American Totalisator Systems, Inc. v. Dubno, 13409

• Decision Date: 14 March 1989
• Docket Number: No. 13409,13409
• Citation: 555 A.2d 421,210 Conn. 413
• Court: Connecticut Supreme Court
• Parties: AMERICAN TOTALISATOR SYSTEMS, INC. v. Orest T. DUBNO, Commissioner of Revenue Services.

Page 421

555 A.2d 421

210 Conn. 413

AMERICAN TOTALISATOR SYSTEMS, INC. v. Orest T. DUBNO, Commissioner of Revenue Services.

No. 13409.

Supreme Court of Connecticut.

Argued Dec. 16, 1988.

Decided March 14, 1989.

Richard K. Greenberg, Asst. Atty. Gen., with whom, on the brief, was Joseph I. Lieberman, former Atty. Gen., for appellant (defendant).

Scott P. Moser, Hartford, with whom, on the brief, was H. Douglas Bailey, for appellee (plaintiff).

Before PETERS, C.J., and SHEA, CALLAHAN, GLASS and COVELLO, JJ.

CALLAHAN, Associate Justice.

This case is one of four related appeals from sales and use tax assessments that were consolidated for trial in the Superior Court and subsequently appealed to this court. The other three appeals were decided on this same date. See American Totalisator Co. v. Dubno, 210 Conn. 401, 555 A.2d 414 (1989). As did the first of those appeals, this appeal arises out of contracts between American Totalisator Company, Inc. (AmTote), and the state of Connecticut. These contracts provided that AmTote establish and operate the state's initial teletrack, off-track betting and daily lottery ventures. This case is addressed separately because it concerns personnel services rather than personal property and because the trial court reached a different result in this case than in the others.

The basic facts are not in dispute. The plaintiff in this case, American Totalisator Systems, Inc. (Systems), and AmTote are both wholly owned subsidiaries of General Instrument Corporation. In 1973, AmTote entered into a contract with the state to establish and operate the state's teletrack and off-track betting systems. In 1977, it contracted with the state to establish and operate the daily lottery. Because AmTote did not directly employ sufficient personnel to render all the services required by its contracts with the state, it used employees of Systems, its sister corporation, to fulfill its contractual obligations. The arrangement between Systems and AmTote arose out of considerations of business policy and convenience; Systems did not hold itself out, advertise or operate as a personnel agency in the public domain and it supplied employees only to AmTote and to no other entity. Systems was reimbursed for its employees' services to AmTote by a fee equal to 100 percent of its employees' salaries plus 5 percent for overhead expenses.

In 1982, the commissioner of revenue services (commissioner) assessed a sales tax deficiency against Systems in the amount of $283,080.98 for the period January 1, 1976, through February 28, 1982. ¹ That assessment was based on a determination by the commissioner that Systems was an agency providing personnel services at retail within the meaning of General Statutes § 12-407(2)(i)(C) ² and (3). ³ Systems petitioned for a reassessment of the sales tax deficiency under General Statutes § 12-418(1) ⁴ and requested an oral hearing under General Statutes § 12-418(2). ⁵ After the oral hearing, the commissioner confirmed the assessment against Systems. Subsequently, Systems appealed to the Superior Court, pursuant to General Statutes § 12-422. ⁶ The Superior Court determined that sales tax deficiencies were incorrectly assessed against Systems because Systems' transactions with AmTote were not retail sales as defined by § 12-407(3). The court found instead that the services of Systems' employees were purchased by AmTote for "resale" to the state, thus taking the transactions out of the definition of retail sales. ⁷ The trial court consequently determined that the transactions were not subject to the imposition of a sales tax. The commissioner, however, contends that AmTote did not resell the services of Systems' employees to the state but rather used those services itself to fulfill its teletrack, off-track betting and daily lottery contracts. We agree with the commissioner and conclude that the sales of Systems' employees' services to AmTote were not sales for resale but rather retail sales subject to the imposition of a sales tax.

Our conclusion is based on the same rationale that underlay our holding in American Totalisator Co. v. Dubno, supra, that is, that the intention of both the state and AmTote, as manifested by their contracts, was that AmTote provide the state with equipment and personnel to establish and operate the state's embryonic wagering systems. The agreements clearly indicate that the state did not contract with AmTote to purchase personnel services per se. See Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 601, 362 A.2d 847 (1975). Instead, it contracted to have AmTote initiate and operate the wagering systems it desired and AmTote, under the contracts, was obligated to supply the necessary personnel to do so. "The court must look to the intention of the parties to the contract to determine whether the items in a contract are held for resale or were purchased for a different purpose." White Oak Corporation v. Department of Revenue Services, 198 Conn. 413, 422, 503 A.2d 582 (1986). "That intention is to be ascertained from the language used, interpreted in the light of the situation of the parties and the circumstances surrounding them." United Aircraft Corporation v. O'Connor, 141 Conn. 530, 538, 107 A.2d 398 (1954). The personnel services furnished by Systems to AmTote, while necessary, were incidental to the primary purpose of AmTote's contracts with the state and were utilized by AmTote, itself, in performing those contracts. White Oak Corporation v. Department of Revenue Services, supra, 198 Conn. at 422-23, 503 A.2d 582; Dresser Industries, Inc. v. Lindley, 12 Ohio St.3d 68, 69, 465 N.E.2d 430 (1984). The services were not purchased from Systems and then "resold" to the state by AmTote as Systems contends. Consequently, the sale of Systems' personnel services to AmTote was a "retail sale" as defined by § 12-407(3). White Oak Corporation v. Department of Revenue Services, supra, 198 Conn. at 423, 503 A.2d 582.

Systems has, however, urged an alternate ground for sustaining the judgment of the trial court. It argues that it is not an "[agency] providing personnel services" as contemplated by § 12-407(2)(i)(C) and is, therefore, not subject to the imposition of a sales tax on the sale of its employees' services to AmTote. It contends that the "agencies" intended by the legislature to be subject to sales taxes for "providing personnel services" are those "agencies" that advertise and hold themselves out to the public to be in the business of placing their employees with other businesses and industry. Systems claims that the statute was never intended to include within its parameters the sale of the services of employees of one wholly owned subsidiary of a parent corporation to another. ⁸ We disagree.

Absent a specific exemption, transactions between affiliated corporations are subject to the imposition of a sales tax. Ex parte Capital City Asphalt, Inc., 437 So.2d 1291 (Ala.1983); Superior Coal Co. v. Department of Finance, 377 Ill. 282, 291, 36 N.E.2d 354 (1941); Hilton Hotels Corporation v. Traigle, 360 So.2d 245, 246-47 (La.App.1978); Central Cooling & Supply Co. v. Director of Revenue, 648 S.W.2d 546, 548 (Mo.1982); Prospect Dairy, Inc. v. Tully, 53 App.Div.2d 755, 384 N.Y.S.2d 264 (1976); 68 Am.Jur.2d, Sales and Use Tax § 97; see also annot., 64 A.L.R.2d 769. Therefore, if Systems was an "[agency] providing personnel services" its transactions with AmTote were taxable despite the affiliation of the two corporations unless there exists an applicable exemption. There is no definition of the word "agency" in either the statutes concerning the sales and use tax or the regulations. The Random House Dictionary of the English Language (2d Ed.) p. 37, however, defines "agency" as: "An organization, company, or bureau that provides some service to another." Systems in its relations with AmTote fits within that definition. Moreover, we can find nothing in the statutes or the regulations that would dictate reading § 12-407(2)(i)(C) to require that Systems has held itself out to the public as a personnel agency before its transactions with AmTote were subject to the imposition of a sales tax.

Systems argues further, however, that the commissioner's own regulations support its contention that its transactions with AmTote were not taxable because those regulations define personnel services to mean "furnishing temporary or part-time help to others by means of employing such temporary or part-time help directly." Regs., Conn.State Agencies § 12-426-27(b)(3)(c). ⁹ Systems claims that its employees worked for AmTote "on an exclusive, permanent, full time and ongoing basis" and hence that it did not supply AmTote with "personnel services" as envisioned by § 12-407(2)(i)(C) or the regulations. The problem with this argument is that the trial court specifically found that Systems' employees "were not to be permanent" and that its agreement with AmTote "was to provide temporary help." Other than the assertion to the contrary in its brief, Systems has not challenged that finding on appeal. Its argument in this regard is therefore without merit.

Finally, Systems contends that the enactment of Public Acts, Spec.Sess., July, 1987, No. 1, ¹⁰ was a clear signal from the legislature that it never intended that sales taxes be levied on transactions relating to business services between wholly owned subsidiaries of the same parent corporation. That act did, in fact, create such an exemption from the sales and use tax for corporations so affiliated and made that exemption retroactive to July 1, 1982. Although Systems recognizes that its transactions with AmTote predated July 1, 1982, it argues that it should have the benefit of the exemption because the legislative history ¹¹ of the act reveals that the commissioner has all along been misinterpreting § 12-407(2)(i)(C) by applying it to corporations affiliated as are Systems and AmTote. Further, it...