Associated Testing Laboratories, Inc. v. Commissioner of Revenue

• Decision Date: 10 June 1999
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: ASSOCIATED TESTING LABORATORIES, INC. v. COMMISSIONER OF REVENUE.

Page 957

710 N.E.2d 957

429 Mass. 628

ASSOCIATED TESTING LABORATORIES, INC. v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued April 5, 1999.

Decided June 10, 1999.

William A. DeVasher, Jr., Wellesley, for the plaintiff.

John R. Hitt, Assistant Attorney General, for the defendant.

Present: WILKINS, C.J., ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL, & IRELAND, JJ.

LYNCH, J.

Associated Testing Laboratories, Inc. (taxpayer), appeals, pursuant to G.L. c. 58A, § 13, from a decision of the Appellate Tax Board (board), in which the board declined to abate sales taxes assessed against the taxpayer on the taxpayer's purchase of testing equipment between January, 1988, and December, 1990. The Commissioner of Revenue (commissioner) issued notices of assessment for all three tax years, and shortly thereafter the taxpayer paid all taxes, interest, and penalties assessed. The taxpayer then filed timely applications of abatement for the taxes at issue. Following a hearing before the abatement bureau of the Department of Revenue (department), the abatements were denied. The commissioner subsequently issued notice of abatement denials for the three tax years 1988, 1989, and 1990, respectively.

The taxpayer filed timely petitions with the board and the parties filed a statement of agreed facts. The board held a hearing and affirmed the commissioner's denial of the abatements. On February 24, 1998, pursuant to the taxpayer's request under G.L. c. 58A, § 13, and 831 Code Mass. Regs. § 1.32 (1996), the board issued the decision and factual findings from which the taxpayer now appeals. The chairman who conducted the hearing did not participate in the board's decision. ¹

Except as otherwise noted, the facts are not in dispute. The taxpayer is a New Jersey corporation which operates a testing laboratory in a 27,000 square foot building containing over 1,400 pieces of testing equipment located in Burlington. The taxpayer renders testing services for its clients' products, to ensure that the items meet certain specifications. The taxpayer does not own the items tested, rather they remain the property of the taxpayer's customers throughout the testing process. Once the taxpayer completes the required tests, it returns the items to the customer. Although customers typically hire the taxpayer to test their products prior to their sale to third parties, at least one customer, a Federal government agency, requests testing on products it has purchased to determine whether these goods are in conformance with its specifications.

The sole question presented is whether G.L. c. 64H, § 6 (§ ), exempts the property at issue from sales and use tax. General Laws c. 64H, § 6 (§ ), provides in relevant part:

"The following sales and the gross receipts therefrom shall be exempt from the tax imposed by this chapter....

"Sales of machinery, or replacement parts thereof, used directly and exclusively ... in an industrial plant in the actual manufacture of tangible personal property to be sold .... For the purpose of this paragraph ... the term 'industrial plant' shall mean a factory at a fixed location primarily engaged in the manufacture, conversion or processing of tangible personal property to be sold in the regular course of business; and machinery shall be deemed to be used directly and exclusively in the actual manufacture, conversion or processing of tangible personal property to be sold only where such machinery is used solely during a manufacturing, conversion or processing operation to effect a direct and immediate physical change upon the tangible personal property to be sold; to guide or measure a direct and immediate physical change upon such property where such function is an integral and essential part of tuning, verifying or aligning the component parts of such property; or to test or measure such property where such function is an integral part of the production flow or function.... Machinery used directly and exclusively in the actual manufacture, conversion or processing of any tangible personal property which is not to be sold and which would be exempt under paragraph (r ) of this paragraph if purchased from a vendor thereof or machinery used during any manufacturing, converting or processing, conveying or packaging operation or function or for any other purpose, except as heretofore specified, shall not be exempt under this paragraph even though such operation, function or purpose is an integral or essential part of a continuous production flow or manufacturing process."

Thus, to qualify for this exemption, the statute requires the taxpayer to demonstrate the machinery assessed was used (1) directly and exclusively; (2) in an industrial plant; (3) in the actual manufacture, conversion, or processing; (4) of tangible personal property; (5) to be sold. As applied to the instant facts, the statute further provides that the first and third requirements will be deemed to have been satisfied only where the machinery is "used solely during a manufacturing, conversion or processing operation ... to test or measure such property where such function is an integral part of the production flow or function." The board rejected the taxpayer's argument that the machinery fell within this latter provision because "the testing services performed by [the taxpayer] were not, at all times, an integral part of the production flow," and because "the testing was not always done on items to be sold." Our review, limited as it is to questions of law (as opposed to factual conclusions), encompasses issues of statutory construction. See Tilcon-Warren Quarries Inc. v. Commissioner of Revenue, 392 Mass. 670, 672, 467 N.E.2d 472 (1984), citing Coomey v. Assessors of Sandwich, 367 Mass. 836, 839, 329 N.E.2d 117 (1975). We now conclude that the board's ruling that the taxpayer failed to demonstrate that the testing was integral to the production flow of manufactured goods is based on an erroneous interpretation of G.L. c. 64H, § 6 (§ ).

1. Directly and exclusively engaged in actual manufacture requirements. Whether testing machinery is an "integral part of the production flow or function," and thus, "deemed to be used directly and exclusively in the actual manufacture, conversion or processing of tangible personal property," turns on whether the testing is a sine qua non of the produced items' ultimate salability. Contrary to the board's implicit suggestion, neither the physical proximity of the testing plant to the rest of the production line, nor the chronology of when the testing takes place is material to the analysis, so long as the test occurs prior to sale. See Commissioner of Revenue v. Fashion Affiliates, Inc., 387 Mass. 543, 546, 441 N.E.2d 520 (1982). Rather, for purposes of the first and third requirements, it is sufficient that the testing services were an essential part of bringing the product to market.

Furthermore, we decline to read into the statute the added requirement that the testing must be performed by the same entity as the rest of the manufacturing process. The board's citation to Arizona Dep't of Revenue v. Sonee Heat Treating Corp., 178 Ariz. 278, 872 P.2d 682 (1994) (construing Ariz.Rev.Stat. § 42-1409[B], renumbered as § 42-5159[B] ), and Pledger v. Baldor Int'l, Inc., 309 Ark. 30, 827 S.W.2d 646 (1992) (construing Ark.Code Ann. § 26-53-114[C][B] ), does not persuade us otherwise. The statutes in these States were less expansively drafted than G.L. c. 64H, § 6 (§ ), and neither includes a clause "deeming" certain testing machinery to be within its respective exemption.

More on point is our decision in Commissioner of Revenue v. Fashion Affiliates, Inc., supra at 545-547, 441 N.E.2d 520, a case on which the board relied in construing the exemption. In that case we concluded that the exemption in question extends to machinery used to produce "markers," a device used in the process of manufacturing dresses. Id. We reasoned that, despite the fact that the items produced by these machines were used up during the manufacturing process, "[t]he definition does not require that the machinery's guidance or measurement be direct or immediate in the sense of physical contact." Id. at 546, 441 N.E.2d 520.

Here the record indicates that the ultimate purchaser of these goods required the taxpayer's seal of approval. Items that did not measure up to required specifications were returned to the seller. Accordingly, because no sale could be final without a successful test result, the tests were integral to the production flow or function of the items tested. The taxpayer's testing machinery, therefore, satisfies the first and third statutory...