RCA Corp. v. State Tax Commission of Missouri
| Citation | 513 S.W.2d 313 |
| Decision Date | 09 September 1974 |
| Docket Number | Nos. 58150,No. 2,58151,s. 58150,2 |
| Parties | 15 UCC Rep.Serv. 487 RCA CORPORATION, Appellant, v. STATE TAX COMMISSION OF MISSOURI et al., Respondents |
| Court | United States State Supreme Court of Missouri |
Lawrence M. Berkowitz, Kansas City, for appellant; Stinson, Mag, Thomson, McEvers & Fizzell, Kansas City, of counsel.
James F. McHenry, Cole County Pros. Atty., and James C. Swearengen, Asst. Pros. Atty., Jefferson City, for respondent.
HOUSER, Commissioner.
These are two appeals from judgments holding RCA Corporation liable to pay ad valorem personal property taxes on electronic data processing equipment used by the Department of Revenue and Division of Welfare of the State of Missouri under printed agreements captioned 'Equipment Lease and Service Agreement.' In Case No. 58,151 RCA sued the Collector of Cole County to recover $40,499.11, the amount of 1970 taxes allegedly wrongfully assessed and paid under protest. In Case No. 58,150 RCA sued the State Tax Commission, the Assessor and Collector of Cole County, under the Administrative Review Act, to review the proceedings and order of the commission affirming the assessment of the equipment as taxable property of RCA and fixing its assessed value for the year 1971 at $1,006,623. RCA lost and appealed both cases, which were consolidated for argument since they involve a common question. This Court has jurisdiction since these appeals involve a construction of the revenue laws of the state.
The pertinent tax statute, § 137.075, RSMo 1969, V.A.M.S., provides:
'Every person owning or holding * * * tangible personal property on the first day of January * * * shall be liable for taxes thereon during the same calendar year.'
The ultimate question for decision is whether under the equipment lease and service agreements between RCA and these two state agencies RCA is the 'owner' of the equipment, liable as such for the payment of ad valorem personal property taxes thereon, or whether RCA has nothing more than a nontaxable security interest therein.
Both agreements provide that RCA 'agrees to lease to the Customer' the described equipment and provide specified maintenance upon certain terms and conditions, and that the agreements shall remain in force for seven years 'except for the Customer's right to cancel after one year's use of the equipment on any anniversary, upon at least 60 days' prior written notice to RCA.' No provision is made for cancellation by RCA. For the unrestricted use of the equipment annual payments of $376,369 are required to be made by the revenue department; $104,820 by the welfare division, except that, '(s)hould the effective annual period overlap fiscal periods, that portion beyond the current fiscal period shall be subject to the appropriation of funds.' 1
Paragraph 3 of each agreement, designated 'Option to Purchase,' gives the agency the option to purchase the equipment on any annual anniversary date, by giving RCA written notice before that date, 'upon payment of amounts due on that date, plus any arrearages and the 'Cost to Purchase' amount applicable to that payment date,' as follows:
Allowance for
Payment Purchase Cost to
Number Option Purchase
Department of
-------------
Revenue
-------------
1 $ 287,843 $1,727,057
2 575,686 1,439,214
3 863,529 1,151,371
4 1,151,372 863,528
5 1,439,215 575,685
6 1,727,058 287,842
7 2,014,900 -
Division of
-------------
Welfare
-------------
1 74,206 445,234
2 148,412 371,028
3 222,618 296,822
4 296,824 222,616
5 371,030 148,410
6 445,236 74,204
7 519,440 -
Paragraph 3 also provides: Paragraph 5, denominated 'Taxes,' provides: 'There shall be added to the charges provided for in this Agreement amounts equal to any taxes, however designated, levied or based, on such charges or upon this Agreement or the equipment or any parts thereof or repair or replacement thereto or service rendered in connection with any of the foregoing, or the use of any of the foregoing, or any taxes or amounts in lieu thereof paid or payable by RCA in respect of the foregoing, exclusive of ordinary personal property taxes assessed against or payable by RCA and taxes based upon net income.' Paragraph 7 of the agreement with the division of welfare, titled 'Insurance,' provides: 'The Customer shall be relieved of all responsibility for any loss or damage from any external cause as respects the property covered by this Agreement.'
RCA's tax manager testified at the commission hearing as follows: RCA has four forms of contracts whereby a customer may acquire use of its computers: outright sale, conditional sales agreements, commercial leases, and equipment lease and service agreements of which the agreements in question are examples. The latter are available only to governmental agencies and not to private commercial customers. They are 'handmade,' that is, designed especially for certain governmental agencies and are frequently referred to as 'state and local contracts.' State and local contracts are treated as sales by RCA on its own books for federal and state tax purposes, and when consummated the cost of the equipment is written off. Under RCA's normal commercial lease, equipment is shown on RCA's books as 'leased,' not 'sold,' and the cost of the leased equipment is capitalized, shown on the books as a fiscal asset, and depreciated. Customers pay approximately 30% more under a commercial lease than under a state and local contract because the rentals under commercial leases include tax payments to be made by RCA. RCA's installment loan contracts also include costs and taxes not included in state and local contracts. In the latter the price is figured on the selling price of the equipment plus interest, but does not include taxes.
Appellant, pointing out that the property is in the possession and under the control of the state agencies, argues that RCA's property interest in the equipment is only a security interest; that RCA's object is to secure payment of what is owed RCA under the agreements; that the nature of RCA's interest in the property under the agreements is defeasible title held for security purposes, and not a taxable interest under the personal property laws; that defeasible title to personal property held to secure the purchase price is taxable to the buyer and not to the seller in conditional sales contracts, under Municipal Acceptance Corporation v. Canole, 342 Mo. 1170, 119 S.W.2d 820 (banc 1938), and that by analogy RCA's interest under these agreements, title having been retained solely for purposes of security, should be treated for tax purposes the same as that of a conditional seller. The Court in Canole reasoned that the value of property consists in its use; that whoever owns the use is the true owner of the property for the time being, even though it is on a condition subsequent; that in ad valorem taxation values are the ultimate objects of taxation, and 'they to whom the values belong should pay the taxes.' Citing Kolb v. Golden Rule Baking Co., 222 Mo.App. 1068, 9 S.W.2d 840 (1928), and Vette v. J. S. Merrell Drug Co., 137 Mo.App. 229, 117 S.W. 666 (1909), RCA urges that whether a contract is a true lease or a contract for security purposes depends upon the substance and not the form of a transaction; quotes the following excerpts from the Uniform Commercial Code, and stresses the passage underscored:
§ 400.1--201(37): "Security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer * * * is limited in effect to a reservation of a 'security interest'. * * * Unless a lease * * * is intended as security, reservation of title thereunder is not a 'security interest' * * *. Whether a lease is intended as security is to be determined by the facts of each case; however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security.'
§ 400.9--102(2): 'This article applies to security interests created by contract including * * * title retention contract and lease * * * intended as security * * *.'
Respondents assert that RCA's interest under the agreements is absolute title, taxable under the personal property tax laws; that the agreements are lease agreements; that the inclusion of an option to purchase clause in a lease agreement does not necessarily or absolutely transform a lease into a security agreement under § 400.1--201(37), because under § 400.1--102(3), RSMo 1969, V.A.M.S., the effect of the provisions of the Uniform Commercial Code may be varied by agreement; that the agreements themselves do not refer to security; that the agency's cancellation privilege on any anniversary date and the variance of the option to purchase provision indicate pure lease, as does the language reserving in RCA title and risk of loss and damage to the equipment.
While in form the agreements are leases '[t]he real...
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