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Court of Appeals of Texas,Austin.

John SHARP, Comptroller of Public Accounts for the State of Texas;  and Dan Morales, Attorney General of the State of Texas, Appellants, v. MORTON BUILDINGS, INC., Appellee.

No. 03-96-00458-CV.

Decided: June 19, 1997

Before CARROLL, C.J., and ABOUSSIE and B.A. SMITH, JJ. Dan Morales, Atty. Gen., Jim B. Cloudt, [signed], Asst. Atty. Gen., Taxation Division, Austin, for Appellants. Cindy Ohlenforst, Hughes & Luce, L.L.P., Dallas, for Appellee.

Morton Buildings, Inc. (“Morton”) sued to recoup use taxes paid on building components brought to Texas to compose prefabricated buildings in Texas.   Morton, with Comptroller John Sharp and Attorney General Dan Morales (“the State”), filed stipulations of fact.   Both sides moved for partial summary judgment.   The trial court granted Morton's motion, denied the State's motion, and, after receiving supplemental stipulations regarding the tax refund owed, rendered judgment based on the partial summary judgment.   The State appeals, contending that the trial court should have granted its motion for partial summary judgment and denied Morton's motion.   We will affirm the judgment.


Factual summary

This summary is condensed from the parties' stipulations.   Morton has its principal place of business in Illinois.   It manufactures, sells, and installs prefabricated, timber-framed, metal-sheathed buildings primarily used in farming and industry.   Morton sells directly to the consumer without intermediaries like lumber yards, dealers, or retailers.   Buyers can customize the basic building with choices such as window and door placement.   The order forms are sent to the Illinois headquarters where the building components are assembled for shipping to Texas.

Morton forms the building components from raw materials purchased from sellers outside of Texas.   Morton takes the lumber, plywood, paint, and steel and manufactures trusses, columns, doors, and rafters, among other items.   The various manufacturing processes for wooden items generally consist of cutting the lumber to the right lengths, attaching the pieces with steel plates secured by nails, and laminating if necessary;  Morton corrugates metal panels.   Morton occasionally purchases already-made windows and doors.1  Morton's factories are all located outside of Texas.

The building components are shipped to the site in Texas where they are stored for one to three days, awaiting the Morton employees who affix them to the ground and assemble the building.   The building process takes four or five days.   The buyer pays Morton a lump sum that includes the costs of both the components and the assembly.

Relevant statutes and code provisions

Texas imposes a use tax “on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state.”  Tex. Tax Code Ann. § 151.101(a) (West 1992).   The building components are “taxable items” as defined by the statute.   See Tax Code §§ 151.009, 151.010.

Both the administrative code and the tax code have special rules for lump-sum contractors.   The administrative code deems lump-sum contractors “consumers of all materials, supplies, and equipment used or incorporated into a customer's property.   As a consumer, a contractor must pay tax to suppliers at the time the materials are purchased.”   Tex. Admin.   Code § 3.291(b)(2)(A) (1983).2  The underlying tax code provision similarly deems them consumers of tangible personal property they furnish and incorporate into the property of their customers if the contract between the contractors and their customers contains a lump-sum price covering both the performance of the service and the furnishing of the necessary incidental material.  Tex. Tax Code Ann. § 151.056(a) (West 1992).

The cross-motions for partial summary judgment

Both motions for partial summary judgment relied on the stipulated facts.   Morton noted that the use tax could be imposed only on items of tangible personal property purchased for use, storage, or consumption in Texas.   Morton contended that the stipulated facts conclusively established that the raw materials were purchased and used, stored, or consumed outside of Texas when they were converted into building components.   Morton argued that the State could not tax the raw materials because they were not used here, and the State could not tax the building components because they were not purchased.

The State contended in its motion that the items Morton brought into Texas were raw materials purchased for use in Texas.   As a lump-sum contractor, Morton consumed the raw materials in Texas when it incorporated its materials into the property of the buyer.   The tax was therefore proper.

The trial court granted summary judgment that Morton was entitled to refund of use taxes paid with respect to all raw materials used outside of Texas in Morton's manufacturing process.   The parties then stipulated to the amount of refund due for use taxes Morton paid from August 1, 1984 through June 30, 1989.   In its final judgment, the court awarded Morton the stipulated amount ($264,237.81), plus interest.


 We review to determine whether either party proved the absence of issues of material fact and entitlement to judgment as a matter of law.   See Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985);  see also Tex.R. Civ. P. 166a.   When both parties move for summary judgment, each must carry its own burden of proof.  Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649, 650 (Tex.App.-Dallas 1994, no writ).   Any ambiguity in tax statutes must be construed against the State and for the taxpayer.   Geomap Co. v. Bullock, 691 S.W.2d 98, 100 (Tex.App.-Austin 1985, writ ref'd n.r.e.).

The critical issue is whether the whole is different from the sum of the parts.   If Morton's combination of the raw materials into building components created new taxable items, then Morton owed no use tax because it manufactured, rather than purchased, the building components it brought into Texas.   The State taxes items purchased from retailers out-of-state for use in Texas, but does not tax items manufactured by the user for use in Texas.   Conversely, if the building components are nothing more than conjoined raw materials, then the State correctly assessed use tax on the items used in Texas.

Courts in other states are split on this critical issue.   Some have decided that the manufacturing process is merely a preliminary step in the process enabling the use of the raw materials in their state.  Morton Buildings, Inc. v. Comm'r of Revenue, 488 N.W.2d 254, 258 (Minn.1992) (“Despite their alteration at the factories, the raw materials, in their altered form as building components, are used in Minnesota when they are erected into prefabricated buildings.”);   see also Rabren v. Radio Corp. of America, 287 Ala. 395, 252 So.2d 55, 58 (1971) (no distinction between property purchased at retail and property user manufactures from property purchased at retail);  American Can Co. v. Dep't of Revenue, 47 Ill.2d 531, 267 N.E.2d 657, 659 (1971) (Materials purchased outside Illinois with intent that materials would be processed and used in Illinois and other States were taxable because “[t]heir principal and permanent use was intended to be and has been in Illinois and other States as machinery and parts.”);  Chicago Bridge & Iron Co. v. Johnson, 19 Cal.2d 162, 119 P.2d 945, 948 (1941).   Courts in other states have decided that the manufacturing process causes the raw materials to lose their identity and converts them into property with a different identity from its ingredients.  Morton Buildings, Inc. v. Chu, 126 A.D.2d 828, 510 N.Y.S.2d 320, 321 (3d Dist.1987), aff'd 70 N.Y.2d 725, 519 N.Y.S.2d 643, 513 N.E.2d 1304 (1987) (“By its nature, manufacturing results in raw materials losing their identity”);  Morton Buildings, Inc. v. Bannon, 222 Conn. 49, 607 A.2d 424, 430 (1992);  see also Int'l Business Mach. Corp. v. David, 408 S.W.2d 833, 836 (Mo.1966) (computers IBM manufactured out of state but used in state not subject to use tax because not purchased out of state;  constituent raw materials not identifiable as such in state not taxable);  Comptroller of the Treasury v. American Can Co., 208 Md. 203, 117 A.2d 559, 560-61 (1955) ( “To interpret the use of the finished product as a use of the raw materials disregards the fact that before the use began the raw materials had been converted into tangible personal property of a different nature and utility․  We find nothing in the language of the taxing Act that would justify the dissolution of the product into its component parts, despite the mathematical principle that the whole is the sum of its parts.”).

 We conclude that the building components are distinct from their constituent raw materials.   The trusses and other components are something more than pieces of steel and lumber.   Because the lumber and steel are not used in their raw form in Texas but instead are used after their transformation into building components, they are not taxable.   Because Morton did not purchase the building components, the components are not taxable.   Our conclusion that the manufacturing process converts the raw materials into something else also blunts the State's argument that the raw materials can be used both out of state and in state.   Because the raw materials no longer exist, they are not put to a taxable use in Texas.

Morton's status as a lump-sum contractor does not alter our conclusion.   Even if Morton is thus defined as the “user” of the goods, Morton is not using goods that it purchased.   Texas therefore cannot tax the goods under its current taxation scheme.

We recognize that our holding gives an advantage to companies doing business like Morton.   As the Maryland supreme court wrote, “the function of closing loopholes belongs to the Legislature and not the courts.”  Id., 117 A.2d at 561.

 Nor are we persuaded that the storage of the building components at the job site exposes Morton to the storage aspect of the use tax.   This Court decided the contrary under the predecessor of the codified use tax.   See Bullock v. Shell Pipeline Corp., 671 S.W.2d 715 (Tex.App.-Austin 1984, writ ref'd n.r.e.).   Shell delivered its imported pipe directly to the construction site.   Workers inspected, aligned, welded, coated, laid, and tested the pipe.   The pipe was installed within three to five days of its arrival at the site.  Id. at 717.   This Court determined that the pipe was not “stored” for purposes of the use tax because it was not retained for future use, but was brought directly to the job site and installed as expeditiously as possible.  Id. at 719.   The stipulations in this case describe a very similar importation and installation schedule.   We likewise conclude that the building components were not stored within the meaning of the use tax.

The trial court did not err in granting summary judgment to Morton based on the stipulated facts, nor did it err in denying the State's competing motion for summary judgment.   We overrule points one and two.

We affirm the judgment of the trial court.


1.   When Morton purchases preformed components, it pays either use tax (on out-of-state purchases) or sales tax (on in-state purchases).   It did not recover refund of these taxes at trial and does not seek to recover them on appeal.

2.   The current administrative code retains a virtually identical provision.   See Tex. Admin.   Code § 3.291(a)(3)(A) (1997).   It adds the following sentence:  “If the materials are purchased from an out-of-state seller, a contractor must accrue and remit use tax on the materials unless Texas use tax was collected by the out-of-state seller.”

ABOUSSIE, Justice.

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