Untitled Texas Attorney General Opinion

Hon. Robert S. Calvert Opinion MO. ~-165
Comptroller of Public Accounts
Austin, Texas Re : Whether~ certain deficiency
determinations for sales
and use taxes by the Comp-
troller are valid; and
Dear Mr. Calvert: related questions.
You request our opinion regarding deficiency determinations
showing taxes, penalties and Interest due by a public utility
corporation under the Texas Limited Sales, Excise and Use Tax
Act. You advised that the deficiency determinations contained
the following statement: “In particular, we find error In the
followlng:~ failure to properly report and remit sales and/or
use tax as required by the Limited Sales, Excise, and~Use Tax
Act. These discrepancies were revealed by an audit of your
records dated October 15, 1964. Copies of this audit, work-
sheets, and letter of transmittal are enclosed for your records.”
You advised further that the taxpayer against whom the defi2
. I. ciency determinations were Issued was a purchaser of’ tangible
personal property and your first question was whether or not
these deficiency determinations as ,issued are valid.
I.
Our answer to your first question is In the affirmative.
The Issuance of a deficiency determination is authorized by
Article 20.06(~)(i), Taxation-Cieneral, Vernon’s Civil Statutes,
which provides :
“If the Comptroller is not satisfied with the
return or returns of the tax or the amount of
tax required to be paid to the State by any
person, he may compute and determine the amount
required to be paid upon the basis of the facts
contained In the return or returns or upon the
basis of any information within his’possession
or which may come Into his possession. Nothing
in this or any other sectfon of this Act shall
be construed to preclude the Comptroller from
proceeding against the consumer for any tax
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.
Hon. Robert S. Calvert, page 2 (M-165)
which the consumer should have paid but failed
to pay.”
The deficiency determinations contain the amount required to
be paid, which was determined upon the basis of the Information
In the Comptroller’s possession. The Information upon which the
ComptrollerIrelied is an audit of the taxpayer’s records dated
October 1% 1964 .I Therefore, the deficiency determinations contain
’ on their f&e the statutory requirements, I.e., the amount comput-
ed and determlned~to be paid and the basis upon which the determl-
nations are made&’,The only question remaining, therefore, concern-
ing the validity of the determinations Is whether or not It placed
the taxpayer on notice as to what tax was due. The determinations
contain the words “sales and/or use tax.” An examination of the
deficiency determinations, and the audit worksheets attached, do
not purport to distinguish as to which tax was due, the sales tax
or the use tax. The audit worksheeta, however, do detail each and
every transaction upon which a claim of additional tax is made,
These transactions are all purchases by the taxpayer and each in-
vo’lce, the date, the person from whom purchased, and the amount are
detailed on the sudit worksheet. Summaries are then prepared show-
in&,the totals contained in the scheduled worksheets and grouping
these total8 by taxable quarters and than assessing fhe,:tax, pen-
alty, and intdrest to be due. It Is well settled that the sales
and use tax ere complementary taxes which In their every character-
istic are designed and enacted to supplement and complement each
other .’ State ex rel. Transport Mfa.Equip.Co. v.,, Bates, 224 S.W.2d
14 U It d States Gypsum Co. v. Green, 110 So. 2d
8:; Ik.~&. s ?g;Jj. nI,neTexas, the sales tax is a tax on the trans-
action and’not a tax on the parties to the transaction. Calvert v.
Canteen Co., 371 S.W.2d 556 (Tex.Sup. 1963); Young & Co. of Houston
Cl t 405::S.W.2d 174 (Tex.Clv.App. 19%. ,erPoF.,ref;) A -
&e%.T:‘6ie taxpayer was placed on notice of’e&an& every Fran&
action for which a tax was claimed. Inasmuch as these are comple-
mentary taxes, a defense to one would be a valid defense to the other
unless the taxpayer could show that he was Injured by the assessment
of one where the other tax would not have applied. Since no facts
Indicate that an injury occurred, our conclusion, therefore, Is that
the deflclency determinations are authorized by statute and conform
in the issuance thereof to the statute, and place the taxpayer on
notice of the facts upon which a claim for additional taxes are b,e-
lng m%de.. We rust, therefore, conclude that the deficiency determi-
nations as issued in this case are valid.
.
-115.
Ron. Robert S. Calvert, page 3 (M-165)
II.
Your second question Is whether the Comptrollermay proceed
against the vendee loca,ted in Texas for collection of the unpaid
taxes before proceeding against the Texas vendor.
The cases heretofore cited hold that the sales and use tax 1s
a transaction tax. Consequently, the tax liability must fall upon
each party to the transaction, l.e., the purchaser as well as the
seller, until the.tax la paid to the state. The negligence or fall-
ure of the seller to collect the tax from the purchaser does not
relieve ,the purchaser the tax liability. Spencer v. Mere, 52
So. 2d 679 (Fla.Sup. D Ellen Town Builders v. Department of
Revenue, 222 N.E.2d 482, 11.&p. 1967) ., n e a tter case,
theCourt pertinently obser:ed?
“The primary llablllty Is Incurred by the one who
purchases for use, and the seller’s failure to col-
lect the tax cannot operate to discharge the pur-
chaser’s liability. q a D
“The statute does not contemplate that both the re-
tailer’s occupation tax and the use tax reach the
State treasury with respect to any one transaction,
but unless It la shown that the purchaser paid use
tax to the supplier or that the latter paid retailers’
occupation tax to the State, there Is nothing to pre-
clude the Department from collecting either the one
.tax or the other *”
Article 20.04 (J)> Taxation-General, Vernon’s Civil Statutes,
does not,,prevent a collection from the purchaser. ‘This Article
provides:
“The storage> use or other consumptlon~in this
State of tangible personal property,’ the receipts
from the sale, lease, rental or use of which are
required to be included In the measure of the llmit-
ed sales tax, or tangible personal property upon
[ which a use tax has been pald by the taxpayer using
said tangible personal property, 1s exempted from
the use tax Imposed by this Chapter.”
While no Texas cases have been found which construe,,thls pro-
vision,&e Legislature provfded In Article 20.06(~)(i),
Nothing In this or any other, section of this Act shall be construed
-776.
Hon. Robert S. Calved, page 4 (M-165)
to preclude the Comptroller from proceeding aglnst the consumer
for $ny tax which the consumer should have paid but failed to
Pay.
Consequently, the Legislature has provided a mandate that
no section of the Act, including Article 20.04(J) can be constru-
ed In a manner to preclude the Comptroller from proceeding against
the consumer. In this respect identical statutory provisions to
Article 20.04(J) have already been construed by the Supreme Court
of Rhode Island In Capitol Building Company, Inc. v. Langton, 221
A12d 99, (1967), wherein the court held that the exemption did not
pertain to the vendor from whom the purchaser made his purchases.
The Court reasoned that it applied to the purchaser for any sale
of the same personal property that the purchaser might make, and
that the exemption was in the statute to protect the consumer or
purchaser from double taxation and not to protect the vendor.
There Is no showing in this- case that the taxpayer Is subject to
double taxation or that the taxes on this transaction have been
paid. Consequently, we must conclude that the Comptroller has
authority on any given transaction to proceed against the purchas-
er or the seller or both until the tax is paid. This authority
exists on both the sales and the use tax; and without any showing
of injury, it doe8 not matter which tax Is being asserted against
the purchaser.
III.
Your third question is what penalties and interest, If any,
may be properly assessed and at what time. Article 20.05(C),
Taxation-General, Vernon’s Civll’Statutes, provides’as follows:
“(1) On or before the last day of the month
following each quarterly period of three months,
a return for said quarterly period shall be
filed with the Comptroller In such form as the
Comptroller may prescribe.
“(2) For purposes of the Limited Sales tax a re-
turn shall be filed by every person mubject to:the
+3x. For purposes of the use tax a return shall
be filed by every retailer engaged in business in
the State or by every person who has purchased
tangible personal property, the storage, use or
other consumption of which is subject to the use
-?7?-
Hon. Robert S. Calvert, page 5 (M-165)
tax, but who has not paid the use tax due to a
retailer required to collect the tax."
Clearly the taxpayer herein was a "person subject to the tax":
first, the taxpayer was a purchaser on a taxable transaction and
was required to file a limited sales tax return on or before the
last day of the month following each quarterly period; secondly,
the taxpayer was required to make a use tax return, since it did
not pay 'the use tax to its retailer and since it purchased tangible
personal property, the storage 9 use or other consumption of which
was subject to the tax.
Article 20.05(D)(3), Taxation-General, Vernonfs Civil Statutes,
provides for returns file9 by the purchaser:
"In case of a r&turn filed by the purchaser, the
return shall show the total sales price of the
tangible personal property purchased by 'him, the
storage, use or consumption of which becomes itub-
ject to the use tax during the preceding reporting
period."
The sales price of the tangible personal property purchased by
the taxpayer, which the return requires the taxpayer to show, is
both the basis for the sales tax and the use tax.
" 'Article 20.05(H), Taxation-General, Veinon's C$vil Statutes,
provides:
erson shall fail to . . s pay to the
er the tax as imposed herein when said
report or pa ent is due, he shall forfeit five
per cent (5 i? of the amount due as penalty, and
after the first thirty (30) days he shall for-
feit an additional five per cent (5%). Provided,
however, that the penalty shall never be less
than One Dollar ($1). Delinquent taxes shall '
draw interest at the rate of six per cent (6$)
per annumh beginning sixty (60 day8 from the
date due. (Emphasis supplied. 1
This statutory provision applies to all ' eraones" liable for
.' sales or use taxes under Chapter 20, Taxation eneral, not merely
to retailers or other persons mentioned in Article 20.05.
Hon. Robert S. Calvert, page 6 (M-165)
Inasmuch as the deficiency determinations allege that the
taxpayer failed to pay the proper amount of taxes when due,
penalties and Interest were properly assessed. The due date 6f the
taxes alleged to be due was the last day of the month follow-
ing the quarter in which the purchase was made. From the facts
.’ submitted it appears that all of these purchases were made and the
taxes became due for more than thirty (30) da 6 prior to the date
of payment; consequently, a ten per cent (l&y penalty attached
and the delinquent taxes began to draw interest at the rate of six
per cent (6) sixty (60) days after the last day of the month fol-
lowing the quarterly period for which the tax delinquency is claim-
ed. The,.computation of taxes, penalties and~interest as shown in
Exhibit I appear to be correct.
IV.
Your next question concerns the taxability of tangible per-
sonal property which was shipped or delivered after September 1,
1961, pursuant to contracts entered into prior to September 1,
196%.
Contract A
Contract A provides that the electric company will furnish
material and equipment known a8 “telephone central office equip-
,.,ment,,“,;p.repare the,specifications therefor,,and install the equip-
ment in a building provided by the telephone company. The lnstal-
lotion of this equipment Was In a special purpose building, design-
edyfor the purpose of housing such equipment and the equipment was
permanently attached to the building and cannot be removed without
destroying the utility of the building. It is undisputed that it
has been for many years the intention of the two parties to the
contract ~to treat the building and the equipment housed therein
as real property, From the evidence presented, this intention has
been further expressed by treating this equipment as improvements
to the land and as a part thereof for ad valorem tax purposes.
The transcript and evidence on this matter is uncontradicted. This
equipment, thereforei meets the,teSts set out for determining the
nature of fixtures in Swern Public Service Co. v. Smith, 31 S.W.2d
WV! (Tex.Clv.A p. 19291 no writ) ; also, Hutchins v. Masterson, 46
Tex. 551 (1877 P . Consequently, we conclude therefrom, as a matter
of law, that this equipment when installed constitutes real property.
Southern California Telephone Co. v. State Board of Equalization,
. 422 (Cal.Sup.Ct. 1936); Hutchins v. Masterson,supra;
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Hen; Robert S. Calvert, page 7 (M-165)
G. A. Jones v. T. D. Bull, 85 Tex. 136 (1892); C. D. Shamburger
Lumber Co. v. Bredthauer, 62 s.W.2d 603 (Tex.Clv.App. 1933
writ dl )* F L Carmlechel v. U.S., 273 F,2d 392 (5th Cir.
1960): ``‘A&.&r.‘793. Fixtures. Secf’. 72. The electric com-
$tny;*theref&e, be&e a cont&tor whose duty ft. was to
Improve the realty belonging to the telephone company. The
materials and equipment used by the electric company were
all purchased or specially fabricated prior to September 1,
1961. The only transaction occurring after September 1, 1961,
was the shipment of the equipment to the contractor and the
Incorporation of the materials by the contractor Into the
realty of the taxpayer. The issue presented by your opinion
request Is whether there is a tax on the equipment and materials
used by the contractor to perform this contract which was entered
Into prior to September 1, 1961. Simply stated, Is the incor-
poration of these materials into realty a taxable event under
the Limited Sales, Excise and Use Tax Act? Since the facts
are undisputed, the issue presented Is purely a question of law.
While there are no Texas authorities on this subject, the
authorities throughout the United States appear to be divided
as to whether the contractor who incorporates materials into
real property is a retailer or a consumer of the materials so
used. 163 A.L.R. 267 (1946); 171 A.L.R. 684 (1947). The major-
. . . ,-Ity ,and,.mbre,modern vldw is that the contractor is a consumer.
Duhame v. State Tax Commission,,179 P.2d 252 (Ariz.Sup. 1947).
me reason for this rule Is stated by this court at page 259:
“When a contractor fabricates his materials
for the contractee, and the completed struc-
ture Is erected on the owner’s land, It Is as
much real property as the land itself. The
conetlttient elements of tangible personal
property have been destroyed by their incor-
poration lnto the completed structure. And
such a contractor, therefore, is pot making a
sale of tangible personalty to hI$ contractee.
“While perhaps a contractor may be making a sale
In the loose sense of the word, and while, that
loose sense might also be a sale at retail, he is
certainly not making a sale at retail of tangible
personal property which >a the necessary meaning
-780.
Hon. Robert S. Calvert, page 8 (M-165)
of the term ‘sale’ when used in this Act. By
the definitions in this Act a contractor when
fabricating personalty into realty neither sells,
resells, sells at retail, nor can he be consider-
ed a retailer,”
Consequently, we must conclude that the incorporation of tan-
gible personal property into realty, as an improvement, is not a
sale in and of itself, unless the Legislature has specifically
deemed such to be a taxable transaction. In this respect Article
20.01 (T) expresses the legislative intent regarding contractors:
“‘Contractor’ or ‘Repairman’ shall mean any per-
son who performs any repair services upon tan-
gible personal property or who performs any lm-
provement upon real estate, and who, as a necessary
and-incidental part of performing such’servlces, in-
corporates tangible personal property belonging to
him into the property being so repaired or Improved.
Contractor or repairman shall be considered to be
the consumer of such tangible personal property
furnished by him and Incorporated into the property
of his customer, for all the purposes of this Chap-
ter.
“(1) The above provision shall apply on y if the
contract between the person performing t x e ser-
vices and the person receiving them contains a lump
sum price covering both the performance of the
services and the furnishing of the necessary lnci-
dental material.
“(2) If the contract between the person providing
the services and the person receiving them contains
separate amounts applicable to the performance of
the services and the furnishing of the material then
the above Section shall not apply, and the person
furnishing the materials shall be liable for the
limited sales tax upon the agreed price of the mater-
ials as thus set forth in the.contract. Provided,
however, that the agreed price of the materials
shall be not less than the actual cost of such mater-
ials to the person so providing them.
“(3) In any case where the person so providing
such materials has paid the limited sales tax to his
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Hon. Robert S. Calvert, page 9 (M-165)
supplier when purchasing the tangible per-
sonal property; he shall be entitled to credit
the tax so paid to his supplier-against any
tax imposed by this Chapter with. respect to his
subsequent sale of that tangible,personal proper-
ty.”
Article 20.01 (R) also contains a reference to Article 20.01
(T):
“‘Use’ includes the exercise of any right or
power over tangible personal property incident
to the ownership of that tangible personal proper-
ty except that it does not include the sale of
,that tangible personal property in the regular’
course of business. ‘Use’ specifically Includes
the incorporation of tangible personal property
into. real estate or Ynto improvements upon real
estate without regard to the fact that such real
estate and improvement may be subsequently sold
as such except as provided in Article 20.01(T)(2).”
Cle&rly, where the contract consists of a contract contaln-
\ in65 a lump sum price covering both the performance of the services
and the furnishing of necessary material then the contractor, i.e.,’
the e,lectric company, would be deemed the consumer of such material
‘and there would be no sale of tangible personal property as to the
transaction of incorporating the material into the real estate be-
longing to the customer. However, Contract A contains separate
amounts applicable to the performance of the se~rvices and the fur-
nishing of the materials, Consequently, it may be argued that un-
der Section 2 of Article 20,01(T) the person furnishing the mater-
ials, i.e., the contractor,would be liable for the limited sales
tax upon the agreed price of the materials as set forth In the con-
tract. But the contractor cannot be subject to the use tax inas-
much as the term “use” will not include the i.ncorporation of such
tangible personal property into real estate by virtue of the statu-
tory language in Article 20.01(R) as specifically rsXated to Arti-
de 20.01(T)(2). However, the Sales Tax Act is silent as to which
transaction the limited sales tax attaches. Is the taxable trans-,
~:actlon in 20.01(T)(2) referring to the purchase of,the materials
by the contractor, or is it referring to the incorporation of the
materials by the contractor into the real roperty? If it is refer-
ring to the purchase of the materials by t Ke contractor, then the
transaction subject to the tax will be the same for both a lump sum
contractor and a separated contractor. But the tax base for the
Hon. ,Robert S. Calvkrt, page 10 (M-165)
purpose of computation may be different inasmuch as the computa-
tion for the lump sum contractor shall be made upon the actual
cost of the materials to the contractor while the tax’base for
the separated contractor shall be the agreed price of the mater-
ials as set forth in the contract so long as it is not less than
the actual cost of the materials to the contractor. Consequently,
if a separated contractor agrees to a price of materials furnish-
ed by him which is higher than his actual cost, then the contract
price will be the basis for the computation of: the tax. However,
if the transaction to be taxed under a separated contract Is not
the purchase of the materials by the contractor but the incorpora-
tion of the materials by the contractor Into realty, then the sep-
arated contractor would be paying a tax based on one transaction,
i.e., Incorporation of materials into realty, and a lump sum con-
tractor would be paying a tax based on a different transaction, i.e.,
purchase of materials before incorporation. Inasmuch as the stat-
ute Is not clear as to which transaction shall be the subject mat-
ter of the tax then we must resort to prior interpretation by the
Comptroller and to the rules of statutory construction.
The Comptroller by Ruling No. 9 (95-0.09) provides:
“A contract may recite the charges for skill
and labor separately from the charges for mater-
ials for the purpose of causing the customer to
be the ultimate consumer of the ma,terial.”
Ruling No. 2 (95-0.02) provides that.the contractor should
give a resale certificate to his supplier and accept the tax from
his customer upon the agreed price of the materials or accept an
exemption certificate In lieu of the tax should his customer be an
exempt organization, The effect of such ruling Is to remove the
contractor as a consumer from the transaction so that the furnish-
ing of the materials Is directly to the customer. The customer is
considered the ultimate consumer of the materials and the person
subject to the tax. ‘It is worthy to note that the Comptroller did
not rule that there were two transactions, i.e., the purchase of
materials by the contractor and the sale of the materials by the
contractor to the customer. The effect of the ruling is merely to
deem that under a separated contr,act, the customer, not the contrac-
tor, is. the consumer a The Comptroller apparently construed the
purpose of 20.01(T) as that of allowing a contractor to perform
work for an exempt organization without incurring a tax on the
materials used in the performance of a contract. Consequently,
we have been unable to find a clear decisive administrative in-
terpretation that the Legislature intended a statutory “sale” to
-783-
Hon. Robert S. Calvert, page 11 (M-165)
occur by virtue of Incorporating tangible personal property ln-
to real roperty. We note that the Sales Tax Act had been amend-
ed iri 19k!3 and 1967 with no substantial change in Article 20.01(T).
We cannot assume. that there has been a legisl;stioe re-enactment of
any administrative policy to the effect that the incorporation of
tangible personal property into realty is a statutory sale. Do the
rules of statutory construction suggest such Interpretation?
We hold that they do not. It is fundamental In construing
tax statutes that they be given a construction in harmony with the
Constitution of the state and federal governments. They may not
be interpreted to deprive a person of property without due process
of law. Article I, Section 3.6 of the Constitution of Texas and the
fifth amendment to the Constitution of the United States require
that taxing statutes be certainand definite in their scope and
standard and the classlflcatlon of the subjects of taxation be
clear, definite, and reasonable and free from any discrimination.
They are required to be interpreted “fairly for the government
and justly for the citizen.” 54 Tex.Jur.2d 165, Taxation, Sec. 41.
Article VIII, Section 1, Tex.Const. requires that “Taxation shall
be equal and uniform.” It prevents any substantial discrimination
while requiring all classifications to be reasonable and all tax
enactments to operate equally within the class:. 54 Tex.Jur.2d 147-
5.0, 152, Taxation, Seca. 29, 31. Tax discrimination results in a
violation of the constitutional requirement of equal protection of
. .
‘the law. 54 Tex.Jur.2d 144-145, Taxation,, Sec. 26. No court will
adopt a ccnstruction that results in discriminatory taxation.
Western Public Service:~Co, v. Mehar 116 Tex. 193, 292 S.W. 168
(1927); 54 Tex.Jur.2d 167, Taxation: 'Sec. 41.
It is settled that "where'the legislative intent is' ambigu-
ous or obscure, a rule of strict construction is applied against
the state and of liberal construction in favor of taxpayers. . a *”
Also . e 0 in construing statutory provisions delegating a power
to tax, every reasonable doubt Is resolved in favor of the tax-
payer, both as to whether a power to tax was ever granted and
whether the conditions attached to its exercise were ever perform-
ed. Nor will any exercise of a taxing power be extended by impli-
cation to embrace persons or property not plainly within the levy."
54 Tex.Jur.26 166-67, Taxation, Set; 41.
Ap lying these principles, we have concluded that Article
20.01(T P (2) fails to contain such clear and definite language as
would require the act of incorporating materials Into realty to
be deemed a taxable event. This being so, we are required by the
rules of strict construction to hold that such is not a taxable
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Hon. Robert S. Calved, page 12 (M-165)
event. Furthermore, the interpretation of Article 20.01(T)(2
in such a manner a8 to treat contractors who perform under pr 1or
lump sum contracts as being exempt from the tax and not falling
within the taxing act, but to treat’contractors who have p’erform-
ed pursuant to a prior separated contract as not being exempt
and falllng,wlthln the taxing act, would’ be treating two similarly
situated.persons in a different manner. This inconsistent treat-
ment would be a violation of due u’rocess and the eaual urotection
clause of both the United States and Texas Constitutions,
Ni3. 1 Oil Corp. v. Sheppard, 89 S.W.2d 1021, 1023
1935 , error ref.). Calvert v. McLemore, 163 Tex.
551 (1962). We d; not think that the statutes compel such an in-
terpretation, and under the applicable canons of statutory construc-
tion, we cannot give it such interpretation. As related to con-
tracts entered into before September 1, 1961, we believe that if
Article 20.01(T) is Interpreted to require a different result for
the lump sum contractor than for the separate contractor, we
would be allowing mere form to prevail over substance.~ This would
amount to tax dlscrlmlnation and unequal treatment. It would also
be subject to. attack on the basis of producing, a retroactive ap-
plication, since the article does not protide a~,fllxed standard of
duty so as to give the contracting parties an opportunity to com-
ply with the permitted options.
Recently, an analogous situation was disposed of which in-
,volved the construction and applicationof the Minnesota sales and
use tax. Attorney General’ s Opinion (Minn, July 27, 1967), P-H
State & Local Tax Serv,, para. 23, 505. There, as here, the prob-
lem concerned construction ,pontractors who had entered into an en-
forceable construction contract unconditionally vesting the rights
and obligations of the parties thereto and making no provisions for
1 allocation of future taxes prior .to the enactment date of the tax
law. However, some ofthe purchases which had been made pursuant
thereto were not consummated until after the effective~date of the
tax law, which Imposed the tax upon sales made In the state after
the date of the enactment of the law. Minnesota had adopted ,the
common law and had Incorporated into its statutes the rule of a
presumption against a retroactive effect. The Minnesota Attorney
General, faced with such a presumption and in the absence of any
expressed legislative intent in the statute to impose taxes retro-
.act%vely’on such a voluntary transaction as a lump sum, cost plus,
or time and material contract,’ with a guaranteed price, held that
the purchases or sales made pursuant to the enforceable contract
execucad.before the’tax enactment but completed afterwards were
non-taxable transactions.
-m-
.
Hon. Robert S. Calvert, Page 13 (M-165)
In the course of the opinion, the Attorney General took no-
tice that such retroactive imposition of taxes based upon such
a ~voluntary act is held invalid as a denial of constitutional due
urocess and observed that the courts will arford urotection from
‘such retroactive sales taxation. The case of the-state v. Indus-
trial Tool & Die Works, Inc., 220 Minn, 591, 21 N.W.2d 31 (1945)
was cited in support thereof, ,wherein the court distinguished a
retroactive nonLDrofits tax +rom a tax on voluntarv a&. auot-
lng from Welch v: Henry , 305 U.S. 134, 147, 59 s.ci. 121;1i5-26
(1938)) as follows:
“‘In the cases In which this Court has held in-
valid .the taxation of gtfts made and completely
vested before the enactment of the taxing stat-
ute decision was rested on the ground that the
nature or amount of the tax could not reasonably
have been anticipated by the taxpayer at the time
the uarticular voluntarv act which the stat)Jte later
;made’the taxable event .: ‘NiCbbls v. .Coo3idge> .‘2’{11
U.S., 531, 542; 47 S. Ct. 710, 713. . . . Since, in
each of these cases, the donor might freely have
chosen to give or not to give, the taxation, after
the choice was made,,of a gift which he might well
have refrained from making had he anticipated the
tax, was thoughtto be so arbitrary and,oppressive
., ’as to be .a denial of due proces,s. Hut there are
other forms of taxation whose retroactive imposi-
tion cannot be said to be similarly offensive be-
cause their incidence is not on the voluntary act
of the taxpayer.‘” (Italics omitted.)
Article 20.02, Taxation-General, Vernon’s Civil Statutes,
merely provides:
“There is hereby Imposed a limited salestax at
the,rate of two per cent (2%) on the receipts
from the sales at retail of all tangible personal,
property within this State.”
‘hhere Is nothing in the,statute from which an Intent may be
,infer’red to Impose taxes retroactively on such a construction
contract entered into prior to the effective date of such taxing
statute. The construction contracts in question herein consti-
tute the kinds of “voluntary acts” which the Minnesota Attorney
General concluded from the cited authorities would be protected
Hon. Robert S. Calvert, page 14 (M-165)
by the courts from retroactive sales taxation. Here the parties
merely chose at the time of the contract. to separate the cost
of materlale from the labor rather than to price: them together.
Had the Telephone Company chosen the latter course, its tax lla-
bility would not be in question. To permit the statute to be
construed so as to Impose taxes based on the mere form of a con-
tract entered Into prior to the taxing statute would be to allow
the taxing tncidence to fall upon the voluntary act of the tax-
ayer occurring prior to the assage of the taxln statute. Hence
t he incidence of the tax woul B operate in the pro 6 ibited retro-
active manner.
Texas has adopted the common law, and it also follows the
rule of presum tion against retrospective application of statutes.
53 Tex.Jur.2d fig-53, Statutes, Sec. 28. In addition, Article I,
; Section 16, Tex.Conat., expressly provides that “No . . . retro-
ac~tlve law . . . shall be made.’ It also’applles to the levy or
Imposition of taxes. Castleberry v. Coffee,, 272 S.W. 767 (Tex.
CommIApp. 1925).
Consequently, we must conclude that constitutional conslder-
ations compel an interpretation of Article 20.01(T) in such a
manner that the prior lump sum contractor will not be treated dlf-
.ferently from the prior separated contractor; and construing the
statute in the light of the constitutional requirements, we hold
that the transaction of delivery and incorporation of the mater-
ials Into real property pursuant to the contract entered into prior
to the enactlqent of the law In question was non-taxable and did not
constitute a sale of tangible personal property occurring after
the statute became operative and effective. After the tax law be-
came effective, the parties are, of course, free to contract that
the liability for the tax upon the transaction Is Incurred by the
contractor if he is a lump sum contractor or by his cuetomer if /
he Is a separated contractor, and the tax base will be the costs
of the materials to each, The cost of materials to the ,lump sum
contractor Is what he pays for the materials, and the cost of
the materials to the separated contractor’s customer is the cost
as provided in the separated contract if that amount is equal to
or greater than ths actual value. The effect of Article 20.01(T)
(2) then Is to authorize a transfer of liability from the contrac-
tor to his customer so that if the customer is an exempt organlza-
tion he may claim the exemption in lieu of paying the’tax on the
materials. We do not perceive that the Legislature intended a tax
to be levied upon the act of incorporating materials Into the
realty by a separated contractor and no tax to be levied upon the
-18%
Hon. Robert S. Calvert, page 15 (M-165)
same act done by a lump sum contractor.
Thls.lnterpretation, therefore, is consistent with and al-
lows the~enforcement of Attorney General’s Opinion No. C-30 (1963),
from which we quote, in part, at page 5 as followcj:
“We believe that the purpose of the provision
mentioned (Article 20.04(~), Vernon’s Civil
Statutes) was to make provisions for such per-
sons as contractors whb have entered into con-
struction contracts based upon the fact that the
contractor could purchase certain materials at
certain prices without a tax on the sale of the
materials and he agrees to perform the contract
for a certain amount. If a contractor ehculd be
required to pay a tax on the~material, then he
would suffer a loss in performing his contract.
The~Legislature did not want to make a person
who had made a bona fide contraCt before the
effective date of the Act to suffer a loss on
account of the Act .‘I
By that opinion this office ruled that the purchase of mater-
iala by a contractor to perform his obligations under a contract
entered into prior to September 1, 1961, would be exempt from the
tax’under Article 20.04(R). At that time the Attorney General made,
no ‘distinction between lump sum contractors and. separated contrac-
tore for the purpose of exemption. We see no reason to make such
a distinction at this time. This conclusion Is also consistent
with Attorney General’s Opinion No. WW-1435 (1962), which held that
developers and builders wer,e selling real property and not tangible
person81 property and that regardless of the form of their contract
they could not be held to be reselling the materials purchased by
them. ‘:
Th$s is also consistent-with Attorney General’s Letter Opinion
dated R@ember 24, 1961, which held in reference to the prlor:con+
tract pqovislon that there could be no distinction between prior
contracts whether they were lump sum or a coat-plus contract (a
cost-plus contract generally contains separate amounts applicable
to the cost of materials and the cost of services and are conslder-
ed sep8r8ted contracts).
The ,only remaining question concerning Contract~A is the pro-
vieion that:
-788.
Hon. Robert S. Calvert, page 16 (M-165)
“Title to said material shall pass
-_ .~ to the
Telephone Company upon shipment thereof from
factory to’ storerooms consigned to the Tele-
phone Company or to the installer of the Elec-
tric Company in care of the Telephone Company.
The Telephone Company shall thereafter be sole-
ly responsible for loss or damage, including
the value of installation work performed, result-
ing from fire or any other cause whatsoever.”
Article 20.01(K)(l) provides that:
“tSalel means and includes any transfer of
title or possession or segregation in contem-
plation of transfer,of title or possession, ex-
change, barter, lease or rental, conditional or
otherwiee, in any manner or by any means whatso-
ever, ‘of tangible personal property for a conslder-
atlon D”
The Issue presented by this clause was whether or not the trans-
fer of title prior to installation by the contractor Is in and
of itself a sale of tangible person81 property. We understand
thst there was no transfer of possession to the Telephone Com-
pany but that’tiie equipment and materials Involved stayed In
the stole possession of the contractor-electric company during
the entire period of time until completely Installed; that the
arrangement was for a “turn-key” job whereby,tHe taxpayer did
not accept the goods until they were completely installed and
in good working order; and further, that, the parties did not in-
tend that this provision be an unconditional transfer of owner-
ship of the.matesia&s Involved but meant that It would be a desig-
nation of ownership to determine the responsibility for the goods
should loss from unavoidable acts ensue. That is, upon the hap-
pening of certain conditions, i.e., loss, or damage, the Tele-
phone Company was to be responsible and bear such loss.
In determining tax liability it is fundamental that sub- !
stance, rather than the form of the transaction govern. a4 C.J.S.
165, Taxation, Sec. 62; 51 Am.Jur. 43, Taxation, Sec. 10. Ac-
tqalitlce and consequences of a commercl,al transaction, rather
than the method employed in doing business, are controlling facts
In determining such llabllity.
“The refinements or technicalities of contracts
and conveyances are not the true diagnostics of
-189-
..
Hon. Robert S. Calvert, page 17 (M-,165)
taxability of *a . transfer,
. . It is ,. ,more ef-"
..
ficient to put In contrast on tne one siae
the substance and practical effect of what
was actuall~v done. and on’the other the im-
port and design of the terms of the taxing
statute." Bank of,New York v. Kelly, 38 A.2d
899, 901 (R.J. Prerog.Ct. 1944).
For Instance when the contrsct provided that title passed
upon dellvery‘to the job site of an exempt entity, the courts
have c6nstrued such.contract provisions as not constituting a
sale :
“The circumstance that the title to the lum-
ber passed to the Government on delivery does
not obligate it to the contractor's vendor
under a cost plus contract more than under a
lump sum contract .” Alabama v. King and Boozer,
314 u.,s. 1, 13 (1941).
The court in that case refused to allow the government’s
immunity from tax to attach to the contractor’s purchase of mater-
ials for the perfonaance of a cost-plus contract with the govern-
ment even though title to the goods p8Ssed to the government upon
delivery.
“The Government may look at actualities and
'upon determlnation that the for&employed for
doing business or carrying out the challenged
tax event 1% Unreal or a Sh8m may SUStain or
disregard the effect of the fiction as best
serves the purposes of the tax statute. To
hold otherwise would permit the schemes of tax-
payers to supersede the legislation and the
determination of~the time and the manner of tax-
8tion.n Higgins v. Smith, 308 U.S. 473, 477'
(1939) *
Consequently, it is not the contract.whitiR tionstitutes a sale
but the pprformsnce of the contrsct which is the taxsble event.
It is not What ,ths parties agreed to do, it'is wh8t the parties
actually do that the tax must be levied upon. It would be strange
Indeed that we could take the position that this contractual pro-
vision ~8% not sufficient upon which to constituta a sale between
-790-
Ron. Robert S. Calvert, page 18 (~-165)
the contractor and the federal government for the purposes of
tax Immunity and then in another transaction say that the pro-
vision Is sufficient to constitute a sale between a contractor
and his customer for the purposes of levying a tax. The con-
tractual provision Is either a sale or it is no,t a sale, and
if it Is not a sale for the purpose of granting tax Immunity
It is clearly not a sale for the purpose of imposing,the tax.
Consequently, we must hold that In absence of some other act or
some*other performance, such as a transfer of possession or the
exercise by the customer of an Incident of ownership over the
property wh%ch was the subject matter of the contract, no Zax
will Incur merely by virtue of the contractual provision desig-
nating the party to be responsible for loss or damage.
In the view and disposition we have taken In this Opinion,
we do not reach the question of whether the transaction falls
within the exemption provisions of Article 20.04(H),‘Taxation-
General, Vernon’s Civil Statutes. We observe that this Article
makes no distinction as to whether title passed prior to incor-
poration ,into realty or after such incorporation. Likewise, it
makes no distinction as to a lump sum or a separated contractor.
It may well be that the original supplier or selIer of the mater-
ials sold them to the taxpayer’s contractor In contemplation of
the contract and transaction in question, and that the taxpayer,
as the third party, Is thus exempt from tax under Article 20.04(R)
_ because the property Is being “used” to perform the prior contract.
However, we have no such facts before us, and we cannot assume
that this Is so. The original supplier or seller may have sold
the materz$als to the contractor long before the contract was con-
templated,.and the contractor already carried a sufficient stock
of materials to fill the contract at the time of its contempla-
tion. If so. the taxcaver mlaht not be entitled to claim tax,:’
ex&ption~un&r:~Articie-20.04~H) in view of the holdin in Calvert
v. ,BritishiAtnerican 011 Producing Co., 397 S.W.2d 839 7Tex.r
1966)ompucomputer
wh c machines (which were
categorized as tangible personal prope&y)rather than dealing with
the apparent real property question here presented. In that case,
the court held that Article 20,04(H) contemplates for tax exemp-
tion a written contract between the purchaser and a third party
and not between the seller and the purchaser. We, therefore, will
not pas8 upon whether’the taxpayer’s transaction falls within the
exemption provisions of Article 20,04(~).
Contract B
The next contract, Contract B, covers the purchase of telt-
phone directories. We understand that thdee telephone directories
-791.
Hon. Robert S. Calvert, page 19 (M-165)
were purchased by the taxpayer for the puTpose of distributing
the same to its customers in the areas that it served. All
purchases Involved were made after September 1, .1961, and tiere
made pursuant to contracts entered Into prior to September 1,
1961. The issue presented by ,this contract is whether or not
the telephone directories were used to peaform a contract entered
Into prior to September 1, 1961. The title and possession of
the telephone dlrector$es passed to the taxpayer after September
1, 1961. Consequently, the taxpayer Is the person who must
show that these were used to perform a prior contract. The con-
tract that he must show and that he Is required to perform Is
that one between the purchaser and a third party. This contract
was not submitted with the opinion request and we further under-
stand that notice of such contract was not filed with the Comp-
troller within 120 days from the effective date of the Act as
required by Article 20.04(R). Consequently, we must conclude
that the facts as presented to us In the opinion request are
Insufficient upon which to base an exemption and In view of
the fact that all the provisions of exemption have not been met.
Contracts C& D
a+
Contract C covers the purchase of office supplleti, office
furniture and equipment and Contract ? covers the purchase of
electronic data processing equipment. The purohase of these
h8terlals’wae Identical with the question presented to the Texas
Supreme Court in th;g;ayWogdCalvert vi British-American Oil
Producing. Company 839 (lgbb) 1 hi h th f
held that such p&chases’w&e taxable abien: z s:owinE %iz the
purchaser used the property to perform a written contrac,t
entered,into prior to September 1, 1961. The facts are lden-
t;lcal here and thus we must reach the same result and we con-
clude that the tax on these Items was properly levied.
Contract E 1
Contract D provides for ‘the Joint use by the Telephone
Company and otlier utility companies of wooden poles, wherein
other utility companies are allowed to attach lines and devices
to the Telephone,Company’e poles, and the Telephone Company Is
allowed to attach its lines and devi’ces to the utility companies’
poles. The parties jointly call this arrangement a,,pole-rental.
The Sales Tax Act does not define the word rental. However,
clearly, there must be more than the denomination by the parties
that such a transaction be a rental. There must be a transfer
of possession or dominion plus a license In the transferee to
-792-
.
Hon. Robert S. Calvert, page 20 (M-165)
use the property in order to constitute a rental. A license
to use without a concurrent transfer of poss~ession or.domlnion
doss.not constitute a rental. As we understand the ‘control and
poessssion of these poles remain with the respective owners of
the poles with merely the.license to’use by the other company.
We must conclude, therefore, that luithouf a transfer of possess-
ion there can be no rental and thus no taxable event. However,
should it be shownthat the control or the possession of the
~olcs be transferred. then the auestlon must arise as to whether
lertv. The Texas Court8
.
,
ments’. Irrthe Reynolds v. McLemore case, the court held that te E-
Phone lines and wires were a Permanent fixture and a fee lnteres t.
In the Ward Count case, the court held that the taxing authority
had the ---T-f
power ax and enforce a real property Ben upon tele-
graph lines and poles. In all three cases the court rejected the
argument that the poles and lines were personal property. Conse-
quently, we must conclude phat if there was In fact a rental of ,!
the poles that such would not be a rental of tangible personal
property but would be a rental of real property and not subject to
the Texaa Limited Sales, Excise and Use Tax Act. d
V.
The next question asked concerns the purchase of electricity
for the use in transmitting telephone messages and operating tele-
phone equipment and whether this electricity was exempt from the
tax prior and subsequent to July 1, 1963.
Prior to July 1, 1963, the exemption found in Article 20.04(Q),
Taxation-General, Vernon’s Civil Statutes, provided:
“There are exempted from the taxes imposed by
this Chapter the sale, production, dlstribu-
tion, lease or ,rental of ;and the storage, use
or other consumption In this State of gas and
electricity when used in industrial, manufactur-
ing, mining, agricultural, dairy or poultry
operations or pumping water for Irrigation or
-793-
.
Hon. Robert S. Calvert, page 21 (M-165:)
for electrical processes such as elcctro-
plating and electrolysis.”
The Issue raised is whether this electricity was used in an
Industrial operation or a manufacturing operation. With regard
to the latter, we cannot conclude that the Telephone Company is
manufacturing or processing tangible personal property. Even
though electricity is considered tangible personal property and
the message transmitted to some extent processes the electricity,
we feel that the overall transaction is that of a service render-
ed by a telephone company. We feel that this was the legislative
intent in Article 20.04(B)(4) which provided:
“There are exempted from the taxes imposed
by this Chapter the receipts from the sale,
production, distribution, 1ease:or rental of
and the storage, use or other consumption In
this State of telephone:and telegraph service.”
The function of the telephone‘company Is to render a service
and not to manufacture messages or process electricity. The
sole ques,tlon then is whether the use of electricity by the tele-
phone company is an industrial use. The courts of Texas have con-
&rued “industrial”’ not as a technical term but as a term to be
construed in its plain and ordinary acceptance. Calvert v. Austin
Laundry and Dry Cleaning 365 S.W.2d 232 (Tex.Civ.App. 1963 error
ref.. n.r.e.1. In this iesoect the sales of electricitv u&d to
propel street cars or used Lo pump water for, municipal water works
have not been deemed to be sales to “industrial” consumers. State
v. Smith, 11 S.W.2d 513 (Mo.Sup. 1938). Inasmuch as exemptions
are str&tly construed we cannot readily conclude that the plain
meaning of the word “Industrial” demands a conclusion that the
Telephone Company is performing an lndustrlal operation.
The 58th Legislature amended Article 20.04, by an Act that
became effective on July 1, 1963. This *amendment, by subsection
(Q), exempts all electricity from the sales tax, except when sold
for residential or commercial use, and defined commercial use as
follows :
“For the purpose of this Subsection thr: terms
‘residential use’ and ,‘commercial use’ shall
have the following meanings: . . ~. ‘Commercial
use’ means use by persons engaged in selling,
warehousing, or distributing a zommodity or
service either professional or personal.”
-194-
Hon. Robert S. Calvert, page 22 (M-165)
I
We conclude that the Telephone Company is a person engag-
ed in distributing a service, and thus falls within the defini-
tion of commercial use. Commercial use is excepted from the ax-
emption provision and the use by the Telephone Company of eltc-
tricity to p'trform its operations is a taxable use.
SUMMARY
A deficiency determination showing the amount of
taxes, penalties and interest claimed by the Comp-
troller and containing a statement identifying the
Information upon which the additional tax assess-
ment is bastd, together with attached worksheets
showing the transaction upon which the Comptroller
bases the determination Is a valid determination,
and ,inasmuch as the sales and use tax art complt-
mentary taxes the Comptroller Is not required to. "
elect which tax is being assessed but merely requir-
ed to deflignate the transaction upon which the assess-
ment Is made.
II.
Upon any transaction the Comptroller may proceed
with a deficiency determination against the seller
or the purchaser or both without proceedin against
tht other. The Limited Sales, ,Excise and 8 st Tax
is a transaction'tax wherein each party to
action as liable for the tax until the tax
paid to the State.
III.
The penalties and Interest to be contained In the
dtficitncy determination are computed from the
last day of the month immediately following the
quarter In which the transaction which gave rise
to the tax occurred and not from the date of the
deficiency determination.
Iv.
Contract A
Materials used pursuant to a contract entered in-
to prior to September 1, 1961, for incorporation
-19s.
. .
Hon. Robert S. Calvert, page 23 (M-165)
into realty after September 1, 1961, are not
subject to the sales or use tax. The act of
incorporation Into realty is not a statutory
sale.
Contract B
1% +&p,,%haensLELof showing that the ttlt hone
d$rectorles were used to perform a writ4 en con-
tract prior to September 1, 1961, and since notlce of
such contract was not given by the taxpayer to the
Comptroller of Public Accounts within the 120 day
period after September 1, 1961, the purchase of
telephone directories cannot be held to be exempt
under the provisions of Article 20.04(H).
Contracts C &D
The purchase of office supplies, furniture and
equipment and electronic data processing equip-
ment after September 1, 1961, pursuant to con-
tracts entered into prior to September 1, 1961, is’
not exempt absent a showing that such equipment
was used to perform a contract written and entered
Into prior to September 1, 1961.
Contract E
An agreement between a telephone company and a
utility wherein each company allows the other to
attach Lines and devices onto each company’s ret-
pectlve poles does not constitutt & thilr&B’le:%``~t-
action under,the Texas Limited Sales, Excise ,a&
Use Tax Act, $
:‘.A telephone company is ‘not considered’ an Inaue-
trial optration for the purposts of’ txtmptIon of
eltcbfk?ity :&rchased prior to Jul 1, 196% ama
t o ba ren&~-1
sold 1t.a eom``r(o 7 a4
. . .
Hon. R0bert.S. Cslvert, page 24 (M-165) ,,
use and not exempt after July 1, 1963.
V&truly yours,
Prepared by Kerns B. Taylor
Assistant Attorney General
KBT:ms
APPROVRQ':
OPINION,COMMITTEE*
Hawthorne Phillips, Chairman
w. V., Geppert, Co-Chairman
Nola White
John Reeves
Jack Sparks
Alvin Zimmerman
A. J. Carubbi, 3r.
Staff LegAl Assistant