Commissioner of Revenue v. Fashion Affiliates, Inc.

• Decision Date: 29 October 1982
• Citation: 387 Mass. 543,441 N.E.2d 520
• Parties: COMMISSIONER OF REVENUE v. FASHION AFFILIATES, INC.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 520

441 N.E.2d 520

387 Mass. 543

COMMISSIONER OF REVENUE v. FASHION AFFILIATES, INC.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Sept. 17, 1982.

Decided Oct. 29, 1982.

Judith S. Yogman, Asst. Atty. Gen., for plaintiff.

Lawrence M. Slater and Victoria L. Polito, Boston, for defendant, submitted a brief.

James C. Heigham, Boston, for Massachusetts Newspaper Publishers Association, amicus curiae, submitted a brief.

Before WILKINS, ABRAMS, NOLAN, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

The Commissioner of Revenue has appealed from a decision of the Appellate Tax Board (board) granting Fashion Affiliates, Inc., an abatement of use taxes assessed on its rental of certain machinery used in the manufacture of clothing. The board concluded, we think correctly, that the machinery, known as the "Markamatic System" and leased by Fashion Affiliates, was exempt from use taxes by reason of the provisions of G.L. c. 64H, § 6(§ ), as appearing in St.1971, c. 555, § 45. See G.L. c. 64I, § 7(b ).

The board rejected the Commissioner's argument that, because Fashion Affiliates did not file timely sales and use tax returns (except for one three-month period), Fashion Affiliates' appeals for abatement were, in large measure, not properly before the board. Our recent opinion in Commissioner of Revenue v. Pat's Super Mkt., Inc., 387 Mass. 309, 439 N.E.2d 306 (1982), deals with the jurisdictional question. We remand the appeals to the board for consideration in light of that opinion. Because, as both parties agree, the substantive issue must be reached at least as to one three-month period, we discuss it first.

1. Whether the machinery is exempt from the use tax depends on the scope of the exemption set forth in G.L. c. 64H, § 6(§ ). That section exempts sales (including the lease or rental of tangible personal property [G.L. c. 64H, § 1(12)(a ) ] ) of certain machinery used directly and exclusively in an industrial plant in the actual manufacture, conversion, or processing of tangible personal property to be sold. The relevant exemption language of G.L. c. 64H, § 6(§ ), as appearing in St.1971, c. 555, § 45, is set forth in the margin, with the changes wrought by the 1971 amendment presented in italics. ¹ The 1971 amendment narrowed the scope of § 6(§ )'s exemption. Machinery is exempt if it 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" or "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."

The "Markamatic System" is a series of machines, the heart of which is a minicomputer, that Fashion Affiliates uses to manufacture dresses. The process begins with a dress pattern of a single size. A pattern grader enters these dimensions into the system, which then automatically calculates the adjustments necessary to produce patterns of various dress sizes. The system displays the pieces comprising a single dress size as images on a cathode-ray screen. In this way, the operator can position them to achieve maximum use of the fabric, which usually comes in bolts one hundred yards long. The result of the process is a marker, a long sheet of paper on which many pattern pieces are traced. The marker is taken into the cutting room, spread onto a pile of fabric from the long bolts, and used to guide the cutting knife. In the process, the marker is destroyed. The pieces it defined are stitched together to make dresses.

The Commissioner argues that the "Markamatic System" is not exempt because it is not used directly and exclusively in the actual manufacture of dresses and because the system produces not dresses but markers that are consumed and used in the actual manufacture of dresses. The first of these arguments concerns the proper application of the exemption language of § 6(§ ) quoted above. The second concerns the denial of any exemption pursuant to the penultimate sentence of § 6(§ ), a point to which we shall return.

We acknowledge that the 1971 amendment of § 6(§ ) imposed new restrictions on that exemption, thus limiting the broad construction given to § 6(s), before its amendment, by our opinion in Courier Citizen Co. v. Commissioner of Corps. & Taxation, 358 Mass. 563, 266 N.E.2d 284 (1971). See Lowell Gas Co. v. Commissioner of Corps. & Taxation, 377 Mass. 255, 260 n. 9, 385 N.E.2d 991 (1979). Cf. Houghton Mifflin Co. v. State Tax Comm'n, 373 Mass. 772, 776 n. 5, 370 N.E.2d 441 (1977) (discussing amendments made by St.1971, c. 555, § 45, to G.L. c. 64H, § 6[r] ). We must scrutinize closely the definition of what is deemed to be machinery "used directly and exclusively ... in the actual manufacture, conversion or processing of tangible personal property to be sold." The use of the Markamatic System falls within at least the second of the three stated statutory definitions (see note 1 above) because it is machinery "used solely during a manufacturing ... operation ... to guide or measure a direct and immediate physical change upon ... [tangible personal] property where such function is an integral and essential part of ... verifying or aligning the component parts of such property." The machinery is used to guide and measure a direct and immediate physical change in the material, a function that is an integral and necessary role in producing properly cut portions of the dresses being manufactured. We think it immaterial that the Markamatic System provides guidance and measurement through the production of markers. The physical change upon the material must be immediate and direct, as it is. The definition does not require that the machinery's guidance or measurement be direct or immediate in the sense of physical contact. ²

We come then to the Commissioner's argument that the next to last sentence of § 6(s) denies any exemption to Fashion Affiliates. The Commissioner argues that this sentence, which is set forth in the margin, ³ denies an exemption for machinery used directly and exclusively in the actual...