STATE OF WISCONSIN
TAX APPEALS COMMISSION
RIVER CITY REFUSE REMOVAL, INC.
P. O. Box 1460
Eau Claire, WI 54702,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708,
|DOCKET NO. 00-S-163
RULING AND ORDER
THOMAS M. BOYKOFF, COMMISSIONER:
This case comes before the Commission on cross-motions for summary judgment. The parties have submitted affidavits, exhibits, and legal arguments supporting their motion and opposing the other's motion.
Petitioner, River City Refuse Removal, Inc. ("petitioner"), is represented by Attorney James R. Lowe, of Whyte Hirschboeck Dudek S.C., Milwaukee, Wisconsin. Respondent, Wisconsin Department of Revenue ("Department"), is represented by Attorney Linda M. Mintener.
Based on the entire record, the Commission finds, rules, and orders as follows:
UNDISPUTED MATERIAL FACTS
1. Under date of October 30, 1998, the Department issued an assessment to petitioner for $144,010.33, comprised of $88,877.86 tax, $32,912.70 interest, and $22,219.47 negligence penalty. This assessment covers the fiscal years ending September 30, 1994; September 30, 1995; September 30, 1996; and September 30, 1997 ("period under review").(1)
2. Under date of December 29, 1998, petitioner filed a petition for redetermination with the Department.
3. Under date of June 29, 2000, the Department denied petitioner's petition for redetermination, whereupon petitioner filed a timely petition for review with the Commission.
4. Petitioner was a stock corporation organized under the laws of Wisconsin, with its principal place of business in Eau Claire, Wisconsin. Petitioner was wholly owned by Browning-Ferris Industries, Inc. ("BFI"), also a stock corporation.(2)
5. BFI also wholly owned the following corporations ("BFI subsidiaries"):
(a) Town & Country Waste, Inc.
(b) BFI of Wisconsin
(c) Troy Area Landfill
(d) BFI of Illinois
(e) Woodlake Sanitary Service, Inc. (a/k/a "Woodlake" or
(f) Browning-Ferris Industries of Minnesota, Inc. (a/k/a
"Recycling-Twin Cities" or "Midwest Region")
(g) BFI Medical Waste Systems of Minnesota, Inc. (a/k/a "St.
Paul Med Waste" or "0769")
Only the use tax on transfers between petitioner and BFI subsidiaries are at issue here.
Transfers between petitioner and BFI are not at issue.(3)
6. Petitioner's primary business was hauling refuse and recyclables for Wisconsin residences and businesses. It held a Wisconsin consumer use tax permit.
7. Petitioner received and transferred tangible personal property with both BFI and BFI subsidiaries ("intercompany transfers"). Two categories of assets were received: (a) "non-fixed assets" (such as books, videos, labels, posters, brochures, florescent bulbs, and containers); and (b) "fixed assets" (larger items such as trucks, tractors, tractor trailers). Fixed assets were between 2 to 4 years old when received. Petitioner re-titled motor vehicles it received by intercompany transfers in its own name and paid no tax at the time of re-titling. Petitioner conceded the issue of use tax on non-fixed assets, and it is no longer before the Commission.(4)
8. BFI and its subsidiaries, including petitioner, which are involved in the case before us used the same accounting system. When petitioner received a fixed asset in an intercompany transfer, it made a bookkeeping entry on its general ledger, debiting an asset account and crediting an intercompany account.
9. Petitioner made no payment of cash or other consideration for intercompany transfers of fixed assets. Nor was there an expectation or requirement that cash or any other consideration was to be paid for the fixed asset intercompany transfers. These intercompany transfers, if accounted for correctly, would net to zero and would be shown as zero when BFI consolidated its financial statements with those of its subsidiaries.
10. Petitioner paid no use tax on its receipt of any fixed asset by inter-company transfer. Nor did petitioner provide an exemption certificate to a transferor when it received an intercompany transfer.
11. The Department's measure of use tax on fixed assets was calculated by taking the asset's original cost and reducing it by any depreciation taken by any prior owner.
CONCLUSIONS OF LAW
1. There are no material facts in dispute, and this matter is appropriate for summary judgment as a matter of law.
2. The use tax does not apply to transfers of fixed assets which petitioner received by intercompany transfers from separately organized, affiliated subsidiary corporations owned by BFI.
Summary Judgment Standard
Wisconsin Statutes § 802.08(2) provides that summary judgment "shall be rendered if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."
Both parties have provided ample undisputed material facts and legal arguments to justify granting summary judgment.
In 2000, another case involving the use tax and intercompany transfers was decided by the Commission. In Browning-Ferris Industries of Wisconsin, Inc. v. Dep't of Revenue ("BFI-Wis. case"), Wis. Tax Rptr. (CCH) ¶ 400-469 (WTAC 2000), the Commission addressed several issues very similar to issues in the current case, but involving an earlier period. The Commission's conclusions of law included that "the use tax [did] not apply to the tangible personal property petitioner received by intercompany transfer from separately organized affiliated entities."
Under date of February 2, 2000, the Department issued a Notice of Non-acquiescence pursuant to Wis. Stat. § 73.01(4)(e)2 regarding only the above issue (Wis. Tax Rptr. (CCH) ¶ 400-475). The Department disagreed with the Commission's conclusions on intercompany transfers and stated that, "while binding on the parties for the instant case . . . [the Commission's conclusions] are not binding upon or required to be followed by the [Department] in other cases". In its Notice of Nonacquiescence, the Department summarized the Commission's position with which it disagreed as follows:
. . . Petitioner's intercompany transfers are not sales or purchases from a retailer within the meaning of §§ 77.51(14) and 77.53(1) and (2), Stats.; that Petitioner's entering the net book value of the transferred assets on its books is not remuneration or consideration for the subject intercompany transfers; and that the items of tangible personal property which Petitioner received by inter-company transfer are not subject to Wisconsin use tax.
In that case, petitioner appealed the Commission's other conclusions of law. The Commission's decision on these issues was affirmed by the Circuit Court of Dane County(5) and the District 4 Court of Appeals.(6) The Wisconsin Supreme Court then denied BFI-Wis.'s petition for review on September 19, 2001.
Narrowing the Issues in the Current Case
The case currently before the Commission was initiated when petitioner filed a petition for review with the Commission on August 24, 2000. Petitioner appealed the Department's imposition of use tax on tangible personal property which it received by intercompany transfers and on assets that petitioner purchased which it asserted were used exclusively and directly in waste reduction and recycling (including many 7.5, 15, 30, and 50 gallon containers).(7) In addition, petitioner appealed the Department's imposition of the negligence penalty pursuant to Wis. Stat. § 77.60(3).
After the Wisconsin Supreme Court's denial of BFI-Wis.'s petition for review, petitioner conceded the waste-reduction-and-recycling issue in the current case,(8) as well as the taxability of non-fixed assets.(9)
The only remaining issue is the use tax status of fixed assets acquired by petitioner through intercompany transfers.
The facts in the current record regarding intercompany transfers are very similar to those in the BFI-Wis. case. This is not surprising, as both petitioner and BFI-Wis. were subsidiaries of BFI.
In both cases, petitioners received fixed assets by transfers from other BFI subsidiaries. The transfers included all rights to, and ownership of, the transferred assets. Motor vehicles received by intercompany transfers were re-titled in each petitioner's name. Fixed assets were depreciated on each petitioner's income/franchise tax returns. Both petitioners' method of bookkeeping entries on received intercompany transfers was to debit the asset account and credit an intercompany account. No money or other consideration was exchanged or expected for these intercompany transfers.
The great similarities between the current case and the earlier BFI-Wis. case compel the Commission to reach the same conclusion here as it did in the prior case. Because of those similarities, the following analysis of the applicable statutes appearing in the BFI-Wis. case applies equally to this case.
"Use tax" is defined in Wis. Stat. § 77.51(23) as the tax imposed by Wis. Stat. § 77.53. The principal language imposing the use tax is found, in pertinent part, in Wis. Stat. § 77.53(1) and (2), which reads as follows:
77.53 Imposition of use tax.
(1) . . . an excise tax is levied and imposed . . . on the storage, use or other consumption of tangible personal property purchased from any retailer . . . .
(2) Every person storing, using or otherwise consuming in this state tangible personal property . . . 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. [Emphasis supplied.]
"Retailer" is defined, in part, in § 77.51(13) as:
77.51 Definitions. Except where the context requires otherwise, the definitions given in this section govern the construction of terms in this subchapter.
* * *
(13) "Retailer" includes:
(a) Every seller who makes any sale of tangible personal property or [a] taxable service.
Eleven of the remaining 12 paragraphs(10) of § 77.51(13) define "retailer" using a form of the word "sale" (ex.: par. (b) - "making sales"; par. (c) - "making the sales"; par. (d) - "sells"; and pars. (i) thru (o) - "A person selling".
The "inclusive" or "open" (i.e., uses the word "includes") definition of "sale" and similar terms begins in § 77.51(14)(intro), as follows:
(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 . . . . [Emphasis supplied.]
The language in § 77.51(14)(intro) implies a transfer for remuneration or consideration, as do the 11 subsequent paragraphs (ex.: par (a) - "sold to a successful bidder"; pars. (b) and (h) - "for a consideration"; par. (c) - "payment of the price"; and (d) - "retail selling price". We reject the Department's assertion that these transfers fit within § 77.51(14)(intro). This statute lists some aspects of a sale but not all factors, and then follows with a list of "sales" which involve a transfer for consideration.
The undisputed material facts here are that the intercompany transfers of tangible personal property resulted in bookkeeping entries on the receipt of the assets, involved no exchange of money or other consideration and no expectation of payment, and resulted in petitioner receiving no invoice or other bill. Therefore, we conclude that the unambiguous use tax imposition language of § 77.51 does not apply to these transfers because no property was "purchased" from a "retailer" within the meaning of § 77.53(1) and (2). To find otherwise would not only contradict the express language of the statute, but would also improperly construe an imposition statute in favor of imposition. See, Kearney & Trecker Corp. v. Dep't of Revenue, 91 Wis. 2d 746, 753 (1979).
The Department asserts that, rather than exchanging money, petitioner made bookkeeping entries to show the value of assets received by intercompany transfers. The Department imposed the use tax on each net book value entered on petitioner's records, but this is no substitute for remuneration or consideration.
In applying these statutes, unlike our analysis in the earlier BFI-Wis. case, we consider that the courts have stated that to be a retailer and subject to the sales/use tax, the transaction under review must have a "mercantile" intent. The Wisconsin Supreme Court so concluded in Kollasch v. Adamany, 104 Wis. 2d 552 (1981), when it held that meals served by a religious order, in carrying out an integral part of their ministry at their religious center, were not subject to sales tax on the portion of meal charges made to guests who paid for lodging, food, and use of the order's facilities. The charges for meals had a "complete lack of mercantilism" (i.e., did not intend making a profit) and were not subject to the sales tax. Kollasch, 104 Wis. 2d at 572.(11)
In Frisch, Dudek & Slattery v. Dep't of Revenue, 133 Wis. 2d 444 (Ct. App. 1986), the Court of Appeals extended this concept beyond the Kollasch nonprofit setting. It ruled that, similar to the non-mercantile intent in Kollasch, the non-mercantile intent of a law firm which separately itemized charges for photocopies prevented application of the sales/use tax to transfers of the photocopies. The Court stated:
"Retailer" is defined as "[e]very seller who makes any sale of tangible personal property . . . ." (Citation omitted.) In Kollasch . . . (citation omitted), the supreme court adopted the commonly-understood conception of a retailer as "one who transacts business with a consumer in hopes of making a profit on the transaction." In the court's view, "[t]he type of transactions which make one a . . . retailer are mercantile ones. (Citation omitted.) Applying these principles, the Kollasch court held that a group of nuns who sold meals to the public at cost in order to promote their religious beliefs were not "retailers" for sales tax purposes. (Citation omitted.)
Even though Frisch may charge a client a penny or two per page more than its estimated average cost of making the copies, it has not been established that when it bills those charges it "hopes [to make] a profit on the transaction." (Citation omitted.) It is not a "mercantile" transaction. (Citation omitted.)
Frisch, 133 Wis. 2d at 447-448.
Like in Kollasch and Frisch, the current petitioner's intercompany transfer acquisitions were not mercantile motivated. Petitioner made no payment of cash or other consideration upon receipt of intercompany transfers of fixed assets. Petitioner had no expectation of any requirement to transfer cash or other consideration for these intercompany transfers. Nor was petitioner billed for the assets. We conclude that the intercompany transactions had no mercantile intent and, therefore, were not subject to the use tax.
The Department asserts that "Petitioner is a mercantile business and its transactions are thus mercantile."(12) This ignores the Wisconsin Supreme Court's holding in Kollasch, supra, and the Wisconsin Court of Appeals' holding in Frisch, generally providing that a business may intend breaking even (Kollasch) or making an over-all profit (Frisch), but some of its transactions may be characterized as non-mercantile.
The Department contends that petitioner and its related sister corporations are separately incorporated entities. That is obvious, and we agree. But the Department then states that transactions between these related parties must be treated the same as transactions between other unrelated parties. We disagree in the case now before us for the reasons stated above.
The Department asserts that by recording transferred property on its books as payables or liabilities, petitioner has made a promise to pay. This is not accurate. Petitioner had to record the receipt of these assets somewhere on its books. Its choice of where to record the assets did not result in any promise of payment. Merely labeling an asset does not give rise to facts or legal conclusions not consistent with the record. There were no payments, expectations of payments or promises to give anything of value for the intercompany transfers.
The Department argues at length that petitioner made payments for these intercompany transfers. This is not supported in the record.
The Department now asserts that petitioner's accrual method of accounting and, for franchise/income tax purposes, its depreciating the property it received by intercompany transfers somehow results in payment for the property received. The Department also asserts that, when petitioner's parent corporation reconciles the intercompany transfers of all of its subsidiaries, this results in a payment by petitioner for fixed assets acquired by intercompany transfers. These arguments ignore the facts. No automatic payment arises out of the above accounting adjustments. Petitioner made no payments, no payments were expected, and no invoices or demands for payment were ever made.
The Department asserts that, by depreciating a fixed asset received by an intercompany transfer, petitioner is receiving a benefit and should be regarded as having paid for the asset. We disagree. Petitioner may have received a franchise/income tax benefit from the asset's depreciation. However, this did not suddenly create a payment for acquiring the asset for sales/use tax purposes; no such payment was made or can be implied.
The Department also contends that two prior Commission decisions involving bookkeeping entries are similar to the instant case and should lead us to conclude that the intercompany transfers now before us involve payments for property. See, Ladish Co., Inc. v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶ 203-326 (WTAC 1992), and Diagnostic Radiology Associates of Wisconsin, S.C. v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶ 400-087 (WTAC 1994).
In Ladish, the petitioner argued that amounts it transferred to its parent corporation were "not loans, but unconditional payments in the nature of undeclared dividends, mistakenly reported as repayable sums in accounts receivable." Supra at p. 15,422. The Commission stated that the petitioner "booked the transfers as repayable debt, carried those transfers for as much as 2 ½ years as debt, showed the transfers as debt on its Wisconsin income tax returns, and failed to declare the transfers to be dividends or to account for them as dividends . . .", and concluded, "[u]nder the circumstances, the assertion of mistake is untenable." Supra at p. 15,423. The Commission also stated that "this is one of those relatively rare cases where form prevails over substance, where formal appearance becomes reality." Supra.
In the current case, no mistaken listing on the account books was claimed. Upon the intercompany transfer, the property was intentionally shown as a debit on an asset account and a credit on an intercompany transfer account. There was no expectation of payment for the asset. Therefore, here substance prevails over form, and the accounting entries indicate that payments were neither expected nor made. In addition, depreciating an asset received by intercompany transfer does not result in a payment for that asset.
In the Diagnostic Radiology case, petitioner made monthly rental payments to another service corporation for a CAT scan machine and paid no sales tax on the rental fees. After the Department assessed sales tax to petitioner, petitioner asserted that since 2 of its 4 members were the same as the 2 members of the payee service corporation, petitioner was making payments to itself. Petitioner argued further that it was exempt under Wis. Stat. § 77.51(14g)(d) as a corporation which distributed property to its members as a dividend or in liquidation.
The Commission ruled in favor of the Department. In dismissing the first assertion, the Commission concluded that petitioner and the CAT machine's owners were separate service corporations, i.e., separate legal entities, and lease payments from one to the other were subject to the sales tax. Rejecting the second assertion, the Commission recognized petitioner is a service corporation, a different legal entity from a corporation, and ruled that § 77.51(14g)(d) did not apply. The Commission stated, "A taxpayer cannot, in hindsight, recant its former transactions for ones that it might have made in order to obtain tax advantages." Supra, at p. 30,304.
The Diagnostic Radiology case does not apply here. In the instant case, petitioner is not attempting to restructure a prior transaction.
The Negligence Penalty
In its assessment, the Department included a 25% negligence penalty under Wis. Stat. § 77.60(3). The statute authorizes imposition of this penalty "If due to neglect an incorrect return is filed. . . . A person filing an incorrect return shall have the burden of proving that the error or errors were due to good cause and not due to neglect."
Prior to the audit under review, the Department audited petitioner for the period October 1, 1987 through September 30, 1993. The prior audit involved the same two issues as in this audit: intercompany transfers and a claimed exemption for waste reduction and recycling equipment. At the Department's appellate unit, petitioner requested that intercompany transferred vehicles be adjusted to their net book value. The Department made that change, and the parties entered into a closing agreement.(13)
The Department asserts that petitioner continued its failure to report use tax on its intercompany transferred equipment and vehicles, plus other types of purchases. The Department concludes that because petitioner did not align its sales/use tax practices to comply with the closing agreement, petitioner was negligent and the 25% negligence penalty applies.
A portion of the assessment giving rise to the current case related to purchases of assets used by petitioner in its recycling and waste reduction activities. The same issue was being litigated in the BFI-Wis. case, which was only resolved on September 19, 2001 when the Wisconsin Supreme Court denied BFI-Wis.'s petition for review.
The issues in the earlier BFI-Wis. case were unresolved when the Department applied the negligence penalty here as part of its October 30, 1998 assessment, almost 3 years prior to the Wisconsin Supreme Court's denial of BFI-Wis.'s appeal. Petitioner was reasonable in believing that judicial review might reverse the Commission's ruling.
The Commission's decision in the BFI-Wis. case was issued on January 13, 2000. The Commission ruled in favor of the Department on the waste reduction and recycling issues and in favor of BFI-Wis. on the intercompany transfers issue. Those issues were similar to the ones involved in the Department's current audit of petitioner.
The facts on this issue in the current case are very similar to those in the BFI-Wis. case. The Commission concludes that, notwithstanding the Department's nonacquiescence, petitioner acted reasonably in following the Commission's holding on the intercompany transactions issue in the BFI-Wis. case.
The waste reduction and recycling issues in the BFI-Wis. case were appealed. We conclude that petitioner acted reasonably in not changing its sales/use tax practices on this issue during the pendency of the current litigation.
Therefore, we conclude that petitioner has met the burden of proving that its actions during the period under review were "due to good cause and not due to neglect." Wis. Stat. § 77.60(3).
IT IS ORDERED
1. The Department's motion for summary judgment is denied.
2. Petitioner's motion for summary judgment is granted, and the Department's action on petitioner's petition for redetermination is reversed.
Dated at Madison, Wisconsin, this 19th day of August, 2003.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Chairperson
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
September 19, 2003 Appealed to Dane County Circuit Court(03CV2774)
August 2, 2004 - Dane County Circuit Court Case No. 03CV2774 Reversed.
September 20, 2004 - Appealed to Wisconsin Court of Appeals, Appeal No. 04-2468.
February 2, 2006 - Wisconsin Court of Appeals - Appeal No. 04-2468, District IV - Circuit Court decision reversed.
March 6, 2006 - Petition to Wisconsin Supreme Court.
March 8, 2007 Supreme Court of Wisconsin - Review of a Decision of the Court of Appeals. Affirm the Court of Appeals decision.
11 In the BFI-Wis. case, the Commission did not engage in any Kollasch-type analysis. We consider Kollasch and its progeny here because it provides a separate basis for supporting our second conclusion of law.