Western Elec. Co., Inc. v. Weed
| Decision Date | 15 July 1974 |
| Docket Number | No. C--435,C--435 |
| Citation | 524 P.2d 1369,185 Colo. 340 |
| Parties | WESTERN ELECTRIC COMPANY, INCORPORATED, a New York corporation, and the Mountain States Telephone and Telegraph Company a Colorado corporation, Plaintiffs-Appellants, v. Hugh H. C. WEED, Jr., Director of Revenue of the State of Colorado,Defendant-Appellee. |
| Court | Colorado Supreme Court |
Rovira, DeMuth & Eiberger, Lael S. DeMuth, Stuart S. Gunckel, Denver, for plaintiffs-appellants.
John P. Moore, Atty. Gen., John E. Bush, Deputy Atty. Gen., Chris J. Eliopulos, James A. Clark, Bruce D. Pringle, Sp. Asst. Attys. Gen., Denver, for defendant-appellee.
Pursuant to Colorado Appellate Rules (C.A.R. 50), we granted appellants' petition for certiorari to the Colorado Court of Appeals prior to argument and judgment in that court.
This case involves the Colorado sales and use tax laws. C.R.S.1963, 138--5--2 and 138--5--34.
Appellants Western Electric and Mountain Bell contend that they are not subject to sales and use tax on the purchase by Mountain Bell from Western Electric and others of telephone instruments and other items used directly in providing telephone service to Mountain Bell's customers. Specifically, they assert that the processing clause of the sales and use tax statutes exempts them from paying these taxes on the purchase of such items.
As an alternate issue, it is asserted that the sales and use tax statutes, if applied to the appellants in connection with such purchases, are unconstitutional because they deny to the appellants equal protection of the laws under the Fourteenth Amendment of the United States Constitution. Also, the appellants take issue with the imposition of interest and penalties on the assessment made by the director of revenue for the unpaid sales and use taxes.
When these appellants did not include sales and use tax on the purchase of these items in their tax returns to the Department of Revenue for the month of October 1971, the appellee director of revenue made assessments therefor which also included the imposition of interest and penalties against the appellants.
These assessments were challenged by the appellants in an action filed in the district court. After a trial de novo, the district court entered its judgment upholding the assessments made by the director of revenue. From this judgment, the appellants appeal and urge reversal.
We find that the trial court's judgment was a proper disposition on the issues presented and we therefore affirm the judgment.
Of the issues presented in this appeal, the most significant is in regard to the appellants' contention that they are exempt from the collection and payment of sales and use taxes on purchases by Mountain Bell from Western Electric and other firms of items used directly in providing telephone service.
In this case, it is Western Electric which maintains that it is not required to collect sales tax from Mountain Bell when Mountain Bell purchases such items from it in Colorado because of Mountain Bell's exemption from the sales tax under the provision of the processing clause. On the other hand, it is Mountain Bell which contends that it is exempt from paying use tax when it purchases such items from firms outside of Colorado for use or consumption in Colorado.
The following fact situation makes up the posture upon which a determination must be made on this issue.
In October 1971, Mountain Bell purchased from Western Electric and other firms telephone instruments, station apparatus, cable, wire, conduit, telephone poles, crossarms, directories, switching equipment, and other related apparatus. During that same month, Mountain Bell purchased from Western Electric and other firms many other items of tangible personal property, such as, office supplies, tools, automobiles, trucks and similar items. In accordance with previous notifications to the Department of Revenue when Western Electric filed its sales tax return and Mountain Bell filed its use tax return for the month of October 1971, only the purchases of tangible personal property, such as, office supplies, tools, automobiles, trucks and similar items were reported on these returns and the appropriate tax paid thereon. The purchases of telephone instruments, station apparatus, cable, wire, conduit, telephone poles, cross-arms, directories, switching equipment, and other related apparatus used directly in providing telephone service, were not reported on the grounds that the purchases of those items are exempt under the so-called processing clause of the sales tax and use tax statutes.
The processing clause of the sales tax law (C.R.S.1963, 138--5--2(14)) and the processing clause of the use tax law (C.R.S.1963, 138--5--34(7)) provide that the purchase of tangible personal property which enters into the processing of or becomes an ingredient or component part of the product or service is deemed to be a wholesale purchase and consequently, exempt from sales and use tax. The subsections setting forth the processing clause of the sales tax law and the processing clause of the use tax law are set forth in the following two paragraphs.
It should be noted that the wording of the processing clause as to both the sales tax and the use tax is identical. With regard to the sales tax, C.R.S.1963, 138--5--2(14) provides that:
'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 sections 138--5--1 to 138--5--32.'
C.R.S.1963, 138--5--34(1) and (7) states that authorization to impose a use tax shall not apply
'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 thereof.'
In this discussion, Rule 54 promulgated by the Department of Revenue must be considered. It states that those rendering services 'must pay the sales and use tax on the purchase of all tangible personal property used in performing a service, unless otherwise exempt.' It is obvious that Rule 54 points directly to the processing clauses for guidance in determining what tangible personal property is exempt from sales and use tax.
At the trial, the witnesses presented by Western Electric and Mountain Bell explained generally the basic components of the telephone system and how it works. A description was given as to how a subscriber's voice when directed into a telephone instrument is converted into electrical impulses which are carried from the subscriber's telephone along wires strung on telephone poles or buried in conduit to a switching location known as the central office. At this point, the equipment directs the electrical impulses by means of a switching device directly to the called party's telephone receiver or to another central office where the final connection is made to the called party. Upon answering the call, the called party's telephone instrument converts the electrical impulses back to vibrations which are capable of being heard and understood by a human ear. The equipment which is necessary to amplify and boost the electrical impulses as they proceed through the wires was also described. It was explained how many messages may be joined together on a single circuit and later unscrambled by a carrier device. It was noted that in the case of long distance telephone calls, the transmission of the voice or other sounds may be carried by microwave which is essentially a radio transmission from one point to another. It was explained that the various items of purchased equipment and apparatus sought to be exempt are all telephone network components which are essential to and directly involved in the telephone service supplied by Mountain Bell to its subscribers.
On cross-examination, appellants' witnesses, and on direct examination, appellee's witnesses testified that all of these items of equipment and apparatus remain at all times in the ownership of Mountain Bell, are depreciated for tax purposes, and the cost thereof is included in the rate base upon which telephone charges are determined.
It is conceded that the purchases upon which an exemption is sought fall within the general definition of retail sales and do not meet the definition of wholesale sales. No resale of these items by Mountain Bell to its subscribers is contemplated or ever effectuated. See definitions in C.R.S.1963, 138--5--2(5) and (6) and Herbertson v. Cruse, 115 Colo. 274, 170 P.2d 531 (1946) which deals with the difference between a wholesale and retail sale under the sales tax statutes.
Therefore, the crucial issue as presented in this appeal is whether these sales to Mountain Bell shall be deemed to be wholesale sales and thus exempt under the processing clause of the sales and use tax provisions of C.R.S.1963, 138--5--2(14) and 138--5--34(7) as set forth previously herein. In resolving this issue, we are concerned with the meaning of the phrase 'enters into the processing of' which will henceforth be referred to as the 'processing clause.'
The appellants contend that the items in question enter into the processing of the telephone service which Mountain Bell provides to its subscribers. More specifically, they argue that the phrase 'enters into the processing of' must be...
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