United Illuminating Co. v. Groppo

• Decision Date: 07 January 1992
• Docket Number: No. 14321,14321
• Parties: UNITED ILLUMINATING COMPANY v. John G. GROPPO, Commissioner of Revenue Services.
• Court: Connecticut Supreme Court

Page 1005

601 A.2d 1005

220 Conn. 749

UNITED ILLUMINATING COMPANY v. John G. GROPPO, Commissioner of Revenue Services.

No. 14321.

Supreme Court of Connecticut.

Argued Oct. 2, 1991.

Decided Jan. 7, 1992.

Paul M. Scimonelli, Asst. Atty. Gen., with whom, on the brief, was Richard Blumenthal, Atty. Gen., for appellant (defendant).

Patrick J. Monahan, with whom, on the brief, was Phyllis M. Pari, New Haven, for appellee (plaintiff).

Before PETERS, C.J., and CALLAHAN, GLASS, BORDEN and BERDON, JJ.

GLASS, Associate Justice.

The dispositive issue in this tax appeal is whether the trial court properly held that certain machinery and equipment at three electricity generating plants owned and operated by the plaintiff, United Illuminating Company (taxpayer), constitute "machinery and production equipment" at an "industrial plant" within the meaning of § 12-426-26(d) of the Regulations of Connecticut State Agencies, and thereby qualify for an exemption from the sales tax imposed on services to "industrial, commercial or income-producing real property" pursuant to General Statutes § 12-407(2)(i)(I). ¹ After a determination by the defendant, the commissioner of revenue services (commissioner), that the taxpayer was liable for a deficiency assessment for the period from January 1, 1983, through December 31, 1985, the taxpayer appealed to the Superior Court pursuant to General Statutes § 12-422. ² The court concluded that the taxpayer had established that the subject property was exempt from General Statutes § 12-407(2)(i)(I) pursuant to § 12-426-26(d) of the Regulations of Connecticut State Agencies. ³ The commissioner appealed and the taxpayer cross appealed. We transferred the appeal from the Appellate Court in accordance with Practice Book § 4023. We reverse.

The trial court found the following facts, which are undisputed. The taxpayer is a public utility company that generates electricity for distribution to consumers in south central Connecticut. The taxpayer has three plants in Bridgeport and New Haven, each of which consists of an integrated system of water pipes, steam ducts, boilers, pumps, heaters, baffles, condensers, turbines, generators, transformers, smokestacks and assorted parts and connections. This integrated system heats water to steam and brings the steam to super high temperatures. The resulting heat energy turns the turbines, which use mechanical energy to turn the generators, which generate electricity. The transformers change the electricity from high current to high voltage, which is then fed by transmission lines to consumers. The component parts of the system require periodic maintenance, which is performed by third party contractors. The commissioner assessed a sales tax upon the cost of these services pursuant to General Statutes § 12-407(2)(i)(I).

In reviewing a decision of the trial court sustaining a taxpayer's appeal from a deficiency assessment, this court must determine whether the trial court's factual findings are clearly erroneous, or whether the decision is otherwise legally erroneous. See Practice Book § 4061; Zachs v. Groppo, 207 Conn. 683, 689, 542 A.2d 1145 (1988). When a party has challenged the legal conclusions of the trial court, as the commissioner has here, we must determine whether these conclusions are legally and logically correct and find support in the facts set out in the court's memorandum of decision. Zachs v. Groppo, supra; see also Pandolphe's Auto Parts, Inc. v. Manchester, 181 Conn. 217, 221-22, 435 A.2d 24 (1980).

We note at the outset the principles of statutory construction that govern the applicability of a tax exemption. "First, statutes that provide exemptions from taxation are a matter of legislative grace that must be strictly construed against the taxpayer. Second, any ambiguity in the statutory formulation of an exemption must be resolved against the taxpayer. Third, the taxpayer must bear the burden of proving the error in an adverse assessment concerning an exemption." Plastic Tooling Aids Laboratory, Inc. v. Commissioner of Revenue Services, 213 Conn. 365, 369, 567 A.2d 1218 (1990). Applying these principles to the present case, we conclude that the trial court incorrectly held that the taxpayer had sustained its burden of proving eligibility for the exemption from § 12-407(2)(i)(I) for services to "machinery and production equipment" at an "industrial plant" pursuant to § 12-426-26(d) of the regulations.

The purchase by a taxpayer of services for the maintenance of industrial, commercial or income-producing real property is subject to the sales tax under § 12-407(2)(i)(I) unless the transaction qualifies for an exemption pursuant to another section of the Sales and Use Tax Act or regulations promulgated thereunder. The commissioner contends that the various components of the taxpayer's electric generating plants that are the subject of this appeal are commercial real property and are thus subject to the tax. The taxpayer argues first that these components are personal property, but that, even if they are deemed to be fixtures, the services rendered to them qualify for an exemption under § 12-426-26(d) of the regulations, as services to "machinery and production equipment" at an "industrial plant." We agree with the commissioner that the taxpayer does not qualify for the exemption. ⁴

The taxpayer claims an exemption pursuant to § 12-426-26(d) of the regulations, which provides in pertinent part: " 'Industrial property' shall mean and include an 'industrial plant' as defined in Section 12-426-11b of the Regulations of Connecticut State Agencies and all real estate with structures thereon, if any, used in support of the industrial plant.... Services rendered to machinery and production equipment are not taxable even though such machinery or equipment is considered to be a fixture under Connecticut real property law. " (Emphasis added.) Section 12-426-11b(7) of the regulations defines an "industrial plant" as a "manufacturing facility at which a manufacturing production process is occurring." The regulations define both "manufacturing" ⁵ and "manufacturing production process" ⁶ as activities that "shall occur solely at an industrial plant." The taxpayer contends that services rendered to the components of its electricity generating facilities are exempt from the sales tax because the generation of electricity is "manufacturing."

Whether the generation of electricity constitutes manufacturing for the purposes of a sales tax exemption is a question of first impression in this state. In determining this question, we need not undertake a scientific discussion of the nature of electricity or its generation by mechanical means. See, e.g., Frederick Electric Light & Power Co. v. Frederick, 85 Md. 599, 600-602, 36 A. 362 (1897). Rather, we rely on the legislative history and construction of the Sales and Use Tax Act as a whole for our conclusion that electricity generation is not manufacturing. ⁷ While the generation of electricity may in some sense be a "manufacturing" process, we conclude that the legislature did not intend to exempt businesses engaged in the generation of electricity for public consumption from the tax on services rendered to machinery and production equipment under § 12-407(2)(i)(I).

In construing any statute, we seek to ascertain and give effect to the apparent intent of the legislature. Texaco Refining & Marketing Co. v. Commissioner, 202 Conn. 583, 589, 522 A.2d 771 (1987). "In seeking to discern that intent, we look to the words of the statute itself, to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement, and to its relationship to existing legislation and common law principles governing the same general subject matter." Id.

Starting with the language of the statute itself, as we must; see, e.g., Lundy Electronics & Systems, Inc. v. Tax Commissioner, 189 Conn. 690, 695, 458 A.2d 387 (1983); we note that § 12-407(2)(i)(I) refers to "commercial, industrial and income-producing real property." The legislative history of No. 75-213 of the 1975 Public Acts, which enacted the provision, does not clarify the meaning of the term "industrial real property." The regulations define "industrial real property" as an "industrial plant"; Regs., Conn. State Agencies § 12-426-26(d); which is in turn defined as a "manufacturing facility at which a manufacturing production process is occurring." Regs., Conn. State Agencies § 12-426-11b(7). The regulatory definition of "manufacturing" is ambiguous as to whether the generation of electricity is included. See footnote 5, supra.

Where particular words or sections of a statute, considered separately, are imprecise, we may look to the expressed intent of the statute as a whole. State v. Burney, 189 Conn. 321, 326, 455 A.2d 1335 (1983); see also Ruskewich v. Commissioner of Revenue Services, 213 Conn. 19, 25, 566 A.2d 658 (1989). Thus, in construing the terms "industrial real property," as used in § 12-407(2)(i)(I), and "manufacturing," as referred to in the regulations promulgated thereunder, we consider other sections of the Sales and Use Tax Act which contain similar language.

The Sales and Use Tax Act was enacted in 1947 and 1948. ⁸ The act singled out the furnishing of electricity for special treatment in several places. First, the act exempted from taxation the sales, furnishing or service of electricity, and gas, water, telephone and telegraph, "when delivered to consumers through mains, lines or pipes." ⁹ General Statutes (1947 Rev.) § 334i(c). In addition, the act separately exempted materials, tools and fuel used in the generation of gas, water, steam or electricity for distribution to consumers, and materials, tools and fuel used in "an industrial plant in the process of the manufacture of tangible personal property." ¹⁰ General Statutes (1949 Rev.) § 2096(r). The special treatment of electric...