Hartford Parkview Associates Ltd. Partnership v. Groppo

• Decision Date: 23 May 1989
• Docket Number: No. 13534,13534
• Citation: 558 A.2d 993,211 Conn. 246
• Court: Connecticut Supreme Court
• Parties: HARTFORD PARKVIEW ASSOCIATES LIMITED PARTNERSHIP et al. v. John G. GROPPO, Commissioner of Revenue Services.

Page 993

558 A.2d 993

211 Conn. 246

HARTFORD PARKVIEW ASSOCIATES LIMITED PARTNERSHIP et al. v. John G. GROPPO, Commissioner of Revenue Services.

No. 13534.

Supreme Court of Connecticut.

Argued March 1, 1989.

Decided May 23, 1989.

John G. Haines, Asst. Atty. Gen., with whom, on the brief, were Clarine Nardi Riddle, Acting Atty. Gen., and Joseph I. Lieberman, former Atty. Gen., for appellant-appellee (defendant).

Bourke G. Spellacy, with whom were Karen P. Blado, Hartford, and, on the brief, Amy S. McCabe, Hartford, for appellees-appellants (plaintiffs).

Charles H. Lenore and Robert W. McKay, Hartford, filed a brief for the Connecticut Bankers Ass'n et al. as amici curiae.

Before PETERS, C.J., and GLASS, COVELLO, HULL and FRANCIS X. HENNESSY, JJ.

PETERS, Chief Justice.

This tax appeal concerns the applicability of the Connecticut Sales and Use Tax; General Statutes §§ 12-406 through 12-432a; to a hotel's interstate purchase of reservation services and to its intrastate purchase of equipment, furniture and fixtures. The defendant, the commissioner of revenue services (commissioner), assessed the plaintiffs, Hartford Parkview Associates Limited Partnership and Parkview Associates Limited Partnership (the taxpayer), for additional use tax liability. Upon the taxpayer's appeal to the trial court, pursuant to General Statutes § 12-422, the trial court sustained the action of the commissioner as to all but $7665.09 of the taxes assessed against the taxpayer. The commissioner has appealed the trial court's holding that reservation service fees were not fees paid for "computer and data processing services" under General Statutes § 12-407(2)(i)(A), and the taxpayer has cross appealed the court's holding that it was liable for use tax on equipment, furniture and fixtures purchased from Connecticut vendors. ¹ We find no error.

I

The question of the taxpayer's use tax liability for the purchase of reservation services arises out of the following stipulated facts. The taxpayer has operated the Parkview Hilton Hotel in Hartford since 1982. The hotel has regularly paid fees for access to the reservation service provided to it by Hilton Reservation Service (HRS) in Dallas, Texas. For customers and potential customers of Hilton Hotels throughout the world, HRS provides information about room availability and confirmation of reservations. The taxpayer uses its computer to inform HRS of room availability and rates, and to ascertain what space reservations HRS has confirmed. When a customer arrives at the taxpayer's hotel, a local computer interface transfers the applicable HRS reservation to the hotel's front office. HRS charges the hotel a fee for each reservation taken.

The commissioner assessed the taxpayer $7665.09 for use tax on its HRS fees. Reservation services are not expressly covered within the enumerated categories of services subject to the use tax. The commissioner maintained instead that the HRS fees constituted the purchase of "computer and data processing services," subject to the use tax pursuant to § 12-426-27(b)(1) of the Regulations of Connecticut State Agencies. ² The trial court, however, agreed with the taxpayer that "[t]he essence of HRS services is obtaining and informing the Taxpayer of reservations HRS has made for the Hotel" and that HRS services were therefore not taxable under the relevant statute or regulations governing the purchase of computer services. Accordingly, the trial court disallowed this tax assessment.

Before reviewing the merits of the commissioner's appeal from the trial court's ruling, we must restate the standards that govern the adjudication of this disputed tax assessment. The commissioner maintains that the trial court misconstrued the applicability of the use tax statute and regulations to the taxpayer's payment of fees for HRS services. We review the trial court's ruling from the premise that, when the issue is the imposition of a tax, rather than a claimed right to an exemption or a deduction, the governing authorities must be strictly construed against the commissioner and in favor of the taxpayer. Zachs v. Groppo, 207 Conn. 683, 689, 542 A.2d 1145 (1988); Texaco Refining & Marketing Co. v. Commissioner, 202 Conn. 583, 588, 522 A.2d 771 (1987); Schlumberger Technology Corporation v. Dubno, 202 Conn. 412, 420-23, 521 A.2d 569 (1987).

The commissioner argues that HRS services constitute "computer services" within the terms of General Statutes § 12-407(2)(i)(A) ³ and § 12-426-27(b)(1) ⁴ of the Regulations of Connecticut State Agencies. Under the statute, the use tax applies to the rendering of "certain services for a consideration." Among the services listed in the statute are "(A) Computer and data processing services, including but not limited to, time." The regulation, in turn, defines "computer and data processing services" as "providing computer time, storing and filing of information, retrieving or providing access to information, designing, implementing or converting systems providing consulting services, and conducting feasibility studies." Regs., Conn. State Agencies § 12-426-27(b)(1). According to the commissioner, HRS services constitute "computer services" because HRS stores and files information about reservations on its computer, and because the taxpayer's own computer can access that computerized information. Even if, as the trial court found, the computer is merely a tool that is incidental to the function of providing a reservations service, the commissioner maintains that HRS services are still taxable as "computer services." In the commissioner's view, the statute and the regulation impose use tax liability on any use of a computer, regardless of the way in which the computer is used.

This argument proves too much. As the trial court observed, the commissioner's construction would subject to use tax liability any commercial transaction in which computers are used to communicate information. The trial court rejected so sweeping an interpretation, holding that "[t]he fact [that] a computer is used in connection with HRS services cannot alone be a basis for the tax. Otherwise, the reach of the statute is unbounded and covers almost all intercorporate computer interfacing." Indeed, such a construction would equate the statute's imposition of tax liability for computer services with the imposition of liability for computer use. We are not prepared to stretch the language of the statute or the regulation that far. ⁵

Contrary to the view of the commissioner, we are persuaded, for two reasons, that, as in other cases involving use tax liability, the applicability of the tax in this case depends upon a determination of the true object of the underlying transaction. See Dine Out Tonight Club, Inc. v. Department of Revenue Services, 210 Conn. 567, 571, 556 A.2d 580 (1989); American Totalisator Co. v. Dubno, 210 Conn. 401, 406, 555 A.2d 414 (1989); White Oak Corporation v. Department of Revenue Services, 198 Conn. 413, 422, 503 A.2d 582 (1986); Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 609-10, 410 A.2d 457 (1979). First, the commissioner's own administrative interpretations of related statutory provisions have regularly invoked an "essence of the service" test to determine the applicability of the sales and use tax. With respect to actuarial services, which literally might fall within § 12-407(2)(i)(J) as "business analysis and management services," the commissioner has drawn functional lines to distinguish between the nontaxability of actuarial calculations and analyses and the taxability of the rendition of other services. Department of Revenue Services, Bulletin No. 41, January 19, 1989. The department's training manual for its field examiners, in expressly recognizing the nontaxability of an accountant's incidental use of a computer, emphasizes that the test of what is a taxable service is "[t]he essence of what is contracted for." Connecticut Sales and Use Tax Manual (2/1/86) § 10.2.9, pp. 1, 3. ⁶ Second, a narrow view of the scope of taxpayer liability for "computer services" is entirely consistent with the proposition that, as presently drafted, the sales and use tax purports to tax only certain specifically enumerated services rather than commercial services generally. Zachs v. Groppo, supra, 207 Conn. at 692-93, 542 A.2d 1145.

The trial court found that "[t]he essence of HRS services is obtaining and informing the Taxpayer of reservations HRS has made for the Hotel." ⁷ Because the use of a computer to communicate this information was merely incidental to this objective, the court concluded that the commissioner had not met his burden of proving the taxability of the fees paid for HRS services. The commissioner has not challenged the accuracy of the trial court's factual finding. Accordingly, we affirm the trial court's ruling that HRS fees were not subject to the use tax because the purpose of the taxpayer in contracting for HRS services was to purchase reservations services rather than computer and data processing services. ⁸

II

The taxpayer's cross appeal concerns its use tax liability for purchases of equipment, furniture and fixtures from Connecticut vendors. Before and after the opening of the hotel, the taxpayer purchased various items of equipment, furniture and fixtures necessary for the operation of the hotel. Even for those items it purchased from Connecticut vendors, the taxpayer paid no Connecticut sales tax. The commissioner assessed the taxpayer $26,496.47 for use taxes with respect to these intrastate purchases. The taxpayer claims the benefit of a statutory exemption contained in General Statutes § 12-413(1), which excludes use tax liability for transactions that are subject to the sales tax. The trial court nonetheless upheld the use tax assessment.

The taxpayer's appeal requires us to interpret § 12-413(1), which provides that "[t]he storage, acceptance, consumption or other use in this...