RCN-BECOCOM, LLC v. Commissioner of Revenue

• Decision Date: 06 January 2005
• Citation: 443 Mass. 198,820 NE 2d 208
• Parties: RCN-BECOCOM, LLC v. COMMISSIONER OF REVENUE & another.,
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

443 Mass. 198

820 NE 2d 208

RCN-BECOCOM, LLC v. COMMISSIONER OF REVENUE & another.¹,²

Supreme Judicial Court of Massachusetts, Suffolk.

October 5, 2004.

January 6, 2005.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

William Hazel for the taxpayer.

Daniel A. Shapiro for Commissioner of Revenue.

Richard G. Chmielinski, Assistant City Solicitor, for board of assessors of Newton.

The following submitted briefs for amici curiae:

John S. Brown, George P. Mair, Donald-Bruce Abrams, Darcy A. Ryding, & Matthew D. Schnall, for MCI Metro Access Transmission Services, LLC.

Robert J. Kerwin & John D. Stuebing for City Solicitor and Town Counsel Association & another.

SPINA, J.

The Commissioner of Revenue (commissioner), the board of assessors of Newton (assessors), and RCN-BecoCom, LLC (RCN), appeal from different elements of a final determination of the Appellate Tax Board (board) regarding the taxability under G. L. c. 59 of certain personal property assets of RCN situated in Newton. We granted the parties' joint application for direct appellate review.

1. Background.

General Laws c. 59, § 39, requires the commissioner to determine annually the value of the machinery, poles, wires and underground conduits, wire and pipes (statutory property) of all telephone and telegraph companies in the Commonwealth. The commissioner reports the results of his valuation to the company and to the boards of assessors of the cities and towns where such property is located. The local assessors must use this centrally determined valuation when they issue their assessment of the owner's tax obligation to the locality. The purpose of central valuation is to ensure consistency and competence in the valuation of parts of a Statewide system.

The central valuation system began in 1915, following a report from the tax commissioner setting forth local assessors' problems in attempting to value a portion of a system that crossed municipal boundaries and the resulting disparate valuations for affected companies. Report of the Tax Commissioner for Year Ending November 30, 1914, Pub. Doc. No. 16, 27-30 (1915). "It cannot be doubted that § 39 was intended to adopt the recommendation of the tax commissioner" to value certain property of telephone and telegraph companies centrally to rectify "inequality in standards of valuation." Assessors of Springfield v. New England Tel. & Tel. Co., 330 Mass. 198, 202 (1953).

There is no central valuation mechanism for personal property owned by cable television (alternatively known as community antenna television or CATV) or Internet service providers, although it seems they would be similarly subject to "inequality in standards of valuation." Generally, property owned by cable television or Internet service providers is valued and assessed locally under G. L. c. 59, § 18. See Nashoba Communications Ltd. Partnership v. Assessors of Danvers, 429 Mass. 126, 129 (1999). RCN is a provider of telephone, cable television, and Internet services in the Commonwealth. Entities that provide some combination of historically distinct telecommunications services are known as "bundled service providers."

With regard to fiscal year 2000, RCN requested that the commissioner centrally value its statutory property pursuant to G. L. c. 59, §§ 39-41. The commissioner refused because he did not find RCN to be a telephone or telegraph company within the meaning of the statute. RCN appealed from this determination to the board and the assessors were permitted to intervene.

In a separate case, later consolidated with the first appeal, RCN requested the board rule that only its manufacturing machinery be subject to personal property tax under G. L. c. 59, § 18, Second, and that all other machinery be found exempt under G. L. c. 59, § 5, Sixteenth. Section 5, Sixteenth, provides that a company classified as a corporate telephone utility is exempt from tax on all property other than real estate, poles, underground conduits, wires and pipes, and machinery used in manufacturing. RCN is not organized as a corporation. At all relevant times, RCN was a Massachusetts limited liability company.³ It is important to note that, while a corporate telephone utility would be eligible for the exemption, there is no comparative exemption for property owned by companies classified as corporate cable television or Internet service providers. Therefore, the classification decision has significant tax consequences.

The board issued a consolidated final decision finding that for fiscal year 2000: (1) RCN was entitled to have its statutory property valued by the commissioner pursuant to his obligation under G. L. c. 59, § 39, to value such property for all telephone and telegraph companies; (2) any statutory property RCN used for telephone service, even if the property also supported other services, was entitled to central valuation by the commissioner; (3) RCN property, situated in Newton, not involved in telephone service, but otherwise fitting the definition of statutory property, was subject to local valuation, pursuant to G. L. c. 59, §§ 29, 38; and (4) all remaining RCN personal property situated in Newton was subject to local valuation, pursuant to G. L. c. 59, § 18, First.

All parties appeal from this decision of the board, alleging various points of error. For the reasons set out below, we affirm the board's decision in its entirety.

2. Qualification as a telephone and telegraph company under G. L. c. 59, § 39.

Section 39 applies to "all telephone and telegraph companies" and contains no definition for those terms nor any limiting language. The statute is remedial in nature. It was enacted to alleviate inconsistent valuations by various localities of systemwide property of telephone and telegraph companies; it was not enacted to exempt the companies' property from taxation. As a remedial measure, not an exemption, the statute must be construed and applied expansively in order to achieve the Legislature's goals. Walter Kidde & Co. v. Commissioner of Revenue, 389 Mass. 577 (1983).

When faced with a company undeniably engaged in providing telephone services, some method of measuring whether the company has the requisite amount of telephone focus to come within the ambit of § 39 is necessary. The board's choice of methodology to discern which entities qualify under G. L. c. 59, § 39, is a matter of law we review de novo. Commissioner of Revenue v. Jafra Cosmetics, Inc., 433 Mass. 255, 259 (2001).

The board, relying primarily on Fernandes Super Mkts., Inc. v. State Tax Comm'n, 371 Mass. 318 (1976), imports a "substantiality" analysis from tax cases in the manufacturing sector. In the Fernandes case, this court analyzed what factors to consider in classifying "a corporation that conducts both manufacturing and nonmanufacturing activities" under statutes that "do not specify what degree of manufacturing activity is required to classify a corporation as a `manufacturing corporation.'" Id. at 320. The extent of the manufacturing activities are considered in five areas: (1) the financial receipts they bring to the company; (2) the proportion of the entire income they comprise; (3) the percentage of the entire capital that is invested in them; (4) the number of persons employed in them as compared with the total number of employees of the company; and (5) the ratio to the entire business activities of the company. Id. at 322-323, quoting Commissioner of Corps. & Taxation v. Assessors of Boston, 321 Mass. 90, 97 (1947). Ultimately, the company's "entire operations" are reviewed to determine whether the manufacturing activities are "substantial" or "merely trivial or only incidental to its principal business." Fernandes Super Mkts,, Inc. v. State Tax Comm'n, supra at 322, quoting Commissioner of Corps. & Taxation v. Assessors of Boston, 324 Mass. 32, 39 (1949). Fernandes Super Markets failed in its bid to be classified as a manufacturing corporation because only 12.6 per cent of its employees engaged in its manufacturing bakery operation and a scant 2.8 per cent of the company's income came from its manufacturing activities. Fernandes Super Mkts., Inc. v. State Tax Comm'n, supra at 320. In contrast, this court historically has found sufficient manufacturing activity for qualification when as little as twenty per cent of a company's activities were manufacturing in nature. See Commissioner of Corps. & Taxation v. Assessors of Boston, supra at 38-39 (lumber company engaged in production of mahogany veneer).

Classification as a manufacturing company provides an exemption from property tax under G. L. c. 59, § 5, Sixteenth, and investment tax credits under G. L. c. 63, § 31A. These consequences are not dissimilar to those that come from classification as a telephone company, making the substantiality test a reasonable one to borrow. The board's analogy to the manufacturing sector is not perfect, but neither is it impermissible, especially in light of the absence of specific guiding language or any language to the contrary in G. L. c. 59, § 39.

This court also has affirmed the substantiality approach to determine whether a corporation involved in diverse activities should be classified as a "utility corporation" and therefore taxed under G. L. c. 63, § 52A. Tenneco Inc. v. Commissioner of Revenue, 401 Mass. 380, 386 (1987).

The commissioner alleges that the "substantiality" test is inappropriate. He instead suggests an "exclusivity" test, limiting § 39 to those entities that engage solely in telephone or telegraph service, to the exclusion of any other business activity. The commissioner urges that "all telephone companies" should be read to mean every company currently engaged in the sort of business activity engaged in by telephone companies as of the date the statute was enacted. Further, the commissioner distinguishes between "telephone companies" and "companies that engage in or provide telephone...