Palm Oil Recovery, Inc. v. Comptroller of the Treasury

Barnes, J., delivered the opinion of the Court. The question presented to us in this appeal is whether the Maryland Tax Court, on October 21, 1971, erred in holding the appellant, Palm Oil Recovery, Inc. (Palm Oil), a Maryland corporation, liable for sale or use taxes on the purchases of items necessary for the recovery and refining of “waste effluent rolling oil” generated at Bethlehem Steel’s Sparrows Point Plant.' We shall affirm. . The facts in this case have been stipulated and need be detailed only so far as is necessary in reaching the ultimate conclusion. The Bethlehem Steel Co. uses palm oil in its rolling ¹⁵¹ mill process.

In the fabrication of sheet steel, the sheets of metal are passed through a succession of rollers during which the sheets become increasingly thinner until the desired thickness is reached. The oil is poured or sprayed on this metal as a lubricant to reduce friction as the metal passes through the rolling operation. Subsequent to the contract, dated August 12, 1959, between Bethlehem Steel and Palm Oil, the residue of this oil, referred to as “waste effluent rolling oil,” is collected in a reservoir from which it eventually finds its way via a piping system to appellant’s plant. The basic provisions of the contract between Palm Oil and Bethlehem Steel are as follows.

By the first paragraph, Palm Oil agreed to perform all the work, including the furnishing of all materials, tools, equipment, labor, and superintendence required and a site for its facilities, necessary to recover and refine “waste effluent rolling oils” generated at Bethlehem Steel’s Sparrows Point Plant. By the second paragraph, it was agreed that Palm Oil would recover at its own expense the available “waste effluent rolling oils” generated at Sparrows Point and refine as much thereof as Bethlehem Steel might specify. The third paragraph provided that for a period of one year, Bethlehem Steel shall have the option of having up to 100% of its waste oil refined at specified prices and that Palm Oil shall maintain in reserve a minimum of 500,000 pounds of refined oil. Paragraph four detailed the place of delivery of the oil, together with certain specifications of quality.

By the fifth paragraph, it was agreed that Bethlehem Steel “shall retain ownership of all reclaimed oil” and that Palm Oil “will hold such oil available for the company.” It was further provided that if there existed any surplus oil at the end of the contract year, Bethlehem Steel would sell this oil to Palm Oil at a specified price. The term of the Contract was for a period of one year, but is renewable from year to year unless cancelled by a written notice from either party. The parties have further stipulated to a detailed de ¹⁵² scription of the process by which Palm Oil, during the assessment period in question, performed under the Contract its obligation to convert “waste effluent rolling oils” to usable rolling oil: “a. A solution consisting of the residue (‘scums’) of rolling oil which has been used by Bethlehem in the rolling of steel, along with water which has been used by Bethlehem both to cool the steel and the rollers themselves and to extend the oil, is passed out of Bethlehem’s plant through pipelines to the Taxpayer's adjacent water plant.

Prior to the advent of the Taxpayer’s process this solution was discarded as waste. “b. By means of air flotation in the Taxpayer’s water plant the scums are floated to the top of the solution. “c. The scums are collected and passed through a ‘cooker’ where they are treated with sulphuric acid (i) to dissolve out colloidal iron which was absorbed by the rolling oil during the rolling of steel and (ii) to convert iron soaps, which have been formed during the prior rolling of steel, into fatty acids. The resulting mixture is filtered to remove dirt and to break the oil-water emulsion.

The filtrate settles to a raw reclaimed oil and an aqueous phase. “d. The raw reclaimed oil contains several undesirable elements after it comes out of the cooker: “(i) Too high a concentration of free fatty acids (FFA) The high temperatures and pressures to which the rolling oil is submitted during the steel rolling process cause some of it to break down into free fatty acids and glycerine. The reusable rolling oil produced by the Taxpayer under the subject Contract was re ¹⁵³ quired to contain less than 20% free fatty acids. “(ii) Monoglycerides and diglycerides have resulted from the hydrolysis of triglycerides — and further free fatty acids have been formed Both during the steel rolling process and in the Taxpayer’s cooker triglycerides (combinations consisting of 3 molecules of fatty acid and 1 molecule of glycerine) in the rolling oil react with the water (i.e. hydrolyze) with which the rolling oil is mixing so that either one molecule of fatty acid breaks free (leaving a diglyceride — a combination of 2 molecules of fatty acid and 1 molecule of glycerine) or two molecules of fatty acid break free (leaving a monoglyceride — a combination of 1 molecule of fatty acid and 1 molecule of glycerine). These free molecules of fatty acid add further to the undesirable concentration of free fatty acids referred to in (i) above.

Moreover, the diglycerides and monoglycerides must be reconverted to triglycerides before the rolling oil is acceptable to the steel mill. “(iii) Light weight petroleum oils During the steel rolling process various petroleum contaminates have leaked into and dissolved in the rolling oil. These remain throughout the sulphuric acid treatment in the cooker. “e. The raw reclaimed oil which comes out of the cooker containing the undesirable elements described in Paragraph 4 is passed through a vacuum tower wherein it is submitted to temper ¹⁵⁴ atures of approximately 500° F and the following processes take place simultaneously: “ (i) A portion of the excess free fatty acids react with the monoglycerides and diglycerides to form the triglycerides. “(ii) Further excess free fatty acids are distilled off so as to meet the specifications of the contract. “ (iii) The light weight petroleum oils are distilled off. “f. The resulting product meets the specifications of the contract for usable rolling oil.” By assessment dated September 16, 1966, and enclosed with Notice of Assessment dated September 20, 1966, the Retail Sales Tax Division notified Palm Oil of an assessment of use tax in the amount of $6,023.68 together with interest thereon in the amount of $1,099.32 and penalty in the amount of $602.37 for a total assessment of $7,725.37.

Palm oil duly filed an Application for Revision on October 4, 1966, and paid $1,287.56 to the Comptroller of the Treasury, being one-sixth of the amount of the total assessment. A Claim for Refund was duly filed by Palm Oil on December 6, 1966, in respect to the payment of the $1,287.56. The claim of the taxpayer for exemption of use tax on the basis of price amounts in the total of $206,328.77 was rejected by the Retail Sales Tax Division by letter of November 3, 1967, after an informal hearing had been held. A formal hearing was held on January 18, 1968, resulting in a determination by the hearing officer, dated February 28, 1968, adverse to Palm Oil.

Palm Oil then filed on March 28, 1968, a petition of appeal to the Maryland Tax Court, alleging that the Comptroller’s determination was “unlawful, unreasonable and erroneous” for the following reasons: “a. The Taxpayer is engaged in the fabrication and production of new tangible personal property on special order for a consideration ¹⁵⁵ (Section 372(d) (2) of Article 81) which is a ‘retail sale’ as defined in the statute. “b. The tangible personal property so processed by the Taxpayer and claimed to be sold by the Taxpayer to Bethlehem Steel is ‘destroyed’ within the meaning of such term as defined in Rule 63 (Rules and Regulations of the Retail Sales Tax Division) by the subsequent use of the personal property by Bethlehem Steel Company in the manufacturing usage of Bethlehem Steel Company. “c. The items of chemicals listed in the assessment of the Retail Sales Tax Division and claimed to be subject to the use tax are either consumed or destroyed or contaminated to the extent that they are rendered useless or become a part of the end product in the refining process of the Taxpayer, and therefore are exempt from the tax in accordance with Rule 63 of the Retail Sales Tax Division. “d.

The testimony, together with the Stipulation of Facts (Taxpayer’s Appeal Exhibit 1) proves conclusively that said chemicals and other utility items are so consumed in the manufacturing process of the Taxpayer, producing either a by-product which is sold to other customers in which case they are admittedly exempt, or a product which is sold to Bethlehem Steel and is exempt because it is consumed and used in the manufacturing process of Bethlehem Steel. The testimony conclusively shows that the steps utilized by the Taxpayer in producing and manufacturing the ultimate product that is sold to Bethlehem Steel combines both chemical and physical steps resulting in a wholly new product and not merely a ‘laundering service’ of an ever-remaining basic product.” The Retail Sales Tax Division of the Office of the Comp ¹⁵⁶ troller filed an Answer on April 11, 1968, alleging that Palm Oil “does not fabricate or produce new personal property, but, in fact, performs certain operations on waste oil belonging to a steel company.” It was further stipulated between the parties that the only issue any longer in dispute was the applicability of the tax to the purchases of utilities. A hearing was held and on October 21, 1971, an opinion and order was filed by the Maryland Tax Court affirming the action of the Comptroller. The applicable statutory provisions in this case are Article 81 of the Md. Code (1969 Repl.

Vol.) § 324, dealing with the Retail Sales Tax, and § 372, dealing with the Use Tax. Although both parties agree that it would appear to make little difference in result whether the tax in question is labeled a sales or use tax, in our opinion, it is more correctly a sales tax obligation which is under dispute. Section 324 (f) provides in relevant part: “(f) ‘Retail sale’ and ‘sale at retail’ shall