International Business Machines Corp. v. Brown

• Decision Date: 20 August 1974
• Citation: 167 Conn. 123,355 A.2d 236
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION v. F. George BROWN, Tax Commissioner.
• Court: Connecticut Supreme Court

Page 236

355 A.2d 236

167 Conn. 123

INTERNATIONAL BUSINESS MACHINES CORPORATION v. F. George BROWN, Tax Commissioner.

Supreme Court of Connecticut.

Aug. 20, 1974.

Peter A. Kelly, Hamden, with whom was Robert K. Ciulla, New Haven, for plaintiff.

Richard K. Greenberg, Asst. Atty. Gen., with whom were Ralph G. Murphy, Asst. Atty. Gen., and, on the brief, Robert K. Killian, Atty. Gen., for defendant.

Before HOUSE, C.J., and SHAPIRO, LOISELLE, MacDONALD and BOGDANSKI, JJ.

MacDONALD, Associate Justice.

The present case comes to us by reservation from the Court of Common Pleas seeking the advice of this court as to the correct interpretation of § 12-407(7) of the General Statutes, being a portion of chapter 219, the Education, Welfare and Public Health Tax, commonly referred to as the Sales and Use Tax Act. The specific question presented is whether '(t)he transfer of possession of tangible personal property back to plaintiff-taxpayer from an out of state subcontractor who for consideration applied skilled labor to said property supplied by the plaintiff-taxpayer, the title to which remained in the plaintiff-taxpayer throughout,' is a 'purchase' as defined in § 12-407(7) for purposes of computing the use tax base of the plaintiff taxpayer. For the reasons enumerated below we conclude that it is not.

The plaintiff's action, appealing a determination of the defendant tax commissioner, was reserved for the advice of this court upon the following stipulation of facts: The plaintiff, International Business Machines Corporation, hereinafter called IBM, a New York corporation with its principal place of business in Armonk, New York, is authorized to do business in Connecticut and is principally engaged in the manufacturing and marketing, for sale and lease, of computers and associated equipment. When IBM brings its equipment into Connecticut for storage, use or consumption, it is required to pay a use tax on that equipment. IBM's manufacturing and processing operations concerning computers frequently comprise the following activities: (1) purchase of materials, basic components and completed assemblies from vendors; (2) fabrication, processing and assembly within its facilities and by its own employees of said materials, component parts and assemblies; (3) furnishing of certain component parts to outside contractors who further fabricate or process them to IBM's specifications for a fee; and (4) further processing and final assembly by IBM of all materials, components and assemblies into a finished machine. None of IBM's manufacturing and processing operations at issue herein takes place within Connecticut. On December 6, 1971, the tax commissioner of the state of Connecticut, hereinafter called the commissioner, issued to IBM's Data Processing Division an assessment of additional sales and use taxes for the period extending from June 30, 1968, through June 30, 1971, in the amount of $79,052.06, together with interest of $13,011.13, for a total assessment of $92,063.19.

IBM filed a petition for reassessment protesting such additional assessment and, after a hearing, received a letter from the commissioner stating that the aforesaid assessments were found to be proper. Thereafter, IBM received a statement of amount due on sales and use tax, reaffirming the position of the commissioner as stated and showing additional taxes due in the amount of $79,052.06, together with interest of $16,568.47, for a total amount claimed to be due of $95,620.53. IBM appealed this deficiency assessment to the Court of Common Pleas, the sole legal issue being the proper measure of IBM's use tax base for equipment it brings into Connecticut, it being IBM's claim that the proper measure of the use tax base on its machines is the purchase price paid by IBM for component materials and that the costs of out-of-state subcontract labor should not be included in such base. The commissioner, on the other hand, claims that the cost of such labor performed on certain component materials must be included in IBM's use tax base on its machines in addition to the purchase price of the component materials. The parties have stipulated that if the appeal is dismissed, the deficiency assessment in the amount of $79,052.06 plus statutory interest is correct, and that if the appeal is sustained, IBM is entitled to a refund of $4,049.06.

Essentially, the issue presented is whether the use tax, levied upon an out-of-state manufacturing concern when its products enter the state for use, storage or consumption, should include within its ambit the cost of labor performed upon component materials without the state, or whether it should apply solely to the cost to the taxpayer of those component materials when originally purchased. The pertinent sections of the Sales and Use Tax Act relating to this issue are printed in the footnote. ¹ Both parties have noted in their briefs that if the subcontract work were performed in Connecticut the sales tax provisions would include the cost of this intermediary labor in its tax base. This is the result of the inclusion of the following subsection within the statutory definition of 'sale' in § 12-407(2) (c): 'the producing, fabricating, processing, printing or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing or imprinting . . ..' By contrast, the definition of 'purchase,' § 12-407(7), which is central to the operation of the use tax; see Stetson v. Sullivan, 152 Conn. 649, 211 A.2d 685; does not contain a similar provision. The commissioner urges this court to construe the language in the definition of 'purchase' to achieve a result similar to that obtained in connection with the definition of 'sale' under § 12-407(2)(c). The court notes in passing that although the Sales and Use Tax Act (originally and optimistically described by its sponsors as a 'temporary tax') has existed within this state for twenty-seven years, this particular issue apparently is one of first impression.

A brief excursion into the history and purpose of the act may better illustrate the area of dispute. The Sales and Use Tax Act was adopted by the General Assembly as an emergency measure to generate revenue during the post-war period when a waive of social legislation extended the state's budget beyond the bounds of existing revenue measures. See S. Proc., Pt. 2, 1947 Sess., p. 250. The prime revenue source decided upon was the sales tax. The use tax was created as a complementary measure to insure the equitable diffusion of the tax burden upon both in-state purchases of tangible personal property and out-of-state purchases of tangible personal property where such property is used, stored or consumed within the state, thus being, in a certain sense, a gap-filling measure. As such, it would merit a liberal construction to achieve such purposes. However, the court is not convinced that, even given such a construction, the tax should apply in this instance.

The Sales and Use Tax Act is no stranger to this court, and we have had occasion to describe it in the past. 'The two taxes, though imposed by the same act, are distinct. 'A sales tax and a use tax in many instances may bring about the same result. But they are different in conception, are assessments upon different transactions, and in the interlacings of the two legislative authorities within our federation may have to justify themselves on different constitutional grounds. A sales tax is a tax on the freedom of purchase . . .. A use tax is a tax on the enjoyment of that which was purchased.' McLeod v. Dilworth Co., 322 U.S. 327, 330, 64 S.Ct. 1023, 1025, 88 L.Ed. 1304. Whether or not the two shall have precisely the same scope is for the determination of the legislature.' Connecticut Light & Power Co. v. Walsh, 134 Conn. 295, 300, 57 A.2d 128, 130.

There are three subparts to the definition of 'purchase' under § 12-407(7). Subsection (a) is the general, definitive section; subsections (b) and (c) apply to more specific situations. To constitute a purchase within subsection (a) there must exist three conditions: (1) any transfer, exchange or barter, conditional or otherwise, in any manner or by any means, whatsoever, (2) of tangible personal property, (3) for a consideration. Absence of any one of the three conditions is sufficient to exclude a transaction from this subsection. Both parties argue at considerable length in their briefs that the essential issue is whether the transaction involved is a 'transfer.' However, it is unnecessary to decide whether the plaintiff's reacquisition of its property was a 'transfer' within the meaning of that term as used in the statute since what the plaintiff obtained was its own property and what it 'purchased' was not tangible personal property but solely the labor of the subcontractor. As has been noted by the California Supreme Court, construing a statute identical to our Sales and Use Tax Act with respect to these particular provisions, there already is provision for assessing a use tax upon the value of the component materials obtained for use within the taxing state. See Chicago Bridge & Iron Co. v. Johnson, 19 Cal.2d 162, 119 P.2d 945. ² As a matter of fact, this follows what had been the interpretation of the tax commissioner in this state since 1962. ³

Tangible personal property is defined in § 12-407(13) as follows: "Tangible personal property' means personal property which may be seen, weighed, measured, felt or touched or which is in any other manner perceptible to the senses.' 'Personal property' has been defined by this court, with respect to its taxation under a different tax provision, in these words: "The word 'property,' as that term is used in the statutes relating to assessment and taxation, refers to every species of valuable right or interest which is subject to ownership, or that...