Saputo Cheese USA, Inc. v. DOR

COURT OF APPEALS
DECISION NOTICE
DATED AND FILED This opinion is subject to further editing. If
published, the official version will appear in
the bound volume of the Official Reports.
May 24, 2023
A party may file with the Supreme Court a
Sheila T. Reiff petition to review an adverse decision by the
Clerk of Court of Appeals Court of Appeals. See WIS. STAT. § 808.10
and RULE 809.62.

Appeal No. 2022AP195 Cir. Ct. No. 2020CV285

STATE OF WISCONSIN IN COURT OF APPEALS
DISTRICT II

SAPUTO CHEESE USA, INC. AND DCI CHEESE, INC.,

PETITIONERS-APPELLANTS,

V.

WISCONSIN DEPARTMENT OF REVENUE,

RESPONDENT-RESPONDENT,

CITY OF FOND DU LAC,

INTERVENOR-RESPONDENT.

APPEAL from an order of the circuit court for Fond du Lac County:
ANDREW J. CHRISTENSON, Judge. Affirmed.

Before Gundrum, P.J., Grogan and Lazar, JJ.

Per curiam opinions may not be cited in any court of this state as precedent

or authority, except for the limited purposes specified in WIS. STAT. RULE 809.23(3).
No. 2022AP195

¶1 PER CURIAM. Saputo Cheese USA, Inc. and DCI Cheese, Inc.
(collectively “Saputo”) appeal a circuit court order affirming a Wisconsin Tax
Appeals Commission ruling and order. Saputo argues that its clean-in-place
(“CIP”) equipment qualifies for tax exemption under WIS. STAT. § 70.11(27)
(2021-22).1 The Commission determined that Saputo’s CIP equipment is not
exempt under WIS. STAT. § 70.11(27) because it is not “[u]sed directly” in the
“[p]roduction process.” We affirm.

BACKGROUND

¶2 Saputo manufactures and distributes cheese as a United States
subsidiary of Saputo, Inc., a Canadian dairy company. Saputo has ten different
facilities in Wisconsin, each having substantially similar manufacturing operations
and each utilizing the CIP equipment similar to the equipment at issue in this
dispute.2 The parties have stipulated to the relevant facts regarding Saputo’s
equipment and manufacturing process.

¶3 Cheese is manufactured in batches. After each batch is completed,
the CIP equipment runs a cleaning cycle to clean the production equipment. The
CIP equipment creates various chemical solutions based on monitored conditions
including the composition of the soil to be removed and the water conditions at the
plant. The water and chemicals flow through “showerheads” located inside of,
and attached to, the cheese-making and raw material vats. The equipment then

1
All references to the Wisconsin Statutes are to the 2021-22 version unless otherwise
noted.
2
The parties have agreed to use the Alto plant as the test case for the rest of the CIP
equipment at the various Saputo plants.

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No. 2022AP195

uses the chemical solutions in a series of flushing and rinsing cycles that remove
the waste remaining in the cheese production vats after a production cycle. The
waste flows into tanks, where it can be disposed of without contaminating the
finished product. This cleaning cycle prepares the vats for the next production
cycle, maintaining the integrity of the product and increasing plant efficiency. No
raw materials used to produce Saputo’s cheese ever pass through the CIP
equipment, and the CIP equipment does not operate while cheese is being
manufactured; if it did, the cleaning chemicals would contaminate the cheese.

¶4 Saputo contested twenty-nine Department of Revenue property
assessments between 2014 and 2018 regarding the CIP equipment in use at seven
of its facilities. Saputo argued to the Tax Appeals Commission that the
Department had incorrectly concluded that the CIP equipment did not qualify for a
tax exemption under WIS. STAT. § 70.11(27). On cross-motions for summary
judgment, the Commission ruled in favor of the Department. Saputo appealed to
the circuit court, which affirmed the commission’s decision and agreed with the
Department that the CIP equipment does not qualify for exemption because it is
not used directly in the production process. This appeal followed.

DISCUSSION

¶5 In cases involving administrative agencies, we review de novo the
decision of the agency and not the decision of the circuit court. Vega v. LIRC,
2022 WI App 21, ¶25, 402 Wis. 2d 233, 975 N.W.2d 249, review denied (WI
Sept. 13, 2022) (No. 2021AP24). The agency—in this case, the Commission—
determines the credibility and weight of the evidence, not the reviewing court. See
Milwaukee Symphony Orchestra, Inc., v. DOR, 2010 WI 33, ¶31, 324 Wis. 2d
68, 781 N.W.2d 674, superseded on other grounds by statute, Wisconsin Prop.

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No. 2022AP195

Tax Consultants, Inc. v. DOR, 2022 WI 51, ¶8, 402 Wis. 2d 653, 976 N.W.2d
482. The court will review the agency’s interpretation of a statute and conclusions
of law de novo.3 Tetra Tech EC, Inc. v. DOR, 2018 WI 75, ¶84, 382 Wis. 2d 496,
914 N.W.2d 21; Mitchell Bank v. Schanke, 2004 WI 13, ¶24, 268 Wis. 2d 571,
676 N.W.2d 849. “However, pursuant to WIS. STAT. § 227.57(10), we will give
‘due weight’ to the experience, technical competence, and specialized knowledge
of an administrative agency as we consider its arguments.” Tetra Tech, 382
Wis. 2d 496, ¶108. Statutes relating to taxes are to be strictly construed with the
presumption that the property in question is taxable, and the burden of proof is on
the party claiming an exemption. WIS. STAT. § 70.109.

¶6 This case involves the interpretation of WIS. STAT. § 70.11(27)(b),
which, as relevant here, allows tax exemptions for “[m]achinery and specific
processing equipment ... that are used exclusively and directly in the production
process in manufacturing tangible personal property, regardless of their attachment
to real property, but not including buildings.” Saputo first argues that its CIP
equipment is, in fact, “used directly” in the “production process”—both of which
phrases are defined within the statute. See § 70.11(27)(a)5., 7. Second, Saputo
asserts that the Department is impermissibly taking a position that is contrary to
guidance it provided in the Wisconsin Property Assessment Manual (the
“manual”), which stated that “equipment used to clean food processing equipment
between batches which is embedded within and part of the production machine”
are exempt. Finally, Saputo asserts that the Department is estopped from
assessing the CIP equipment as nonexempt. We address each argument in turn.

3
See WIS. STAT. § 227.10(2g) (“No agency may seek deference in any proceeding based
on the agency’s interpretation of any law.”).

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No. 2022AP195

¶7 We begin with the requirements of WIS. STAT. § 70.11(27). For
Saputo to prevail, it must show that its CIP equipment is “used directly” in the
“production process.” See § 70.11(27)(b). The statute itself defines “used
directly” as “used so as to cause a physical or chemical change in raw materials or
to cause a movement of raw materials, work in process or finished products.”
Sec. 70.11(27)(a)7. The parties disagree about whether the cleaning process
involves “raw materials.” Saputo argues that the CIP process “undisputedly
involves ‘raw materials’” because the equipment causes a physical or chemical
change to the leftover “raw material.” Specifically, Saputo asserts that the milk
that is leftover in the cheese production vats is a “raw material,” which the CIP
equipment then chemically changes and moves. This court must give statutory
terms or phrases their common, ordinary, and accepted meaning. State ex rel.
Kalal v. Circuit Ct. for Dane Cnty., 2004 WI 58, ¶45, 271 Wis. 2d 633, 681
N.W.2d 110.

¶8 The statute’s plain language makes clear that the milk residue left in
a cheese production vat is not a “raw material” according to the common,
ordinary, and accepted meaning of that term. A “raw material” is a “material
available, suitable, or required for manufacturing, development, training or other
finishing process but yet to be used.” WEBSTER’S THIRD NEW INTERNATIONAL
DICTIONARY 1887 (unabr. 1993). The CIP equipment chemically cleanses the
cheese vats after the production process has completed, removing the milk residue
and pumping it into a waste tank for disposal. Thus, the leftover milk residue is
not a “raw material” to be converted into a useful product; it is, by Saputo’s own
admission, waste. The parties’ joint stipulation specifically states that “no raw
materials used in cheese production travel through the CIP equipment at any
point.”

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No. 2022AP195

¶9 Because Saputo’s CIP equipment cleans waste from the sides of the
production vats and does nothing to convert raw material into a useful product, we
conclude that it is not “used directly” in production. This conclusion is further
supported by the fact that Saputo must remove the waste before the next
production cycle to prevent contamination of the next batch of cheese. Were the
CIP equipment to activate with a raw material in the vat, it would contaminate it.
Since the CIP equipment does not cause a physical or chemical change to a “raw
material,” the CIP equipment does not satisfy the “used directly” requirement of
WIS. STAT. § 70.11(27)(b) and is thus not exempt from being taxed under that
provision.

¶10 Moreover, even if we determined that the CIP equipment is “used
directly,” it does not satisfy the statutory requirement of being used in the
“production process.” Again, the statute itself defines “production process” as:

the manufacturing activities beginning with conveyance of
raw materials from plant inventory to a work point of the
same plant and ending with conveyance of the finished
product to the place of first storage on the plant premises,
including conveyance of work in process directly from one
manufacturing operation to another in the same plant, ...
including quality control activities during the time period
specified in this subdivision but excluding storage, machine
repair and maintenance, research and development, plant
communication, advertising, marketing, plant engineering,
plant housekeeping and employee safety and fire
prevention activities ….

WIS. STAT. § 27.11(27)(a)5.

¶11 Saputo asserts that the CIP equipment is a part of the production
process because it is necessary to run the CIP equipment cleaning cycle between
each production batch for quality control purposes. But, as set forth in the statute,
being “necessary” is not a quality that makes the machinery part of the production

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No. 2022AP195

process. Saputo admits that the CIP equipment operates “after each batch of
cheese has been manufactured.” To be exempt, the statute requires that the
equipment be used before the finished product is conveyed to the first point of
storage. WIS. STAT. § 70.11(27)(a)5. This means that the CIP equipment cannot
be involved with the manufacturing process because, as Saputo has admitted, the
cleaning cycle occurs only after the cheese has been manufactured and cleared
from the production equipment.

¶12 Next, Saputo argues that the Department’s position is contrary to the
guidance it provided in the manual, and therefore cannot be sustained by operation
of law.4 See WIS. STAT. § 73.16(2). But this argument was not preserved for
appeal; Saputo did not make a contrary-to-guidance argument before the
Commission, and therefore forfeited the right to raise the issue. See State v.
Outagamie Cnty. Bd. of Adjustment, 2001 WI 78, ¶55, 244 Wis. 2d 613, 628
N.W.2d 376 (“It is settled law that to preserve an issue for judicial review, a party
must raise it before the administrative agency.”).

¶13 Saputo counters that its circuit court briefs mentioned WIS. STAT.
§ 73.16(2), which generally provides that an agency may not take a position
contrary to the guidance it provides. But the circuit court is not the place where
issues should first be raised in administrative appeals; rather, judicial review of
agency determinations contemplates a review only of the record developed before
the agency. Outagamie Cnty. Bd. of Adjustment, 244 Wis. 2d 613, ¶55. Even if
we were to overlook Saputo’s failure to raise the matter before the administrative

4
The manual provides that equipment used to clean food processing equipment between
batches which is embedded within and part of the production machine is “specific processing
equipment” and therefore exempt from taxation according to WIS. STAT. § 70.11(27)(a).

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No. 2022AP195

bodies, we are not persuaded that the mere mention of § 73.16(2) before the circuit
court would have been sufficient to preserve the issue for appeal. See State v.
Eugene W., 2002 WI App 54, ¶13, 251 Wis. 2d 259, 641 N.W.2d 467 (holding
that to avoid forfeiture, a party must raise an issue with sufficient prominence such
that the circuit court understands that it is called upon to make a ruling).

¶14 Saputo’s equitable estoppel argument similarly fails because it was
never raised before the Commission. Equitable estoppel consists of (1) action or
nonaction, (2) by the party against whom estoppel is asserted, (3) that induces
reliance thereon by the other party, (4) to its detriment. Kohlenberg v. American
Plumbing Supply Co., 82 Wis. 2d 384, 398, 263 N.W.2d 496 (1978). Saputo
failed to make this argument to the Commission. See Rascar, Inc. v. Bank of Or.,
87 Wis. 2d 446, 454, 275 N.W.2d 108 (Ct. App. 1978) (When a party is not
diligent in their pursuit of an estoppel claim, their claim dies with the lack of
diligence.).

¶15 In summary, Saputo’s CIP equipment does not satisfy the
requirements of WIS. STAT. § 70.11(27) that it be “directly used” in the
“production process” in order to qualify for tax exemption. Saputo’s arguments
that the Commission’s ruling violates the contrary-to-guidance statute and that the
Department is estopped from assessing the equipment as it did fail because they
were not preserved for appeal. Accordingly, we affirm.

By the Court.—Order affirmed.

This opinion will not be published. See WIS. STAT.
RULE 809.23(1)(b)5.

8