Aloha Motors, Inc., In re

• Decision Date: 29 May 1975
• Docket Number: No. 5530,5530
• Parties: In the Matter of the Tax Appeal of ALOHA MOTORS, INC., Appellant. In the Matter of the Tax Appeal of EDWARD R. BACON COMPANY OF HAWALL, LIMITED, Appellant.
• Court: Hawaii Supreme Court

Page 91

536 P.2d 91

56 Haw. 321

In the Matter of the Tax Appeal of ALOHA MOTORS, INC., Appellant In the Matter of the Tax Appeal of EDWARD R. BACON COMPANY OF HAWALL, LIMITED, Appellant.

No. 5530.

Supreme Court of Hawai'i.

May 29, 1975.

Syllabus by the Court

1. It is well settled in this jurisdiction that the rule of strict construction is applicable in tax cases.

2. Where a tax is sought to be imposed, any doubt which exists as to the construction of the taxing statute should be resolved in favor of the taxpayer.

3. It is well established that exemptions from taxation are strictly construed against the taxpayer.

4. HRS § 237-20 provides an exemption from the general excise tax for reimbursements as the relevant provision of HRS § 237-20 does not modify the general proposition that in the imposition of the general excise tax, costs are included as part of one's gross income.

5. HRS § 237-20 covers a situation where there is a flow of property or service from a third party to taxpayers for which the taxpayers pay a monetary consideration and are then subsequently reimbursed by the manufacturer.

6. In the performance of warranty work, where the taxpayers have performed the replacement or repair service themselves and there is no property or service furnished to the taxpayers by a third party, there is a sale, and not a reimbursement, and all amounts received from the manufacturers for the performance of such service constitute taxable gross income.

7. Cost as used in HRS § 237-20 means the monetary amount actually paid out by the taxpayers. Indirect expenses are not included as part of costs.

Ronald W. K. Yee, Honolulu (Case, Stack, Kay, Clause & Lynch, Honolulu, of counsel), for appellants.

T. Bruce Honda, Deputy Atty. Gen., Honolulu, for Director of Taxation, appellee.

Before RICHARDSON, C. J., DOBAYASHI, OGATA and MENOR, JJ., and FONG, Circuit Judge, assigned by reason of vacancy.

KOBAYASHI, Justice.

This is an appeal from the findings of fact and conclusions of law and judgment of the tax appeal court which, inter alia, concluded that the credits given by manufacturers to Aloha Motors, Inc., and the Edward R. Bacon Company of Hawaii, Limited, hereinafter appellants, for the performance of warranty work by the appellants did not qualify as reimbursements under HRS § 237-20, but constituted gross income, and were therefore subject to the general excise tax pursuant to HRS § 237. We affirm.

ISSUE

Whether the payments received by the appellants for parts and labor furnished in the performance of warranty work are subject to general excise tax under HRS § 237-20.

STATEMENT OF THE CASE

The stipulated facts show, inter alia, as follows:

Aloha Motors, Inc. (Aloha), is engaged in the sale and service of new and used cars. Upon the purchase of each new car, the retail purchaser receives a manufacturer's warranty against defects in material and workmanship.

In order to acquire and maintain its auto franchise, Aloha entered into an agreement with the manufacturer wherein Aloha agreed to participate in effectuating the manufacturer's warranty.

For defective parts and accessories Aloha was given a credit on its account with the manufacturer in an amount equal to the then current dealer price (factory list price) plus twenty-five percent (25%). The twenty-five percent figure was generally designed to reimburse Aloha for costs incurred in the carrying of excess inventory of parts which was necessary due to the distance from manufacturer. Costs related to such excess inventory included freight, rent, employee wages and benefits and interest to carry said inventory.

For labor, Aloha was credited on the basis of a system of time allotments applied to the various types of warranty work, all as established by the manufacturer. The time allotted for each type of work was then multiplied by the hourly rate of $7.70 for 1967 and $8.00 for 1968 to arrive at the total credit allowed for labor performed by Aloha in the repair or replacement of any defective part or accessory. The rates of $7.70 and $8.00 for the years in question were established by the years in question applying a set formula to information supplied by Aloha and were designed specifically to take into account certain direct and indirect costs of labor.

For damages sustained by vehicles while in transit from the manufacturer's plant, Aloha was paid by way of credit as follows:

Labor-85% of current retail customer's rate;

Parts and accessories-manufacturer's suggested mainland retail list price less 25%.

By way of comparison, Aloha priced parts and accessories on non-warranty work to the retail purchaser, as follows: Current dealer price plus a 108% gross profit markup. For example, a part with a factory list price of $.60 would generally carry a mainland retail list price of $1.00 and an Hawaii retail list price of $1.25.

Appellant Bacon (Bacon) is engaged in the sale and service of heavy equipment and various kinds and types, such as tractors, peneumatic tools, diesel engines, and pumps. Most of the equipment carry manufactruers' warranties.

In general most of the warranties provide that the manufacturer will repair or replace any parts that are presented to the manufacturer within a certain period and which examination discloses to the manufacturer's satisfaction to have been defective.

The manufacturer directs the disposition of necessary warranty work. The replacement of defective parts under a warranty is made by Bacon without charge to the retail purchaser.

In cases where Bacon replaced defective parts under the warranty or performed some repair work, the manufacturer gave Bacon the following credit on account:

Defective parts-current dealer price (factory list price); however, all costs of shipping and handling of parts were borne by Bacon.

Labor-varying hourly rates depending on the warranty: e. g. $10.00 per hour, $4.50 per hour.

By way of comparison, the cost to Bacon of labor for the years is question, taking into account shop department overhead and general overhead and administrative expense, amounted to $8.00 per hour in 1967 and $7.66 per hour in 1968.

Work done under warranty claims such as field welding which could not be accomplished by Bacon personnel were contracted out to other companies. Bills for these services were paid by Bacon and then submitted to the manufacturer. The manufacturer would then pay or credit these amounts to Bacon.

HRS § 237-20 provides as follows:

§ 237-20 Principles applicable in certain situations. A person or company having shareholders or members (a corporation, association, group, trust, partnership, joint adventure, or other person) is taxable upon its business with them, and they are taxable upon their business with it. A person or company, whether or not called a cooperative, through which shareholders or members are pursuing a common objective (for example, the obtaining of property or services for their individual businesses or use, or the marketing of their individual products) is a taxable person, and such facts do not give rise to any tax exemption ot tax benefit except as specifically provided. Even though a business has some of the aspects of agency it shall not be so regarded unless it is a true agency. The reimbursement of costs or advances made for or on behalf of one person by another shall not constitute gross income of the latter, unless the person receiving such reimbursement also receives additional monetary consideration for making such costs or advances. (Emphasis added.)

The instant appeal involves the construction of the italicized last sentence of the statute.

QUESTIONS PRESENTED

1. Whether payments received by the appellants for the performance of warranty work constitute 'reimbursement of costs or advances made for or on behalf of one person by another'?

2. What is the meaning of the term 'costs'?

3. Was the relevant portion of HRS § 237-20 relating to the non-taxable reimbursements designed to create a tax exemption?

Appellants contend that, rather than an exemption, the relevant portion of HRS § 237-20 merely clarifies a basic principle of the general excise tax law and therefore, if any question arises as to the meaning of the statute, it should be construed in favor of the taxpayer; that the amounts received by the appellants from the manufacturers for the performance of warranty work are reimbursements of costs incurred by the appellants on behalf of the manufacturers and are within the purview of the relevant portion of HRS § 237-20; that the cost must reflect direct and indirect costs.

Appellants alleged that the tax appeal court erred in holding:

1. that HRS § 237-20 is an exemption statute;

2. that the rule governing the non-taxability of reimbursements provided in HRS § 237-20 was intended to cover the flow of property or services from a third party to the taxpayers for which the taxpayers paid a monetary consideration and was then subsequently reimbursed by the manufacturer;

3. that the performance of warranty service work by the appellants constitutes a business activity-that is, the transaction between the appellants and the manufacturer constitutes a sale;

4. that the term 'costs' means a monetary amount paid out for property or services furnished, and does not include indirect costs.

It is well settled in this jurisdiction that the rule of strict construction is applicable in tax cases. Honolulu Star Bulletin, Ltd. v. Burns, 50 Haw. 603, 605, 446 P.2d 171, 172 (1968). Thus, 'if doubt exists as to the construction of a taxing statute, the doubt should be resolved in favor of the taxpayer'. Hawaiian Trust Co., Ltd. v. Borthwick, 35 Haw. 429, 436 (1940). This is clearly the applicable rule where a tax is sought to be imposed. However, it is also equally well established that exemptions from taxation are strictly construed against the taxpayer. In re Tax Appeal of Pacific Marine & Supply Co., Ltd., 55 Haw. 572, 578, 524 P.2d...