AMERICAN TOTALISATOR CO. v. DUBNO, 210 Conn. 401 (1989)

555 A.2d 414

(13408) (13410) (13411) (13412)Supreme Court of Connecticut

PETERS, C.J., SHEA, CALLAHAN, GLASS and COVELLO, Js.

The three plaintiff companies appealed separately to the trial court from the assessment of use tax deficiencies, penalties and interest by the defendant commissioner of revenue services on certain computers, computer terminals, computer components and paper stock the companies had provided to the commission on special revenue in connection with various wagering systems. The trial court consolidated the three cases for trial and upheld the commissioner’s assessment of taxes as to all the plaintiffs but determined that they were not liable for penalties and interest. On the plaintiffs’ appeal challenging the assessment of taxes and the commissioner’s appeal challenging the denial of interest, held: 1. The plaintiffs could not prevail on their claim that the items in question were purchased or leased for resale and therefore were not subject to tax; the true object of the contract and the primary object of the

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personal property employed was to implement the wagering systems the plaintiffs had contracted to provide for the state, not to effect a resale of that property to the state. 2. The trial court did not abuse its discretion in determining that the plaintiffs were not liable for interest because each plaintiff had a firm and reasonably held belief in the correctness of its legal position and did not appeal for purposes of delay; the statute (12-422) granting equitable powers to the trial court in connection with tax appeals authorizes that court to set aside an assessment of interest.

Argued December 16, 1988

Decision released March 14, 1989

Three appeals from the assessments of sales and use tax deficiencies, brought to the Superior Court in the judicial district of Hartford-New Britain at Hartford, where the cases were consolidated and tried to the court, O’Neill, J.; judgment for the defendant in the first case, from which the plaintiff and the defendant filed separate appeals; judgment for the defendant in the second case, from which the plaintiff DTP Royalty, Inc., appealed and the defendant cross appealed; and judgment for the defendant in the third case, from which the plaintiff GTECH Corporation appealed and the defendant cross appealed. No error.

The defendant filed motions for reargument which were denied.

Richard K. Greenberg, assistant attorney general, with whom, on the brief, were Joseph L Lieberman, attorney general, and Antoinette M. Tease, legal intern, for the defendant, commissioner of revenue services.

Scott P. Moser, with whom, on the brief, were James Sicilian and H. Douglas Bailey, for the plaintiff American Totalisator Company, Inc.

George C. Hastings, with whom was Richard W. Tomeo, for the plaintiffs DTP Royalty, Inc., and GTECH Corporation.

CALLAHAN, J.

These consolidated appeals and cross appeals were brought to this court from judgments rendered in the Superior Court on appeals brought by the

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plaintiffs pursuant to General Statutes 12-422[1]
from deficiency assessments of use taxes, penalties and interest[2] by the defendant commissioner of revenue services (commissioner).[3]
The trial court upheld the commissioner’s assessment of taxes as to all the plaintiffs but determined that they were not liable for penalties and interest. We find no error.

The essential facts are not in dispute. The plaintiffs American Totalisator Company, Inc. (AmTote), DTP Royalty, Inc. (DTP), and GTECH Corporation (GTECH), at various times contracted with the state of Connecticut acting through the division of special revenue (state) to provide personal property, training, personnel and services to establish systems to enable

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the state to conduct its lottery, teletrack and off-track betting enterprises.[4] In order to accomplish that purpose the plaintiffs, during the years for which deficiencies were assessed, purchased or leased[5] computers, computer components, computer terminals, paper stock and other tangible items on which they paid no sales tax. Subsequent to conducting audits, the defendant commissioner assessed use tax deficiencies, penalties and interest against all the plaintiffs, reasoning the various items purchased were not acquired for resale but were retail purchases of equipment and material used by the plaintiffs to discharge their contractual obligations with the state. The plaintiffs disagreed with the commissioner’s assessments and argued that their purchases were not retail sales as defined by General Statutes 12-407 (3)[6]
They claimed instead that the personal property involved had been purchased for

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resale and consequently was not subject to the imposition of a use tax under General Statutes 12-41].[7]

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I
A conclusion as to whether the personal property in question was acquired by the plaintiffs for their own use in fulfilling their agreements with the state and therefore subject to a use tax or was purchased for resale to the state[8] and consequently not subject to the imposition of a use tax requires a determination of the true object of the contracts between the parties. Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 609-10, 410 A.2d 457
(1979); United Aircraft Corporation v. Connelly, 145 Conn. 176, 184-85, 140 A.2d 486 (1958); United Aircraft Corporation v. O’Connor, 141 Conn. 530, 537-38, 107 A.2d 398 (1954); White v. Storer Cable Communications, Inc., 507 So.2d 964, 968
(Ala.Civ.App. 1987); Culligan Water Conditioning, Etc. v. State Board of Equalization, 17 Cal.3d 86, 96, 550 P.2d 593, 130 Cal.Rptr. 321 (1976). “The court must look to the intention of the parties to the contract to determine whether the items in a contract are held for resale or were purchased for a different purpose.” White Oak Corporation v. Department of Revenue Services, 198 Conn. 413, 422, 503 A.2d 582 (1986). “That intention is to be ascertained from the language used, interpreted in the light of the situation of the parties and the circumstances surrounding them.” United Aircraft Corporation v. O’Connor, supra, 538.

A careful reading of the contracts in question leads to the inescapable conclusion that the intention of the parties in contracting and the true object of each of the contracts was the furnishing by the plaintiffs, and the retention by the state, of the plaintiffs’ expertise and services to establish, implement and operate the

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various systems of wagering desired by the state.[9]
Nowhere in any of the contracts are the words “lease”

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or “rental” mentioned in relation to personal property and nowhere, other than in certain clauses giving the state the option to purchase various items at set periods, are the words “sale,” “sell,” or “purchase” mentioned in regard to personal property.[10] Further, other than in the option clauses, nowhere in any of the contracts is there a price or rental figure established for the purchase or lease of any particular piece of equipment or any commodity. Rather, the contracts stipulate that the plaintiffs are to be compensated by the payment of a fee based on a percentage of the revenues generated by the particular system of wagering with which they are affiliated. See U-Need-A-Roll-Off Corporation v. New York State Tax Commission, 67 N.Y.2d 690, 691, 490 N.E.2d 840, 499 N.Y.S.2d 921 (1986); Greene
Kellogg, Inc. v. Chu, 134 App. Div.2d 755, 756, 521 N.Y.S.2d 571 (1987).

As might be expected, the involvement of the state in gaming required that it maintain significant control over its operation. The extent of that control is reflected in the contractual provisions for such things as mandated licensing requirements, placement of terminals,

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and security procedures. The presence of state control, however, does not convert contracts for the establishment and operation of wagering systems into contracts for the sale or lease of the personal property used in operating those systems. White Oak Corporation v. Department of Revenue Services, supra, 423. Nor does the fact that agents or licensees of the state, after training by the plaintiffs, dispensed tickets and collected money alter our view that the true object of the contracts and the primary purpose of the personal property employed was to implement the systems the plaintiffs had contracted to provide, not to effect a resale.[11]

In short, we believe that the language of the agreements between the state and the plaintiffs compel a determination that the computers, computer terminals, computer components, paper stock and other personal property that the plaintiffs claim were purchased or leased for resale, although not inconsequential in utility or cost, were incidental to the primary purpose of the contracts which was to provide the state with wagering systems. White Oak Corporation v. Department of Revenue Services, supra, 422; see Black’s Law Dictionary (5th Ed.) p. 686. It is the primary purpose for which the personal property was purchased and put to use that controls the determination of the property’s taxability. Dresser Industries, Inc. v. Lindley, 12 Ohio St.3d 68, 69, 465 N.E.2d 430 (1984); Fliteways, Inc.

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v. Lindley, 65 Ohio St.2d 21, 25, 417 N.E.2d 1371
(1981). Where, as here, the primary function and purpose of the taxpayers was to provide wagering systems and the ownership, use and maintenance of certain personal property and equipment were necessary to enable them to furnish those systems, those taxpayers, not the state, were the ultimate users or consumers of that property and equipment within the meaning of the sales and use tax statutes. White Oak Corporation v. Department of Revenue Services, supra, 423; Boise Bowling Center v. State, 93 Idaho 367, 369-70, 461 P.2d 262
(1969); Appeal of ATT Technologies, Inc., 242 Kan. 554, 561-62, 749 P.2d 1033 (1988); Southwestern Bell Telephone Co. v. State Commission, 168 Kan. 227, 232, 212 P.2d 363 (1949); Nashville Mobilephone Co. v. Woods, 655 S.W.2d 934, 937 (Tenn. 1983).

We conclude, therefore, that the plaintiffs did not purchase or lease to resell to the state the personal property for which a use tax was assessed. Rather, the property was purchased or leased for use in delivering to the state the gaming systems the plaintiffs had contracted to provide. The plaintiffs’ lease or purchase of the property in question therefore was subject in each case to a use tax deficiency as determined by the commissioner and affirmed by the Superior Court. There is no error as to the use tax assessments against the plaintiffs.[12]

II
The trial court determined, however, that “each of the plaintiffs had a firm and reasonably held belief in the correctness of its legal position and that none of them brought suit for delay.” The trial court, therefore, rendered judgment that the defendant commissioner collect the use tax assessments against the

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plaintiffs without penalty or interest. The commissioner appeals that determination of the trial court.

The defendant commissioner does not contend that the trial court lacked authority to forgo penalties against the plaintiffs.[13] He does contend, however, that the trial court lacked authority to relieve the taxpayers of their obligations to pay the statutory interest due on their assessments. The commissioner’s position is that the imposition of interest on delinquent taxes is not punitive but compensatory in nature, and that the trial court had no authority to waive it. We disagree.

General Statutes 12-422 provides in pertinent part: “Any taxpayer aggrieved because of any order, decision, determination or disallowance of the commissioner of revenue services under section 12-418, 12-421 or 12-425 may . . . take an appeal therefrom to the superior court for the judicial district of Hartford-New Britain . . . . Said court may grant such relief as may be equitable . . . .” (Emphasis added.) That broad statutory grant of equitable powers has been interpreted by this court to authorize the Superior Court to set aside an assessment of interest. “We agree with the plaintiff that it was within the trial court’s province to consider whether to set aside the interest imposed as part of its review of the deficiency assessment; see Duval v. Brown, (31 Conn. Sup. 373, 377, 333 A.2d 63 (1974)]; Bowne v. Brown, [30 Conn. Sup. 309, 316, 313 A.2d 426
(1973)]; but we also consider the resolution of that issue to be within the court’s sound discretion.” H. B. Sanson, Inc. v. Tax Commissioner, 187 Conn. 581, 587-88, 447 A.2d 12 (1982); New England Yacht Sales, Inc. v. Commissioner, 198 Conn. 624, 637, 504 A.2d 506 (1986). “The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the

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trial court.” Allen v. Nissley, 184 Conn. 539, 546, 440 A.2d 231 (1981). The defendant in this instance has not persuaded us that the trial court’s exercise of its discretion was clearly erroneous. H. B. Sanson, Inc. v. Tax Commissioner, supra, 588.

The defendant also argues that an interpretation of 12-422 that would allow a court to waive the commissioner’s assessment of interest would be unconstitutional because it would constitute a delegation of the commissioner’s administrative function to the judiciary. We find the defendant’s reasoning in this regard difficult to follow, and we also find inapposite the case of Adams v. Rubinow, 157 Conn. 150, 251 A.2d 49 (1968), on which it primarily relies.[14]

Article XX of the amendments to the Connecticut constitution expressly provides that the jurisdiction of the courts shall be defined by law.[15] In effectuating that constitutional mandate, the legislature has promulgated General Statutes 52-1, which expressly gives the

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Superior Court the power to “administer legal and equitable rights and apply legal and equitable remedies.”[16] That general grant of equitable powers has been further enhanced and defined by 12-422, the statute pursuant to which these appeals were taken, which provides that the court “may grant such relief as may be equitable.” The statute does not exclude assessments of interest from its equitable ambit. Since under 12-422, the trial court was exercising de novo jurisdiction over the taxpayers’ appeals and was not bound by the commissioner’s previous rulings; Kimberly-Clark Corporation v. Dubno, 204 Conn. 137, 143-45, 527 A.2d 679 (1987); its determination did no more than carry out its constitutional and statutory mandates by affording equitable relief where that court deemed it appropriate.

There is no error.

In this opinion the other justices concurred.