Morton Buildings, Inc. v. VT Dept. of Taxes

Morton Buildings, Inc. v. Dept. of Taxes  (97-002); 167 Vt. 371; 705 A.2d 1384

[Opinion Filed 26-Dec-1997]

[Motion for Reargument Denied 15-Jan-1998]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                            No. 97-002


Morton Buildings, Inc.                       Supreme Court

                                             On Appeal from
    v.                                       Washington Superior Court

Vermont Department of Taxes                  September Term, 1997


Alan W. Cheever, J.

       Paul P. Hanlon, Montpelier, and Abraham M. Stanger and Lisa Barse
  Bernstein of Seyfarth, Shaw, Fairweather & Geraldson, New York, New York,
  for Plaintiff-Appellee.

       J. Wallace Malley, Jr., Acting Attorney General, and  Danforth
  Cardozo, III, Special Assistant Attorney General, Montpelier, for
  Defendant-Appellant.


PRESENT:  Dooley, Morse, Johnson and Skoglund, JJ., and Gibson, J.
          (Ret.), Specially Assigned


       DOOLEY, J.   The Vermont Department of Taxes appeals a Washington
  Superior Court order granting a use tax refund to Morton Buildings, Inc. 
  The issue is whether Morton must pay a use tax on raw materials it
  purchased outside of Vermont, assembled into building components at its
  Gettysburg, Pennsylvania factory, and then brought into Vermont to
  construct prefabricated buildings.  We hold that Morton must pay the use
  tax on the materials pursuant to 32 V.S.A. § 9773(1), and reverse the
  superior court decision.

       Morton originally sought a refund of use taxes paid between July 1987
  and February 1990.  The department denied the refund, and the Commissioner
  of Taxes affirmed, ruling that the building components were essentially the
  same as the raw materials Morton had purchased at retail.  Because Morton
  had not paid sales tax on these materials, the Commissioner ruled that it
  must pay a use tax pursuant to 32 V.S.A. § 9773(1).  On appeal, the
  superior court disagreed, concluding that the fabricated components Morton
  brought into Vermont were not the same as

 

  the items of tangible personal property Morton had bought at retail and, as
  a result, they were not taxable.(FN1)  The department appealed to this Court.

       The parties have stipulated to the facts.  Morton is an Illinois
  corporation, with its principal place of business in Illinois and a Vermont
  sales office in Rutland.  It is engaged in the production, sale and onsite
  erection of prefabricated timber-frame, metal-sheathed warehouses and other
  buildings for use by farm and industry.  The overall style of the buildings
  is uniform, but the customer specifies the dimensions of the building and
  the location of doors, windows and skylights.

       Morton purchases raw materials used in its business in bulk from
  vendors outside Vermont and stores them in its own warehouses outside
  Vermont.  The principal materials are steel and lumber.  Morton pays no
  sales tax to any state on its purchase of the raw materials.

       Morton makes building components destined for Vermont customers in its
  factory in Gettysburg, Pennsylvania.  When an order is received, Morton
  withdraws the necessary raw materials from storage and makes them into
  various building components in accordance with the customer's
  specifications for the building.  The building components include trusses,
  lower columns, upper columns, purlins, metal panels and overhead rafters. 
  Making these building components involves sawing the lumber to different
  lengths and angles, drilling holes as needed, and assembling the cut lumber
  using metal gussets, connector plates or nails.  Morton also makes metal
  panels (from galvanized cold-rolled steel), which it uses to construct the
  building's interior and exterior walls and roof panels.

       Morton delivers the completed building components, along with windows,
  doors and other items purchased by Morton in their final form, to the
  customer's site.  The erection and

 

  installation of the building on site is a "turnkey" project, taking about
  four to five days. Morton's employees supply all the labor for
  transportation, loading, unloading, and erection of the building.  The
  erection and installation of a Morton building represents a permanent
  improvement to real property in Vermont for sales-and-use-tax purposes.

       In reviewing this case, we must afford deference to the Commissioner's
  determination, and his findings should not be set aside unless clearly
  erroneous.  Bigelow v. Department of Taxes, 163 Vt. 33, 35, 652 A.2d 985,
  986 (1994).  In addition, "[a]bsent compelling indication of error, the
  interpretation of a statute by the administrative body responsible for its
  execution will be sustained on appeal."  Burlington Elec. Dep't v.
  Department of Taxes, 154 Vt. 332, 337, 576 A.2d 450, 453 (1990) (quoting In
  re R.S. Audley, Inc., 151 Vt. 513, 517, 562 A.2d 1046, 1049 (1989)). 
  Nonetheless, we recognize that when construing a statute imposing a tax, we
  resolve any ambiguities in favor of the taxpayer.  See International Bus.
  Machs. v. Department of Taxes, 133 Vt. 269, 277, 336 A.2d 158, 163 (1975).

       In approaching the issues in this case, it is first helpful to
  consider the purpose of the use tax scheme, because we must construe the
  statute to carry out the intent of the Legislature.  Id. at 275, 336 A.2d 
  at 162.  Complementary use taxes were enacted to discourage consumers from
  shopping in states with low or no sales taxes.  See W. Warren & M.
  Schlesinger, Sales and Use Taxes: Interstate Commerce Pays Its Way, 38
  Colum. L. Rev. 49, 63-65 (1938).  The goal of use taxes is to place
  in-state and out-of-state sellers on the same footing.  See Chicago Bridge
  & Iron Co. v. Johnson, 119 P.2d 945, 947 (Cal. 1941).  As we stated in
  Rowe-Genereux, Inc. v. Department of Taxes, 138 Vt. 130, 133-34, 411 A.2d 1345, 1347 (1980):

     A use tax is a necessary complement to a state's sales tax, and is
     used as a revenue-raising device in almost all fifty states. . . . It
     is designed to protect a state's revenues by taking away the
     advantages to residents of traveling out of state to make untaxed
     purchases, and to protect local merchants from out-of-state
     competition which, because of its lower or nonexistent tax
     burdens, can offer lower prices.

  (Citation omitted).  This dispute revolves around the application of one
  specific provision of the

 

  use tax statute.  The statute imposes a five percent use tax on "any
  tangible personal property purchased at retail" unless the property "has
  already been or will be subject to the sales tax under this chapter."(FN2) 
  32 V.S.A. § 9773(1).  Thus, in order for the department to impose a use tax
  on the materials Morton incorporates into its building components and
  thereafter into its buildings, it must show that (1) Morton purchased
  tangible personal property at retail, and (2) Morton used the same tangible
  personal property in Vermont.

       Morton contends that the department cannot make the two-part showing
  because the tangible personal property it used to construct buildings in
  Vermont is not the same tangible personal property that it purchased at
  retail.  Morton argues that through its manufacturing processes, the raw
  materials it purchased at retail were transformed into different items of
  tangible personal property -- i.e., building components.  Thus, the
  building components it used in Vermont were not, it argues, purchased at
  retail.

       Morton emphasizes that we drew this exact distinction in International
  Bus. Machs. v. Department of Taxes, where a manufacturer argued that the
  use tax discriminates against out-of-state products because an in-state
  manufacturer can avoid a use tax by paying a sales tax on the component
  parts whereas a manufacturer from a state with no sales tax pays a use tax
  on the full value of the manufactured product when it is brought into
  Vermont.  We responded:

     The fundamental difficulty with the IBM interpretation is that it
     refuses to recognize a manufactured piece of equipment as a
     distinct piece of property with an identity separate from its
     component parts.  When a use tax is assessed upon a computer, it
     is the computer as a distinct entity, and not component parts that
     have lost their identity, which is the "property" subject to taxation.

  133 Vt. at 275, 336 A.2d  at 162.  Here, Morton asks that we apply this
  distinction to recognize its trusses, purlins, columns, etc. as
  manufactured items separate from the raw materials that went into them.

 

       A number of appellate courts have accepted Morton's argument in
  construing use tax provisions similar to ours.  The earliest case accepted
  the structure of Morton's argument without closely examining whether Morton
  had sufficiently changed the raw materials so that they had lost their
  identity.  See Morton Bldgs., Inc. v. Chu, 510 N.Y.S.2d 320, 321-22 (App.
  Div.), aff'd, 513 N.E.2d 1304 (N.Y. 1987).  The more recent cases have
  accepted Morton's position that it has transformed the raw materials so
  they no longer exist.  In Morton Bldgs., Inc. v. Bannon, 607 A.2d 424
  (Conn. 1992), the Connecticut Supreme Court found that Morton's processing
  of the materials "involves an integrated series of operations using the
  taxpayer's production machinery that not only cuts the raw materials to
  size but changes their shape and affixes metal plates and other hardware"
  and concluded that its "building components are not identical with the raw
  materials that go into their production."  Id. at 427-28; See also Morton
  Bldgs., Inc. v. Commissioner of Revenue, No. 96-P-295, slip op. at 6-7
  (Mass. App. Ct. Aug. 28, 1997) (because one could not "disassemble a truss
  and have recognizable lumber, steel, and nails to be used or consumed,"
  Morton "so significantly altered the raw materials that those raw materials
  do not come within the reach . . . [of the use tax statute] as written");
  Sharp v. Morton Bldgs., Inc., No. 03-96-00458-cv, slip op. at 7 (Tex. Ct.
  App. July 1, 1997) ("trusses and other components are something more than
  pieces of steel and lumber" and are "distinct from their constituent raw
  materials").

       The department does not appear to disagree with the general
  proposition that manufactured items can be different for tax purposes from
  the raw materials that went into them. It emphasizes, however, that Morton
  sells buildings, not building components, and the building components are
  themselves raw materials.  Thus, it argues that the partial assembly of the
  original raw materials does not transform these materials into something
  else.  In support of this position, it notes that Morton's activities do
  not meet the definition of "manufacturing" contained in the department's
  regulations.  It cites cases that have rejected Morton's position, see
  Morton Bldgs., Inc. v. Commissioner of Revenue, 488 N.W.2d 254, 259 (Minn.
  1992), as well as cases

 

  involving taxpayers in similar situations where the court found that a use
  tax could be levied, see Chicago Bridge & Iron Co. v. Johnson, 119 P.2d  at
  948 (Cal. 1941); Western Contracting Corp. v. State Bd. of Equalization, 71 Cal. Rptr. 472, 473-76 (Cal. Ct. App. 1968); Exxon Corp. v. State Bd. of
  Equalization, 783 P.2d 685, 688-89 (Wyo. 1989).

       For three reasons, we conclude that the department has the better
  argument on the facts before us.  First, we believe that the statutory
  language taken as a whole supports the department's position.  Although the
  cases on which Morton relies are instructive, we have stressed in the past
  that cases from other states are of little assistance because each
  statutory scheme is unique.  See Rock of Ages Corp. v. Commissioner of
  Taxes, 134 Vt. 356, 358, 360 A.2d 63, 65 (1976).  Moreover, we must read
  the tax statutes together in pari materia to implement the intent of the
  Legislature.  See In re Cottrell, 158 Vt. 500, 504, 614 A.2d 381, 383
  (1992).  The use tax statute on which Morton relies does not specifically
  state that raw materials that are used in manufacturing lose their separate
  identity as personal property purchased at retail subject to a use tax. 
  Indeed, the statutory definitions of "use" and "tangible personal property"
  are quite broad and cover the raw materials that Morton brings into
  Vermont. See 32 V.S.A. § 9701(13) ("use" means "the exercise of any right
  or power over tangible personal property"); id. § 9701(7) (tangible
  personal property is "personal property which may be seen, weighed,
  measured, felt, touched or in any other manner perceived by the senses").
  Certainly, one can see the lumber and fasteners from which Morton
  constructs its building components, and Morton uses them in Vermont in
  constructing its building.

       It is significant that the statutory scheme contains a use tax
  exemption that covers situations similar to that before us.  32 V.S.A. §
  9741(14) exempts from the sales and use tax tangible personal property
  "which becomes an ingredient or component part of, or is consumed or
  destroyed or loses its identity in the manufacture of tangible personal
  property for sale." Neither party has claimed that this exemption statute
  applies to this case, apparently because what Morton ultimately sells is
  real property.  What Morton seeks is a virtually identical

 

  exemption for ingredients or component parts of real property through a
  statutory construction of the general provisions setting forth what
  constitutes a taxable use.

       We conclude that the Legislature specifically dealt with the situation
  of ingredients and components used in manufacturing by providing a limited
  exemption from use taxation in § 9741(14).  That exemption would be
  unnecessary if the general statute on imposition of the use tax did not
  extend to ingredients and component parts of manufactured products. 
  Reading the statutory sections together, we conclude that the Legislature
  did not intend that ingredients or component parts escape use taxation
  except in the circumstances set forth in § 9741(14).

       Second, even if we held that § 9773(1) did not extend to raw materials
  used in creating manufactured products, we would not hold that Morton's raw
  materials would escape use taxation.  The "manufacturing" that Morton
  claims here is quite rudimentary.  By regulation, the department defines
  "manufacturing" as:

     performance as a business of an integrated series of operations
     which places personal property in a form, composition, or
     character different from that in which it was acquired whether for
     sale or use by the manufacturer.  The change in form, composition
     or character must result in a different product having a distinctive
     name, character and use.

  Vermont Department of Tax Regulations, § 1.9741(14)-2(a), 1 Code of Vt.
  Rules 10060022 (1995).  Even if the purlins, trusses and columns have a
  "form, composition or character" different from the wood and metal
  components from which they are made, it is difficult to discern how they
  are a "different product" with a "distinctive . . . character and use."

       Morton plunges us down a slippery slope of line drawing.  Most of what
  Morton has done is to cut pieces of wood and fasten them together, albeit
  with great precision.  The wood and metal are immediately identifiable in
  the new building component.  We think we must find more change of character
  and use to invoke an exception to the statutory coverage.

       Finally, we find compelling the department's contention that to not
  impose a use tax on Morton would be inherently unfair to similarly situated
  taxpayers.  For example, a Vermont

 

  contractor purchasing building supplies in Vermont to build a home in
  Vermont would pay sales tax on the supplies, and a New Hampshire contractor
  bringing lumber and supplies into Vermont to build a home would be subject
  to Vermont's use tax.  Moreover, any alterations made to these materials
  (i.e., converted into purlins, columns or trusses) at the construction site
  would not vary the tax consequences.  Yet, under Morton's interpretation of
  32 V.S.A. § 9773(1), if these alterations to the materials occur in another
  state (e.g. Pennsylvania), Vermont's use tax does not apply.  This
  interpretation of § 9773(1) is clearly unfair to similarly situated
  building contractors and is contrary to the complementary nature of
  Vermont's sales-and-use tax.

       We conclude that the building materials Morton purchased at retail
  outside Vermont were used in Vermont and are covered by § 9773(1). 
  Consequently, the department's decision to impose a use tax on these
  materials was correct.

       Reversed.


                              FOR THE COURT:



                              _______________________________________
                              Associate Justice



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                                  Footnotes



FN1.  The department also argued that the materials were taxable under
  § 9773(3) as tangible personal property "not acquired for purposes of
  resale, upon which any taxable services . . . have been performed."  The
  Commissioner agreed, but the superior court ruled that no taxable services
  had been performed on the building components.  In view of our disposition,
  we do not reach this alternative ground for deciding that the materials are
  subject to a use tax.

FN2.  Property on which a sales tax was paid in another state is
  exempt from use taxation if the other state allows a corresponding
  exemption.  See 32 V.S.A. § 9744(a)(3).