State Bar of Wisconsin Return to wisbar.org Wisconsin Tax Appeals Commission


[WP]

STATE OF WISCONSIN

TAX APPEALS COMMISSION


AMUSEMENT DEVICES, INC.

1219 Appleton Road

Menasha, WI 54952

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8933

Madison, WI 53708-8933

Respondent.

DOCKET NO. 96-S-591

DECISION AND ORDER


MARK E. MUSOLF, CHAIRPERSON:

This matter was heard at Appleton October 6 through 8, 1998. Attorney John R. Austin represents the petitioner. Attorney Linda M. Mintener represents the respondent.

Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:

FINDINGS OF FACT

Jurisdictional Facts

1. By a Notice of Amount Due dated September 5, 1995, respondent issued a sales and use tax assessment against petitioner in the amount of $93,291.36, including tax, interest, and late filing fees, for the period April 1, 1990 through March 31, 1994, which is the period under review.(1)

2. Petitioner timely filed a petition for redetermination with respondent on or about October 5, 1995, which was granted in part and denied in part by Notice of Action dated April 5, 1996.

3. Petitioner timely appealed respondent's denial action to this commission on May 3, 1996.

Items No Longer In Dispute

4. Petitioner has conceded the following audit adjustments:

a. Respondent's adjustments on Schedule 1 of the Audit Report for petitioner's sales of fixed assets without collecting sales tax;

b. Respondent's adjustments on Schedule 2 of the Audit Report for petitioner's sales of tangible personal property without collecting sales tax;

c. Respondent's adjustments on Schedule 4 of the Audit Report;

d. Respondent's adjustments on Schedule 5 of the Audit Report; and

e. Respondent's adjustments marked with asterisks on Discovery Exhibit 2 (a marked copy of Schedule 3 of the Audit Report), except for the invoice from Merit Industries dated April 2, 1991, in the amount of $5.42, which petitioner claims is for the purchase of parts for its machines.

5. Petitioner has withdrawn its claim stated in paragraph 6(c) of its petition for review regarding computer software.

6. Respondent has agreed to adjust off the measure of tax for the J. C. Whitney & Co. invoice #A-0238087, dated January 19, 1994, in the amount of $254.60, found on Schedule 3, page 12 of the Audit Report.

Other Facts

7. Petitioner was in the business of placing various coin-operated machines ("amusement devices" or "devices") in business establishments, including hotels, motels, taverns, bowling alleys, restaurants, convenience stores, and schools ("establishments").

8. These devices provided amusement to the establishments' patrons in exchange for the patrons' money. These patrons were the customers of petitioner when they paid to play the petitioner's amusement devices.

9. Petitioner paid sales tax on the majority of amusement devices and their related parts and accessories purchased from Wisconsin vendors, but did not pay sales or use tax on those purchased from out-of-state vendors. Petitioner did not use resale exemption certificates when purchasing the items that remain at issue between the parties. When purchasing items it intended to resell, petitioner gave its suppliers resale exemption certificates and did not pay sales tax.

10. Petitioner negotiated agreements, either written or oral,(2) with the owners of the establishments where its devices were placed. In the written agreements, petitioner was designated as "operator" of the devices and each establishment owner was "location owner."

11. Each agreement specified the amusement devices to initially be placed in the establishment by petitioner and the percentage of gross receipts from these devices to be paid to the location owner "[f]or and in consideration of the use of the space in Location Owner's premises." Petitioner agreed to maintain the devices in good working condition, and to provide the parts and supplies needed to play them. Under each agreement, title to the devices remained in petitioner's name at all times.

12. Each agreement provided that the establishment would permit only petitioner's amusement devices to be used on the establishment's premises, although oral exceptions were occasionally agreed upon. Petitioner had exclusive keyed access to the devices' coin boxes. Receipts were routinely removed from the devices by petitioner, usually in the presence of an employee of the establishment. The receipts were then counted, sales taxes were calculated and subtracted, and the amount due to the location owner was calculated and paid.(3) The petitioner subsequently remitted the sales tax to respondent.

13. The establishments exercised very limited control over petitioner's amusement devices, including where they were placed and when their patrons had access. Petitioner ultimately controlled the type and number of devices and charges for playing them, except that petitioner would remove objectionable devices at the establishment's request.

APPLICABLE WISCONSIN STATUTES

77.51 Definitions. Except where the context requires otherwise, the definitions given in this section govern the construction of terms in this subchapter.

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(4) ** * (c) "Gross receipts" includes:

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5. If a lessor of tangible personal property reimbursed the vendor for sales tax on the sale of the property by the vendor to the lessor, the tax due from the lessor on the rental receipts may be offset by a credit equal to, but not exceeding, the tax otherwise due on the rental receipts from this property for the reporting period. The credit shall expire when the cumulative rental receipts equal the sales price upon which the vendor paid sales taxes to this state. If a purchaser of tangible personal property reimbursed the vendor of the property for sales tax on the sale and subsequently, prior to making any use of the property other than retention, demonstration or display while holding it for sale or rental, makes a taxable sale of the property, the tax due on the taxable sale may be offset by the tax reimbursed.

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(5) For purposes of subs. (13)(e) and (f) and (14)(L) and s. 77.52(2m) "incidental" means depending upon or appertaining to something else as primary; something necessary, appertaining to, or depending upon another which is termed the principal; something incidental to the main purpose of the service. Tangible personal property transferred by a service provider is incidental to the service if the purchaser's main purpose or objective is to obtain the service rather than the property, even though the property may be necessary or essential to providing the service.

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(7) "Lease" includes rental, hire and license.

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(13) "Retailer" includes:

(a) Every seller who makes any sale of tangible personal property or taxable service.

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(e) A person selling tangible personal property to a service provider who transfers the property in conjunction with the selling, performing or furnishing of any service and the property is incidental to the service, unless the service provider is selling, performing or furnishing services under s. 77.52(2)(a)7., 10., 11. and 20. This subsection does not apply to sub (2).

(f) A service provider who transfers tangible personal property in conjunction with but not incidental to the selling, performing or furnishing of any service and a service provider selling, performing or furnishing services under s. 77.52(2)(a)7., 10., 11. and 20. This subsection does not apply to sub. (2).

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(k) As respects a lease, any person deriving rentals from a lease of tangible personal property situated in this state.

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(14) "Sale", "sale, lease or rental", "retail sale", "sale at retail", or equivalent terms include any one or all of the following: the transfer of the ownership of, title to, possession of, or enjoyment of tangible personal property or services for use or consumption but not for resale as tangible personal property or services and includes:

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(j) The granting of possession of tangible personal property by a lessor to a lessee, or to another person at the direction of the lessee. Such a transaction is deemed a continuing sale in this state by the lessor for the duration of the lease as respects any period of time the leased property is situated in this state, irrespective of the time or place of delivery of the property to the lessee or such other person.

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(L) Transfers by a service provider of tangible personal property in conjunction with but not incidental to the selling, performing or furnishing of any service, and transfers by a service provider selling, performing or furnishing services under s. 77.52(2)(a)7., 10., 11. and 20. This subsection does not apply to sub. (2).

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77.52 Imposition of retail sales tax.

(1) For the privilege of selling, leasing or renting tangible personal property, including accessories, components, attachments, parts, supplies and materials, at retail a tax is imposed upon all retailers at the rate of 5% of the gross receipts from the sale, lease or rental of tangible personal property, including accessories, components, attachments, parts, supplies and materials, sold, leased or rented at retail in this state.

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(2) For the privilege of selling, performing or furnishing the services described under par. (a) at retail in this state to consumers or users, a tax is imposed upon all persons selling, performing or furnishing the services at the rate of 5% of the gross receipts from the sale, performance or furnishing of the services.

(a) The tax imposed herein applies to the following types of services:

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2. The sale of admissions to amusement, athletic, entertainment or recreational events or places, the sale, rental or use of regular bingo cards, extra regular cards, special bingo cards and the sale of bingo supplies to players and the furnishing, for dues, fees or other considerations, the privilege of access to clubs or the privilege of having access to or the use of amusement, entertainment, athletic or recreational devices or facilities, including, in connection with the sale or use of time-share property, as defined in s. 707.02(32), the sale or furnishing of use of recreational facilities on a periodic basis or other recreational rights, including but not limited to membership rights, vacation services and club memberships.

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(2m)(a) With respect to the services subject to tax under sub. (2), no part of the charge for the service may be deemed a sale or rental of tangible personal property if the property transferred by the service provider is incidental to the selling, performing or furnishing of the service, except as provided in par. (b).

(b) With respect to the services subject to tax under sub. (2)(a)7., 10., 11. and 20., all property physically transferred to the customer in conjunction with the selling, performing or furnishing of the service is a sale of tangible personal property separate from the selling, performing or furnishing of the service.

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77.53 Imposition of use tax.

(1) An excise tax is levied and imposed on the use or consumption in this state of taxable services under s. 77.52 purchased from any retailer, at the rate of 5% of the sales price of those services; on the storage, use or other consumption in this state of tangible personal property purchased from any retailer, at the rate of 5% of the sales price of that property; and on the storage, use or other consumption of tangible personal property manufactured, processed or otherwise altered, in or outside this state, by the person who stores, uses or consumes it, from material purchased from any retailer, at the rate of 5% of the sales price of that material.

(2) Every person storing, using or otherwise consuming in this state tangible personal property or taxable services purchased from a retailer is liable for the tax imposed by this section. The person's liability is not extinguished until the tax has been paid to this state, but a receipt with the tax separately stated from a retailer engaged in business in this state or from a retailer who is authorized by the department, under such rules as it prescribes, to collect the tax and who is regarded as a retailer engaged in business in this state for purposes of the tax imposed by this section given to the purchaser under sub. (3) relieves the purchaser from further liability for the tax to which the receipt refers.

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77.60 Interest and penalties.

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(3) If due to neglect an incorrect return is filed, the entire tax finally determined shall be subject to a penalty of 25%, or 50% in the case of returns under s. 77.61(1)(c), of the tax exclusive of interest or other penalty. A person filing an incorrect return shall have the burden of showing that the error or errors were due to good cause and not due to neglect.

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ISSUES INVOLVED AND CONCLUSIONS OF LAW

1. Did petitioner purchase the disputed amusement devices at retail and not for resale/lease as tangible personal property or services, thereby subjecting petitioner to the Wisconsin sales or use tax? The Commission concludes that the disputed purchases were at retail and not for resale or lease, thereby subjecting petitioner to the use tax.

2. Did respondent properly impose the 25% negligence penalty provided in Wis. Stat. § 77.60(3) for petitioner's filing an incorrect return due to neglect? The Commission concludes that the penalty was properly imposed.

OPINION

Wisconsin's sales tax is imposed on sales "at retail" of tangible personal property and specified services. Wis. Stat. § 77.52(1) and (2). "At retail" is defined as "for use or consumption but not for resale." Wis. Stat. § 77.51(14). Where such personal property is purchased from a retailer without payment of sales tax, a use tax is imposed on use or consumption in Wisconsin. Wis. Stat. § 77.53(1) and (2).

Because petitioner did not pay a sales tax when it purchased the amusement devices in question, respondent assessed petitioner a use tax on the grounds that they were purchased at retail and used or consumed in petitioner's business in Wisconsin.

Petitioner asserts that its purchase of the devices was not at retail because they were purchased for rental to the establishments that were petitioner's customers. A lease of tangible personal property is the equivalent of a sale. Wis. Stat. § 77.51(14)(j).

The parties agree that the question boils down to whether petitioner leased the amusement devices to the establishments where they were placed, in which case its purchases of the devices were for resale and not subject to the retail sales or use tax.

The parties also agree that, if we determine that petitioner provided taxable services under Wis. Stat. § 77.52(2)(a)2, we must consider whether the purchases in question are not taxable because the amusement devices were "transferred" in conjunction with and were more than "incidental" to providing the taxable services, within the meaning of Wis. Stats. §§ 77.51(13)(e), 77.51(14)(L), 77.52(2m) and 77.51(5), supra.

Did Petitioner Lease the Amusement Devices to the Establishments?

Petitioner contends that it purchased the disputed amusement devices solely for purposes of renting or leasing them to the establishments where the devices were placed, and that the establishments were its customers. Respondent argues that petitioner's customers were the establishment patrons who played petitioner's devices, not the establishments where they were placed. The fundamental issue is whether a lessor-lessee relationship existed between petitioner and the various establishments with respect to the amusement devices.

This is not the first time this question has been before Wisconsin courts and this Commission in the context of liability for the sales and use taxes imposed by Chapter 77 of the Statutes. In Mitchell v. Department of Revenue, 113 Wis. 2d 138 (Ct. App. 1983), Mitchell purchased coin-operated amusement machines and placed them in business establishments under agreements by which he owned, repaired, and maintained the machines, collected the coins from them, and paid the proprietors a percentage of gross receipts. Although he paid sales tax when he purchased each machine, Mitchell later claimed a credit for the tax paid against the sales tax due on the gross receipts from that machine.(4) His argument was that the sale to him was not at retail because he purchased the machines to rent to the public.

The Court of Appeals, affirming the Tax Appeals Commission and the Dane County Circuit Court, rejected Mitchell's argument, holding that two taxable retail transactions occurred. First, the sale of the machines to Mitchell "was at retail and taxable because it was a sale of personal property used and consumed in his business." Second, "The sale of the use of his amusement machines to the public was at retail and taxable because it was a sale of services." Id. at 141.

There is no material difference between the facts in Mitchell and the facts before us as they pertain to the relationship between petitioner, the establishments, and the establishments' patrons who used the devices. Both involved coin-operated amusement devices. Both involved agreements with the establishments, which provided that ownership and maintenance responsibility for the devices remained in petitioner. In both cases, the owner of the amusement devices collected the coins and paid the establishment proprietor a percentage of gross receipts as consideration for the use of space in the establishment.

The only difference is that Mitchell claimed that the resale of amusement services was to the public, while here petitioner claims there was a resale by leasing the machines to the establishments. The analysis of whether a retail sale or resale occurred is identical, however, and produces the same conclusion: the purchase of the amusement devices was a taxable retail transaction because they were consumed in petitioner's business of providing amusement services to those who played the devices.

Support for this analysis and conclusion is also found in Servomation Corp. v. Department of Revenue, 106 Wis. 2d 616 (1982), where the issue was whether Servomation Corp. was the "seller" of products from the vending machines it placed in schools and hospitals. Concluding that Servomation was the seller, the Supreme Court noted that it retained ownership and control of the machines and possessed the only keys to them, just as petitioner did here. Servomation's employees removed the money and accounted to the establishment, just as petitioner's employees did here. The Court found:

Selling products through vending machines is Servomation's business. The schools and hospitals are not involved in these sales. They did not own nor lease the machines, nor control or handle the proceeds. They only received a commission calculated by Servomation because they permitted the machines to be placed in their institutions.

Id. at 621.

The Court also found that "[s]imply because the schools and hospitals may have the power to bar the public from using the machines is not enough to make them the sellers ", id., and that they were "simply furnishing space to Servomation for its vending machines." Id. at 623.

So it is here in every material respect, except that petitioner's business sold amusement services rather than products from its machines. Just as in Servomation, the establishments here received a commission on the sales in exchange for furnishing space for petitioner's amusement devices. Petitioner's agreements with the establishments say as much.(5)

Petitioner argues that the amount of control exercised by the establishments shows that they were lessees of the amusement devices. We disagree and conclude that petitioner, who was the "Operator" of the amusement devices under the agreements with the establishments, owned and controlled the devices as part of its business operations. Petitioner placed and removed them, repaired and maintained them, had exclusive access to their cash boxes, retained title to them, and was the sole judge of the types of devices used in the establishments.

Petitioner was therefore not a lessor because it did not lease its amusement devices to the establishments. The establishments simply provided space in exchange for a share of the fees paid by its patrons to play petitioner's devices.(6) If any lease existed, the establishments were the lessors of space to petitioner.

The petitioner sold its device-dispensed amusement services at retail to those who paid to play. Petitioner's purchases of the amusement devices were therefore at retail within the meaning of Wis. Stat. § 77.51(14) and taxable because they were used or consumed in petitioner's business of furnishing and selling amusement services rather than for resale (or lease) as tangible personal property or services.

Applicability of Other Statutes

Wis. Stat. § 77.51(13)(e) defines a "retailer" as including a person selling tangible personal property to a service provider who transfers the property in conjunction with selling the service and the property is "incidental to" the service. Similarly, Wis. Stat. § 77.51(14)(L) defines "retail sale" to include transfers by a service provider of tangible personal property "in conjunction with but not incidental to" the selling of a service. Finally, § 77.52(2m) provides that, with respect to taxable amusement services, no part of the charge for the service may be deemed a sale or rental of property if the property transferred is "incidental to" the selling of the service.

Petitioner contends that, because the disputed amusement devices it transferred to the establishments were more than incidental to the selling of its services, they must therefore be considered as having been purchased for resale under these statutory definitions.

We reject the petitioner's contention for several reasons. First, under the Wisconsin case law discussed above, the amusement services were not provided to the establishments but to their patrons who played the games. The establishments were not involved in the sale of the services and only received a commission because they permitted the machines to be placed on their premises. Under the oral and written agreements with the various establishments, petitioner simply rented space from them while retaining ownership and control of the amusement devices and the revenues they generated.

Second, it is obvious from the context of these statutes that they apply only with respect to the transfer of personal property to the recipient of a service, who in this case were the patrons of the establishments, not the establishments themselves. Since there was no transfer of the amusement devices to the establishments' patrons, none of these statutes applies.(7) Petitioner was the retailer of its amusement services to the patrons; the

establishments were not. We therefore conclude that Wis. Stats. §§ 77.51(13)(e), 77.51(14)(L), 77.52(2m) and 77.51(5), do not absolve petitioner from liability for the use tax assessed by respondent on the disputed amusement devices.

Liability for the 25% Negligence Penalty

Under Wis. Stat. § 77.60(3), the petitioner has the burden of proving that its failure to report and pay the taxes assessed by respondent was "due to good cause and not due to neglect." The petitioner has shown no such good cause.

The fact that petitioner paid sales taxes on its in-state purchases, while ignoring the use tax due on the out-of-state purchases at issue, belies its contention concerning the use taxes assessed, which involved similar purchases of amusement devices. The petitioner had been in business for many years and had a CPA as its controller beginning in May 1992.

As a result, the petitioner either knew or should have known that sales or use taxes were payable on all of the disputed purchases, not just those purchased from in-state vendors. The petitioner has not shown good cause for ignoring the use taxes due when it filed tax returns for the period under review.

ORDER

The respondent's action on petitioner's petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 15th day of December, 1999.

WISCONSIN TAX APPEALS COMMISSION

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Mark E. Musolf, Chairperson

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Don M. Millis, Commissioner

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Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

January 12, 2000 Appealed to Dane County Circuit Court (Case No. 00CV0100).

1 All facts pertain to the period under review unless otherwise stated.

2 Approximately 60% of the agreements were written and signed. "Agreement" or "agreements" refers to both written and oral agreements.

3 Often the location owner was paid by check issued later by petitioner.

4 See, Wis. Stat. § 77.51(4)(c)5.

5 Finding of Fact 11.

6 This is not to say that a transaction involving such devices would not be a lease if there was a lease agreement that reflected economic reality. No such agreement existed in this case.

7 It is also doubtful that there was a "transfer" of the devices to the establishments within the statutory meaning, because the agreements provided that all significant incidents of ownership were retained by petitioner.