W. Ky Coca-Cola Bottling v. Revenue Cabinet, 2000-CA-002883-MR.

• Decision Date: 21 December 2001
• Docket Number: No. 2000-CA-002883-MR.,2000-CA-002883-MR.
• Citation: 80 S.W.3d 787
• Parties: WESTERN KENTUCKY COCA-COLA BOTTLING COMPANY, INC., Appellant, v. REVENUE CABINET, Commonwealth of Kentucky; and Kentucky Board of Tax Appeals, Appellees.
• Court: Kentucky Court of Appeals

80 S.W.3d 787

WESTERN KENTUCKY COCA-COLA BOTTLING COMPANY, INC., Appellant, v. REVENUE CABINET, Commonwealth of Kentucky; and Kentucky Board of Tax Appeals, Appellees.

No. 2000-CA-002883-MR.

Court of Appeals of Kentucky.

December 21, 2001.

Discretionary Review Denied by Supreme Court August 14, 2002.

John David Cole, Cole, Moore & Baker, Matthew P. Cook, Bowling Green, KY, for appellant.

Douglas M. Dowell, Revenue Cabinet, Commonwealth of Kentucky, Frankfort, KY, for appellee.

Before COMBS, HUDDLESTON and MILLER, Judges.

OPINION

HUDDLESTON, Judge.

With Chief Justice Marshall's famous declaration "the power to tax involves the power to destroy," the United States Supreme Court established the doctrine of federal immunity from state taxation, a principle founded on the Supremacy Clause of the United States Constitution.¹ By voluntarily waiving immunity from state taxation in certain instances, the Buck Act² narrowed the application of this general principle while maintaining the protection afforded to instrumentalities of the United States. At the heart of the present controversy is the question of whether a military post exchange can properly be classified as an instrumentality and therefore qualify for the protection afforded by the Buck Act exception which preserves immunity from state taxation for instrumentalities of the federal government.

Western Kentucky Coca-Cola Bottling Company, Inc. appeals from a Franklin Circuit Court order which reversed a decision of the Kentucky Board of Tax Appeals and affirmed the assessment of sales tax in the amount of $175,323.29 plus interest by the Kentucky Revenue Cabinet. In so doing, the circuit court held that the sales in question were not sales at commissaries or post exchanges restricted to "authorized persons," and taxation was therefore not precluded by the exception. The taxes at issue were levied as the result of a contract between Western Kentucky Coca-Cola and the Army and Air Force Exchange Service (AAFES)³ pursuant to which Western Kentucky Coca Cola sold canned soft drinks to the Exchange for resale from vending machines to military personnel and others permissibly at the Kentucky portion of the Fort Campbell military reservation. The secondary transactions conducted between the Exchange and authorized customers do not fall within our realm of concern. Determining the propriety of the assessment which prompted this appeal, that is, whether the Exchange can properly be categorized as an instrumentality of the United States within the meaning of the Buck Act, is the dispositive inquiry as the only relevant transaction is between Western Kentucky Coca-Cola and the Exchange.

The pertinent facts of this case are not in dispute. Western Kentucky Coca-Cola is a private corporation that sells soft drinks and the Exchange is a place on the military base which sells needed items at a reduced cost for the convenience of individuals authorized to make purchases. By its terms, the contract governed only the vending machine sales of soft drinks on the base. The vending machines were leased by the Exchange and Western Kentucky Coca-Cola retained a service charge for rental of the machines based solely on the quantity of soft drinks sold. Paragraph 6(b) of the subject contract provides that title to the soft drink inventory passes to the Exchange upon its placement in the vending machines. The Exchange assumed product or money loss resulting from use of slugs, break-ins, external power failure and losses not attributable to the contractor (Western Kentucky Coca-Cola). Risk of loss resulting from mechanical defects, including but not limited to inventory spoilage, machines vending merchandise without coins being deposited and damage to products vended was assumed by Western Kentucky Coca-Cola.

Under the contract, the Exchange retained exclusive authority to determine where the machines were to be placed, which varieties of Coca-Cola products were to be sold and the price at which the sales were to be made. Western Kentucky Coca-Cola's duties included stocking, repairing, servicing, cleaning and maintaining the machines. The company was also liable for any income lost as a result of its failure to implement a price change in a timely manner. In addition, Western Kentucky Coca-Cola was responsible for the collection of monies from the vending machines which the company initially deposited at a bank located on the base. All monies removed from the machines remained the property of the Exchange which established the procedures for collection. Western Kentucky Coca-Cola was liable for loss of the receipts until they were turned over to an authorized Exchange employee and a proper receipt was obtained. There were no visible restrictions on or around the vending machines limiting who could purchase the soft drinks.

The sales tax originally assessed by the Cabinet was based on the gross proceeds Western Kentucky Coca-Cola removed from the vending machines during the period from March 1, 1991, through February 28, 1995. In response to this unfavorable ruling, Western Kentucky Coca-Cola appealed to the Board which held an evidentiary hearing on October 11, 1999. At the hearing, the company offered testimony indicating that entry to the base is restricted at all times and that the actual performance of the parties was consistent with the terms of the contract. On April 17, 2000, the Board set aside the assessment, noting that 103 Kentucky Administrative Regulations (KAR) 30:235(1) precludes the application of sales tax to receipts from sales made to instrumentalities of the federal government. In reversing the Cabinet, the Board properly focused on the transaction between Western Kentucky Coca-Cola and the Exchange, holding that it was improper to assess state sales or use taxes on the transactions between the company and the Exchange since the Exchange is a federal instrumentality and sales to it are immune from the imposition of state sales tax under Section 107 of the Buck Act.

Following the decision of the Board, the Cabinet petitioned for judicial review. In an order entered on December 4, 2000, the court reversed the determination of the Board and reinstated the assessment against Western Kentucky Coca-Cola. In so doing, the court held that the sales in question were not sales at commissaries or post exchanges restricted to "authorized persons," thereby rendering the exception inapplicable. Western Kentucky Coca-Cola then appealed to this Court.

When the outcome of a case turns on an issue of law, as in the instant matter, appellate review is de novo. There is no requirement that we grant any deference to the trial court where factual findings are not at issue.⁴ A determination of an issue of law is also presented where the question is one of statutory construction⁵ or where the relevant facts are undisputed and the dispositive issue thereby becomes the legal effect of those facts.⁶ As noted previously, whether the Exchange constitutes an instrumentality for present purposes is the legal question to be decided since resolution of this issue will necessarily determine the propriety of the assessment.

On October 9, 1940, the United States Congress adopted what is generally known as the Buck Resolution or the Buck Act which provides, in pertinent part, as follows:

Sec. 105. State ... taxation affecting Federal areas; sales or use tax

(a) No person shall be relieved from liability for payment of, collection of, or accounting for any sales or use tax levied by any State, or by any duly constituted taxing authority therein, having jurisdiction to levy such a tax, on the ground that the sale or use, with respect to which such tax is levied, occurred in whole or in part within a Federal area; and such State or taxing authority shall have full jurisdiction and power to levy and collect any such tax in any Federal area within such State to the same extent and with the same effect as though such area was not a Federal area.⁷

A limitation upon the application of Sec. 105(a) is contained in Sec. 107, the exception to the general rule:

Sec. 107 Same; exception of United States, its instrumentalities, and authorized purchases therefrom

(a) The provisions of sections 105 and 106 of this title shall not be deemed to authorize the levy or collection of any tax on or from the United States or any instrumentality thereof, or the levy or collection of any tax with respect to sale, purchase, storage, or use of tangible personal property sold by the United States or any instrumentality thereof to any authorized purchaser. (b) A person shall be deemed to be an authorized purchaser under this section only with respect to purchases which he is permitted to make from commissaries, ship's stores, or voluntary unincorporated organizations of personnel of any branch of the Armed Forces of the United States, under regulations promulgated by the departmental Secretary having jurisdiction over such branch.⁸

The United States Supreme Court has said that this section can only be read as an explicit congressional preservation of federal immunity from state sales taxes unconstitutional under the immunity doctrine.⁹ More specifically, the Supreme Court has established that post exchanges and similar facilities such as the one at Fort Campbell are arms of the government which are essential for the performance of government functions and partake of whatever immunities are provided under the Constitution and federal statutes.¹⁰

At issue in Standard: Oil Co. v Johnson¹¹ was the validity of a California statute imposing a fuel license tax on individuals who distributed fuel to post exchanges.¹² After reviewing the formation and development of exchanges, the Supreme Court resolved the issue as follows:

From all of this, we conclude that post exchanges as now operated are arms of the Government deemed by it essential for the performance of governmental functions. They are integral parts of...