Technocom Business Systems Incorporated v. North Carolina Department of Revenue, 010411 NCSUP, 10 CVS 004398

Docket Nº:10 CVS 004398
Opinion Judge:TENNILLE, JUDGE.
Party Name:TECHNOCOM BUSINESS SYSTEMS INCORPORATED, Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent.
Attorney:Everett Gaskins & Hancock, LLP by Ed Gaskins; The Wooten Law Firm by Louis E. Wooten, III for Petitioner Technocom Business Systems, Inc. North Carolina Department of Justice by Tenisha S. Jacobs for Respondent North Carolina Department of Revenue.
Case Date:January 04, 2011
Court:Superior Courts of Law and Equity of North Carolina
 
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2011 NCBC 1

TECHNOCOM BUSINESS SYSTEMS INCORPORATED, Petitioner,

v.

NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

No. 10 CVS 004398

Superior Court of North Carolina, Wake

January 4, 2011.

Everett Gaskins & Hancock, LLP by Ed Gaskins; The Wooten Law Firm by Louis E. Wooten, III for Petitioner Technocom Business Systems, Inc.

North Carolina Department of Justice by Tenisha S. Jacobs for Respondent North Carolina Department of Revenue.

CORRECTED ORDER ON PETITION FOR REVIEW OF FINAL DECISION

TENNILLE, JUDGE.

{1} This matter comes before the Court on a Petition for Judicial Review of a Final Agency Decision in a contested tax case arising under N.C. Gen. Stat. § 105-241.15. Technocom Business Systems, Inc. filed this appeal pursuant to N.C. Gen. Stat. § 150B-45.

{2} The Court has considered the Official Record in Contested Case, the briefs on appeal, and the oral arguments of counsel. For the reasons discussed below, the Court hereby REVERSES the decision of Office of Administrative Hearings and the Final Agency Decision of the Department of Revenue. The Court remands this case to the Office of Administrative Hearings and instructs it to GRANT partial summary judgment for Petitioner, leaving open the amount of the tax credit to which Petitioner is entitled.

I. PROCEDURAL BACKGROUND

{3} Respondent, the North Carolina Department of Revenue ("Department"), conducted an audit of Petitioner for the tax period beginning June 1, 2002 and ending September 31, 2005. Based on that audit, it issued a Notice of Final Determination ("Final Determination") of the tax owed by Petitioner on September 26, 2008.

{4} Pursuant to N.C. Gen Stat. § 150B-23(a) and N.C. Gen Stat. § 105-241.15, on November 18, 2008, Petitioner, Technocom Business Systems, Inc. ("Technocom"), filed in the Office of Administrative Hearings a Petition for Contested Case Hearing in which it sought a public hearing and an appeal of the Final Determination issued by the Department. It claimed that it was not liable for the taxes, penalties, or interest as set forth in the Final Determination and that the Department is required to credit the excess of any of the sales tax previously paid under the mistaken belief that the transactions in question were taxable sales, less the newly assessed use tax liability.

{5} Technocom filed a Motion for Partial Summary Judgment on May 1, 2009 and a Brief in Support of the Motion on May 8, 2009 in which it argued it was entitled to the requested credit, but it left unresolved the amount of credit that was due. The Department filed a Motion for Summary Judgment on May 1, 2009 and a Brief in Support of the Motion on May 7, 2009 in which it argued that Technocom is not entitled to a credit under the North Carolina Revenue Laws. The case, Technocom Bus. Sys., Inc. v. N.C. Dep't of Revenue, OAH No. 08 REV 2880 (Administrative Hearing Feb. 23, 2010), was heard in the Office of Administrative Hearings by The Honorable Robin Adams Anderson, Temporary Administrative Law Judge, on May 12, 2009. Judge Anderson issued a Decision Granting Summary Judgment For Respondent on November 16, 2009.

{6} The Department received Judge Anderson's decision and the official record of the case on November 25, 2009. Pursuant to N.C. Gen. Stat. § 150B-36, the Department submitted its Exceptions to the Decision Granting Summary Judgment For Respondent on December 28, 2009. On January 19, 2010, Technocom filed its Exceptions to the Decision Granting Summary Judgment for Respondent and supporting documents.

{7} On February 23, 2010, the Department issued its Final Agency Decision. It upheld the decision of the Administrative Law Judge granting summary judgment for Respondent. The Department's Final Determination on the audit, dated September 26, 2008, was sustained as to the tax, penalties, and interest shown due, plus interest accruing until the tax is paid in full.

{8} Pursuant to N.C. Gen. Stat. § 150B-45 and § 105-241.16, Technocom filed a Petition for Judicial Review of the Final Agency Decision in the Superior Court of Wake County and a Notice of Designation pursuant to N.C. Gen Stat. § 7A-45.4(a)(7) on March 18, 2010. It asks this Court to reverse the decision of the Office of Administrative Hearings and the Final Decision issued by the Department of Revenue and to remand the case to the Office of Administrative Hearings with instructions to grant partial summary judgment in its favor.

{9} This action was designated a mandatory complex business case by Order of the Chief Justice of the Supreme Court of North Carolina dated March 19, 2010 and subsequently was assigned to the undersigned Chief Special Superior Court Judge for Complex Business Cases by Order of the Chief Special Superior Court Judge for Complex Business Cases dated March 22, 2010.

{10} The Court heard oral argument on December 10, 2010.

II.

FACTS

A.

THE PARTIES

{11} Technocom is an S Corporation organized under the laws of the State of North Carolina, having its principal place of business in Matthews, North Carolina. {12} Respondent is the North Carolina Department of Revenue.

B.

THE AUDITS

{13} Technocom first registered for North Carolina sales and use tax purposes on January 1, 1987. For over twenty years, it has been selling and servicing office equipment, primarily copiers. As part of its business, Technocom entered into certain optional long term maintenance agreements for servicing the office equipment purchased or leased by its customers ("Service Agreements"). Its obligations under the Service Agreements include cleaning and replacing parts and supplies covered by the agreements' terms. Technocom purchased these parts and supplies from various vendors who generally do not charge it sales tax on those purchases.

{14} The Department conducted an initial audit of Technocom for the period June 1, 1987 through May 31, 1990. Following the audit, the auditor and Technocom agreed that Technocom would remit sales tax to the Department based on a percentage of the sale price of each Service Agreement. (R. at 119.) Regular maintenance agreements would be taxed at twenty-five percent (25%) of the total amount charged, and total coverage agreements would be taxed at forty percent (40%) of the total amount charged. (R. at 119.)

{15} These charges were fixed costs to Technocom's customers.

{16} Between 1990 and 2005, Technocom treated the provision of parts and supplies to its customers under the Service Agreements as taxable sales, and it charged its customers sales tax on the parts and supplies provided. (See R. 69-70; 119-21.) Technocom's customers paid the sales tax, and Technocom remitted the tax to the Department. Both Technocom and its customers shared the same belief: the tax that properly would be remitted to the Department as a result of the sale of the Service Agreements was for parts and supplies provided under the Service Agreements.

{17} The Department conducted a second audit of Technocom for the period January 1, 1992 through November 30, 1994, and a third audit for the period April 1, 1996 through March 31, 1999. (R. at 118.) In a report from the third audit dated September 10, 1999, Department officials compared the amount of sales tax Technocom charged and remitted on a representative sample of Service Agreements with the tax that would have been due on the wholesale price of the actual parts and supplies used to service its customers' machines under those Service Agreements. (R. at 120.) "In each case, the tax remitted to the Department was either much more than was due or much less than was due." (R. at 120.) The percentages to which the Department and Technocom originally agreed after the first audit in 1990 did not bear any relationship to the actual activity associated with the Service Agreements. (R. at 120.) Additionally, in 1999 Technocom had software with "an excellent inventory tracking system" (R. at 120.), which, presumably, would have allowed Technocom to verify the parts and supplies provided to each customer pursuant to the Service Agreements.

{18} Still, when the Department averaged its representative sample transactions, it...

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