State Dept. of Revenue v. Adolph Coors Co.

• Decision Date: 08 September 1986
• Docket Number: No. 84SC322,84SC322
• Citation: 724 P.2d 1341
• Parties: STATE of Colorado DEPARTMENT OF REVENUE, and Alan Charnes, Executive Director, Petitioners, v. ADOLPH COORS COMPANY, a Colorado corporation, Respondent.
• Court: Colorado Supreme Court

Page 1341

724 P.2d 1341

STATE of Colorado DEPARTMENT OF REVENUE, and Alan Charnes, Executive Director, Petitioners, v. ADOLPH COORS COMPANY, a Colorado corporation, Respondent.

No. 84SC322.

Supreme Court of Colorado,

En Banc.

Sept. 8, 1986.

Rehearing Denied Sept. 29, 1986.

Duane Woodard, Atty. Gen., Charles B. Howe, Chief Deputy Atty. Gen., Richard H. Forman, Sol. Gen., Robert L. Patterson and Steven M. Bush, Asst. Attys. Gen., Denver, for petitioners.

Bradley, Campbell & Carney, Professional Corp., Victor F. Boog, Golden, for respondent.

ERICKSON, Justice.

We granted certiorari to review the decision of the court of appeals in Adolph Coors Co. v. Charnes, 690 P.2d 893 (Colo.App.1984), which affirmed a district court judgment granting a tax refund on sales and use taxes paid from 1977 to 1980 by the Adolph Coors Company (Coors) on purchases of beer keg materials used in its beer-making business. The court of appeals held that the purchases were exempt from sales and use taxes because the beer kegs qualified as containers under sections 39-26-102(20)(a) and 39-26-203(1)(f)(I), 16B C.R.S. (1982). We affirm the judgment of the court of appeals.

I.

Coors, a Colorado corporation, brews and sells beer and has its principal place of business in Golden, Colorado. Coors paid Colorado sales taxes for the years 1978 to 1980 on certain materials (bung plates and tap wells), which were used in the assemblage of beer kegs, and paid Colorado use taxes for the years 1977 to 1979 on out-of-state purchases of other materials (aluminum discs), also used in manufacturing beer kegs.

On June 13, 1980, Coors filed a claim with the State of Colorado Department of Revenue (Department) for refunds in the total amount of $134,359.65 for sales and use taxes under section 39-26-102(20)(a), 16B C.R.S. (1982), and from use taxes under section 39-26-203(1)(f)(I), 16B C.R.S. (1982).

The essential facts are not in dispute. Coors is in the business of selling beer and cannot sell the beer without providing a container for it, such as a bottle, can, or keg. From 1977 to 1979, Coors purchased aluminum discs from Anaconda Corporation in St. Louis, Missouri, and paid the State of Colorado use taxes in the amounts of $15,699.65, $105,840.87, and $1,652.72 on these purchases. The discs were later transported by Coors to Hoover University, Inc. (Hoover), a corporation located in Beatrice, Nebraska, which manufactures beer kegs by forming the aluminum discs into keg halves and by welding the halves together and affixing a bung plate and a tap well to the keg. Hoover held a Colorado retail tax license. In the years 1978 to 1980, Coors paid Hoover for its labor in assembling the kegs and also paid Colorado sales taxes on the bung plates and tap wells in the amounts of $2,406.40, $6,676.61, and $2,083.10. The completed kegs were transported by Hoover to the Coors Brewery in Golden, Colorado.

From 1977 to 1980 Hoover manufactured 205,094 half-barrel kegs for Coors. The total cost for the completed half-barrel kegs, including the costs of the aluminum discs used in the manufacturing process, ranged from $44 per keg in 1977 to $54 per keg in 1980. ¹ Hoover also manufactured 2,236 quarter-barrel kegs for Coors in 1979 at a cost of $39 each and 4,878 quarter-barrel kegs in 1980 at a cost of $40 each.

In its brewery, Coors fills the kegs with draft beer and delivers the kegs to its customers, mostly wholesale distributors, who then sell to retailers for resale to the ultimate consumers. The distributors are charged for the price of the beer plus a separate deposit of $12 for both the half- and quarter-barrel kegs. From 1977 to 1979 Coors charged distributors $9 for the beer in the quarter-barrel, and in 1980 it increased the price to $10. The price Coors charged distributors for the beer in a half-barrel keg was $15 in 1977 and $16 from 1978 to 1980. The charge for the beer plus the $12 deposit, therefore, varied from a low of $21 for a quarter-barrel keg in 1977 to a high of $28 for a half-barrel keg during the 1978-1980 period.

After the distributors purchase the beer from Coors, they in turn collect a $12 deposit per keg from the retailers, who then collect a $12 deposit from the consumer. When the empty kegs are returned by the consumers, the $12 deposit is refunded by the retailers, who then return the keg up the distribution line in exchange for the deposit. Coors places the deposits received from its distributors into a liability account until the keg is returned and the deposit is refunded to the distributor. The apparent purpose for requiring deposits is to cause the kegs to be returned to Coors for reuse.

Coors has a written agreement with its distributors that authorizes it to charge a distributor the full value of a keg if it is not returned, but Coors has never exercised that option or taken legal action against a distributor for failing to return a keg. However, during periods when there has been a shortage of kegs, Coors has urged its distributors to return the kegs more quickly. Coors washes and sterilizes the returned kegs for reuse, repairs them if necessary, and, if damaged beyond repair, sells them as scrap aluminum. The income from the scrap metal is recorded as miscellaneous income with any loss of value above the scrap metal value written off as a cost of doing business.

Coors' deposit system has been successful, in that the majority of kegs are ultimately returned for reuse. The average half-barrel keg is reused from 59 to 71 times, and the average quarter-barrel keg is reused from 48 to 53 times. ² Coors inventories the kegs annually, including those in the hands of distributors and retailers. The number of kegs located during the inventory is subtracted from the number of kegs on Coors' books, with the difference representing the number of kegs for which deposits have been forfeited. Coors declares forfeited deposits as miscellaneous income, not income from the sale of an asset, and continually purchases new kegs to replace those damaged beyond repair or not returned. ³ The Department made a final determination, pursuant to section 39-21-103(8), 16B C.R.S. (1982), that Coors was not entitled to a refund of the sales and use taxes. Coors appealed the final determination to the Jefferson County District Court, which reversed the determination and granted the refund on the basis that the beer kegs purchased by Coors were "containers" exempt from tax pursuant to section 39-26-102(20)(a), 16B C.R.S. (1982), and section 39-26-203(1)(f)(I), 16B C.R.S. (1982).

The court of appeals affirmed the district court, and we granted certiorari to consider whether Coors' purchases of the beer keg materials qualify for the container exemptions under Colorado's sales and use tax statutes.

The Department contends that the container exemptions should apply only to those containers which, along with the manufactured product, are resold by the manufacturer to its customers and should not exempt those containers that are owned and reused by the manufacturer. Coors, on the other hand, argues that all containers of a manufactured product are exempt regardless of their resale and, alternatively, that the beer kegs in question have been resold for the deposit charge within the meaning of the tax exemption statutes. For the reasons set forth in this opinion, we agree that Coors' purchases of beer keg materials qualifies for the container exemptions.

II.

Colorado imposes a sales tax "[o]n the purchase price paid or charged upon all sales and purchases of tangible personal property at retail." Section 39-26-104(1)(a), 16B C.R.S. (1982). Colorado also imposes a use tax on "the privilege of storing, using, or consuming in this state any articles of tangible personal property purchased at retail." Section 39-26-202(1), 16B C.R.S. (1985 Supp.). The use tax is supplementary to the sales tax and does not apply to property subject to the sales tax. Section 39-26-203(1)(a), 16B C.R.S. (1982). As this court observed in Bedford v. Colorado Fuel and Iron Corp., 102 Colo. 538, 540, 81 P.2d 752, 753 (1938), the use tax "was designed to apply to the use and consumption of commodities elsewhere purchased at retail, which, if purchased in Colorado, would have been subject to the sale tax." Because the sales and use taxing schemes are designed to complement each other, provisions of one should be interpreted in harmony with provisions of the other.

The exemptions at issue here are contained in sections 39-26-102(20)(a) and 39-26-203(1)(f)(I), 16B C.R.S. (1982). Pursuant to section 39-26-102(20)(a), the following transactions are exempt from the sales tax:

Sales to and purchases of tangible personal property by a person engaged in the business of manufacturing, compounding for sale, profit, or use, any article, substance, or commodity, which tangible personal property enters into the processing of or becomes an ingredient or component part of the product or service which is manufactured, compounded, or furnished, and the container, label, or the furnished shipping case thereof, shall be deemed to be wholesale sales and shall be exempt from taxation under this part 1.

(Emphasis added.)

Section 39-26-203(1)(f)(I) provides a similar exemption from the use tax:

(1) [The use tax] ... shall not apply:

(f)(I) To the storage, use, or consumption of tangible personal property by a person engaged in the business of manufacturing, compounding for sale, profit, or use, any article, substance, or commodity, which tangible personal property enters into the processing of or becomes an ingredient or component part of the product or service which is manufactured, compounded, or furnished, and the container, label, or the furnished shipping case.

(Emphasis added.)

This court previously construed these exemptions in Weed v. Occhiato, 175 Colo 509, 488 P.2d 877 (1971). In Occhiato, we held that bottles purchased by a soft drink manufacturer and delivered by the...