INDIANA AMERICAN WATER CO INC v. INDIANA DEPARTMENT OF STATE REVENUE (2026)

ORDER ON PARTIES’ CROSS-MOTIONS FOR SUMMARY JUDGMENT

This case presents novel questions about the application of two of Indiana's sales and use tax exemptions to the production of tap water. Indiana American Water Co., Inc. (“INAW”), transforms raw water into tap water that is both potable (suitable for drinking) and pressurized (suitable to be used) and delivers the water directly to its customers’ water systems through a series of interconnected pipes and pumping stations. It uses an array of equipment (e.g., pipes, seals, fittings, valves, meters, protective wraps, tracer wire, and backfill) to construct, operate, and maintain these public water systems throughout the state. It contends that this equipment is exempt from Indiana's sales and use tax under two different exemptions: the manufacturing equipment exemption (Indiana Code § 6-2.5-5-3) and the environmental quality exemption (Indiana Code § 6-2.5-5-30).

The manufacturing equipment exemption applies to the entire production process and covers tangible personal property that is used in the production of other tangible personal property. On appeal, the parties agree that the manufacturing equipment exemption applies to INAW's production of water at its water treatment plants but diverge in their assessment of whether it applies to the parts of the public water system positioned after those plants. The parties’ disagreement ultimately turns on the determination of where the production process ends and the most marketable product (tap water) emerges. The uncontroverted facts show that INAW's production of tap water is incomplete until at least the last time INAW takes active measures to pressurize the water or make it potable. The “first mile” of piping and pipe accessories (those used to convey water to the location where the last action occurs) can thus be exempt even if they are located beyond the water treatment plant. On this record, however, the Court cannot determine the role that the “last mile” of piping and pipe accessories (those that occur after the last change in pressurization or potability) play in the production process as the water continues to the customers’ water systems.

The environmental quality exemption covers certain tangible personal property tied to compliance with environmental quality laws. To qualify for exemption, the property must fall into either of two categories: (a) it must be itself a device, facility, or structure predominantly used and acquired for compliance purposes; or, (b) it must be incorporated into or consumed in the operation of a device, facility, or structure predominantly used and acquired for compliance purposes. The parties are at odds about the predominant purpose for the equipment at issue. INAW argues that all of the equipment is purchased and used for compliance purposes but also points to other noncompliance reasons for the purchases without providing a clear indication of which purpose predominates. The Court is unable to resolve the genuine issue of material fact on summary judgment because the evidence does not permit an inference as to the predominant reason for INAW's purchase and use of the equipment.

Ultimately, the Court grants summary judgment in part to INAW with regard to the manufacturing equipment exemption as it relates to the “first mile” but not the “last mile” of equipment and denies summary judgment to INAW and the Department of Revenue in all other respects.

I. BACKGROUND FACTS AND PROCEDURAL HISTORY

INAW is a water and wastewater utility company regulated by the Indiana Utility Regulatory Commission. (Jt. Stip. Facts Not in Dispute ¶ 3 (hereinafter “Jt. Stip. (Gen.)”).) It owns and operates across the state of Indiana more than thirty public water systems and serves nearly one million residents.¹ (Jt. Stip. (Gen.) ¶¶ 4, 5). As part of its business, it produces tap water that has been treated, disinfected, and pressurized and delivers that water directly to its customers’ water systems.² (Jt. Stip. (Gen.) ¶¶ 6, 7.) Only a small fraction of the water that INAW sells is used for drinking water; most of it is used for other household purposes or commercial and industrial purposes. (Britto Aff. ¶ 12.)

State and Federal Regulation

INAW's operations are subject to overlapping federal and state laws concerned with public health. (See Stip. ¶¶ 4–5, 8–10 (hereinafter “Jt. Stip. (Env't)”).) These laws require that INAW protect the public health “by ensuring the continuity of its water purification process all the way to the customer water system.” (Jt. Stip. (Gen.) ¶ 7 (internal quotation marks omitted).) INAW is required to operate its public water systems in a manner that ensures the water is “(1) safe in quality; (2) clean and adequate in quantity; and (3) chemically satisfactory for ordinary domestic consumption.” (Jt. Stip. (Env't) ¶ 15.) To this end, the laws establish drinking water standards to protect water quality. (See Jt. Stip. (Env't) ¶ 5.) These standards define maximum levels for various contaminants, require INAW to disinfect the water that it provides to customers, and obligate INAW to monitor contaminant levels throughout the process to ensure that they remain below maximum permissible levels. (Jt. Stip. (Env't) ¶¶ 5, 9–11.) The law requires INAW to maintain a normal operating pressure of at least twenty (20) pounds per square inch (psi) at all points in its water mains. (Jt. Stip. (Env't) ¶ 18.) Indiana law also governs how INAW operates, constructs, repairs, maintains, and modifies its public water systems and sets the standards for materials INAW is permitted to use in its systems. (Jt. Stip. (Env't) ¶¶ 15–17.)

Water Treatment and Pressurization Process 3

The process of creating clean, pressurized, usable water begins when INAW draws and conveys raw water from a surface water source (e.g., lake, river, reservoir) or from a groundwater well to one of its water treatment plants. (Britto Aff. ¶¶ 9, 10; Hobbs Aff. ¶ 4.) The treatment path varies with the source of the raw water, but it generally proceeds in multiple stages. (Britto Aff. ¶ 10.) First, coagulation introduces particles that bind with impurities. (Britto Aff. ¶ 10.) Next, flocculation mixes the resulting particulates so they clump together. (Britto Aff. ¶ 10.) The water then moves to sedimentation tanks, where heavier particles settle out and filtration removes smaller particles and harmful bacteria. (Britto Aff. ¶ 10.) INAW then disinfects the treated and filtered water using chlorine or chloramines, and sometimes ultraviolet light, until it meets drinking water standards. (Britto Aff. ¶ 11.) Corrosion control chemicals are also sometimes added to the water at the treatment plant. (Hobbs Aff. ¶ 4.) Once treated and disinfected, the water is pressurized and travels along the public water system through pipes and pumping stations to the customer's water system. (Hobbs Aff. ¶ 5.) Both pressure and chlorine levels are affected as the water moves through the public water system.

Water loses pressure continuously as it travels along the public water system. (See Hobbs Dep. 20:8–9.) Depending on the system's size and extent, pressurization may occur at several locations before it reaches customers to ensure that there is adequate pressure for the water to be usable. Pressure is created at water treatment plants, booster stations, and elevated storage tanks, though here INAW focuses on only the first two locations. (See Hobbs Aff. ¶¶ 5, 10; Hobbs Dep. 20:19–23.) Pumps at water treatment plants initially pressurize the water, and, in some systems, the water is further pressurized—or de-pressurized, if necessary—elsewhere at downstream pumping stations. (Hobbs Aff. ¶ 5; Miller Aff. ¶ 7.) These downstream stations—composed of a “series of pumps” and “motors to drive the pumps” housed in buildings—are generally referred to as “booster stations.” (Hobbs Dep. 20:16–17, 25:23–24; Miller Aff. ¶ 7.) INAW operates more than seventy (70) such booster and pressure-reducing stations in the state to make sure that water at the appropriate pressure reaches customers. (Hobbs Aff. ¶ 9.) The pumps at these stations are used to modulate the pressure of the water on an as-needed basis. (Hobbs Aff. ¶¶ 9, 10.)

Similar to the loss of pressure, residual chlorine concentration levels can also decrease as water travels from the treatment plant to customers’ water systems. (See Hobbs Aff. ¶ 7.) INAW monitors and analyzes the levels of chlorine and chloramines throughout the system to ensure compliance with regulations, “inhibit microbial growth,” and “prevent harmful disinfection byproducts.” (Hobbs Aff. ¶¶ 5, 8, 12; Britto Aff. ¶ 23.) If testing reveals that chlorine levels are below acceptable levels, INAW may add additional chlorine at the booster stations. (Hobbs Aff. ¶ 12; Hobbs Dep. 15:2–5, 30:22–24.) If a contaminant in the public water system exceeds the maximum level, INAW must notify the Indiana Department of Environmental Management and issue public notice. (Britto Aff. ¶ 24.)

Present Dispute

In operating its public water systems, INAW purchases pipes, pipe accessories, and other equipment. (Jt. Stip. (Gen.) ¶ 10.) During the three-year period from January 1, 2018, through December 31, 2020, INAW purchased more than $14.5 million worth of these items and supplies for use in its operations. (Jt. Stip. (Gen.) ¶ 9.) The purchases made during the tax periods were installed in INAW's public water systems and are summarized in the following table:

PURCHASES TAX AMOUNT Pipe and Pipe Accessories $ 653,577 Nonresidential Meters $ 99,892 Miscellaneous Equipment & Accessories $ 28,052 Miscellaneous $ 9,841 Manufacturing Equipment $ 143,978 Residential Meters $ 9,751 Polywrap $ 33,218 Tracer Wire $ 34,582 Backfill & Related Materials $ 119 Miscellaneous Parts $ 90 Lead Meter Tags $ 1,013,100

Table 1.

(Jt. Stip. (Gen.) ¶¶ 11, 12.)

In 2021, INAW sought a refund from the Department for the sales and use tax paid, among other things, on the equipment listed in Table 1.⁴ (Jt. Stip. (Gen.) ¶ 15.) The Department granted only a portion of the refund request and denied the remainder. (Jt. Stip. (Gen.) ¶¶ 14 n.3, 21.) INAW protested the denial, invoking the two statutory sales and use tax exemptions at issue here, the manufacturing equipment exemption under Indiana Code § 6-2.5-5-3(b) and the environmental quality exemption under Indiana Code § 6-2.5-5-30. (Jt. Stip. (Gen.) ¶¶ 22–25.) After an administrative hearing, the Department issued a Final Order denying INAW's protest. (Jt. Stip. (Gen.) ¶ 26; Jt. Stip. (Gen.), Ex. 10-J (DOR Final Order) at INAW0022767.) INAW then requested a rehearing, and the Department affirmed its previous determination that INAW was not entitled to the claimed exemptions. (See Jt. Stip. (Gen.) ¶¶ 27–30.)

Once the appeal process at the Department concluded, INAW filed an appeal with this Court. (Jt. Stip. (Gen.) ¶ 31.) The parties’ cross-motions for summary judgment are now before the Court.⁵

II. STANDARD OF REVIEW

The Tax Court reviews final determinations of the Department de novo, Ind. Code § 6-8.1-5-1(i) (2026), and accordingly the Court is not bound by the evidence or the issues raised at the administrative level, see Subaru-Isuzu Auto., Inc. v. Ind. Dep't of State Revenue, 782 N.E.2d 1071, 1073 (Ind. Tax Ct. 2003).

Summary judgment is proper only when the designated evidence demonstrates that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C) (eff. Jan. 1, 2008); see also Merchandise Warehouse Co. v. Indiana Dep't of State Revenue, 87 N.E.3d 12, 15–16 (Ind. 2017). “Summary judgment is designed to provide speedy resolution to those cases—or those parts of cases—that may be determined as a matter of law because there are no factual disputes.” Pinnacle Ent., Inc. v. Ind. Dep't of State Revenue, 32 N.E.3d 1216, 1218 (Ind. Tax Ct. 2015). However, “[s]ummary judgment shall not be granted as of course because the opposing party fails to offer opposing affidavits or evidence, but the court shall make its determination from the evidentiary matter designated to the court.” Ind. Trial Rule 56(C). “When reviewing a motion for summary judgment, the Court will construe all properly asserted facts and reasonable inferences drawn therefrom in favor of the non-moving party.” Crown Prop. Grp., LLC v. Ind. Dep't of State Revenue, 135 N.E.3d 671, 675 (Ind. Tax Ct. 2019). “Cross-motions for summary judgment do not alter this standard.” Id.

III. THE MANUFACTURING EQUIPMENT EXEMPTION

The question before the Court is whether Indiana's manufacturing equipment exemption applies to the piping and pipe accessories INAW purchased for use throughout its public water systems. INAW contends that this equipment is essential and integral to producing its most marketable product—potable, pressurized water usable at the customer's tap—and that the exemption therefore covers its public water system all the way up to the point of delivery to the customer's water system. The Department disagrees. In its view, INAW's production process concludes at the water treatment plant, and the piping that follows is a distribution system through which an already-finished product merely passes. The Court concludes that INAW has the better argument but that the record does not support the conclusion that the exemption applies all the way to the customer's water system. INAW's integrated process produces a distinct marketable good—potable, pressurized water usable at the customer's tap—and the piping and associated equipment located before the last point in the system that alters the water to its completed form is properly considered part of the production process. The record is insufficient, however, to resolve the status of the piping and associated equipment that lies beyond that point.

A. Background Legal Framework: Indiana's Statutes, Regulations, and “Double Direct” Jurisprudence

Indiana imposes a sales tax on retail transactions in Indiana, and a complementary use tax on tangible personal property stored, used, or consumed in the state. See Ind. Code §§ 6-2.5-2-1, 6-2.5-3-2. The legislature has provided a series of exemptions from these complementary taxes. See Ind. Code §§ 6-2.5-5-1 to -58. Like others, these exemptions are strictly construed against the taxpayer, and the taxpayer must demonstrate entitlement to them. Indianapolis Fruit Co. v. Dep't of State Revenue, 691 N.E.2d 1379, 1383 (Ind. Tax Ct. 1998).

One such exemption is the so-called manufacturing equipment exemption. It is one of several exemptions comprising the industrial exemptions, which exempt purchases of equipment and other materials “closely connected with the production of goods” to “promote industrial growth and prevent tax pyramiding” (i.e., the levying of a tax on a tax). Merchandise Warehouse, 87 N.E.3d at 16 (quoting Harlan Sprague Dawley, Inc. v. Ind. Dep't of State Revenue, 605 N.E.2d 1222, 1228 (Ind. Tax Ct. 1992)). The industrial exemptions “cover a host of different activities and factual situations. There are innumerable ways to produce ․ tangible personal property, and the exemption provisions cannot be expected to give a precise answer to each factual situation that arises.” Rotation Prods. Corp. v. Dep't of State Revenue, 690 N.E.2d 795, 798 (Ind. Tax Ct. 1998).

By statute, the manufacturing equipment exemption generally exempts from sales and use tax tangible personal property used in the production, manufacturing, or processing of other tangible personal property:

[T]ransactions involving manufacturing machinery, tools, and equipment ․ are exempt from the state gross retail tax if the person acquiring that property acquires it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.

Ind. Code § 6-2.5-5-3(b) (2018). The legislature has explicitly excluded distribution and transmission equipment purchased by public electric utilities from the benefit of the exemption. Ind. Code § 6-2.5-5-3(d). However, the legislature has not included a similar exclusion for other public utilities such as water, gas, or telecommunications providers.

There are two important questions that must be addressed in applying the exemption. First, the Court must determine whether there is “direct production” as the exemption is only available for direct production of a distinct marketable good. Second, the Court must determine whether the equipment to be exempted is an essential and integral part of the production process.

1. Direct Production

There is “one iron-clad rule: without production there can be no exemption.” Merchandise Warehouse, 87 N.E.3d at 17. The statute plainly “require[s] that the taxpayer engage in [direct] production before qualifying for the exemption.” Id. at 16 (second alteration in original). The exemption may only be sought for production, or the substantial change of tangible personal property into distinct marketable goods.

Applying the exemption is not an exercise in parsing the linguistic distinctions between the various activities described by the statute—production, manufacture, fabrication, assembly, extraction, mining, processing, refining, and finishing. The activities “are not mutually exclusive.” Ind. Dep't of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 524 (Ind. 1983) (describing predecessor to Indiana Code § 6-2.5-5-3). The statutory terms “overlap and at times encompass each other” to “provide a comprehensive description of various means of production.” Id. “For example, ‘production’ may include manufacture, fabrication, assembly, processing, refining, and/or finishing.” Id.

Instead, the nature of the process at issue must be examined to determine whether there is a transformation of tangible personal property into a distinct marketable good. At its core, “direct production” means “a process during which tangible personal property undergoes substantial change that transforms it into a distinct product.” Merchandise Warehouse, 87 N.E.3d at 17. The relevant statutes do not define the term “direct production,” but the Department's administrative regulations shed light on its meaning:

“Direct production, manufacture, fabrication, assembly, or finishing of tangible personal property” is performance as a business of an integrated series of operations which places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change, and it must result in a transformation of property into a different product having a distinctive name, character, and use. Operations such as compounding, fabricating, or assembling are illustrative of the types of operations which may qualify under this definition.

45 Ind. Admin. Code 2.2-5-8(k) (2018).

Whether a given process constitutes production is a fact-sensitive inquiry that depends on the circumstances of each case. See Aztec Partners, LLC v. Ind. Dep't of State Revenue, 35 N.E.3d 320, 324 (Ind. Tax Ct. 2015). Courts have looked for the presence of a substantial change in the form, composition, or character of tangible personal property in discerning whether there is the creation of a distinct product. See id.; Indianapolis Fruit, 691 N.E.2d at 1385. When such transformation is present, courts have generally found production to exist. See, e.g., Aztec Partners, 35 N.E.3d at 324; Indianapolis Fruit, 691 N.E.2d at 1385.

2. Essential and Integral

If there is direct production, the machinery, tools, and equipment must be directly used in the direct production process to qualify for the exemption. This means the equipment must serve “an essential and integral part” in transforming the property into a distinct product. Merchandise Warehouse, 87 N.E.3d at 17. The exemption applies to machinery, tools, and equipment that have an immediate effect on the article being produced so long as they are “an essential and integral part of an integrated process which produces tangible personal property.” 45 Ind. Admin. Code 2.2-5-8(c) (2018).

The exemption applies to the whole of the production process and “circumscribes all of the operations or processes by which the finished product is derived.” Cave Stone, 457 N.E.2d at 524. “Production” is considered broadly and includes the whole transformative process employed to create the distinct marketable good. See Merchandise Warehouse, 87 N.E.3d at 17. “[I]t cannot be artificially broken down into its component parts.” Guardian Auto. Trim, Inc. v. Ind. Dep't of State Revenue, 811 N.E.2d 979, 984 (Ind. Tax Ct. 2004). Determinations about equipment's “essential and integral” nature are made with respect to all subprocesses that are “inextricably linked” to the ongoing transformation process of the proper marketable good. Id. Arbitrarily cutting up the production process into only those parts that directly transform the property leaves integral pieces on the cutting board. What matters is looking at the “process as a whole.” Id.

“Often, this determination is made by identifying the points where production begins and where it ends.” Indianapolis Fruit, 691 N.E.2d at 1384 (citing Gen. Motors v. Ind. Dep't of State Revenue, 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991), aff'd, 599 N.E.2d 588 (Ind. 1992)). The production process “encompass[es] all steps that alter the tangible personal property into its completed form.” Merchandise Warehouse, 87 N.E.3d at 17. The exemption applies as soon as the production process begins and extends until the most marketable product emerges. Under the Department's regulations, the production process “begins at the point of the first operation or activity constituting part of the integrated production process” and, importantly for this case, “ends at the point that the production has altered the item to its completed form” including any necessary packaging. 45 Ind. Admin. Code 2.2-5-8(d) (2018). The statute does not punish taxpayers for creating incomplete but potentially marketable products on the way to creating their most marketable ones. The production process “does not conclude when it yields a potentially marketable product;” it concludes only when “it yields the most marketable good.” Merchandise Warehouse, 87 N.E.3d at 18 (emphasis added). Accordingly, production is not complete until “the product actually marketed” has emerged. Aztec Partners, 35 N.E.3d at 325 (quoting Gen. Motors, 578 N.E.2d at 404).

Equipment used in an integrated production process need only be essential and integral to the process, not directly transformational. See id. at 326 (citing Cave Stone, 457 N.E.2d at 524). “The fact that such equipment may not touch the work-in-process or, by itself, cause a change in the product, is not determinative.” 45 Ind. Admin. CodE 2.2-5-8(c), Example 2 (2018). That no specific transformation occurs in the period that the exempt equipment is involved in production is “irrelevant.” Cave Stone, 457 N.E.2d at 524. A “continuous flow from one production step to another” is enough to be eligible for exemption. Id. at 525.

Of course, some equipment “lack[s]” the “essential and integral relationship with the integrated production system” that is necessary to receive the exemption. 45 Ind. Admin. Code 2.2-5-8(c), Example 4 (2018). For example, fire extinguishers, which provide general safety in a plant, or ceiling lights, which provide general illumination, are disconnected from the integrated production system and thus do not receive the exemption. Id. Similarly, a distribution system for post-production transportation, or other equipment “used ․ to move finished products from the last step of production” to the customer, is taxable. Id.

B. INAW's Production Process

Taking each element of the manufacturing equipment exemption in turn—(1) whether INAW produces a distinct marketable good and (2) whether the equipment used in that production (the piping and pipe accessories) is essential and integral to the production—the Court concludes that INAW's process can satisfy both. INAW's process results in the production of potable, pressurized water usable at customers’ taps, which is a distinct marketable good from the raw water that INAW begins with. It is a different product with a different form, composition, and character. The production of this distinct marketable good can continue at least through the last point in the system (a booster station) where an action is taken to make the water either usable (by modulating the pressurization) or potable (by adding chlorine). The piping and associated equipment that conveys the water to the location where that last action occurs (i.e., the “first mile” of the system) is essential and integral to achieving the water's production because without it the water would not become usable or potable. As for the piping and other parts of the public water system located after the last pressurization or chlorine injection (i.e., the “last mile” of the system), the record is unclear about how this last mile of piping interacts with the water. The Court cannot make any determination about whether the last mile is part of the production process or essential and integral to production.

1. Is there direct production of a distinct marketable good?

At the heart of the direct production inquiry in this case is a question about the nature and purpose of pressurization. The parties agree that INAW engages in production insofar as it produces potable drinking water, but they heavily disagree as to whether INAW's production process includes pressurization. Without designating any evidence apart from that which was designated by INAW, the Department argues that INAW produces only clean and consumable water. (Resp't Br. Supp. Mot. Summ. J. at 10.) For the Department, potability is everything and pressure is irrelevant. In contrast, INAW agrees that it produces potable water but also contends that the water contains appropriate pressure to make it usable at the customer's tap. It contends that pressure is required so that the water can be put to work when it reaches the customers’ water systems. (See Pet'r Memo. Supp. Mot. Partial Summ. J. at 12–13.) This disagreement is fundamental to the direct production analysis and can only be resolved by examining the designated evidence and deciding whether pressurization enacts a substantial change in the form, composition, or character of the water such that it yields a distinct marketable good.

On summary judgment, the Court considers only the evidence specifically designated by the parties, see City of Beech Grove v. Beloat, 50 N.E.3d 135, 137 (Ind. 2016), remembering that “summary judgment is not a summary trial.” Hughley v. State, 15 N.E.3d 1000, 1003–04 (Ind. 2014) (cleaned up). The Court must view that evidence in the light most favorable to the non-moving party. See Crown Prop. Grp., 135 N.E.3d at 675. The Court is not empowered to resolve factual disputes or to choose among conflicting factual inferences that arise from undisputed facts. See Elmer v. Ind. Dep't of State Revenue, 42 N.E.3d 185, 197 (Ind. Tax Ct. 2015). Summary judgment is only appropriate where “there is no genuine issue as to any material fact and ․ the moving party is entitled to judgment as a matter of law.” Ind. Trial Rule 56(C). “A fact is ‘material’ if its resolution would affect the outcome of the case, and an issue is ‘genuine’ if a trier of fact is required to resolve the parties’ differing accounts of the truth, or if the undisputed material facts support conflicting reasonable inferences.” Hughley, 15 N.E.3d at 1003.

a. Production of Potable Water

The water treatment process works a substantial change in the water's composition and character and is undoubtedly direct production. Before it can be sold, raw water undergoes a sequence of chemical and physical processes designed to make it potable. The process removes particles, sediments, and harmful bacteria from raw water using coagulation, flocculation, sedimentation, and filtration and adds chlorine or chloramines to it. Not only does this change the chemical and physical composition of the water, it also fundamentally alters the character of the water. It transforms raw water into drinking water and places it in a state that is safe for human consumption.

b. Potable, Pressurized Water

Treated water must also be pressurized to make it usable by INAW's customers. The relevant evidence comes from three INAW employees: (1) INAW's Vice President of Operations, Kari Britto; (2) INAW's Engineering Manager, Richard Miller; and, (3) INAW's Director of Engineering, Matthew Hobbs. Britto states that “[w]ater that meets drinking water standards alone is not sufficient; the water must be sufficiently pressurized to serve its intended purpose.” (Britto Aff. ¶ 15.) “While the water INAW sells must meet drinking water standards, the water must also be capable of being put to work,” since, as she points out, “[o]nly a small fraction of the water sold by INAW is used for drinking; the majority is used for other household, commercial, or industrial purposes.” (Britto Aff. ¶ 12.) Miller and Hobbs concur with Britto. Miller states that the water “INAW sells is not just clean water; it is clean, pressurized, disinfected water that is usable not only for drinking, but for a wide variety of commercial, residential, and industrial uses.” (Miller Aff. ¶ 9.) He continues: “To that end, appropriate pressurization is an essential (and IDEM required) aspect of INAW's product.” (Miller Aff. ¶ 9.) When asked what INAW considered to be its final product, Hobbs stated, “[i]t's usable water to the customer's door basically.” (Hobbs Dep. 19:8.) He later elaborated that, “[w]ithout pressure, [the water] can't be used․ [I]f there is no pressure and [the customer] turn[s] on their faucet, no water will come out.” (Hobbs Dep. 19:21–25.)

The inferences that can be drawn from these facts point only in one direction—that INAW produces a distinct marketable product of potable, pressurized water usable at the customer's tap. The three witnesses converge by identifying the product not just as treated or potable water in the abstract, but as potable, pressurized water that can be put to work at the customer's location. The only available inference is that potability is necessary but not sufficient to constitute the marketed product; pressurization is also required.

This is because pressurization works a substantial change in the character of the water. Before it is pressurized, the water—however clean or potable—cannot perform the functions for which INAW's customers acquire it. Once appropriately pressurized, the same water can be put to work in the customers’ water systems. That is a significant change in the character of the water: it is the difference between a product that cannot be used and one that can. (See Hobbs Dep. 19:21.) The record confirms that this difference defines the distinct marketable good, because usability is part of what INAW offers to the market. (See Britto Aff. ¶ 12; Miller Aff. ¶ 9.)

c. The Alternative of Potable, Unpressurized Water

The Department offers no competing testimony of its own, relying instead on selected passages from Hobbs's deposition that, in its view, show INAW's distinct marketable product is simply potable water. (See Resp't Memo. Opp. Pet'r Mot. Partial Summ. J. at 3 (citing Hobbs Dep. 18:13–19:12) [hereinafter “Resp't Resp.”].) In his deposition, Hobbs is asked if a customer could consume the water as it left the water treatment plant, to which he answers affirmatively. (Hobbs Dep. 18:13–16.) In a followup, he is asked, “[a]nd even if the water is not pressurized, ․ can it still be consumed,” to which he again answers affirmatively. (Hobbs Dep. 19:9–12.)

Hobbs's statements, however, do not support the inferences the Department attempts to draw from them. Read in the light most favorable to the Department, this testimony only supports two inferences: that a consumable (potable) form of the water exists at the point it leaves the treatment plant and that potability does not necessarily depend on pressurization. Testimony that the water “could” be consumed at the plant establishes at most that INAW produces water that is potable, but it cannot support the Department's additional inference that potability is the only characteristic of water actually marketed by INAW. Confirmation that no such inference can be drawn from these statements can be found in additional testimony offered by Hobbs that, without pressure, INAW's water “can't be used” and, “if there is no pressure and [the customer] turn[s] on their faucet, no water will come out.” (Hobbs Dep. 19:21–25.) It is unlikely that INAW's customers pay for potable water that they cannot access or use.

The testimony the Department highlights is simply proof that a potentially marketable product exists at the water treatment plant. This is precisely the standard rejected by this Court in General Motors, and later in Aztec Partners. In General Motors, the Court framed the choice as whether an integrated process “ends when a potentially marketable product first emerges (first finished marketable product) or whether it ends when the product is finished for actual sale in the marketplace (most marketable product).” 578 N.E.2d at 402. The Court held that it is the latter—“the product actually marketed.” Id. at 404. Between the statements highlighted by the Department, Hobbs testified that “somebody just can't come up and fill up at the plant, if you will.” (Hobbs Dep. 18:24–25.) That testimony shows the water is not transacted or made available to customers at the plant. Whatever its potability, water at the plant is not the product sold. Proof that water at the plant is capable of being consumed speaks to the emergence of a potentially marketable product but does not, by itself, identify the product “actually marketed” by INAW. See Gen. Motors, 578 N.E.2d at 404.

Viewed in the light most favorable to the Department, the evidence supports only one possible inference: the distinct marketable product INAW markets to its customers is potable, pressurized water usable at the customer's tap. The testimony uniformly describes the product in those terms, and the Department has designated no evidence of its own to the contrary. The Department's position rests on a reading of Hobbs's deposition that, as explained above, establishes at most that a potentially marketable product exists at the treatment plant.

d. INAW directly produces a distinct marketable good

In this instance, all of the evidence designated by both parties is one-sided and supports a finding that INAW engages in the direct production of a distinct marketable good. Raw water from wherever INAW draws it is neither potable nor pressurized, and it bears no resemblance to the product INAW ultimately delivers to its customers. (See Britto Aff. ¶ 9.) INAW's production process not only transforms that water from non-potable to potable water but also imbues it with appropriate pressurization to make it capable of being put to work by INAW's customers. These changes unequivocally effect a substantial change in the form, composition, and character such that a distinct marketable good results. As anyone who has attempted to shower with low water pressure can attest, there is a marked difference in character between unpressurized and pressurized water. Potable water cannot by itself be used in a customer's water system, but appropriately pressurized water can be. The designated evidence shows that production occurs when INAW pressurizes the water and makes it potable and that the process yields a distinct marketable good.

2. Are the pipes essential and integral to the production of potable, pressurized water?

The Court now turns to the question of whether the piping and pipe accessories are directly used in INAW's production process. The Department argues that INAW's equipment is not essential and integral because, in its view, the production process ends when the water exits the water treatment plant. Under the Department's theory, no further change in the form, composition, or character of the water occurs in the public water system and pressurization is simply a means of distribution.

As explained above, the determination of whether equipment is essential and integral is “[o]ften ․ made by identifying the points where production begins and where it ends.” Indianapolis Fruit, 691 N.E.2d at 1384 (citing Gen. Motors, 578 N.E.2d at 404). This is because direct use is measured by whether equipment is essential and integral to the integrated production process as a whole. See Guardian Auto. Trim, 811 N.E.2d at 984. After all, “ ‘[d]irect use in the production process’ ․ ends at the point that the production has altered the item to its completed form ․” 45 Ind. Admin. Code 2.2-5-8(d).

This endpoint inquiry carries particular weight where, as here, the equipment at issue transports an unfinished product along production steps rather than transforming it. Transportation equipment (like piping) can be exempt when it operates within the integrated production process—that is, before production ends—even though it works no transformation of its own. The Indiana Supreme Court addressed such equipment in Cave Stone. There, stone companies quarried crude stone and sold sized stone aggregate. Cave Stone, 457 N.E.2d at 521. The operation moved in a continuous, fixed sequence, and the transportation equipment at issue was part of that internal movement from one step of the production process to another. The trucks in Cave Stone hauled crude stone from a blasting area to a primary crusher, where the stone was crushed, washed, screened, and then moved again to stockpiles, where the stone dried to a marketable standard. See id. The Department taxed the transportation equipment, but the Indiana Supreme Court held it exempt as directly used in direct production. See id. at 525. That “no specific transformation occurred in the period of time that it was being transported” was “irrelevant”; the equipment was essential to transforming crude stone into aggregate because, without it, “no marketable product will result.” Id. at 524. The transportation “constituted transportation of unfinished work in process” flowing from one production step to the next within the companies’ integrated operations. Id. at 522–23.

The central question in this case requires the Court to discern the point at which production of INAW's water reaches its completed form. The parties present three possible ends of production. Because they do not disagree about what happens to the water as it progresses through the public water system, their differences are not factual, only legal, and are focused on how the manufacturing equipment exemption applies to INAW's process. The Department places the endpoint of production at or immediately after the water leaves INAW's water treatment plant. In its view, potability is the only relevant characteristic, and the water “reaches its most marketable form prior to leaving the water treatment facility.” (Resp't Br. Supp. Mot. Summ. J. at 10.) INAW counters that its production spans the entire length of the public water system, ending at the customers’ water systems. (Pet'r Memo. Supp. Mot. Partial Summ. J. at 12–13, 15.) INAW also offers an alternative endpoint, contending that the production process ends no earlier than the last booster station in the system because that station is “the last location in the system” where INAW can add disinfection chemicals or adjust pressurization through pumps. (Pet'r Memo. Supp. Mot. Partial Summ. J. at 18.)

The Court concludes that, in systems that have them, booster stations are significant inflection points. They are the last points where the form, composition, and character of the water can be changed. At a booster station, pressure can be modulated to a level that renders the water usable at the tap, and the water can be treated and made potable. Production extends at least to these points. The Court therefore analytically divides the piping into two segments for purposes of the direct-use analysis: the “first mile” and “last mile” of piping. The “first mile” of piping runs from the water treatment plant through the last booster station. The “last mile” of piping is whatever comes after the last booster station, or—in systems without booster stations—whatever comes after the treatment plant. As explained below, much is known about production along the “first mile” but little is known about what occurs along the “last mile.”

The Court finds that the first-mile pipes are essential and integral to the direct production that occurs at the last booster station where the water's usability or potability is altered. The last-mile pipes, however, lie beyond that last alteration, and the record is unclear about how they interact with the water. The Court cannot determine from the record whether the pipes change the form, composition, or character of the water or whether they are essential and integral to the production that occurs before them.

a. First Mile of Piping (up to and including the last Booster Station)

Both attributes of INAW's most marketable product—pressurization and potability—matter to the first mile of piping. Because the facts show these attributes may reach their final state at different points in the system, the Court examines each independently.

i. Emergence of Appropriately Pressurized Water

Whether the first-mile pipes are essential and integral to producing usable, pressurized water depends on where in the public water system that pressure can be imparted. The designated evidence establishes that appropriately pressurized, usable water does not exist independent of location; it must be produced within a certain proximity to the customer's water system. Pressure is not an immutable aspect of water that, once added, persists; it is consumed with “every foot of travel.” (Hobbs Dep. 20:8–9.) The farther from the customer's water system the previous pressurization occurs, the more pressure is lost before the customer's use. Too far, and the water is unable to do work.

In booster station systems, INAW's pressurization of its water is not accomplished in a single act but in stages. Pumps at the treatment plant initially pressurize the water. (Miller Aff. ¶ 7.) Downstream booster stations positioned closer to the customer further pressurize the water—or de-pressurize it in some cases. The proximity within which usable water can be created varies with the characteristics of the system, including its specific topography, the distance the water must travel, customer demand, and friction. (See Miller Aff. ¶ 8; Hobbs Aff. ¶¶ 10, 14.) Accordingly, production of the most marketable product is decentralized and is carried forward in stages until the water reaches a point close enough to the customer to be pressurized to the appropriate level.

It follows that the pressurized character of the water takes its final, usable form at the last pump before the customer's water system. In systems without downstream booster stations, that point is the water treatment plant; in systems with them, it can be the last booster station.⁶ (See Miller Aff. ¶ 14 n.3.) At that last pump, the water is adjusted so that the customer receives “appropriate pressurization.” (Miller Aff. ¶ 9.) This last calibrating adjustment is what renders the water usable. (See Britto Aff. ¶¶ 15–16 (“[W]ater must be sufficiently pressurized to serve its intended purpose․ INAW must ensure that water is usable for a wide variety of services.”).) Before it, the water is either over- or under-pressurized for the point at which it will be drawn.

The process of pressurizing the water is similar to the production in Indianapolis Fruit, where the Court found that the active intervention in a natural process (ripening of bananas through the application of ethylene gas) qualified as production. See 691 N.E.2d at 1385. The Court distinguished the ripening of the bananas from the passive ripening of tomatoes where the taxpayer did nothing more than place the tomatoes in processing units. Id. at 1382, 1385–86. The Court held that “with respect to the bananas, Indianapolis Fruit made something happen [while,] with respect to the tomatoes, Indianapolis Fruit let something happen.” Id. at 1386 (emphases in original). Here, INAW's operation of pumps at its booster stations is akin to the banana-ripening process in Indianapolis Fruit. It applies mechanical energy to counteract the pressure loss that occurs as the water travels through the public water system. (See Hobbs Dep. 20:8–9.) Pressure declines continuously as the water moves through the system, and the booster stations intervene in that natural process. Some stations arrest the decline by pressurizing the water; others, where upstream pressure would otherwise arrive too high, bring it down or depressurize the water. Absent that intervention, the water arriving at the customer's water system would fall outside the appropriate pressure range.

Figure 1, set forth below, illustrates pressurization as it relates to two hypothetical customers. The water treatment plant stands at the origin point, with the y-axis measuring pressure in psi and the x-axis measuring a customer's distance from the water treatment plant. Customer 1 resides closer to the water treatment plant, and Customer 2 resides farther away. Setting aside other factors like topography, pressure declines constantly after the initial boost at the plant as the water moves along the x-axis toward the two customers. This constant decline is represented by the same negative slope across each of the three blue water lines. See Figure 1.

Tabular or graphical material not displayable at this time.

Each customer resides on the far side of a booster station that adjusts the pressure at that location. For Customer 1, the booster station removes, or steps down, pressure. Without the step-down, Customer 1's water would have too much pressure. The dashed blue line, showing the trajectory of the water based on the pressure imparted at the plant, would intersect Customer 1's position outside the appropriate pressure zone (shown in gray). For Customer 2, the booster station adds, or steps up, pressure. Without the step-up in pressure, Customer 2 would have no usable water, as indicated by the intersection of the dashed blue line and the x-axis. The booster station allows the water to reach Customer 2's water system at the appropriate pressure. In each instance, the water pressure is adjusted to the appropriate level to enable it to be used by the customer.

This adjustment occurs at a proximity close enough to the customer to place the water in a usable condition as it reaches the customer's system. Production therefore extends at least until the last act of exogenous pressurization occurs—either at the water treatment plant or the last booster station in systems where they exist for that purpose. At those points, and not before, INAW makes a last mechanical adjustment— up or down—to ensure the water arrives at the customer's premises at the appropriate pressure. The product undergoes a substantial change in its character whenever the ultimate adjustment occurs: the water finally becomes usable for the customer. Before that last modulation of pressure, though, the water will not be usable and will either be over- or under-pressurized.

ii. Emergence of Potable Water

As with pressure, the second characteristic of INAW's most marketable product, potability, is also not a fixed attribute conferred once at the water treatment plant and thereafter retained until the customer's water system. It is an attribute that degrades over time and from travel through the public water system, requiring affirmative restoration throughout the system. This dynamic parallels the loss and restoration of pressure, and it supports the conclusion that INAW's production process ends no earlier than the last booster station in each system.

The record establishes that the chlorine residual—a key indicator of potability ⁷ —diminishes during transit, similar to how pressure degrades. Water undergoes physical and material changes as it proceeds from the water treatment plant through the public water system. (See Hobbs Aff. ¶ 7.) Hobbs testified that residual chlorine is lost “between the plant and the customer” such that “chlorine could have to be added.” (Hobbs Dep. 52:12–13.) Potability, then, is not continuous. It is not simply created once and preserved passively. It decays and, if left unaddressed, that decay can render the water non-potable before it reaches the customer.

Because of this continuous degradation, potability—just like pressure—requires proximity to the customer to be meaningful. INAW's marketable product is not water that is potable only at the plant. It is water that is potable at the point of use. Hobbs testified that, after water leaves the plant, “it still has to be processed, continuously processed to the customer.” (Hobbs Dep. 15:21–23.) Because potability degrades with distance and time, water that satisfies drinking water standards at the plant will not necessarily satisfy them at the customer's water system absent intervening treatment. INAW must counter that natural process by continuously processing the water to reestablish potability. (See Hobbs Aff. ¶ 8.)

That intervening treatment can occur at booster stations. The record establishes that the booster station is a location where INAW treats the water to restore the chlorine residual that has depleted since the initial treatment at the plant. Hobbs's affidavit states that “additional chlorine can be added into the [public water system] at booster stations to ensure that INAW complies with state requirements relating to the amount of ‘residual’ chlorine or chloramines that are present in the water sold to customers.” (Hobbs Aff. ¶ 12.) His deposition confirms that post-plant chlorine additions can occur at a booster station and are triggered “if chlorine residuals are [at] lower-than-acceptable levels.” (Hobbs Dep. 15:2–5, 30:22–24.)

These additions change the composition and character of the water, restoring a property (potability) that had been lost. Wherever that restoration last occurs marks the endpoint of production. Water is not in its “completed form” until it has been rendered potable in a state capable of reaching the customer. Because the last booster station is the last point at which INAW can chemically manipulate the water to that end, that station marks the endpoint of production.

b. Pressurization as Distribution

The Department resists the conclusion that production can extend to the last booster station on the ground that pressurization functions as distribution, not production. In the Department's view, INAW's water is already potable—and therefore already complete—at the treatment plant. (See Resp't Br. Supp. Mot. Summ. J. at 10–12.) It contends that the pressure INAW supplies thereafter serves only to convey the finished product through a distribution system to the customer. (See Resp't Br. Supp. Mot. Summ. J. at 10–12.) The Department reasons that pressurization “ensures that the water is transportable” but “does not cause a substantial change to the character of the water” and so is not part of INAW's most marketable product. (Resp't Reply Supp. Mot. Summ. J. at 7 [hereinafter “Resp't Reply Br.”].) It contends that booster stations only repressurize “the water to the level it was at when it left the treatment plant.” (Resp't Reply Br. at 7.) As the Department sees it, the water leaving the plant is “in the same condition” as it arrives at the customer's water system, and any additional treatments or pressurization only “serve to preserve rather than modify the water.” (Resp't Resp. at 7.) The Court disagrees and addresses each of these contentions.

The Department's framing of a public water system as only a distribution system treats pressurization as though it does only one thing—move the water. Pressure serves, however, at least three distinct and simultaneous functions within the public water system: (1) it moves water through the system, (2) it is required to maintain the water's potability, and (3) it renders the water usable by INAW's customers.

The usability of the water conferred by pressurization is integral to the product marketed. Even if INAW used other means to deliver the water and ensure its potability, pressure would still be needed to make it usable. Consider a hypothetical public water system in which water is delivered to customers not through pipes but by a fleet of tanker trucks that deposit potable water in a holding tank at each customer's premises. In such a system, the customer would have access to potable water. They could, for example, draw the water out with buckets or a ladle. Yet that would plainly be a different product than the one delivered under INAW's current model. If INAW did not provide additional pressurization, the customer would need some other means of pressurizing the water in the holding tank to power their internal plumbing. This is precisely what INAW does with the booster stations positioned throughout its network of pipes.

That pressurization enables transportation does not subtract from its function of enabling the water to be usable. When pressure is adjusted upwards or downwards to ensure that the water reaches the customer's water system at the correct level, the character of the water is definitively changed—from under- or over-pressurized to appropriately pressurized. In some instances, this appropriate pressurization can only be achieved at INAW's booster stations located in proximity to the customer. (See Miller Aff. ¶ 8.)

The pressure the customer receives is not the same pressure imparted at the plant. Pressure is naturally lost as water travels through the public water system due to friction, time, topography, and demand. (Hobbs Aff. ¶¶ 10, 14.) By the time the water reaches the booster station, the pressure imparted by the water treatment plant is consumed, at least in part, and new pressure must be added. The water must be continuously processed to achieve the most marketable product at the point it is desired—the customer's tap—and booster stations are the means of this continuous production. (See Hobbs Dep. 26:22–25 (“[B]ooster stations are there to make sure the system pressure is at a certain level that's appropriate for the area.”).)

The Department's “preserve rather than modify” framing might fit a case in which a producer's finished good is transported in a state that requires only maintenance—a refrigerated truck, for example, that carries an already-frozen good and simply keeps it frozen en route. See, e.g., 45 Ind. Admin. Code 2.2-5-8(e), Example 1, and -8(f)(2) (2018). The frozen good reaches its finished, most marketable form the moment it is frozen. The truck maintains that pre-existing frozen state during transport, but doing so does not effect a change in the form, composition, or character of the good. At all times the good remains frozen. By contrast, potability and pressurization are not settled characteristics that remain static as the water is conveyed through the public water system. Pressure dissipates continuously, while potability deteriorates. Both must be adjusted sufficiently near the point of use to arrive in appropriate form for the customer. For that reason, they are not preserved but produced by later interventions in the public water system.

The continuous and decentralized nature of INAW's production process distinguishes it from a pure distribution process. To be sure, the parts of a public water system after the water treatment plant may function purely as a distribution mechanism in those instances where the water treatment plant is used to deliver the potable, appropriately pressurized water to the customer. But in those instances where pressure is adjusted to an appropriate level at a distant booster station before the water reaches the customer, the production process necessarily expands to encompass the change in the form, composition, and character caused by the booster station.

c. The first-mile equipment is essential and integral to INAW's production

The designated evidence requires different conclusions about the equipment located in the “first mile” and equipment located in the “last mile.”

As previewed above, Cave Stone controls the status of the first-mile equipment. Just as the trucks there transported crude stone between quarry, crusher, and stockpile within the stone companies’ integrated operations, the first-mile pipes convey the water in a continuous process from one production step (the water treatment plant) to another (the booster station in proximity of customers’ water systems) within INAW's integrated operations. Without them, the water would remain an unfinished work in process with inadequate pressure and be unusable. In this way, the equipment in and between the water treatment plant and the booster stations—those that change the pressurization to render the water usable or that restore the water's potability—is “inextricably linked” to the ongoing process of transformation and production of the marketable good. Guardian Auto. Trim, 811 N.E.2d at 984; see Cave Stone, 457 N.E.2d at 524.

The Court holds that the equipment leading up to the last pressurization or injection of chlorine is an essential and integral part of achieving the water's transformation. Under Cave Stone, the “first mile” equipment—up to and including the last booster station directly used in production—forms an essential and integral part of the integrated process because that equipment transports INAW's most marketable product along the production process. In systems with booster stations, the piping and pipe accessories carry water from the treatment plant to the last booster station, where it becomes usable or receives additional chlorine as necessary. By adjusting the marketable aspects of the water to the customers’ needs, actions at the booster station “make” something happen and cannot be said to “let” something happen. Indianapolis Fruit, 691 N.E.2d at 1386.

By contrast, the “last mile” of piping—that which lies beyond the final booster station or treatment plant and carries the water the remaining distance to the customer's water system—stands in a different evidentiary posture than the first mile. The record as developed concentrates on the treatment plant and the booster stations. It is at those points that the designated evidence describes INAW pressurizing the water, adjusting that pressure to the level the customer requires, and restoring depleted chlorine residual. Once the water passes the last booster station, the record offers few specifics about the last mile of piping. INAW's designated Booster Station Study shows the approximate ratio of system equipment and feet of pipe before and after the final booster stations in each public water system. (See Miller Aff. ¶¶ 10, 15; Miller Aff., Exs. 1–33.) Deposition testimony establishes that the pipes in general, last and first mile alike, “protect” the water. (Hobbs Dep. 50:16.) INAW's Director of Engineering asserts the piping is “integral” to the water's pressurization. (Hobbs Aff. ¶ 17.) INAW's Engineering Manager states that the pipe, accessories, and related equipment “support” pressurization of the water. (Miller Aff. ¶ 9.) The record also indicates, in general terms, that the piping and pipe accessories that INAW purchases “have a direct effect” on the water “by keeping it free from external contaminants, reducing water age, controlling pressurization, and preventing the premature dissipation of chlorine.” (Hobbs Aff. ¶ 16.) None of these sources, however, explains in any detail how the piping or pipe accessories function or how they transform the water.

Notwithstanding the assertions about the role of the last mile in pressurization and in maintaining the water's potable character, the Court is unable to determine anything specific about the interaction between the piping and the water. Beyond the commonly understood inference that the piping controls, or contains, pressure introduced into the system, the record does not contain facts sufficient to determine whether the last mile of piping alters the water's pressure or is, instead, a passive conduit playing no role once pressurization is complete. The same is true as relates to potability. The record establishes only that the piping keeps the water “free from external contaminants,” “reduc[es] water age,” and “prevent[s] the premature dissipation of chlorine.” (Hobbs Aff. ¶ 16.) It does not establish whether the last mile of piping actively effects a change in the water's potable character or merely contains the disinfectant residual introduced upstream.

Therefore, at this stage in the litigation, the record does not support a judgment for INAW with respect to the “last mile” of piping. INAW, as the party seeking the exemption, bears the burden of designating evidence sufficient to establish that the last-mile pipes are essential and integral to its production process. While INAW has designated some evidence that the last-mile pipes operate on the water as it moves through them, that evidence is too conclusory to establish, as a matter of law, that the last-mile pipes are essential and integral to the production of INAW's most marketable product or to show the specific manner in which they place tangible personal property “in a form, composition, or character different from that in which it was acquired.” 45 Ind. Admin. Code 2.2-5-8(k). It is, however, enough to prevent the opposite conclusion—that the last-mile pipes play no role in production and are mere passive conduits—as a matter of law. Hughley, 15 N.E.3d at 1003 (“[W]hile federal practice permits the moving party to merely show that the party carrying the burden of proof lacks evidence on a necessary element, [Indiana state courts] impose a more onerous burden: to affirmatively ‘negate an opponent's claim.’ ”). There is insufficient evidence to demonstrate that the last-mile pipes produce the water or are essential and integral to the production occurring up to and including the booster stations.⁸

IV. THE ENVIRONMENTAL QUALITY EXEMPTION

The Court now turns to the second exemption that INAW invokes, the environmental quality exemption, under which INAW seeks to exempt certain purchases—namely, its piping and pipe accessories, meters, backfill, tracer wire, and polywrap. The exemption statute provides that sales of tangible personal property are exempt from tax if:

(1) the property constitutes, is incorporated into, or is consumed in the operation of, a device, facility, or structure predominantly used and acquired for the purpose of complying with any state, local, or federal environmental quality statutes, regulations, or standards; and

(2) the person acquiring the property is engaged in the business of manufacturing, processing, refining, mining, recycling ․, or agriculture.

Ind. Code § 6-2.5-5-30 (2018). See also 45 Ind. Admin. Code 2.2-5-70 (2018). The parties’ dispute centers on the predominant use of the relevant purchases and on the predominant use of the facilities and structures into which they are incorporated. There is no dispute that INAW is engaged in the business of manufacturing or processing water. (See Jt. Stip. (Gen.) ¶ 6.) There is no dispute that the laws that govern INAW's operation of public water systems are the type of environmental quality statutes and regulations contemplated by the exemption.⁹ There is also no dispute that a public water system is an environmental facility or structure. (See Dorner Affirmation, Ex. 1 (Resp't Admis.) ¶ 4.)

In support of its claim for the exemption, INAW advances two separate but related arguments. It first argues that the purchases themselves—located within the public water systems—are mandated by detailed environmental regulations that the Department concedes are environmental quality regulations or standards. (Pet'r Resp. Resp't Mot. Summ. J. & Designation Evid. at 10 (quoting Jt. Stip. (Env't) ¶ 19) [hereinafter “Pet'r Resp.”].) Because they are mandated by such regulations, INAW reasons that the purchases were predominantly used and acquired to comply with Indiana's environmental standards. INAW alternatively argues that the equipment at issue is incorporated into public water systems that themselves are facilities or structures predominantly used and acquired for compliance with the environmental quality laws. It asserts that the predominant purpose behind constructing public water systems—and behind IDEM's oversight of those systems—is to protect both the water the systems convey and the surrounding environment from contamination.

In response to each of these arguments, the Department places a high bar on the word “predominantly,” reading a “but for” requirement into the exemption. In its view, because INAW would have purchased the items anyway—legal and regulatory requirements aside—INAW should not benefit from the exemption. Since INAW had other reasons for the items’ use and purchase, the Department reasons, the items are not predominantly used and acquired for complying with its obligations under state and federal law. (See Resp't Br. Supp. Mot. Summ. J. at 14; Resp't Resp. at 14.)

The Court agrees with INAW that “predominantly” does not have the restrictions placed on it by the Department. Nonetheless, while there is no dispute that the relevant purchases are used and acquired for the purpose of compliance, the Court is unable to find on this record whether they are predominantly used and acquired for such purpose as the statute requires. Similarly, the Court is likewise unable to find on this record that the public water systems themselves, into which the equipment is incorporated, are predominantly used and acquired for such purpose.

A. Meaning of “predominantly”

Application of the environmental quality exemption depends heavily on the meaning of the word “predominantly.” While the exemption statute uses the word, it does not define the term or provide any descriptive or numerical threshold for deciding whether something has been “predominantly used and acquired” for the specific purpose it describes. See Ind. Code § 6-2.5-5-30. Nor is the term defined in the Department's regulations. Instead, the question of meaning is left to the courts.

In the absence of a statutory definition of “predominantly,” the Court turns to the word's ordinary meaning. When construing a statute, the Court's first task is to “determine whether the Legislature has spoken clearly and unambiguously on the point in question.” City of Carmel v. Steele, 865 N.E.2d 612, 618 (Ind. 2007). If the legislature has done so, the Court gives the statute's words their “plain, or ordinary and usual, sense,” except where that reading would be “plainly repugnant to the intent of the legislature or of the context of the statute.” Ind. Code § 1-1-4-1 (2026). For that reason, absent a technical meaning, courts “avoid legal or other specialized dictionaries ․ and turn instead to general-language dictionaries.” Rainbow Realty Grp., Inc. v. Carter, 131 N.E.3d 168, 174 (Ind. 2019); see also B.L. Reever Transp., Inc. v. Indiana Dep't of State Revenue, 226 N.E.3d 834, 840 (Ind. Tax Ct. 2024). This approach means a statute's language will carry the same meaning for “virtually anyone competent to understand” it. Johnson Cnty. Farm Bureau Co-op. Ass'n, Inc. v. Indiana Dep't of State Revenue, 568 N.E.2d 578, 581 (Ind. Tax Ct. 1991) (quoting Hutton v. Phillips, 70 A.2d 15, 17 (Del. Super. Ct. 1949)), aff'd, 585 N.E.2d 1336 (Ind. 1992).

General-language dictionaries reveal that, under the exemption, compliance with “environmental quality statutes” need only be the most important or prevailing element in INAW's acquisition and use of its relevant purchases. The word “predominantly” means “[h]aving greatest ascendancy, importance, influence, authority, or force.” Predominant, The Am. Heritage Dictionary of the English Language 1032 (1969). It can also mean “prevailing,” Predominant, The New Lexicon Webster’s Dictionary of the English Language 790 (1987), or “preponderant.” Predominant, The Random House Dictionary of the English Language 1523 (2d unabridged ed. 1987). In other contexts, the word has been interpreted similarly to mean the main element. See, e.g., Hill v. Rieth-Riley Constr. Co., 670 N.E.2d 940, 943 (Ind. Ct. App. 1996) (defining, in the context of a product liability action, “predominantly” as “for the most part”); State v. Lee, 257 P.3d 799, 807 (Kan. Ct. App. 2011) (defining, in the context of a criminal action, “predominantly” as “for the most part” or “mainly”). Common across these sources is that a “predominant” element leads, outweighs, or prevails over the others.

INAW contends that the predominance requirement is met so long as it is compelled to do something by law. In its view, the environmental regulations prescribe which products INAW must use and acquire, and that regulatory mandate is the only consideration that matters under the exemption. (See Pet'r Resp. at 10–11.) INAW argues that whether it may also have other reasons for the same purchases is immaterial under the statute, so long as the purchases are required for compliance.

This conception of predominance misses the mark. It conflates the existence of a legal mandate with the predominance of a compliance purpose, treating the two as equivalent. They are not. A “predominant” purpose, as the dictionary definitions above establish, is one that leads, prevails, or outweighs the alternatives—not simply one reason among several. A regulated party can be subject to a mandate and still carry out the regulated conduct for reasons that have little to do with the mandate itself. A fire code may require a restaurant to install a sprinkler system, and the restaurateur may install one just the same because their insurer requires it or because they want to protect the building. In such a case, compliance with the fire code is a reason—but it is not necessarily the leading reason. More would have to be known about the restaurateur's motivations. The exemption statute's “predominantly” modifier directs the analysis toward the prevailing or most important rationale. By implication, this means that a regulatory requirement must do more than exist among other reasons; it must be shown to lead.

From the Department's perspective, the statute only exempts purchases that “would not have been made but for” the requirements under law. (Resp't Br. Supp. Mot. Summ. J. at 14 (emphasis added).) For the Department, the “but for” test operationalizes “predominantly,” such that, if INAW would have purchased or used the same item even in the absence of the environmental regulations, then compliance with those regulations cannot be the item's predominant purpose. To support its argument, the Department points to Hobbs's deposition testimony when he was asked what INAW would “stop doing to protect the health and safety of [its] customers” if it were not legally obligated to do so. (Hobbs Dep. 53:6–7.) Hobbs responded, “I don't think anything.” (Hobbs Dep. 53:17–18.) From this admission, the Department concludes that compliance with environmental law was, at most, one of several sufficient reasons for the purchases—and therefore not the “but for” reason that, in the Department's view, the exemption's predominant-use requirement demands. (See Resp't Br. Supp. Mot. Summ. J. at 14.)

The Department's proposed interpretation is too restrictive and cannot find support in the word's plain and ordinary meaning. Putting Hobbs's comment aside, the Department does not provide any statutory or caselaw support for its “but for” interpretation. Nor does it support its proposed definition with authoritative sources on ordinary meaning. Taken together, the dictionary definitions make clear that “predominant” is a broad term that does not incorporate a “but for” construction. A “but for” test asks whether compliance was a necessary condition of the purchase, such that the purchases would not have happened without it. Predominance asks a different question: whether one reason is more prevailing or important than the others. It sets a separate threshold that admits multiple sufficient reasons for action though none may be necessary or required. Returning to the example of the restaurant and the fire sprinkler system, the restaurateur has three independent reasons for installing a sprinkler system: (1) a legal requirement, (2) an insurance requirement, and (3) a desire to protect their building. Each reason alone is sufficient to cause the installation, but no single reason is necessary because the system would be installed even if any two of the other reasons were absent. Under a “but for” test, then, none of the three reasons would qualify. That all three reasons may point in the same direction does not mean one is not weightier or more important than the others. If one of the three reasons were more important than the others, it could be considered the predominant reason. For this reason, predominance and “but for” ask related but different questions and are not interchangeable.¹⁰

B. “Predominantly” as applied to INAW's purchases themselves

Applying the definition of “predominantly” to equipment at issue, the Court finds the record insufficient to determine whether INAW's predominant purpose in acquiring and using the items was compliance or some other reason. Summary judgment is proper only when the designated evidence demonstrates that there are no genuine issues of material fact. Ind. Trial Rule 56(C). Genuine issues of material fact arise “when a fact concerning an issue that would dispose of the case is in dispute or when the undisputed facts support conflicting inferences as to the resolution of an issue.” Popovich v. Ind. Dep't of State Revenue, 52 N.E.3d 73, 76 (Ind. Tax Ct. 2016). Here, the evidence presented is subject to conflicting inferences and thus inappropriate for resolution on summary judgment.

Close examination of Hobbs's deposition and the supporting affidavits reveals that INAW's acquisition and use of the relevant items is in fact driven by multiple motivations operating at once. Compliance with environmental regulations is certainly among them, but compliance does not stand alone. For many items, the very purchase that satisfies a regulatory command also serves an independent operational or business end, and the two motivations are intertwined to a degree the record does not disentangle.

Backfill illustrates the point. The governing regulation prescribes how backfill must be installed, directing that “[c]ontinuous and uniform bedding shall be provided in the trench for all buried pipe,” and that the “[b]ackfill material shall be tamped ․ to adequately support and protect the pipe.” 327 Ind. Admin. Code 8-3.2-17(b) (2018). Yet Hobbs's testimony shows that purchases under these same specifications answer to engineering and operational needs no less than to regulatory ones. When asked to explain backfill material, Hobbs shared that backfill “basically locks that pipe in place so it can't move” and protects it from “vehicles driving over it and crushing the pipe.” (Hobbs Dep. 46:24–47:1.) Asked whether other items like stone could be used, Hobbs indicated that backfill “has to be specific to the application.” (Hobbs Dep. 47:16.) He later agreed that INAW would still purchase backfill absent the environmental regulations because “[w]ithout proper backfill, the pipe could break” and environmental contaminants could impact the water. (Hobbs Dep. 48:6–7; see Hobbs Dep. 48:7–9.) Backfill is thus, on this record, a regulatory mandate, an engineering necessity, and a safeguard of INAW's water, all at once—and nothing in the evidence marks any one of these purposes as more important than the others.

The record reveals multiple legitimate business reasons—apart from compliance—behind INAW's purchase and use of other items. Asked whether INAW would still purchase each of the items absent the environmental regulations, Hobbs agreed that it would, and he identified various business justifications having no relation to compliance. (See Hobbs Dep. 40:20–41:1, 42:7–13, 43:13–20, 48:3–9.) Explaining the purpose for tracer wire and meters, Hobbs stated that INAW acquires tracer wire to allow pipes and pipe accessories to be easily located. When asked if INAW would purchase tracer wire if not for environmental regulations, Hobbs answered in the affirmative—“because [INAW] need[s] to know where [its] assets are.” (Hobbs Dep. 42:10.) Hobbs answered in the affirmative when asked the same question about meters, explaining that meters were how INAW measured revenue. (See Hobbs Dep. 43:16–17.) Admissions such as these confirm that INAW acquires and uses the items for reasons independent of environmental compliance—and that, by Hobbs's own admission, it would acquire and use at least several of them even if the regulations did not exist.

Notwithstanding non-compliance-based reasons such as these, compliance might still predominate over any other such reason. After all, it need only be the most important or prevailing element in acquiring and using the relevant purchases. The inquiry is comparative, and resolving it requires evidence from which the Court could rank compliance above the other purposes that the same items simultaneously serve.

Proving predominance, however, requires more than this record supplies. Recognizing the other non-compliance-based reasons already discussed, the Court finds the record insufficient to determine whether the “predominant” purpose was compliance or something else. The designated evidence supports conflicting inferences regarding the most important or prevailing purpose behind acquiring and using the relevant purchases. The very reasons Hobbs gives for the purchase and use of the equipment answer to a business purpose and a compliance purpose at once. The designated evidence places these purposes side-by-side without ranking them, and nothing in the record affords a principled way to choose between them.

It is not the role of this Court on summary judgment to weigh competing inferences. “Summary judgment is not an appropriate vehicle for the resolution of ․ conflicting inferences which may be drawn from undisputed facts.” Bell v. Northside Fin. Corp., 452 N.E.2d 951, 953 (Ind. 1983). In sum, the designated evidence, taken together with the reasonable inferences arising therefrom, presents a genuine dispute as to which purpose predominates, which is material to the resolution of whether the environmental quality exemption applies. Try as it may, the Court cannot find that the designated evidence and the reasonable inferences drawn from it point in only one direction on which purpose predominates. Neither INAW's evidence nor the Department's foreclose the reasonable inference that the other party's asserted purpose is the predominant one. Because the designated evidence reveals disputed issues of material fact, neither INAW nor the Department has demonstrated an entitlement to judgment as a matter of law under Indiana Trial Rule 56(C).

C. “Predominantly” as applied to the public water system

INAW fares no better with its second argument—that property incorporated into the public water system is exempt. The statute does exempt property incorporated into a device, facility, or structure predominantly used and acquired to comply with environmental quality statutes, regulations, or standards. See Ind. Code § 6-2.5-5-30. But INAW has offered no evidence that the public water system itself was “predominantly” used and acquired for that purpose.

It contends that the “primary and predominant purpose” for constructing a public water system is “to protect the water it conveys and the surrounding environment from contamination” as required by state and federal environmental laws. (Pet'r Reply Br. Supp. Mot. Partial Summ. J. at 8 [hereinafter “Pet'r Reply Br.”].) An argument in a brief, however, is not evidence, and the record is silent as to which purpose predominates in the use and acquisition of the public water systems. INAW cites several stipulations in support of its claim that the systems’ “fundamental purpose ․ is to protect the environment and the water within it from contamination.” (Pet'r Resp. at 11 (citing Jt. Stip. (Env't) ¶¶ 8–10, 15).) Those stipulations establish only that INAW's operation of public water systems in Indiana “must comply with” certain IDEM-promulgated drinking water standards and other water requirements under Indiana Code § 13-18-16-6. (Jt. Stip. (Env't) ¶ 9; see Jt. Stip. (Env't) ¶¶ 8, 10, 15.) That a system must comply with environmental standards does not, by itself, establish that compliance is the predominant purpose for which it is used and acquired. In short, INAW's argument is unsupported by any evidence demonstrating that no genuine issues of material fact exist and thus that it is entitled to judgment as a matter of law.

Additionally, the argument becomes less clear when INAW later states that the public water system, “as a whole, is a facility acquired and operated predominantly for environmental compliance.” (Pet'r Reply Br. at 9.) The argument appears to be that the most important or prevailing purpose for why INAW operates public water systems is that regulations govern the systems. Common sense dictates that regulations do not create the underlying demand for systems that deliver water to the public. Though regulations may affect a business fulfilling that need, the Court is unconvinced that INAW's most important or prevailing purpose behind creating and maintaining its public water systems is to fulfill the requirements of regulation. Said differently, if there were no regulation, it seems likely that INAW would still establish and maintain public water systems as a business.

V. CONCLUSION

The Court GRANTS IN PART the summary judgment motion of INAW as it pertains to the manufacturing equipment exemption with respect to the “first mile” of piping and pipe accessories but DENIES the motion with respect to the “last mile.” As noted in footnote 8, the record does not reveal the frequency with which the “first mile” equipment is used to create pressurized, potable water. The Court is therefore unable to determine whether INAW is entitled to a full or partial exemption at this time and therefore reserves judgment on the issue. The Court DENIES the Department's summary judgment motion as it pertains to the manufacturing equipment exemption. Neither party has designated sufficient evidence at this stage in the proceedings to carry its burden with respect to the “last mile” of piping and pipe accessories.

With respect to the environmental quality exemption, the Court DENIES both parties’ motions for summary judgment as genuine issues of material fact exist.

Under separate cover, the Court will schedule a case management conference with the parties to develop a case management plan regarding all issues that remain.

SO ORDERED this 27th day of October, 2026.

FOOTNOTES

1.   A “public water system” is defined by Indiana regulations as “a public water supply for the provision to the public of water for human consumption through pipes or other constructed conveyances, if the system has at least fifteen (15) service connections or regularly serves at least twenty-five (25) individuals daily at least sixty (60) days out of the year.” 327 Ind. Admin. Code 8-10-1(16) (2018). The term includes “any collection, treatment, storage, and distribution facilities under control of the operator of the system ․” Id.

2.   A “customer water system” is defined by Indiana regulations as the “piping, fixtures, and appurtenances ․ used by a customer to convey water on his or her premises.” 327 Ind. Admin. CodE 8-10-1(12) (2018).

4.   INAW initially sought a refund for numerous other remitted amounts, including taxes paid for water plant expenses, production consumables, capital improvements, and real property. (See Jt. Stip. (Gen.), Ex. 1-J (Claim for Refund) at INAW0015444.) These same requests appeared in INAW's protest to the Department but were not appealed to this Court. (See Jt. Stip. (Gen.), Ex. 7-J (Statement of the Protest) at INAW0022526–29; Jt. Stip. (Gen.) at 5 n.3.)

5.   INAW does not discuss the environmental quality exemption in its motion for partial summary judgment, but it does discuss the exemption at length in its brief and discussed it at oral argument. The Department engaged INAW's arguments in the briefing and at oral argument and has not asserted any claim of waiver or defect. The Court therefore treats INAW's arguments regarding the environmental quality exemption as part of its motion. (See generally Pet'r Mot. Partial Summ. J. (not mentioning Indiana Code § 6-2.5-5-30); Pet'r Memo. Supp. Mot. Partial Summ. J. (mentioning Section 30); Resp't Memo. Opp. Pet'r Mot. Partial Summ. J. (same).)

6.   Production ends at different points for different public water systems. INAW acknowledges this variability across its systems: “for some of INAW Public Water Systems, the water is boosted at the plant and no further boosting of the water's pressure is required to make it marketable; while in other INAW Public Water Systems, INAW is required to boost the water (sometimes multiple times) to ensure the water is in its final marketable form when sold.” (Miller Aff. ¶ 14 n.3.)

7.   Chlorine residual is connected to water's potability. The CDC Chlorine Residual Testing Fact Sheet states that “[t]he presence of free residual chlorine in drinking water is correlated with the absence of disease-causing organisms, and thus is a measure of the potability of water.” (Jt. Stip. (Gen.), Ex. 8-J (Centers for Disease Control and Prevention's Chlorine Residual Testing Fact Sheet) at INAW0022642.) Because the record measures potability in terms of residual chlorine concentration and because the concentration falls during transit, it follows on this record that potability itself degrades during transit.

8.   The record does not disclose whether each booster station is always used to adjust pressure to the appropriate level or add chlorine to reestablish potability. It appears that booster stations may not always be active or may not always be utilized. The presence of exempt and nonexempt use can result in a partial exemption under certain circumstances. See, e.g., 45 Ind. Admin. Code 2.2-5-8(c), Examples 3(C), 7, 10 (2018); Indianapolis Fruit, 691 N.E.2d at 1386 n.7; Graham Creek Farms v. Indiana Dep't of State Revenue, 819 N.E.2d 151, 161 n.8 (Ind. Tax Ct. 2004). The Court sets aside the question of how these facts may affect the application of the manufacturing equipment exemption here as the parties have not raised it.

9.   The parties jointly stipulate that INAW's operation of public water systems in Indiana is subject to, amongst other statutes and regulations, Indiana Code Title 13, Article 18, Chapter 16 (“Public Water Systems”), (see Jt. Stip. (Env't) ¶ 12,) which the parties have further agreed is a state environmental quality statute. (Jt. Stip. (Env't) ¶ 14.) Chapter 16 is defined by statute as an “[e]nvironmental management law[ ].” See Ind. Code § 13-11-2-71(7) (2018). It requires that INAW operate its public water systems so that the water is (1) safe in quality; (2) clean and adequate in quantity; and (3) chemically satisfactory for ordinary domestic consumption. See Ind. Code § 13-18-16-6 (2018). The parties have further jointly stipulated that Indiana Department of Environmental Management's (IDEM) promulgated regulations governing the “Technical Standards for Water Mains,” which “specify the materials and standards for the construction, repair, maintenance, and upkeep of water mains,” are state environmental quality regulations and/or standards. (Jt. Stip. (Env't) ¶ 17; see Jt. Stip. (Env't) ¶ 19.) The parties also point to a federal environmental quality regulation that requires “public water systems to replace ‘customer lead service lines,’ that is, customer-owned equipment that is connected to a Public Water System.” (Jt. Stip. (Env't) ¶ 22; see Jt. Stip. (Env't) ¶¶ 20–21.)

10.   In its analysis of the word “predominantly,” the Department references, without any discussion, Indiana Code § 6-1.1-10-36.3(a), which is a property tax statute that defines predominant based on whether property is used for an exempt purpose more than fifty percent of the time. (See Resp't Br. Supp. Mot. Summ. J. at 13.) The Court does not find this statutory definition useful in discerning the meaning of the term “predominantly” for purposes of the environmental quality exemption. The definition of predominant provided in Indiana Code § 6-1.1-10-36.3(a) is narrower than the ordinary meaning of the word and is used in a different context. The adoption of a narrow definition in one part of the Indiana Code “does not mean the legislature intended to impose a narrow meaning elsewhere.” IBEW Local 305 v. Allen Cnty. Assessor, 278 N.E.3d 395, 403 (Ind. Tax Ct. 2026).

Justin L. McAdam Judge, Indiana Tax Court