MacKe Co. v. State Department of Assessments & Taxation

BARNES, J., delivered the opinion of the Court. The principal question presented to us in this appeal is whether certain vending machines of The Macke Company, the appellant (Macke), which mix and dispense hot and cold drinks, are “used in manufacturing” so as to qualify Macke, as their owner, for an exemption from the personal property tax pursuant to Code (1969 Repl. Vol.) Art. 81, § 9 (23). The facts are not in dispute.

Macke, a Delaware Corporation, has its principal place of business in Cheverly, Maryland. Its primary business is providing food services on sites owned by others. In the course of its business, it maintains and operates conventional vending machines, hot and cold beverage vending machines, and catering facilities at various locations in Maryland, Virginia and the District of Columbia. In Maryland, Macke operates machines and conducts business in seven counties, i.e., Prince George’s, Montgomery, Calvert, Charles, Howard, Anne Arundel and St. Mary’s.

Macke employs several hundred persons in Maryland. Its payroll for Maryland employees for the year ending June 30,1970, was $4,641,103.74. ¹²⁴ As of January 1, 1968, Macke owned in Maryland 175 hot “post-mix” vending machines and 171 cold “post-mix” machines. These machines cost $509,727 and had a combined book value of $199,441. A year later, Macke had holdings in Maryland of 274 hot drink machines and 212 cold drink machines which cost $677,657 and were valued on its books at $278,409.

Macke employed eight persons full time to service these machines and 42 other part-time employees for this purpose. In 1968 and again in 1969, Macke protested the assessment of the appellee, State Department of Assessments and Taxation (Department), of the value of the hot and cold machines as subject to personal property taxes, contending that these machines were exempt from taxation since their function was the manufacture of a product. At the hearing before the Maryland Tax Court, the testimony and exhibits in regard to the operation of the cold and hot “post-mix” machines indicated the following. Cold Drink Machines Although there are several different models of cold drink machines dispensing various flavors, the operation of all of them is substantially the same.

They automatically prepare and deliver to the customer carbonated and non-carbonated drinks in cups. The ingredients of the cold drinks are carbon dioxide, refrigerated water, syrup and ice. Each ingredient is stored in a compartment within the machine. Usually there are four tanks of different syrups, any one of which can be mixed automatically with the other ingredients to produce the desired flavor of drink either carbonated or without carbonation.

The cold drink machine is connected to a water pipe in the building in which the machine is located. This pipe supplies the water used in making carbonated water and ice. There is a constant supply of electricity necessary to operate the water pump and the refrigeration of the machine. A hydraulic pump is used to convey water to the carbonating unit.

The refrigeration unit cools water to a constant temperature and also makes ice. ¹²⁵ The customer places a coin in the machine and this activates a vend switch. The vend switch then energizes a credit relay completing a circuit to selection buttons on the front panel to enable the customer to make his choice of flavor and type of drink. When a selection button is pressed, electronic circuits are set up and a series of solenoid valves are opened in a programed sequence through one full cycle. When the cycle begins, the cup delivery motor operates the dispenser unit and a cup is automatically delivered to a position in the recessed portion of the front panel to receive the cold drink.

If the customer elects to receive a carbonated drink of a certain flavor, the carbonated water valve, the ice dispenser motor and the syrup pump motor are then energized by a switch on cams operated by a cycle timer. When the proper amounts of carbonated water, ice and syrup have been dispensed, the respective cams release the switches closing the water solenoid and stopping the syrup pump and the ice dispenser motors. When the cycle ends, switches are released through cam action to open the circuit, to circuits previously energized so that the unit is then ready for the next cycle. If the customer elects to receive a drink without carbonation, he pushes the appropriate button so that carbon dioxide is not added by the control mechanism.

Hot Drink Machines Hot drink machines prepare coffee, tea, chocolate and soup and dispense these products to the customer. Some of these machines brew one cup of coffee at a time; others brew 11 cups of coffee, storing them in a pot. Here again, the basic operation of all of the machines is substantially the same. The ingredients used in the coffee vendors are regular ground coffee, water, powdered cream and granulated sugar.

The ingredients for the tea, chocolate and soup are present in powdered or undiluted form. Each ingredient is stored in a separate compartment which is controlled individually by portion dispensers. ¹²⁶ Here again, the machine is connected to a water pipe in the building in which it is placed. The incoming water passes through a filter, a strainer and a water solenoid or electromagnetic hydraulic valve. The cycle is similar to that in the cold drink machine.

The customer inserts a coin which activates a vend switch. This in turn energizes a credit relay completing a circuit to selection buttons on the front panel. When the customer has made his selection, electrical circuits are set up and the machine operates through a complete cycle. This cycle begins when a delivery motor dispenses a cup automatically to a position in a recessed portion of the front panel to receive the hot drink.

Then a cycle timer programs the sequence of the operation of the coffee brewer and dispenser (assuming coffee is the hot drink selected), compounding the ingredients selected by the customer on the push-button panel. In brewing a cup of coffee, a predetermined amount of the regular ground coffee is dispensed into the brewing compartment, upon which the lid automatically closes. Then, an air pump begins to operate forcing six ounces of preheated water through the brewing compartment. The mixture of coffee and hot water then passes through screens and filters to the mixing bowl where it may be mixed with cream, with cream and sugar or with sugar only, depending upon which buttons the customer has pushed on the front panel.

Near the end of the cycle, switches are released by cam action to open the circuits previously energized, thereby uncovering the brewing compartment and emptying any coffee grounds into a waste container within the machine itself. Merrill Krakauer, General Manager and Vice President of Macke, testified on behalf of Macke at the hearing in the Maryland Tax Court. He qualified as an expert in the operation of vending machines. In addition to facts already given in regard to the operation of the cold drink and hot drink machines, he testified, without contradiction, that none of the ingredients used in either of the machines, with the exception of water, was palatable in ¹²⁷ the form in which Macke purchased them and prior to going through the machine’s cycle.

He also testified that the machines used by Macke are not produced by it, but are purchased from other companies, and further that the mechanisms which control the operation of the cold drink and hot drink machines had not changed materially during the last 30 years although these mechanisms are now more complex, more sophisticated and result in more reliable and better control than the older mechanisms. John J. Raul, who has been an assessor in the Department for some 25 years and whose sole duties during that time have been in connection with the assessment of personal property, testified, without contradiction, that, in administering the applicable tax law, the Department, without exception, has assessed for personal property taxation the type of vending equipment for which Macke is claiming an exemption and that no company owning such machines has ever been granted an exemption for such machines. The Maryland Tax Court on appeal to it from the action of the Department in assessing the machines in question for personal property taxation affirmed the action of the Department. In its carefully considered opinion, the Maryland Tax Court affirmed for essentially two reasons, i.e., (a) that the machines were not “used in manufacture” within the meaning of those words in Art. 81, § 9 (23), as interpreted by us and our predecessors, and (b) that, in any event, Macke was not shown to be the user of the alleged manufacturing equipment, a prerequisite for the claimed exemption by our decision in Pan American Sulphur Co. v. State Department of Assessments and Taxation, 251 Md. 620, 625-29 , 248 A. 2d 354, 357-59 (1968), reh. denied Jan. 7, 1969.

On an administrative appeal by Macke to the Circuit Court for Prince George’s County from the adverse decision of the Maryland Tax Court, the circuit court (McCullough, J.) affirmed the decision of the Maryland Tax Court. A timely appeal from that action by the circuit court was taken by Macke to this Court. ¹²⁸ The same two questions which the Maryland Tax Court considered are presented to us. Inasmuch as we agree with the Department on the first question, we do not find it necessary to decide the second one in regard to whether or not Macke is a user of the alleged manufacturing equipment. Art. 81, § 8 of the Code (1969 Repl.

Vol.) provides, in relevant part, that: “The following property, except as in §§ 9 and 10 provided, shall be subject to assessment to the owner * * * and taxation for ordinary taxes * * *:” * * * “(2) Tangible personal property. — All tangible personal-properties located in this State, by whomsoever owned, * * Art. 81, § 9 provides in pertinent part: “The following shall be exempt from assessment and from State, county and city taxation in this State, each and all of which exemptions shall be strictly construed:” * * ‡ “(23) Tools, implements, etc., used in manufacturing or farming. — Tools (including mechanical tools), implements, whether worked by hand, steam or other motive power, machinery, manufacturing apparatus or engines used in manufacturing, whether temporarily idle or not, in any county or city, as herein defined (including the City of Baltimore), whether exempted by the county in which said city is located or not, in any political subdivision in which by law, resolution or ordinance the same are or may be exempt from county or city taxation; and the county commissioners of any county and any city, as herein defined, including the mayor and city council of Baltimore, are hereby authorized ¹²⁹ to pass such resolution or ordinance. * * * Notwithstanding the provisions of this subsection, tools (including mechanical tools), implements, whether worked by hand, steam, or other motive power, machinery, manufacturing or farming apparatus, or engines, used in manufacturing or farming, whether temporarily idle or not, are exempt from State taxation.” (Emphasis supplied.) The word “manufacture” is a word of broad meaning as appears from its definition in Webster’s New International Dictionary, 2nd Edition, unabridged, page 1499: “manufacture, n. * * * “2. The process or operation of making wares or any material products by hand, by machinery, or by other agency; often, such process or operation carried on systematically with division of labor and with the use of machinery. “3. Anything made from raw materials by the hand, by machinery, or by art, as cloths, utensils, machinery, etc.” The question arises in