Phelps Dodge Copper Products Co. v. Groppo

• Decision Date: 16 June 1987
• Docket Number: No. 13008,13008
• Citation: 204 Conn. 122,527 A.2d 672
• Court: Connecticut Supreme Court
• Parties: PHELPS DODGE COPPER PRODUCTS COMPANY v. John G. GROPPO, Commissioner of Revenue Services.

Page 672

527 A.2d 672

204 Conn. 122

PHELPS DODGE COPPER PRODUCTS COMPANY v. John G. GROPPO, Commissioner of Revenue Services.

No. 13008.

Supreme Court of Connecticut.

Argued March 3, 1987.

Decided June 16, 1987.

Peter H. Gruen, Bridgeport, with whom was Gary L. McGuirk, for appellant (plaintiff).

Jonathon L. Ensign, Asst. Atty. Gen., with whom, on brief, was Joseph I. Lieberman, Atty. Gen., for appellee (defendant).

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

ARTHUR H. HEALEY, Associate Justice.

This matter, which comes to us by way of reservation from the Superior Court, seeks advice on the following question: "Whether a component part of a machine must constitute a machine in and of itself or be purchased in conjunction with a machine in order to be exempt from the Connecticut sales and use tax pursuant to Section 12-412(34) ¹ of the Connecticut General Statutes." On March 12, 1985, the plaintiff, Phelps Dodge Copper Products Company, received a "Statement of Amount Due, Sales and Use Tax" which imposed a sales and/or use tax in the amount of $119,695.58, plus interest and penalty. The plaintiff protested the amount of the tax on the basis that its purchase of certain machinery and devices was not taxable by virtue of the exemption from tax on the sale and use of machinery used directly in a manufacturing process provided for in General Statutes § 12-412(34). As a result of the protest, the defendant commissioner of revenue services (commissioner) reduced the assessment and issued a "Revised Statement of Tax" in the amount of $60,329.83 plus interest of $36,529.30. On September 9, 1985, the plaintiff, under protest, paid the total amount due pursuant to the "Revised Statement of Tax."

On September 11, 1985, the plaintiff instituted an action in the Superior Court against the commissioner requesting that the assessment be reduced to zero and that the plaintiff be reimbursed for any tax and interest paid as a result of the assessment. The plaintiff and the commissioner filed a joint request to reserve the matter for consideration by the Appellate Court. On June 5, 1986, the trial court, A. Aronson, J., granted that request. On August 4, 1986, the parties filed a joint motion to transfer the case to the Supreme Court. On August 12, 1986, the case was transferred to this court.

The parties have stipulated to the following background facts: The plaintiff is a division of Phelps Dodge Industries, Inc., a Delaware corporation authorized to do business in Connecticut. The plaintiff is engaged in the business of manufacturing continuous cast copper rod and related products at its production facility in Norwich.

Between December, 1980, and July, 1983, the plaintiff installed a new production line at its Norwich copper plant for the production of cast copper rod. In connection with the installation of the new production line, the plaintiff "purchased machines, equipment, devices, components, belts, pulleys, ducts, shafts, valves, tubing, coils, retainers, and other related devices ('The Installed Devices') from various sources" and incorporated the installed devices into the new production line at the Norwich plant.

After the plaintiff had installed the new production line, the commissioner audited the plaintiff's records for the period December 1, 1980, through November 3, 1983. As a result of the audit, the commissioner issued a deficiency assessment plus interest and penalty thereon. In assessing the amount of tax due, the commissioner determined that some of the installed devices, the "disputed devices," were not entitled to the exemption provided in § 12-412(34). As stipulated by the parties, the commissioner made this determination because by regulation he has interpreted this exemption as applying "(i) to an item or device which, when purchased, is a 'basic machine itself' within the meaning of § 12-412, or (ii) to 'component parts and contrivances, such as belts, pulleys, shafts, moving parts, operating structures and all equipment or devices used or required to control, regulate or operate the machinery' ... only when purchased in conjunction with a 'basic machine itself.' ... [U]nder [the commissioner's] interpretation [of § 12-412(34) ], such component parts [and] contrivances ... qualify for the exemption only if purchased from the same vendor of the 'basic machine itself' and at the same time as the 'basic machine itself.' " The assessment was therefore based on the finding of the commissioner that the disputed devices did not constitute a "basic machine" or were not purchased from the same vendor of the "basic machine" and at the same time as the purchase of the "basic machine."

The parties have also expressly stipulated that all the disputed devices will be used in a "manufacturing and production process" as required by § 12-412(34) and that the disputed devices, by themselves, do not either singly or jointly constitute a "basic machine" as that term is used in § 12-412(34). Additionally, the parties have stipulated that all of the disputed devices were purchased at the same time and all were necessary for the initial operation of the new production line. ² The plaintiff concedes that but for the exemption provided in § 12-412(34), the disputed devices would be subject to tax.

I

General Statutes § 12-412(34) exempts from the sales and use tax the sale and use of "machinery used directly in a manufacturing ... production process." The statute defines "machinery" as "the basic machine itself, including all of its component parts and contrivances, such as belts, pulleys, shafts, moving parts, operating structures and all equipment or devices used or required to control, regulate or operate the machinery...." Section 12-426-11b(c)(1) of the regulations of Connecticut state agencies provides: "The [sales and use] tax shall apply to sales of and the storage, use or other consumption of contrivances, such as belts, pulleys, shafts and operating structures accessory to machinery, spare parts for the repair of machinery, and component parts, when purchased separately." (Emphasis added.)

The commissioner argues that his regulatory interpretation of § 12-412(34) is consistent with that statute and, therefore, "a component part of a machine must constitute a machine in and of itself or be purchased in conjunction with a machine in order to be exempt from the Connecticut Sales and Use Tax...." The plaintiff argues that the commissioner's regulatory interpretation of § 12-412(34) is "invalid, unreasonable, arbitrary, contrary to law and an unconstitutional exercise of administrative powers" ³ and that, under the statute, component parts of a machine are exempt from the Connecticut sales and use tax whether they constitute a basic machine in and of themselves or are purchased in conjunction with a basic machine. The issue before this court, therefore, is essentially the proper interpretation and application of the language of § 12-412(34).

The plaintiff claims that items such as the disputed devices fall within the clear meaning of the term "machinery" as it is used in the exemption statute. It argues that in enacting § 12-426-11b(c)(1) of the regulations, the commissioner was not attempting to interpret § 12-412(34) but was instead enacting new legislation. The plaintiff contends that the commissioner's regulation is invalid and, therefore, "should not be applicable in determining the tax exempt status of the Disputed Devices since [the regulation] establishes an artificial distinction between component parts purchased from a separate vendor and component parts purchased from the same vendor on the same invoice as the basic machine." The plaintiff argues that the distinction created by the regulation frustrates the legislative purpose of § 12-412(34). ⁴

The commissioner in his brief sets forth three arguments which, when considered together, support his regulatory interpretation of General Statutes § 12-412(34). First, the commissioner points out that § 12-412(34) is an exemption from tax and as such must be strictly construed against the party claiming the exemption. Second, the regulation, which sets forth his interpretation of the statute, has received approval from the standing legislative regulation review committee and has been in effect for the past six years. Third, the commissioner's regulatory interpretation is "fully supported by the legislative history of and circumstances surrounding the enactment of § 12-412(34)."

It is fundamental that " '[t]he power conferred [upon administrative agencies] to make regulations for carrying a statute into effect must be exercised within the powers delegated ... and it cannot be extended to amending or adding to the requirements of the statute itself.' " Loglisci v. Liquor Control Commission, 123 Conn. 31, 37, 192 A. 260 (1937); Page v. Welfare Commissioner, 170 Conn. 258, 262, 365 A.2d 1118 (1976); Ingham v. Brooks, 95 Conn. 317, 329, 111 A. 209 (1920). In Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 604, 362 A.2d 847 (1975), we held that " '[n]o administrative or regulatory body can modify, abridge or otherwise change the statutory provisions under which it acquires authority unless the statute specifically grants it that power.' State ex rel. Huntington v. McNulty, 151 Conn. 447, 449, 199 A.2d 5 [1964]." It is equally fundamental, however, that " '[s]tatutes are to be construed in light of their legislative history, their language, the purpose they are to serve, and the circumstances surrounding their enactment.' " Kellems v. Brown, 163 Conn. 478, 502-503, 313 A.2d 53 (1972), appeal dismissed, 409 U.S. 1099, 93 S.Ct. 911, 34 L.Ed.2d 678 (1973). We also note that the commissioner's regulatory interpretation of the statute, which he is charged with administering, is entitled to great deference and weight. Board of Education v. Connecticut State Board of Labor Relations, 190 Conn. 235, 241, 460 A.2d 1255 (...