Dart Industries, Inc. v. Clark

• Decision Date: 05 June 1997
• Docket Number: No. 95-569-M,95-569-M
• Citation: 696 A.2d 306
• Parties: DART INDUSTRIES, INC., d.b.a. Tupperware Co. v. R. Gary CLARK, Tax Administrator, State of Rhode Island Department of Administration, Division of Taxation. P.
• Court: Rhode Island Supreme Court

Page 306

696 A.2d 306

DART INDUSTRIES, INC., d.b.a. Tupperware Co. v. R. Gary CLARK, Tax Administrator, State of Rhode Island Department of Administration, Division of Taxation.

No. 95-569-M.P.

Supreme Court of Rhode Island.

June 5, 1997.

Everett Hans Lundsten, Elizabeth McDonough Noonan, Providence, for Plaintiff.

Marcia McGair Ippolito, Bernard J. Lemos, Providence, for Defendant.

Before WEISBERGER, C.J., and LEDERBERG, BOURCIER, FLANDERS and GOLDBERG, JJ.

OPINION

LEDERBERG, Justice.

R. Gary Clark, Tax Administrator for the State of Rhode Island (tax administrator), brought this petition for certiorari, seeking our review of a final judgment of the Sixth Division District Court in favor of the respondent-taxpayer, Dart Industries, Inc., d.b.a. Tupperware Co. (Dart). A District Court judge found that certain of Dart's equipment, including molds used in producing plasticware and equipment used in testing and developing plastic products, qualified for exemptions from Rhode Island's sales-and-use tax because the equipment was used in manufacturing and in research and development. For the reasons that follow, we affirm the judgment of the District Court. The facts and travel pertinent to this case are provided below, with additional facts given as necessary in the legal analysis.

Facts and Procedural History

The taxpayer, Dart, is a Delaware corporation that manufactures plastic products, primarily kitchenware, sold under the trade name Tupperware. During the time relevant to this case, Dart operated two facilities in North Smithfield, Rhode Island, referred to by the parties as "the Blackstone plant" and "the Great Road plant." The principal function at the Blackstone plant was the testing, modifying, or repairing of molds used in the manufacturing of Tupperware products. Each mold is a 3,000 to 5,000-pound steel block into which liquefied plastic is injected to form a plastic product. Most of the molds were shipped directly from the out-of-state vendor to the Blackstone plant where they were "set up" prior to their use in manufacturing in other states. According to Dart, the set-up of a new mold consists of "preparing a computer tape to program the mold for the desired production cycle and having test runs performed, for which the mold was installed on one of the three mold machines at this location and was used to produce samples." The sample products were not sold but were either recycled or destroyed. A small percentage of the molds was received from out-of-state manufacturing facilities for routine repair and maintenance. The molds typically remained in Rhode Island for about a month before being sent to manufacturing facilities located in other states. The parties do not dispute that the molds were used in manufacturing in out-of-state facilities, nor do they dispute that salable products using the molds were never manufactured in Rhode Island.

The Great Road plant was devoted primarily to four small manufacturing operations that produced packaging materials, plastic pellets used as a coloring agent, and pastry sheets. The tax-exempt status of the equipment used in these manufacturing activities is not in dispute. The Great Road plant also performed what was alternatively characterized as "research and development" or "quality control." ¹ Ralph Belleville (Belleville), a revenue agent for the Rhode Island Division of Taxation (tax division), described the activity at issue as "a type of quality control," involving "testing their own product, * * * testing raw materials, testing competitor's products." In contrast, Frederick Pezzera (Pezzera), a witness for Dart, described the purpose of this activity as "new product development" and the analysis and testing of "new material," not existing materials.

The present controversy began when the Blackstone and Great Road plants were subjected to a routine field audit under the Sales and Use Tax Act, G.L.1956 chapters 18 and 19 of title 44. As a result of the audit, the tax division issued three notices of deficiency against Dart seeking a total of $1,438,387.81 in unpaid taxes, interest, and penalty. At least 90 percent of this amount was attributable to the auditor's determination that the molds that were set up or repaired at the Blackstone plant were subject to the use tax because they did not qualify for a manufacturing exemption. The remainder was derived from an assessment on equipment used to work on the molds in the machine shop at the Blackstone plant and equipment at the Great Road plant for which Dart sought a research-and-development exemption. Dart conceded liability for a small portion of the assessment.

Dart sought administrative review of the assessment pursuant to § 44-19-17. A formal hearing was held under the Rhode Island Administrative Procedures Act, G.L.1956 chapter 35 of title 42, on October 18, 1991. In its memorandum to the hearing officer, Dart argued that the molds and the equipment in the machine shop used to work on the molds were entitled to the manufacturing exemption from the sales-and-use tax, § 44-18-30(W) (subsequently amended), and that the equipment used for what Belleville called quality control was in fact research-and-development equipment entitled to the research-and-development exemption from the sales-and-use tax, § 44-18-30(VV) (subsequently amended). ² On November 24, 1992, the hearing officer issued a decision rejecting Dart's arguments and recommending that the assessment, revised downward to $1,293,659.08 to account for certain errors in the original assessment, be affirmed. The tax administrator accepted the recommendation of the hearing officer and issued a final decision and order dated December 2, 1992, stating that the assessment as revised was correct.

On December 28, 1992, Dart paid the tax division $1,468,767.24, representing the amount of the revised assessment plus statutory interest. One day later, Dart filed an appeal with the Sixth Division District Court, seeking de novo review of the final administrative decision pursuant to G.L.1956 § 8-8-24. A hearing was held on Dart's appeal on June 21, 1995. On September 18, 1995, the District Court judge entered an order reversing the decision of the tax administrator and, in his written decision, found that the molds qualified for the manufacturing exemption and that the equipment for which Dart sought a research-and-development exemption did in fact qualify for such an exemption. The decision did not specifically address the machine-shop equipment used to work on the molds but implicitly ruled that such equipment also fell within the manufacturing exemption. The tax administrator petitioned this Court to issue a writ of certiorari to review the District Court decision, and on January 19, 1996, the writ was issued.

Standard of Review

The General Assembly has directed that each appeal of a final decision of the tax administrator "shall be an original, independent proceeding in the nature of a suit in equity to set aside such final decision and shall be tried de novo and without a jury" in the District Court. Section 8-8-24. See Owner-Operators Independent Drivers Association of America v. State, 541 A.2d 69, 73-74 (R.I.1988). A party aggrieved by a final judgment of the District Court in a tax proceeding may petition this Court "for a writ of certiorari to review any questions of law involved. The petition for writ of certiorari shall set forth the errors claimed." Section 8-8-32. Because the quoted language is identical to that providing for certiorari to this Court in administrative matters pursuant to § 42-35-16 of the Rhode Island Administrative Procedures Act, we regard our cases interpreting the scope of our review under § 42-35-16 as applicable in determining the scope of review under § 8-8-32. Therefore, this Court not only addresses alleged errors of law, New England Telephone and Telegraph Co. v. Clark, 624 A.2d 298, 300 (R.I.1993); Rhode Island CATV Corp. v. Clark, 541 A.2d 462, 464 (R.I.1988), but also "properly includes questions of law involving the applicability of a statute to undisputed facts." George, Inc. v. Norberg, 444 A.2d 868, 870 (R.I.), cert. denied, 459 U.S. 908, 103 S.Ct. 214, 74 L.Ed.2d 170 (1982). This Court, however, "cannot weigh the evidence to resolve factual disputes." Kachanis v. Board of Review, Department of Employment and Training, 638 A.2d 553, 556 (R.I.1994). Rather, we shall consider only whether the decision under review is affected by error of law or whether legally competent evidence exists in the record to support the findings of the trial judge. See id.

Manufacturing Exemption

The trial judge in this case determined that the molds qualified for the manufacturing exemption from Rhode Island's use tax. The use tax, imposed by § 44-18-20, is a complement to Rhode Island's sales tax, imposed by § 44-18-18. The sales tax applies to "sales at retail in this state." Section 44-18-18. The use tax, in contradistinction, is imposed on "the storage, use, or other consumption in this state of tangible personal property." Section 44-18-20. Although not mutually exclusive,

"the sales tax generally applies to purchases within the state, and the use tax to purchases which occur out of state but which are in effect 'substitutes' for purchases in this state in the sense that in both cases the property is used in this state. The purpose of a use tax is twofold; to prevent tax avoidance, and to insure that the sales tax will not result in an unfair burden being placed upon the local retailer who must compete with retail dealers in other states who are exempt from the sales tax." Great Lakes Dredge & Dock Co. v. Norberg, 117 R.I. 600, 608-09, 369 A.2d 1101, 1106 (1977).

Transactions subject to the use tax are typically also susceptible to the sales tax. Id. at 603, 369 A.2d at 1103-04. Double taxation is avoided through various credit and exemption provisions. See, e.g., § 44-18-30A (credit for foreign sales tax or...