International Business Machines Corp. v. Charnes

• Decision Date: 24 September 1979
• Docket Number: No. 28435,28435
• Citation: 601 P.2d 622,198 Colo. 374
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellee, v. Alan CHARNES, Executive Director of the Department of Revenue, State of Colorado, Defendant-Appellant.
• Court: Colorado Supreme Court

Page 622

601 P.2d 622

198 Colo. 374

INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellee, v. Alan CHARNES, Executive Director of the Department of

Revenue, State of Colorado, Defendant-Appellant.

No. 28435.

Supreme Court of Colorado, En Banc.

Sept. 24, 1979.

Rehearing Denied Nov. 5, 1979.

Davis, Graham & Stubbs, Alan M. Loeb, Donald J. O'Connor, Donald A. Barnes, Denver, for plaintiff-appellee.

J. D. MacFarlane, Atty. Gen., David W. Robbins, Deputy Atty. Gen., Edward G. Donovan, Sol. Gen., Chris J. Eliopulos, Sp. Asst. Atty. Gen., Denver, for defendant-appellant.

CARRIGAN, Justice.

The Executive Director of the Colorado Department of Revenue (Director) determined that International Business Machine Corporation (IBM) is liable for use tax upon the "capitalized cost" or "full finished goods cost" of items it withdraws from its work in process and sales inventories and diverts to its own intracompany use within Colorado.

After a trial De novo, the district court reversed, holding that a use tax may be imposed upon only the "materials cost" of such items diverted for internal use. The Director had asserted the use tax against the higher "full finished goods cost" or "capitalized cost" by promulgating a regulation ¹ to that effect. The district court held that regulation void. The Director appealed. We affirm the district court.

IBM manufactures and sells business equipment. The company regularly withdraws certain goods and items from its inventories and puts them to its own use in Colorado. These withdrawals include component parts purchased from suppliers, partially completed goods and finished products. Components and partially finished items normally are withdrawn for testing, quality control, and research and development purposes. Finished goods, such as typewriters, computers and copiers ordinarily are taken from inventory and used for their customary, intended purposes in IBM's business.

When IBM, in the course of its normal business operations, buys component parts for fabrication into finished products and ultimate resale, it pays no sales tax. By statute, such purchases are expressly exempted from sales tax as ingredients, or component parts of a product which is manufactured. Section 39-26-102(20), C.R.S.1973.

At the time it purchases the goods and parts which ultimately are to be withdrawn for its own internal use, IBM ordinarily does not, indeed cannot, identify which items eventually will be so withdrawn and used. But, historically, when such items actually have been selected and used in Colorado, IBM has followed the practice of remitting use tax payments based upon their "materials cost." ² IBM has not factored its own labor or overhead into the tax base employed in calculating those payments, and thus has used the same tax base for each item as would have applied if the original purchase of that item's component parts or ingredients had not been exempt from sales tax.

The director, however, maintains that IBM owes additional use taxes based upon the "full finished goods cost" or "capitalized cost" of its inventory withdrawals. Both parties have stipulated that the revenue department's asserted formula would impose the use tax not only upon "materials cost" but also upon the increment in value attributable to IBM's addition of its own labor and overhead.

IBM argues, and the trial court held, that a use tax based upon "full finished goods cost" or "capitalized cost" lacks statutory authority and actually contravenes a provision ³ of the use tax act. ⁴ Moreover, IBM persuaded the trial court that the revenue department's regulation ⁵ exceeded statutory authority and therefore was invalid insofar as it imposed a use tax on "full finished goods cost."

The issue in this case is whether the district court erred in reaching those conclusions in favor of IBM.

A use tax is a levy upon the "privilege of storing, using, or consuming in this state . . . tangible personal property purchased at retail." Section 39-26-202, C.R.S.1973. The use tax is "supplementary" to the sales tax. Section 39-26-203(1), C.R.S.1973; Matthews v. State, Department of Revenue, 193 Colo. 44, 562 P.2d 415, 417 (1977); Fifteenth Street Investment Co. v. People, 102 Colo. 571, 581, 81 P.2d 764, 769 (1938); Bedford v. Colorado Fuel and Iron Corp., 102 Colo. 538, 540, 81 P.2d 752, 753 (1938). It ordinarily serves "to equalize the tax burden as between those who purchase within and without the state." Matthews v. State, Supra, 193 Colo. 44, 562 P.2d at 417. See Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 66, 83 S.Ct. 1201, 1202, 10 L.Ed.2d 202, 204 (1963).

Although the use tax usually operates to eliminate any tax advantage from purchasing in states with lower sales taxes, or none, ⁶ IBM's use tax liability arose under different circumstances. IBM incurred use tax obligations because its inventory withdrawals included items and materials that had been exempted from sales tax when originally purchased for the reason that the purchases were then deemed wholesale purchases for resale. Nevertheless, similar policy reasons of interstate sales tax equalization apply.

Given the supplementary nature and equalizing function of the use tax, the burden on the taxpayer should be no greater than necessary to compensate for the sales tax originally avoided on the purchases.

The state, by asserting the use tax against the enhanced finished or "capitalized" value of IBM's inventory withdrawals, rather than against the initial cost of materials and components, has attempted to extend the use tax beyond its intended function. A levy upon the "full finished goods cost" or "capitalized cost" inevitably would have the effect of taxing the company's labor and overhead. In effect, it would amount to a value added tax.

In arguing that an actual retail purchase is not even a necessary antecedent for the use tax, and that an inventory withdrawal should suffice to trigger use tax liability, the state asks us to extend statutory language which the legislature has left unattenuated. A use tax is imposed upon the storage, use or consumption of "tangible personal property purchased at Retail." Section 39-26-202, C.R.S.1973 (emphasis added). Since "tax (statutes) are construed strictly against the taxing authority," ⁷ we cannot conclude, absent circumstances clearly demonstrating a contrary legislative intent, ⁸ that the term "retail purchase" means in these circumstances anything other than an actual retail purchase.

Moreover, the state sounds a false alarm by maintaining that, if a use tax may be actuated...