A & D TECH. SUPPLY v. NEB. DEPT. OF REV.

• Decision Date: 24 March 2000
• Docket Number: No. S-98-728.,S-98-728.
• Citation: 259 Neb. 24,607 N.W.2d 857
• Parties: A & D TECHNICAL SUPPLY CO., INC., surviving corporation of a statutory merger of A & D Technical Supply Co., Inc., and A & D Duplicating Services Co., appellant and cross-appellee, v. NEBRASKA DEPARTMENT OF REVENUE and M. Berri Balka, State Tax Commissioner, appellees and cross-appellants.
• Court: Nebraska Supreme Court

607 N.W.2d 857

259 Neb. 24

A & D TECHNICAL SUPPLY CO., INC., surviving corporation of a statutory merger of A & D Technical Supply Co., Inc., and A & D Duplicating Services Co., appellant and cross-appellee, v. NEBRASKA DEPARTMENT OF REVENUE and M. Berri Balka, State Tax Commissioner, appellees and cross-appellants.

No. S-98-728.

Supreme Court of Nebraska.

March 24, 2000.

Alan J. Mackiewicz, Omaha, for appellant.

Don Stenberg, Attorney General, and L. Jay Bartel, Lincoln, for appellees.

WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

McCORMACK, J.

I. FACTUAL AND PROCEDURAL BACKGROUND

A & D Technical Supply Co., Inc. (A & D), is the surviving corporation of a merger of A & D Technical Supply Co., Inc., and A & D Duplicating Services Co. After audits of A & D's books and records for the periods from September 1, 1991, through July 31, 1994, for sales tax and from August 1, 1989, through July 31, 1994, for consumer's use tax, the Nebraska Department of Revenue issued deficiency assessments for both the sales and consumer's use taxes. A & D timely protested the deficiency assessments. The State Tax Commissioner sustained the assessments, and A & D appealed to the district court.

The issues on appeal, in the district court and in this court, can be grouped into two distinct areas: (1) collection of sales tax on purchases made by architectural firms working on behalf of tax-exempt organizations and (2) remission of use tax on payments made for computer software support and printing press maintenance.

1. SALES TAX

On May 3, 1993, A & D sold supplies to Zenon, Beringer, Mabrey (Zenon), an Omaha architectural firm. These supplies consisted of blue lines, cover stock, photocopies, and screwposts. This sale was made to facilitate work performed by Zenon for Wayne State College, a tax-exempt organization. On June 17, A & D made a similar sale to Zenon for supplies used for Zenon's work for the Bellwood Public Schools, another tax-exempt organization.

For both of these sales, Zenon furnished an exempt sale certificate, listing the seller as A & D and the purchaser as Zenon, on behalf of the tax-exempt organization. Both certificates listed the basis for exemption as category 5, or "[p]urchase of materials to be incorporated into a construction project pursuant to an attached purchasing agent appointment." There was no purchasing agent appointment attached to either certificate.

In June 1993, A & D made several sales to RDG Schutte, Wilscam, Birge, Inc. (RDG), another Omaha architectural firm. These sales provided supplies for RDG's work for Christ Community Church (Church), another tax-exempt organization. RDG provided exempt sales certificates for these purchases, listing a category 3 exemption, which is a "[p]urchase by an organization created exclusively for religious purposes...." The first of these certificates listed RDG as the seller and the Church as the purchaser, but the second showed A & D as the seller and the Church as the purchaser.

A & D claimed that (1) it was not required to collect sales tax on these transactions because the purchasers were agents of tax-exempt organizations and (2) it accepted the exempt sale certificates in good faith and is thus relieved of liability for failure to collect the tax. The Tax Commissioner rejected these contentions, claiming that exempt organizations cannot transfer their tax-exempt status simply because of an agency relationship. The Tax Commissioner further noted that the exempt sale certificates were not properly completed and that A & D could not have accepted these defective certificates in good faith.

The district court determined that the sales to Zenon and RDG were not exempt because the materials sold were not to be annexed to the real property of the exempt organization. The district court determined that because the certificates issued by Zenon were not properly completed, A & D did not accept them in good faith. The deficiency assessment was affirmed as to the Zenon transactions.

The district court found that the first of the RDG certificates was improper and could not have been accepted in good faith, but that the second certificate was properly completed, and that the sales to the Church were thereby good faith sales and A & D was relieved of liability for the sales tax.

2. USE TAX

A & D made periodic payments to RIMM Computer Systems (RIMM) for software support, including a service for fixing problems if the computer system was not working properly. A & D also made monthly payments to Quality Graphics Repair (Quality) for the cleaning and alignment of A & D's printing presses. A & D maintained that these payments were for nontaxable repair labor, while the Tax Commissioner determined that the payments were made for maintenance agreements which were subject to the use tax. The district court determined that the payments were made pursuant to maintenance agreements which were subject to the use tax. Consequently, the deficiency judgments as to the use tax were affirmed.

II. ASSIGNMENTS OF ERROR

A & D assigns, consolidated and restated, that the district court erred in failing to find that (1) Zenon was the authorized agent of Wayne State College and Bellwood Public Schools and that purchases by such an agent are exempt from sales tax under Neb.Rev.Stat. § 77-2704.15 (Supp.1999); (2) A & D held properly completed exempt sale certificates from Zenon which it received in good faith, relieving it of liability for tax, penalty, and interest; and (3) the payments made to Rimm and Quality were not made pursuant to maintenance agreements as defined by Neb.Rev.Stat. § 77-2702.25 (Reissue 1996).

The department and the Tax Commissioner, on cross-appeal, assign that the district court erred in finding that A & D sustained its burden of proving it relied in good faith on the exempt sale certificate from the Church for work done by RDG on behalf of the Church.

III. STANDARD OF REVIEW

An aggrieved party may obtain review of any judgment or final order entered by a district court under the Administrative Procedure Act. Kimball v. Nebraska Dept. of Motor Vehicles, 255 Neb. 430, 586 N.W.2d 439 (1998); Vinci v. Nebraska Dept. of Corr. Servs., 253 Neb. 423, 571 N.W.2d 53 (1997).

Proceedings for review of a final decision of an administrative agency shall be to the district court, which shall conduct the review without a jury de novo on the record of the agency. Wolgamott v. Abramson, 253 Neb. 350, 570 N.W.2d 818 (1997); George Rose & Sons v. Nebraska Dept. of Revenue, 248 Neb. 92, 532 N.W.2d 18 (1995). A judgment or final order rendered by a district court in a judicial review pursuant to the Administrative Procedure Act may be reversed, vacated, or modified by an appellate court for errors appearing on the record. Father Flanagan's Boys' Home v. Agnew, 256 Neb. 394, 590 N.W.2d 688 (1999).

When reviewing an order of a district court under the Administrative Procedure Act for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable. Kimball v. Nebraska Dept. of Motor Vehicles, supra; Miller v. Horton, 253 Neb. 1009, 574 N.W.2d 112 (1998). An appellate court, in reviewing a district court judgment for errors appearing on the record, will not substitute its factual findings for those of the district court where competent evidence supports those findings. Father Flanagan's Boys' Home v. Agnew, supra.

The interpretation of statutes and regulations presents questions of law, in connection with which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below, according deference to an agency's interpretation of its own regulations, unless plainly erroneous or inconsistent. Schmidt v. State, 255 Neb. 551, 586 N.W.2d 148 (1998); Southeast Rur. Vol. Fire Dept. v. Neb. Dept. of Rev., 251 Neb. 852, 560 N.W.2d 436 (1997).

Tax exemption provisions are strictly construed, and their operation will not be extended by construction. Metropolitan Utilities Dist. v. Balka, 252 Neb. 172, 560 N.W.2d 795 (1997); Omaha Pub. Power Dist. v. Nebraska Dept. of Revenue, 248 Neb. 518, 537 N.W.2d 312 (1995). One claiming an exemption from taxation of the claimant or the claimant's property must establish entitlement to the exemption, because a statute conferring an exemption from taxation is strictly construed. Omaha Pub. Power Dist. v. Nebraska Dept. of Revenue, supra; Nebraska State Bar Found, v. Lancaster Cty. Bd. of Equal., 237 Neb. 1, 465 N.W.2d 111 (1991).

IV. ANALYSIS

1. SALES TAX

It should initially be noted that the parties do not contest the applicability of sales taxes to the type of transactions at issue. In other words, A & D agrees that it would be responsible for collecting sales taxes on the transactions were it not for the involvement of tax-exempt organizations. The dispute in the instant case regards the effect of that involvement.

In addition, we are aware that some of the statutes and regulations relevant to this appeal have been amended over the course of the audit period. The parties have not presented any argument regarding these amendments, and we have determined that these changes do not affect our analysis of the instant appeal. Therefore, we will cite to the current statutory language for the sake of simplicity and convenience. See In re Interest of Jeremy T., 257 Neb. 736, 600 N.W.2d 747 (1999).

(a) Exemption of Agent

The district court relied upon Neb. Rev.Stat. § 77-2704.12(3) (Reissue 1996), which provides:

The appointment of purchasing agents shall be recognized for the purpose of altering the status of the construction contractor as the ultimate consumer of property which is physically annexed to the structure and which subsequently belongs to the owner of the organization or institution. The appointment of purchasing agents shall

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