Kimberly-Clark Corp. v. Dubno, KIMBERLY-CLARK

• Decision Date: 16 June 1987
• Docket Number: No. 12967,KIMBERLY-CLARK,12967
• Citation: Kimberly-Clark Corp. v. Dubno, 204 Conn. 137, 527 A.2d 679 (Conn. 1987)
• Court: Connecticut Supreme Court
• Parties: CORPORATION v. Orest T. DUBNO, Commissioner of Revenue Services.

Page 679

527 A.2d 679

204 Conn. 137

KIMBERLY-CLARK CORPORATION v.Orest T. DUBNO, Commissioner of Revenue Services.

No. 12967.

Supreme Court of Connecticut.

Argued March 3, 1987.

Decided June 16, 1987.

Jonathan L. Ensign, Asst. Atty. Gen., with whom, on the brief, was Joseph I. Lieberman, Atty. Gen., for appellant(defendant).

Christopher F. Droney, with whom was John M. Horak, Hartford, for appellee(plaintiff).

Before PETERS, C.J., and HEALEY, SANTANIELLO, CALLAHAN and HULL, JJ.

ARTHUR H. HEALEY, Associate Justice.

This is an appeal from the judgment of the trial court sustaining the plaintiff's appeal from a determination of the defendant, the commissioner of revenue services (commissioner), upholding the assessment against the plaintiff, Kimberly-Clark Corporation, for Connecticut sales and use taxes in the amount of $137,366.66, of which $103,397.65, plus interest, is in dispute.The commissioner raises three issues on this appeal: (1) whether the trial court should have accepted the commissioner's findings of fact unless they were clearly erroneous; (2) whether the commissioner's declaratory ruling estopped him from making a lawful assessment pursuant to chapter 219 of the General Statutes;¹ and (3) whether the trial court's findings of fact are clearly erroneous in light of the evidence before it.²We find no error.

The facts found by the trial court include the following: The plaintiff is a large national manufacturer of paper and related products.It has several plants throughout the country, including one located in New Milford, which employs approximately 1400 people.In 1978, the plaintiff decided to make substantial changes to its New Milford plant.The changes included installing a new production line at an estimated cost of $17 million and dismantling, expanding and modernizing an existing production line at an estimated cost of $7 million.These production lines are each over 100 yards long and are "completely integrated and automated."

On August 31, 1978, the plaintiff wrote to the commissioner "to request a ruling, with respect to the Connecticut sales and use tax exemption on manufacturing machinery and equipment" for the two lines it intended to install.The letter stated: "[A]ll the machinery for the new production line has been designed by [the plaintiff] and cannot be purchased from a single supplier.The machinery will be fabricated by [the plaintiff].Components for such machine fabrication will be purchased from several suppliers."The letter then itemized the specific units of processes, systems, sections and controls of the new and the modernized production lines, and ended by requesting "that all the above described processes and machinery be ruled exempt from sales and use taxation."

A conference on the plaintiff's request for a ruling was held on September 5, 1978.Present at the conference were Nick D. Hansen, the plaintiff's vice president and tax counsel; David L. Hansell, the plaintiff's administrative manager for the expansion of products; Ralph Madden, the plaintiff's project engineer; Terence J. O'Neil, the commissioner's division chief, legal/technical division; and Solomon J. Karam, the commissioner's director of legal division, public relations and research.At this conference, Madden explained the design and operation of the two production lines.Most of the conference, however, was spent going over the itemized list of specific units of the two lines which had been included in the plaintiff's request for a ruling.The commissioner's representatives marked the specific items with an "E" indicating tax exempt, a "T" indicating taxable, and a "?" indicating that they were not sure whether the item was exempt and needed more information to make such a determination.In the course of the discussions, the plaintiff raised the issue of whether, as a condition of sales tax exemption, the plaintiff had to have the two production lines fabricated by its Wisconsin subsidiary "Kim-Tech."The commissioner's representatives indicated that "that would not be necessary and [that] it would only hurt Connecticut by forcing construction out of the state."

On September 11, 1978, O'Neil wrote to the plaintiff on behalf of the commissioner, stating that he was "returning a copy of the list [which the plaintiff had] submitted with [its] letter of August 31, 1978, indicating [the commissioner's] decision as to taxability.""Items on the list were marked 'E,''T,' and '?,' with only two comments: as to machine platforms and guards--'E if purchased as part of a complete unit,' and as to stock preparation equipment--'E if purchased in conjunction with a machine.' "

The plaintiff supplied additional information as to the questionable items and eventually all the items on the plaintiff's list included in its letter of August 31, 1978, were ruled upon by the commissioner.Of the thirty-seven individual units of the new production line, thirty-five were given tax exempt status, and of the thirteen individual units of the modernized production line eleven were given tax exempt status.The commissioner allowed an exemption for machine controls on the new production line but denied an exemption for the same controls on the modernized line, on the ground that the latter would not be purchased "in conjunction with new machinery" but instead "at a later date to update existing machinery."

Having obtained what the plaintiff believed to be a favorable ruling of tax exemption based on its letter request of August 31, 1978, the plaintiff proceeded to construct the two production lines.

Following the construction of the two production lines, the commissioner audited the plaintiff as to sales and use tax for the period December 1, 1976, through April 30, 1980.As a result of the audit, the commissioner determined that the plaintiff owed taxes in the amount of $137,366.66 of which $103,397.65, plus interest, is disputed.

The items found by the defendant to be taxable (the disputed devices) were in the nature of switch gears, valves, cables, controllers, bearings, and the like, installed in the plaintiff's new and rebuilt production lines.As to the disputed devices, the trial court noted that the parties stipulated as follows:

"1.All of the disputed devices are used 'directly in a manufacturing production process,' as such phrase is used in [General Statutes] Sec. 12-412(34).³

"2.None of the disputed devices, by themselves, constitute[s] a 'basic machine itself,' as such phrase is used in Sec. 12-412(34).

"3.All of the disputed devices are 'component parts and contrivances, such as belts, pulleys, shafts, moving parts, operating structures,' or 'equipment or devices used or required to control, regulate or operate the machinery,' as such terms are used in Sec. 12-412(34).

"4.All of the disputed devices were purchased separately from any portion of the production lines that may constitute a basic machine itself, as defined in Sec. 12-412(34).

"5.All of the disputed devices were purchased at the time of installation of the two production lines, were necessary for the initial operation of those lines and are not repair or replacement parts.

"6.The production lines each constitute a 'basic machine itself,' as that phrase is used in Sec. 12-412(34).

"7.All the disputed devices were included in plaintiff's letter of August 31, 1978 in categories later designated as exempt by the [Commissioner's] ruling."

The plaintiff, asserting that it had been "aggrieved by the action of the commissioner ... in fixing the amount of such tax," requested an administrative hearing, pursuant to General Statutes § 12-421.After a hearing, the deputy commissioner of revenue services rendered a decision upholding the assessment.The plaintiff, thereafter, took a timely appeal to the Superior Court pursuant to General Statutes § 12-422.⁴

At trial, the commissioner essentially attempted to establish that the exemption for the disputed devices granted by the commissioner's letter ruling was conditional upon the fact that the production lines were to be fabricated by an out-of-state subsidiary of the plaintiff.The commissioner argued that to have ruled any other way would have been contrary to his interpretation of § 12-412(34) that "component parts and contrivances, such as belts, pulleys, shafts ... and devices used ... to control ... machinery" were exempt only if purchased from the vendor of the basic machine and at the same time.SeeRegs., Conn.State Agencies § 12-426-11(A).⁵Holding that the commissioner's "exemption rulings are binding on him and enure to the plaintiff's benefit on grounds of statute, estoppel and elemental fairness,"the trial court sustained the plaintiff's appeal.The court ordered the commissioner to return to the plaintiff any payment of the assessment and interest thereon already made by the plaintiff.On January 26, 1986, the commissioner appealed to the Appellate Court.On May 14, 1986, this court transferred the appeal to itself.SeePractice Book§ 4023(formerly § 3004A).

I

The commissioner's first claim of error is that the trial court erred in conducting the appeal de novo.The commissioner argues that under the appropriate standard of review the trial court should have accepted his findings of facts unless they were clearly erroneous.The plaintiff argues that under General Statutes § 12-422, the trial court was empowered to conduct the appeal de novo.

The plaintiff's appeal to the trial court was taken, not under the Uniform Administrative Procedure Act, which excludes tax appeals;General Statutes § 4-186;⁶ but instead under § 12-422.Although this court has never specifically held that § 12-422 empowers a trial court to hear an appeal de novo, the language of that statute is similar to the language used in other Connecticut tax appeal statutes which have been interpreted to require a de novo review by the trial court.For example, appeals taken...