Sharp v. Morton Bldgs., Inc.

• Decision Date: 19 June 1997
• Docket Number: No. 03-96-00458-CV,03-96-00458-CV
• Citation: 953 S.W.2d 300
• Parties: John SHARP, Comptroller of Public Accounts for the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellants, v. MORTON BUILDINGS, INC., Appellee.
• Court: Texas Court of Appeals

Page 300

953 S.W.2d 300

John SHARP, Comptroller of Public Accounts for the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellants, v. MORTON BUILDINGS, INC., Appellee.

No. 03-96-00458-CV.

Court of Appeals of Texas Austin.

June 19, 1997.

Rehearing Overruled Aug. 14, 1997.

Dan Morales, Atty. Gen., Jim B. Cloudt, [signed], Asst. Atty. Gen., Taxation Division, Austin, for Appellants.

Cindy Ohlenforst, Hughes & Luce, L.L.P., Dallas, for Appellee.

Before CARROLL, C.J., and ABOUSSIE and B.A. SMITH, JJ.

ABOUSSIE, Justice.

Morton Buildings, Inc. ("Morton") sued to recoup use taxes paid on building components brought to Texas to compose prefabricated buildings in Texas. Morton, with Comptroller John Sharp and Attorney General Dan Morales ("the State"), filed stipulations of fact. Both sides moved for partial summary judgment. The trial court granted Morton's motion, denied the State's motion, and, after receiving supplemental stipulations regarding the tax refund owed, rendered judgment based on the partial summary judgment. The State appeals, contending that the trial court should have granted its motion for partial summary judgment and denied Morton's motion. We will affirm the judgment.

BACKGROUND

Factual summary

This summary is condensed from the parties' stipulations. Morton has its principal place of business in Illinois. It manufactures, sells, and installs prefabricated, timber-framed, metal-sheathed buildings primarily used in farming and industry. Morton sells directly to the consumer without intermediaries like lumber yards, dealers, or retailers. Buyers can customize the basic building with choices such as window and door placement. The order forms are sent to the Illinois headquarters where the building components are assembled for shipping to Texas.

Morton forms the building components from raw materials purchased from sellers outside of Texas. Morton takes the lumber, plywood, paint, and steel and manufactures trusses, columns, doors, and rafters, among other items. The various manufacturing processes for wooden items generally consist of cutting the lumber to the right lengths, attaching the pieces with steel plates secured by nails, and laminating if necessary; Morton corrugates metal panels. Morton occasionally purchases already-made windows and The building components are shipped to the site in Texas where they are stored for one to three days, awaiting the Morton employees who affix them to the ground and assemble the building. The building process takes four or five days. The buyer pays Morton a lump sum that includes the costs of both the components and the assembly.

                doors. 1  Morton's factories are all located outside of Texas
                

Relevant statutes and code provisions

Texas imposes a use tax "on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state." Tex. Tax Code Ann. § 151.101(a) (West 1992). The building components are "taxable items" as defined by the statute. See Tax Code §§ 151.009, 151.010.

Both the administrative code and the tax code have special rules for lump-sum contractors. The administrative code deems lump-sum contractors "consumers of all materials, supplies, and equipment used or incorporated into a customer's property. As a consumer, a contractor must pay tax to suppliers at the time the materials are purchased." Tex. Admin. Code § 3.291(b)(2)(A) (1983). ² The underlying tax code provision similarly deems them consumers of tangible personal property they furnish and incorporate into the property of their customers if the contract between the contractors and their customers contains a lump-sum price covering both the performance of the service and the furnishing of the necessary incidental material. Tex. Tax Code Ann. § 151.056(a) (West 1992).

The cross-motions for partial summary judgment

Both motions for partial summary judgment relied on the stipulated facts. Morton noted that the use tax could be imposed only on items of tangible personal property purchased for use, storage, or consumption in Texas. Morton contended that the stipulated facts conclusively established that the raw materials were purchased and used, stored, or consumed outside of Texas when they were converted into building components. Morton argued that the State could not tax the raw materials because they were not used here, and the State could not tax the building components because they were not purchased.

The State contended in its motion that the items Morton brought into Texas were raw materials purchased for use in Texas. As a lump-sum contractor, Morton consumed the raw materials in Texas when it incorporated its materials into the property of the buyer. The tax was therefore proper.

The trial court granted summary judgment that Morton was entitled to refund of use taxes paid with respect to all raw materials used outside of Texas in Morton's manufacturing process. The parties then stipulated to the amount of refund due for use taxes Morton paid from August 1, 1984 through June 30, 1989. In its final judgment, the court awarded Morton the stipulated amount ($264,237.81), plus interest.

DISCUSSION

We review to determine whether either party proved the absence of issues of material fact and entitlement to judgment as a matter of law. See Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985); see also Tex.R. Civ. P. 166a. When both parties move for summary judgment, each must carry its own burden of proof. Benchmark Bank v. State Farm Lloyds, 893 S.W.2d 649, 650 (Tex.App.--Dallas 1994, no writ). Any ambiguity in tax statutes must be construed against the State and for the taxpayer. Geomap Co. v. Bullock, 691 S.W.2d 98, 100 (Tex.App.--Austin 1985, writ ref'd n.r.e.).

The critical issue is whether the whole is different from the sum of the parts. If Morton's combination of the raw materials into building components created new taxable items, then Morton owed no use tax because it manufactured, rather than purchased, the building components it brought into Texas. The State taxes items purchased from retailers out-of-state for use in Texas, but does not tax items manufactured by the user for use in Texas. Conversely, if the building components are nothing more than conjoined raw materials, then the State correctly assessed use tax on the items used in Texas.

Courts in other states are split on this critical issue. Some have decided that the manufacturing process is merely a preliminary step in the process enabling the use of the raw materials in their state. Morton Buildings, Inc. v. Comm'r of Revenue, 488 N.W.2d 254, 258 (Minn.1992) ("Despite their alteration at the factories, the raw materials, in their altered form as building components, are used in Minnesota when they are erected into prefabricated buildings."); see also Rabren v. Radio Corp. of America, 287 Ala. 395, 252 So.2d 55, 58 (1971) (no distinction between property purchased at retail and property user manufactures from property purchased at retail); American Can Co. v. Dep't of Revenue, 47 Ill.2d 531, 267 N.E.2d 657, 659 (1971) (Materials purchased outside Illinois with intent that materials would be...