jet engine and the warehoused component parts magically transform in
character upon leaving Pratt’s facility. In an exchange that the majority and the circuit
court inexplicably deemed critical, Pratt’s supply chain logistics manager agreed during
his testimony with the profoundly obvious conclusion that a jet engine is a different
product and has a different utility than an individual repair part such as a grommet or
counterweight. Based upon this comically self-evident testimony alone, the majority
concludes that the property is not exempt from taxation. (“Because Mr. Tucker testified
that a repaired, functional jet engine is a different product with a different utility than the
individual repair parts, we agree . . . that the repair parts are not exempt[.]”).
The logical fallacy in this analysis, however, is that it presupposes that the
component part—the personal property at issue—“becomes” the jet engine when it leaves
the Pratt facility and therefore is a “different” product, having a “different” utility. A
component part, of course, does not transform into a jet engine upon leaving Pratt’s
facility; it remains the same component part. Nor does the jet engine which enters Pratt’s
facility leave a “new” or “different” product with differing utility—it is still a jet engine
and in fact the same jet engine which entered the facility, maintaining the same use and
purpose.
In scraping to reach its ultimate conclusion, the majority alternatively
suggests that because a jet engine arrives inoperable and leaves functional, it therefore
becomes a “different” product with a “different” utility in the process. This obtuse
reasoning perhaps best reveals the majority’s result-oriented handling. A broken jet
engine is still a jet engine. A jet engine—operable or inoperable—has the same utility or
purpose: to provide thrust for an airplane. The majority’s desperate attempt to liken the
limited manipulation of the personal property at issue—which is expressly permitted
under the statute—to something tantamount to full-scale manufacturing fails under the
weight of its own strained semantical logic.1
1 In fact, the majority blithely refers to the repair of the engines on multiple occasions as a “manufacturing process . . . [that] results in a finished product” as though such a characterization is remotely accurate. This mischaracterization is a poorly disguised attempt to render its ultimate conclusion unassailable.
Perhaps the majority’s most fundamental misunderstanding of the scope of
the Freeport Amendment is its apparent belief that nothing short of pure, “hands-off”
warehousing qualifies for the tax exemption. (“[O]ne of the purposes of the Freeport
Amendment is to promote the warehousing industry in West Virginia. It is clear that
Pratt is not engaged in the warehousing business.”) However, the language of the
Amendment itself belies this conclusion. Providing tax exemption to goods temporarily
housed in the State which are not “substantial[ly] alter[ed]” during that time is the
intended goal of the Amendment as per West Virginia Code § 11-5-13a(b). Nevertheless,
it delineates a list of activities which presumptively do not substantially alter the goods
and therefore does not destroy the exemption: assembly, binding, joining, processing,
disassembling, dividing, cutting, breaking in bulk, relabeling, or repackaging for delivery.
W. Va. Const. art. 10, § 1c; W. Va. Code § 11-5-13(b). Certainly these activities go well
beyond passive storage. It is only if this activity has a transformative effect on the stored
components or their purpose that the exemption is lost. As explained above, there is
nothing transformative about replacing or using a grommet or counterweight in an effort
to make repairs to a discrete, singularly-purposed product such that the product may
actually be used for its intended purpose. To say this minimal utilization of the personal
property at issue creates no “substantial alteration” of the personal property itself is an
understatement.
In fact, the lone case to uphold this exemption is frankly even further
removed from exemption than the instant case because the property therein was in fact
altered in some fashion. In Feroleto Steel Co., Inc. v. Oughton, 230 W. Va. 5, 736 S.E.2d
5 (2012), this Court upheld a tax exemption for steel coils which were cut into narrower
steel coils while being housed in a West Virginia facility. Finding that “the composition
of the steel is not changed” simply by cutting it, the Court upheld the exemption and
found such exemption consistent with the intent of the Amendment. Id. at 8-9, 736
S.E.2d at 8-9. In the instant case, however, the component parts at issue themselves are
altered in no way—they are merely integrated into or affixed to the engine. If the
modified steel coils in Feroleto are entitled to tax exemption, there can be little question
that the wholly unaltered repair parts herein likewise qualify.
Finally, with scarcely a sentence of its own analysis, the majority brushes
aside the statutory requirement that the Freeport Amendment be liberally construed in
favor of the taxpayer with its conclusory statement that the inventory of repair parts
simply does not fall within the exemption. West Virginia Code § 11-5-13a(a) expressly
provides that “[i]t is the intent of the Legislature that the provisions of this section are to
be liberally construed in favor of a person claiming exemption from tax [pursuant to the
Freeport Amendment.]” Accordingly, even if one were to dignify the majority’s dubious
assessment that the personal property takes on a differing character once integrated into
the repaired engines, liberal construction would demand that the countervailing
conclusion (that the property has in no way been “substantially altered” merely because it
was affixed to the engines) must prevail to afford Pratt the tax exemption. Only by
completely ignoring this countervailing argument—which, in fact, it does—can the
majority reach a result against the exemption.
Accordingly, for the reasons set forth hereinabove, I respectfully dissent.