Opinion ID: 2100326
Heading Depth: 1
Heading Rank: 2

Heading: The Exemption Claimed on the Basis of Resale of Tangible Personal Property.

Text: At the outset we may note that this question is not discussed in the opinion of the Judge of the Baltimore City Court. We are informed that it was, however, presented by the appellant in the lower court. It must have been determined adversely to the appellant; otherwise, the determination of the Comptroller could not have been fully affirmed. We, therefore, think it is properly before us for consideration. Contracts of several different types are involved in this case. All of them call for alterations, additions or repairs to be made by Steiner to real property belonging to the Railroad. Paragraph 9 of the Stipulation states that all but two of the 47 contracts contained a provision by which Steiner was obligated to sell to the Railroad all materials required for the performance thereof. In 29 contracts there was a breakdown of the total contract price into a stated figure for the material purportedly sold thereunder and into another stated figure for the labor in performing the contract. Eighteen contracts contain no breakdown or separation of the figures representing the price of material sold and the cost of labor, but 15 of these 18 obligate Steiner to sell the materials at actual cost. The other 3 out of these 18 (including the two exceptions above mentioned) contain a provision obligating Steiner to carry out the work on the basis of time and material or labor and material. Six of the contracts, 3 of which are among the 29 and 3 of which are among the 15 above described, contain a total contract price which is stated to be the maximum. The 29 contracts above mentioned account for more than $68,000, or about 80%, of the total cost of materials upon which the assessment in this case was made. Some of these 29 were lump-sum contracts, some were cost plus a fixed percentage of cost, and some were cost plus a fixed fee. In some instances the price of materials was stated as a specified amount, in some as an estimated figure and in some at market values. In each instance a figure was extended to indicate the cost. Of the total of 47 contracts it is stated in Paragraph 8 of the Stipulation that 20 provided for lump sum payments, 23 for the payment of cost plus a fixed percentage of cost and 4 for the payment of the actual cost plus a fixed fee in a specified amount. The Comptroller relies heavily upon the characterization of the contracts contained in this paragraph of the Stipulation and in similar language in Paragraph 13 as precluding any of the contracts from falling within Class (d) under his Rule 53 (which we shall take up in a moment). We do not think, however, that the terms of these paragraphs prevent consideration of the terms of the contracts themselves, excerpts from which were included in an exhibit filed with and as a part of the Stipulation. The appellant relies upon Rule 53 as an interpretation of Sections 259 (f) (3) and 308 (h) (2) of Article 81 of the 1939 Code, 1947 Supplement (Sections 320 (f) (3) and 368 (h) (2) of Article 81 in the 1951 Code), and claims that all but two of the contracts fall within Class (d) of the types of contracts therein described and are exempt thereunder. Rule 53 undertakes to interpret and apply the provisions of the Sections just referred to which defined as sales at retail the sale of building materials to contractors, builders or landowners for use or resale in the form of real estate. These four classes are described as follows: (a) Those contracts in which the contractor or sub-contractor agrees to furnish materials and supplies and necessary services for a lump sum; (b) Those contracts in which the contractor or sub-contractor agrees to furnish the materials and supplies and necessary services on a cost-plus basis; (c) Those contracts in which the contractor or sub-contractor agrees to furnish the materials and supplies and necessary services with an upset or guaranteed price which may not be exceeded; and (d) Those contracts in which the contractor or sub-contractor agrees to sell materials and supplies at an agreed price or at the regular retail price and to render the service either for an additional agreed price or on the basis of time consumed. The Rule then continues: When a contractor or sub-contractor uses materials and supplies in fulfilling either a lump sum contract, a cost-plus contract, a time and material contract with an upset or guaranteed price which may not be exceeded or any other kind of contract except one falling in class (d) above, he becomes the ultimate consumer thereof. The person or vendor who sells such materials and supplies to such contractor or subcontractor is making sales at retail to him and is required to collect the tax from him based upon the receipt from such sales. In cases falling in class (d) above, the contractor or sub-contractor is deemed to be selling tangible personal property at an agreed retail price and he is required to collect the tax from his purchaser based upon the amount of the receipts from such sales. A vendor selling to such contractor or sub-contractor is not required to collect the tax from him but must obtain from him a resale certificate. The foundation for the Comptroller's rule relating to Class (d) contracts contained in Rule 53 is by no means clear to us, and a memorandum to contractors and their suppliers issued by the Comptroller in March, 1951, throws no light on the origin of the Class (d) ruling, and seems really to contradict it, without explanation. If Class (d) had been omitted from Rule 53 and the substance of the memorandum had been inserted instead of it, the second question in this case could scarcely have arisen. It may be noted, however, that the memorandum appeared several months after the last contract involved in this case had been entered into. The substance of the memorandum is that sales and use tax exemptions are available to building contractors working on lump sum or cost plus contracts in only two types of cases. The first type covers situations (as in the McShain Case ) where materials purchased by contractors are to be incorporated in a completed job for the State or a political subdivision thereof, or for a charitable, educational or like corporation. The second is available to contractors who are engaged in performing lump sum or cost plus contracts and who are, in addition, engaged in selling building materials; but it is available only with respect to this second part of a contractor's business. On the first part the contractor must pay the tax on materials purchased to fulfill building contracts. In substance, and despite the understandable efforts of both Steiner and the Railroad to bring purchases of materials to be used by Steiner in performing its contracts with the Railroad within the terms of Class (d) contracts as described in Rule 53, we think the stipulated facts were at least fairly susceptible of the legal interpretation which the Comptroller placed upon them. That is, in short, that the sales to Steiner of the materials upon which the taxes here involved were assessed were within the definition of sale at retail under the Retail Sales Tax Act and under the Use Tax Act, since they were sales of building materials to a contractor for use or resale in the form of real estate, and that each of them falls within either Class (a) (b) or (c) of the types of contracts enumerated in Rule 53. The nature of each of the 47 contracts is clearly shown. Every one of them called for the making of repairs or alterations to existing structures or additions thereto, or additions in the form of new buildings or structures to some facility of the Railroad, and in every instance the end product was to constitute real estate. We think that the evidence was sufficient to support the Comptroller in finding that the Railroad undertook to purchase and pay for these materials when, and only when, they had been incorporated into real estate, and that these materials were sold and were intended to be sold by Steiner to the Railroad only as and when incorporated in a completed job which (when completed) constituted real estate. That, we think, is the substance of the contracts; and we do not think that the inclusion of provisions in the contracts seeking to cast them in the mold of sales of tangible personal property as such, alters the essential nature or effect of the contracts. Likewise, the allocation of price as between materials on the one hand and labor or other items on the other, does not change the nature of the contracts. Furthermore, an examination of a tabulation contained in Plaintiff's Exhibit No. 7 filed with the stipulation shows, in some instances, such wide variations under the 29 contracts upon which the appellant chiefly relies, as between the price charged the Railroad for materials and the cost of those materials to Steiner, and also such variations in Steiner's indicated margin of profit on materials as between different jobs, as to strengthen our view that the Railroad was not acquiring the building materials as such, but only as incorporated in completed real estate projects. It seems probable that a considerable part of these variations may be due to the fact that Steiner employed sub-contractors on most contracts, but this does not weaken our view that essentially the contracts between Steiner and the Railroad called for finished jobs in the form of real estate. It would make no real difference in such contracts whether particular materials were furnished by Steiner or a sub-contractor. Counsel for the Comptroller conceded at the argument that, assuming the Railroad's exemption to be valid, it could have purchased the materials itself tax-free and could then turn them over to Steiner for use on these jobs. The prices and costs to which we have just referred make it clear, we think, that what was actually done in these cases was far from what might have been done if the Railroad had made the purchases itself or if Steiner had, in effect, been its agent in making them. If the provisions of Rule 53 relating to Class (d) contracts therein described would produce in this case a result at variance with the views above expressed, they would, we think, go beyond the permissible limits of administrative interpretation, since they would, on the facts of this case, nullify the applicable statutory definitions of the term sale at retail and would grant an exemption where the statutes grant none. We accordingly hold that the contractor is not entitled to an abatement of the taxes here involved on the basis of these contracts involving the sale of building materials to the Railroad as tangible personal property, and not as real estate. Since our conclusions are adverse to the contentions of the appellant on both of the questions presented, the order appealed from will be affirmed. Order affirmed, with costs.