Raytheon Co. v. Commissioner of Revenue

• Decision Date: 10 November 2009
• Docket Number: SJC-10346.
• Citation: 916 N.E.2d 372,455 Mass. 334
• Parties: RAYTHEON COMPANY v. COMMISSIONER OF REVENUE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

916 N.E.2d 372

455 Mass. 334

RAYTHEON COMPANY v. COMMISSIONER OF REVENUE.

SJC-10346.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued September 8, 2009.

Decided November 10, 2009.

Robert M. Buchanan, Jr., Boston (Samuel B. Bruskin with him) for the taxpayer.

Timothy J. Casey, Assistant Attorney General, for Commissioner of Revenue.

Frederick J. Nicely, Columbus, OH, Jana S. Leslie & Todd A. Lard, of the District of Columbia, & Kathleen King Parker, Boston, for Council on State Taxation, amicus curiae, submitted a brief.

Present: IRELAND, SPINA, COWIN, CORDY, BOTSFORD, & GANTS, JJ.

BOTSFORD, J.

This is a sales and use tax case. At issue is the meaning of the term "sale at retail" in the sales and use tax statutes, G.L. c. 64H and G.L. c. 64I, respectively. The Commissioner of Revenue (commissioner) refused to grant the taxpayer, Raytheon Company (Raytheon), an abatement of sales and use taxes relating to certain goods that constituted overhead or indirect cost items purchased by Raytheon in connection with its performance of work on different Federal contracts. Raytheon appealed to the Appellate Tax Board (board), contending that the sales of these indirect cost items to Raytheon fit within an exception to the statutory definition of a taxable "sale at retail" that applies to sales made for the "purpose" of "resale in the regular course of business." G.L. c. 64H, § 1. The board rejected Raytheon's position, and Raytheon appealed. We granted its application for direct appellate review, and we affirm the board's decision.¹

1. Background. On February 20, 2004, Raytheon filed an application with the commissioner seeking an abatement of sales and use taxes on its purchases of certain indirect cost items for the 2001 taxable year.² On May 20, 2004, Raytheon made the same abatement request for the 2002 taxable year.³ Raytheon, which had obtained a direct pay permit from the commissioner on February 1, 2002—thereby relieving its vendors from thereafter collecting the sales tax and assuming the direct tax liability itself⁴—claimed that its purchases qualified for the exemption for sales made for the purpose of "resale in the regular course of business" as defined in G.L. c. 64H, § 1. Each abatement request was deemed denied,⁵ and Raytheon appealed to the board.⁶ After hearing, the board issued a decision and report affirming the denial of Raytheon's abatement requests.

The record before the board included the parties' statement of agreed facts, stipulated exhibits, and the testimony of four witnesses called by Raytheon. Based on this record, the board found as follows. Raytheon is a corporation organized under Delaware law with its principal place of business in Massachusetts. At all relevant times, Raytheon was engaged in the business of producing specialized command, control, communication, telecommunication, intelligence, and electronic warfare systems, primarily for sale to the United States government, but also for other purchasers including private companies.

In connection with its government contracts, Raytheon purchases two types of tangible personal property, direct cost items and indirect cost items. Direct cost items are goods such as semiconductor chips, sheets of metal, and testing equipment that are incorporated directly into the manufacturing of Raytheon's final products. See 48 C.F.R. § 9904.418-30(a)(2) (2001) (defining direct cost items as "any cost which is identified specifically with a particular final cost objective"). Direct cost items are not at issue in this appeal. Indirect cost or overhead items are costs "not directly identified with a single final cost objective, but identified with two or more final cost objectives or with an intermediate cost objective." 48 C.F.R. § 9904.418-30(a)(3) (2001). Raytheon's indirect cost items include, but are not limited to: cellular telephones and accessories; food and catering services; toilet paper; trash bags; office furnishings; salt and sand for snow removal; a jukebox; latex gloves; paper; printer toner; and promotional items (for example, lapel pins, golf umbrellas, mugs, and key chains). Although not delivered to the Federal government as final products, the indirect cost items are necessary for the completion of Raytheon's contracts with the government.

Raytheon's use of indirect cost items on government contracts is governed by the Federal Acquisition Regulations (FARs), which set forth standards for Federal government contracts. See 48 C.F.R. c. 1 (2001). These contracts provide for Raytheon to be reimbursed for both direct costs and indirect costs. As for the latter, the FARs require government contractors to assign all of their indirect cost items to indirect cost pools. The cost pools are then allocated across contracts and billed to each government contractor in the appropriate percentage. With respect to Raytheon, government contracts account for approximately eighty-one per cent of its business, and therefore the Federal government is billed for and reimburses eighty-one per cent of Raytheon's indirect cost items.

Under the terms of the FARs, title to the indirect cost items passes to the Federal government.⁷ However, possession of the items remains with Raytheon.⁸

2. Discussion. "We will not modify or reverse a decision of the board if the decision is based on both substantial evidence and a correct application of the law." Boston Professional Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285, 820 N.E.2d 792 (2005). Although the proper interpretation of a statute is for a court to determine, we recognize the board's expertise in the administration of tax statutes and give weight to the board's interpretations. Bell Atl. Mobile of Mass. Corp., Ltd. v. Commissioner of Revenue, 451 Mass. 280, 283, 884 N.E.2d 978 (2008). See Northeast Petroleum Corp. v. Commissioner of Revenue, 395 Mass. 207, 213, 479 N.E.2d 163 (1985) (noting court's "traditional deference to the expertise of the board in tax matters involving interpretation of the laws of the Commonwealth"). See also CFM Buckley/North, LLC v. Assessors of Greenfield, 453 Mass. 404, 406, 902 N.E.2d 381 (2009). The board's expertise is also given weight when mixed questions of fact and law are considered. See, e.g., Massachusetts Inst. of Tech. v. Assessors of Cambridge, 422 Mass. 447, 452, 663 N.E.2d 567 (1996); McCarthy v. Commissioner of Revenue, 391 Mass. 630, 632, 462 N.E.2d 1357 (1984).

In this case, the board was tasked with interpreting specific provisions of G.L. c. 64H and G.L. c. 64I, the Massachusetts sales and use tax statutes. General Laws c. 64H, § 2, imposes a sales tax "upon sales at retail in the commonwealth, by any vendor, of tangible personal property or of services performed in the commonwealth." The complementary use tax provides that a tax is "imposed upon the storage, use or other consumption in the commonwealth of tangible personal property or services purchased from any vendor or manufactured, fabricated or assembled from materials acquired either within or outside the commonwealth for storage, use or other consumption within the commonwealth." G.L. c. 64I, § 2. Sales that have already been taxed under the sales tax statute, and sales that are exempt from the sales tax, are exempt from any use tax. G.L. c. 64I, § 7 (a) & (b).

To be subject to the sales or use tax, a transaction must generally meet the statutory definitions of both "[s]ale" and "[s]ale at retail."⁹ The term "sale" is defined to include "any transfer of title or possession, or both ... of tangible personal property or the performance of services for a consideration, in any manner or by any means whatsoever." G.L. c. 64H, § 1. A "[s]ale at retail" is defined in pertinent part as "a sale of services or tangible personal property or both for any purpose other than resale in the regular course of business." Id. Therefore, under the latter definition a sale for the "purpose" of "resale in the regular course of business" qualifies as an exemption from sales and use taxes.¹⁰

The board concluded that Raytheon did not qualify for an abatement of the sales and use taxes imposed because the sales of indirect cost items to it qualified as taxable "[s]ale[s] at retail" within the meaning of G.L. c. 64H, § 1, and G.L. c. 64I, § 1. In so holding, the board focused on the fact that Raytheon, which had the burden of proving its right to the abatement,¹¹ did not establish that these sales were sales "for resale in the regular course of business." Rather, in the board's view, the indirect cost items purchased by Raytheon were incidental to the performance of its government contracts and "merely served to facilitate the completion of those contracts."¹² We agree.

Raytheon contends that the board's conclusion is incorrect. Specifically, Raytheon argues that it purchased the indirect cost items at issue because they were necessary to perform Raytheon's contracts with the Federal government—a point agreed to by the board¹³; that pursuant to the contracts and the FARs incorporated into them, Raytheon was required to transfer, and the United States government accepted and reimbursed Raytheon for, title to eighty-one per cent of the indirect cost items allocated to indirect cost pools; and that the "inherent nature" of Raytheon's business required compliance with the contract terms and the FARs, including their title transfer provisions. Pointing to the statutory definition of "sale at retail," Raytheon argues that each of these transactions qualifies for an exemption because the resale occurred in the ordinary course of Raytheon's business of performing its contracts with the government.

The argument fails. Raytheon relies entirely on the latter portion of the definition of "sale at retail," that is, whether the resale of the indirect cost items to the Federal government occurred "in the regular course of [its] business." By doing so, Raytheon ignores the definition's language that...