WMS Gaming, Inc. v. Sullivan, 2009-17-M.P.

• Decision Date: 01 November 2010
• Docket Number: No. 2009-17-M.P.,2009-17-M.P.
• Citation: 6 A.3d 1104
• Parties: WMS GAMING, INC. v. David M. SULLIVAN, Tax Administrator of the Division of Taxation of the State of Rhode Island.
• Court: Rhode Island Supreme Court

6 A.3d 1104

WMS GAMING, INC.

v.David M. SULLIVAN, Tax Administrator of the Division of Taxation of the State of Rhode Island.¹

No. 2009-17-M.P.

Supreme Court of Rhode Island.

Nov. 1, 2010.

Jon M. Anderson, Providence, Esq., for Plaintiff.

Bernard J. Lemos, Esq., Deputy Chief of Legal Service, Division of Taxation, for Defendant.

Present: SUTTELL, C.J., FLAHERTY, and INDEGLIA, JJ.

OPINION

Justice INDEGLIA, for the Court.

This Court granted a petition for writ of certiorari filed by the petitioner WMS Gaming, Inc. (WMS or petitioner), pursuant to G.L.1956 § 44-19-25,² to review a District Court judgment confirming the final decision and order of the respondent, the tax administrator of Rhode Island's Division of Taxation (division). The final decision and order upheld the division's assessment of a use tax against the petitioner on equipment, namely video lottery terminals (VLTs), which the petitioner manufactured and provided to the Rhode Island Lottery Commission (Lottery) under an agreement between the parties. Specifically, the petitioner asks this Court to review whether the agreement between the parties is a license or a lease and, depending on the outcome of this inquiry, whether the petitioner engaged in a taxable use of its VLTs in Rhode Island as a licensee. If so, the petitioner asks this Court to determine whether the Lottery consequently licensed the petitioner to use the VLTs to operate a lottery in violation of the Rhode Island Constitution, which the petitioner argues the District Court judge erroneously declined to address. After careful review of the record in this case, we conclude that the agreement was a license, that the petitioner engaged in a taxable use of the VLTs, and that the District Court judge did not err when he declined to address the petitioner's constitutional question because it was unnecessary to do so. Accordingly, we affirm the judgment of the District Court.

IFacts and Travel

The Rhode Island Constitution prohibits all lotteries, except those operated by the state. R.I. Const., art. 6, sec. 15. The Lottery has the authority "to conduct and control video lottery games" in Rhode Island. G.L.1956 § 42-61.2-2(a). To carry out this authority, the Lottery "shall license technology providers capable of interfacingwith a central communications system controlled by the [Lottery]." ³ Section 42-61.2-3(1). The petitioner, a Delaware corporation with its principal place of business in Illinois, manufactures "amusement games." In 1992, WMS and the Lottery entered into an agreement captioned "Video Lottery Terminal Technology Provider License Agreement" (agreement) under which WMS would "be licensed as a Technology Provider * * * to provide the Lottery with video lottery terminals." ⁴ In 1997, the parties renewed the agreement until "September 28, 2000, unless terminated earlier by the parties." Either party could terminate the agreement upon written notice within the agreement's prescribed time frames.

Under the agreement, petitioner agreed to "furnish the Lottery with the number and type of video lottery terminals as the Director [of the Lottery], in his sole discretion, from time to time, shall require." WMS's "compensation" was a statutory percentage of the "net terminal income" of the VLTs that it provided in accordance with § 42-61.2-7(a)(3)(i). The agreement required WMS to "pay all costs of any testing, examination, analysis and transportation of terminals." WMS further was obligated to provide spare parts and "training on the maintenance of their terminals" to the central communications systems provider. The petitioner also agreed "to modify its hardware and software to accommodate video game changes directed by the Lottery * * * from time to time." In addition, WMS was responsible for developing and administering at least "five player promotions per year," which were subject to the Lottery's written approval. The agreement also charged WMS with obtaining insurance on the VLTs and stated that WMS was "solely liable for any claims, loss, cost, damage, liability or expense" related to VLT malfunction.

Under the agreement, WMS provided VLTs to the Lottery. The VLTs were placed at two licensed video lottery retailers (retailers), Newport Grand and Lincoln Park,⁵ both parimutuel facilities.⁶ All VLTs were linked through the central communications system, which was provided by GTech, a private company that was also a licensed technology provider. On a daily basis, employees of the retailers removed the cash that their patrons placed into the VLTs and deposited it into the retailers' accounts. The retailers transferred these amounts electronically to the Lottery, which, in turn, remitted weekly the statutory percentage due to each licensed technology provider.

In 2000, the division conducted a field audit of petitioner for the period of July 1994 through June 2000. The auditor discovered that WMS had "never filed [a] use tax with the Division" during the audit period.⁷ He found that WMS never hadpaid a use tax in another state nor was charged sales tax for the materials used to construct the VLTs. During the audit period, WMS retained title to the VLTs. The auditor determined WMS's use-tax liability through an examination of internal records of WMS and municipal records. As a result of the audit, on February 20, 2001, the division issued to WMS a notice of deficiency for the unpaid use tax totaling $208,565.70. ⁸

WMS timely requested an administrative hearing on March 21, 2001, which was held on August 22, 2001, before a hearing officer of the Rhode Island Department of Administration. According to the final decision and order issued by the hearing officer, "[t]he main purpose of the hearing was to allow [WMS] to present evidence and arguments that the 'video lottery terminal technology provider license agreement' between the Rhode Island Lottery Commission and WMS Gaming, Inc. is an exempt business transaction with the [S]tate of Rhode Island, not subject to sales or use tax." The decision included nearly fifty findings of fact, which reviewed the course of the audit and certain provisions of the agreement.

In her discussion of the issue, the hearing officer asserted that "[i]t is clear from the agreement that the taxpayer, as an independent contractor, is obtaining from the State of Rhode Island a license to provide a service which, but for this agreement with [t]he Lottery * * *, would be illegal." Consequently, the hearing officer found that no sale had occurred between WMS and the Lottery. Rather, she determined that WMS was "using the tangible personal property itself for purpose of financial gain." Thus, the hearing officer concluded that WMS made a taxable use of personal property in Rhode Island, and "[t]he assessment should be upheld." On June 26, 2002, the tax administrator approved the hearing officer's findings of fact and conclusions of law and forwarded the final decision and order to WMS. He advised WMS of the amount due, with interest, and its right to seek a judicial redetermination.

On July 24, 2002, petitioner filed a timely petition in the Sixth Division of the Rhode Island District Court for redetermination of the tax assessment. On March 21, 2006, petitioner moved for summary judgment, and argued that it was entitled to judgment as a matter of law because WMS did not "use" the VLTs and, moreover, it would be unconstitutional for it to do so as only the state may operate a lottery. On April 25, 2006, the District Court judge denied petitioner's motion for summary judgment and tried the de novo appeal on May 23 and 24, 2006.

The petitioner called one witness, Barry Greenberg, who was employed by WMS as the "lottery product manager" during the audit period. Mr. Greenberg testified that he was involved with the negotiation and execution of the agreement, and he "viewed the agreement as a lease." He said that "WMS either sells or leases [its]product" and that he did not focus on the label of the agreement during negotiations. According to Mr. Greenberg, he viewed the agreement as a lease because WMS "maintained ownership of the property" and because WMS provided "the VLTs for the Rhode Island Lottery for them to use, for which they were paying us." He was unaware of any Rhode Island law governing such agreements.

Mr. Greenberg testified about the repair and maintenance of WMS's VLTs. According to him, WMS employees also assisted in the installation of VLTs. He testified that once the VLTs are delivered, the central systems provider, GTech, maintained the terminals. WMS trained GTech employees in the maintenance of its VLTs. Mr. Greenberg testified that WMS had staff in Rhode Island during the audit period to conduct promotions, provide training to GTech, and to update the VLTs with new games.

The respondent tax administrator presented two witnesses. It first called Gerald Aubin, who was employed as the executive director of the Lottery during the audit period. Mr. Aubin also was present when the agreement was negotiated and executed, and he was a signatory to it. According to Mr. Aubin, he did not believe that the agreement was a lease because he was precluded by statute from entering into an agreement for the lease of VLTs.

Mr. Aubin verified that under the Lottery's internal operating procedures, the technology providers could maintain the VLTs themselves or could contract with a third-party contractor, including GTech, to provide maintenance services. He testified that although GTech was responsible for maintaining the VLTs "on a day-to-day basis," licensed technology providers such as WMS would "jump in and perform those same duties" when necessary. For example, he testified that if the licensed technology providers did "not get a quick enough response from GTech, they would take it upon themselves to do those maintenance tasks." Thus, according to Mr. Aubin, "[t]he line is truly blurred" between those who would perform maintenance on the VLTs. He testified that...