Opinion
The plaintiff appealed to the Superior Court from the decision of the defendant state tax commissioner assessing against it a sales tax deficiency, a penalty and interest. From that court's judgment dismissing the plaintiff's appeal as to the assessment of the tax and the interest but setting aside the penalty assessment, the plaintiff appealed and the defendant cross appealed to this court. Held: 1. The trial court's finding that the plaintiff was a retailer subject to payment of the sales tax was not clearly erroneous. 2. The trial court did not abuse its discretion in declining to set aside the assessment of interest. 3. Because the trial court's finding that the plaintiff had not intentionally or negligently disregarded the sales tax law was not clearly erroneous, that court did not err in setting aside the penalty.
Argued April 1, 1982
Decision released July 13, 1982
Appeal by the plaintiff from the defendant's deficiency assessment of a sales tax, penalty, and interest against the plaintiff, brought to the Superior Court in the judicial district of Hartford-New Britain at Hartford and referred to Hon. Louis Shapiro, state referee, who rendered judgment dismissing in part the plaintiff's appeal and finding the plaintiff not subject to an assessment of a 10 percent penalty for its alleged disregard of its sales tax liability, and appeal by the plaintiff and cross appeal by the defendant to this court. No error.
Wesley W. Horton, with whom were Alexandra Davis and, on the brief, William R. Moller and Anthony R. Lorenzo, for the appellant-appellee (plaintiff).
Ralph G. Murphy, assistant attorney general, with whom, on the brief, was Carl R. Ajello, attorney general, for the appellee-appellant (defendant).
This is an appeal and a cross appeal from a judgment of the trial court dismissing an appeal from a deficiency assessment of sales tax and interest, and setting aside a statutory penalty assessed against the plaintiff.
The case was tried to the court on a stipulation of facts, the substance of which follows. In the course of its business as a supplier and installer of household equipment, the plaintiff, a Connecticut corporation, constructed and delivered kitchen cabinets to contractors, and installed stairs. The plaintiff filed timely sales tax returns as a retailer for the period June 30, 1970, through March 31, 1973. In computing its sales tax liability, the plaintiff deducted amounts representing the price of delivery and "of installing certain materials such as stairs." Its computed sales tax of $19,194 equals the liability the plaintiff would have incurred on the purchase of materials if it were a construction contractor, who is treated as a consumer for purposes of computing sales tax, rather than a retailer of tangible personal property.
Following an audit by the defendant, the defendant assessed a sales tax deficiency of $27,028.90; General Statutes 12-415; plus a statutory penalty and interest for the applicable tax quarters. After a hearing requested by the plaintiff pursuant to General Statutes 12-418, a deputy tax commissioner upheld the tax, interest and penalty assessments. Although the commissioner made no finding with respect to the stairs, he did find that the plaintiff was a retailer of kitchen cabinets because it did not attach or install them after delivery.
On appeal to the Superior Court from the defendant's decision; General Statutes 12-422; the plaintiff claimed that although it filed sales tax returns as a retailer, it was a contractor and hence liable as a consumer to reimburse its retailers for the sales tax on the cost of materials used in the construction of kitchen cabinets and in the fabrication of stairs. The defendant claimed that the plaintiff was a retailer of tangible personal property and was liable for collecting and remitting to the defendant sales tax on the purchase price, which includes the cost of delivery and installation.
Unless itemized as separate charges, delivery and installation are deemed included in the purchase price. General Statutes 12-407 (8) and (9). For purposes of this appeal, the plaintiff has abandoned its claim that the delivery and installation charges should be excluded from the sales tax.
On the basis of the stipulated facts that the plaintiff filed sales tax returns as a retailer and remitted to the defendant funds collected from its customers, the trial court found that the plaintiff was a retailer of tangible personal property. Accordingly, the trial court held that the plaintiff had not sustained its burden of proving that the sales tax deficiency assessment was erroneous and hence dismissed its appeal in part. In addition, the trial court set aside the 10 percent statutory penalty assessed under General Statutes 12-415 (4), reasoning that the plaintiff did not negligently or intentionally disregard its sales tax liability, but declined to set aside the statutory interest assessed under General Statutes 12-415 (2). In its appeal the plaintiff claims that the trial court erred in finding that the plaintiff was a retailer and in declining to set aside the interest imposed by the defendant. In its cross appeal the defendant claims error in the trial court's setting aside of the statutory penalty.
"A sales tax is imposed on all retailers making sales in Connecticut by General Statutes 12-408 (1). Reimbursement for the tax thereby imposed, furthermore, `shall be collected by the retailer from the consumer and such tax reimbursement, termed "tax" in this and the following subsections, shall be paid by the consumer to the retailer . . . .' General Statutes 12-408 (2). While the statute does not define the term `consumer,' it is generally held that a general contractor who purchases material from a retailer for use in the construction of a building for his customer is the `consumer' of those materials within the meaning of that term as it appears in statutes similar to 12-408 imposing a sales tax." (Citations omitted.) Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 599, 362 A.2d 847 (1975); see General Statutes 12-408; Regs., Conn. State Agencies 12-426-18; Sullivan v. United States, 395 U.S. 169, 171, 89 S.Ct. 1648, 23 L.Ed.2d 182 (1969); see generally International Business Machines Corporation v. Brown, 167 Conn. 123, 128-29, 355 A.2d 236 (1974). A consumer of "`tangible personal property purchased from a retailer' and used in the construction of a building pursuant to a construction contract is ordinarily the general contractor." Fusco-Amatruda Co. v. Tax Commissioner, supra, 601. Although the plaintiff does not dispute that it collected reimbursements from its customers for the sales tax it paid as a retailer, the plaintiff claims that the trial court erred in finding that it was not a consumer, but a retailer.
"[Regs., Conn. State Agencies] Sec. 12-426-18. CONTRACTORS AND SUBCONTRACTORS (a) DEFINITIONS. The term `contractor,' as used herein, includes both contractors and subcontractors and, among others, building, electrical, plumbing, heating, painting, decorating, paper hanging, air conditioning, ventilating, insulating, sheet metal, steel, masonry, carpentry, plastering, cement, road, bridge, landscape and roofing contractors or subcontractors. The term `construction contract,' as used herein, means a contract for the repair, alteration, improvement, remodeling or construction of real property. (b) TAXABILITY OF SALES To OR BY CONSTRUCTION CONTRACTORS. A contractor shall pay the tax as a consumer on the purchase or lease of all materials, supplies or equipment used by him in fulfilling either a lump sum contract, a cost-plus contract, a time and material contract with an upset or guaranteed price which may not be exceeded, or any other kind of construction contract except: (1) Where the contractor contracts to sell materials or supplies at an agreed price and to render service in connection therewith, either for an additional agreed price or on the basis of time consumed or (2) Where such contractor is engaged as a permittee in the business of selling such materials or supplies at retail. . . . A contractor may, in certain instances, himself fabricate part or all of the articles which he uses in construction work. For example, a sheet metal contractor may partly or wholly manufacture roofing, cornices, gutter pipe, furnace pipe, furnaces, ventilation or air conditioning ducts or other such items from sheet metal which he purchases, and use these articles, pursuant to a contract for the construction or improvement of real property. In this instance, the sale of the sheet metal to such contractor constitutes a sale at retail within the meaning of the law and he pays the tax as a consumer when he buys the same. This is so whether the articles so fabricated are used in the alteration, repair or reconstruction of an old building or are used in new construction work. (c) PERSONS WHO SELL COMPLETE UNITS OF STANDARD EQUIPMENT AT RETAIL AND INSTALL SAME. This section is not applicable to sales contracts whereby a person, whether he is a contractor, subcontractor or otherwise, acts as a retailer selling tangible personal property in the same manner as other retailers and is required to install a complete unit of standard equipment, requiring no further fabrication but simply installation, assembling, applying or connecting services. In such instances, the contract will not be regarded as one for improving, altering or repairing real property. For example, the retailer of an awning or blind agrees not only to sell it but to hang it; an electrical shop sells electrical fixtures and agrees to install them; a retailer sells an electric washing machine and contracts to install the same; a dealer sells cabinets and agrees to install them. A person performing such contracts is primarily a retailer of tangible personal property and should segregate the full retail selling price of such property from the charge for installation, as the tax applies only to the retail price of the property. . . ." See General Statutes 12-426 (1); see generally Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 603-604, 362 A.2d 847 (1975).
The burden of proving an error in a deficiency assessment is on the plaintiff. Modugno v. Tax Commissioner, 174 Conn. 419, 421, 389 A.2d 745 (1978); Fusco-Amatruda Co. v. Tax Commissioner, supra, 599. In holding that the plaintiff had failed to sustain its burden, the trial court was not bound to limit its reasoning to that utilized by the tax commissioner, as the plaintiff claims. The court's finding that the plaintiff is a retailer is reasonably supported by the stipulated facts that the plaintiff completed and delivered kitchen cabinets, supplied and installed stairs, and held itself out as a retailer of household equipment. Although the plaintiff's claim that it installed stairs as a contractor may be meritorious, depending upon the extent of fabrication conducted at the construction site; see Regs., Conn. State Agencies 12-426-18 (c); the record is insufficient for us fully to address the merits of this claim. Therefore, the finding is not clearly erroneous. See Practice Book 3060D; cf. Connecticut Theater Foundation, Inc. v. Brown, 179 Conn. 672, 675-76, 427 A.2d 863 (1980).
The plaintiff's claim that the court erred in not setting aside the interest assessment raises the issue of the court's equitable powers in an administrative appeal under General Statutes 12-422. That statute provides in part that in reviewing a decision of the tax commissioner, the "court may grant such relief as may be equitable . . . ." In the absence of a trial court's attempt to exercise administrative powers; see Jaffe v. State Department of Health, 135 Conn. 339, 353-54, 64 A.2d 330 (1949); the trial court may grant relief consistent with its review of a deficiency assessment upheld by the Commissioner. General Statutes 12-421, 12-422; see Duval v. Brown, 31 Conn. Sup. 373, 375, 333 A.2d 63 (1974); Bowne v. Brown, 30 Conn. Sup. 309, 316, 313 A.2d 426 (1973). The tax commissioner may include penalty and interest charges as part of deficiency assessments. Interest may be assessed from the date when the tax should have been paid to the date of payment. General Statutes 12-415 (2). A 10 percent penalty may be assessed when the commissioner determines that a sales tax deficiency is the result of negligent or intentional disregard of the tax law. General Statutes 12-415 (4). The defendant does not dispute that the trial court had jurisdiction to set aside the penalty assessed, but contends that the court has no similar power with respect to an assessment of interest because the defendant or the tax review committee does not have the express power to review an assessment of interest as it does with respect to a penalty. See General Statutes 12-3a, 12-421. In its claim of error, the plaintiff contends not only that the trial court does have jurisdiction to set aside an assessment of interest, but also that it erred in not exercising that power in this case. 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, supra, 377; Bowne v. Brown, supra, 316; but we also consider the resolution of that issue to be within the court's sound discretion. The plaintiff has not persuaded us that the court's exercise of discretion was clearly erroneous.
The penalty for negligent or intentional disregard of the tax law is the greater of 10 percent of the deficiency or $50. When the taxpayer has fraudulently or intentionally evaded the tax, the commissioner may assess a 25 percent penalty. General Statutes 12-415 (5). Tax evasion is not an issue in this case.
In its cross appeal from the trial court's setting aside of the statutory penalty assessed by the defendant, the defendant claims that the court erred by focusing upon the honesty and innocence of the plaintiff, rather than upon its negligence or intentional disregard of sales tax law. In its memorandum of decision, the trial court expressly found that the plaintiff did not negligently or intentionally disregard the law and hence is not subject to the statutory 10 percent penalty. In support of this finding the court explained that the defendant never questioned the plaintiff's honesty or innocence and that the plaintiff relied on his accountant for sales tax advice. The defendant contends that the plaintiff's veracity and reliance upon its accountant were improper considerations for determining a penalty based upon intentional disregard of the law with respect to deductions for transportation and delivery charges. We disagree. Reasonable reliance upon an accountant's advice may be considered as a factor, although not necessarily a conclusive one, when determining whether the plaintiff disregarded the law either negligently or intentionally. Duval v. Brown, supra, 374-76. Moreover, the plaintiff's veracity is clearly relevant to whether a penalty is appropriate. Duval v. Brown, supra, 374. Therefore, the trial court's finding was not clearly erroneous. Practice Book 3060D.