Opinion ID: 1379377
Heading Depth: 2
Heading Rank: 3

Heading: The right to continuous possession or use of tangible personal property is granted under a lease or contract.

Text: Code § 7-2-104 (1968). A retail sale is defined as [a]ny sale, purchase, lease, rental or grant of license to use tangible personal property, or taxable services within the City except a wholesale sale or purchase for taxable resale. Code § 7-2-104 (1968 rev. 1981). A wholesale sale is defined as follows: WHOLESALE SALE or WHOLESALE PURCHASE or SALES FOR TAXABLE RESALE: A sale by wholesalers or retailers to retail merchants, jobbers, dealers, vendors or other wholesalers for taxable resale. It does not include a sale by a wholesaler or retailer to users, consumers, purchasers or customers not for taxable resale, which sales shall be deemed retail sales and subject to the provisions of this Article. Code § 7-2-104 (1968 rev. 1981). The Code also contains a separate exemption from use tax for wholesale sales, as follows: WHOLESALE SALES: The sale by wholesalers or retailers to a licensed retailer, jobber, dealer or other wholesaler for purposes of taxable resale, and not for the retailer's, jobber's, dealer's or wholesaler's own consumption, use, storage or distribution, shall be deemed to be wholesale sales and exempt from taxation. Code § 7-2-442 (1968 rev. 1976). The Code does not define the terms resale or taxable resale. Construing these provisions together, as we must, see Martinez v. Continental Enterprises, 730 P.2d 308 (Colo.1986), it is apparent that the Code authorizes the imposition of retail sales taxes and use taxes on a broad range of purchases of tangible personal property. Whether the taxable event involves sales, rentals, leases, or simply storage or use of property, the original purchase or sale of such property is subject to taxation unless exempted by specific Code provisions. The Court of Appeals emphasized the fact that the Code's definition of purchase or sale provides that lease or rental transactions involving tangible personal property shall be deemed sales. The Court of Appeals then concluded that each rental of a hotel room to guests constitutes a sale, that for purposes of the Code the acquisition of the room was for resale of the room, and that therefore no sales tax may be imposed on the purchase price of the hotel rooms. The Court of Appeals apparently expanded this rationale to conclude that the hotel property located in guest rooms was sold to each guest as part of every rental transaction, and was therefore purchased initially for resale. This rationale cannot withstand an examination of the Code as a whole and ignores the realities of the relevant transactions. It is not every sale that may be exempt from the imposition of retail sales taxes or use taxes, but only a sale for resale. The question of what constitutes a resale is not answered by any definitional provision of the Code. Adoption of the broad definition of resale urged by Investment Ltd. and suggested by the Court of Appeals decision would substantially undermine the purpose of the Code to authorize the imposition of retail sales taxes or use taxes on most commercial transactions. We reject this proposed construction of the Code. Although we have not previously construed the retail sales tax provisions of the Code, we recently construed substantially similar provisions contained in the Emergency Retail Sales Tax Act of 1935, codified at sections 39-26-101 to -211, 16B C.R.S. (1982), Regional Transportation District v. Martin Marietta Corp., 805 P.2d 1102 (Colo.1991), and the sales tax and use tax ordinance of the City and County of Denver, codified at sections 53-1 to 53-145 of the Denver, Colorado Revised Municipal Code (Denver Code). See A.B. Hirschfeld Press, Inc. v. City and County of Denver, 806 P.2d 917 (Colo.1991). In Hirschfeld, we concluded that under the scheme and language of the Denver Code, a purchase is a purchase for resale, and therefore not a taxable purchase at retail, if the primary purpose of the transaction is the acquisition of tangible personal property for resale in an unaltered and basically unused condition. Relying to some degree on our prior discussions concerning the statutory definitions of wholesale sales and retail sales in earlier decisions of this court, [5] we indicated that the factors to be considered in determining whether a particular transaction constitutes a purchase for resale include the nature of the purchaser's contractual obligations, if any, to use, alter or consume the property to produce goods or perform services; the degree to which the items in question are essential to the purchaser's performance of those obligations; the degree to which the purchaser controls the manner in which the items are used, altered or consumed prior to their transfer to third parties; and the degree to which the form, character or composition of the items when transferred to third parties differs from the form, character or composition of those items at the time they were initially purchased. Hirschfeld, at 921. In Regional Transportation District, we concluded that the same test applied to questions arising under the state retail sales and use tax statute. Regional Transp. Dist., at 1104-1105. A taxpayer challenging an assessment of tax must prove the merits of the challenge by a preponderance of the evidence. Hirschfeld, at 920; Honeywell Info. Systems v. Board of Assessment Appeals, 654 P.2d 337 (Colo.App.1982); see Gerner v. Sullivan, 768 P.2d 701 (Colo.1989). Upon reviewing the record, we conclude that Investment Ltd. did not satisfy its burden of proof to establish that the purchase of the hotel property was a wholesale purchase for resale and therefore not subject to the imposition of a use tax. To the contrary, the record requires the conclusion that, pursuant to the test articulated in Hirschfeld and in Regional Transportation District, Investment Ltd. purchased the hotel property primarily for its own use in the conduct of its business of providing furnished rooms to guests for rental fees. Although Investment Ltd. did not enter into any specific contractual obligations to use the hotel property when it purchased the property, its subsequent conduct indicates that at the time of the purchase, it intended to enter into agreements with guests to furnish rooms to those guests and to use the hotel property in question to fulfill its contractual obligations to provide such accommodations. Investment Ltd.'s use of the hotel property in the guest rooms was essential to the performance of such contractual obligations. Investment Ltd. at no time transferred any incidents of ownership in the hotel property to any guests of the hotel, and it no doubt reserved the right to use, repair, replace and store some or all of such property as it, in its sole discretion, determined to be appropriate. For these reasons, we conclude that Investment Ltd. purchased the hotel property located exclusively in the guest rooms primarily for its own use. As noted above, the Court of Appeals reasoned that because Investment Ltd. resold the guest room hotel property to its guests the purchase of such property was exempt from the imposition of retail sales or use taxes under the wholesale for taxable resale exemption to the Code. Code § 7-2-442 (1968 rev. 1976). We do not agree with this reasoning. In Bedford v. Colorado Fuel & Iron Corp., 102 Colo. 538, 81 P.2d 752 (1938), we noted that the terms wholesale and retail sale, as contained in the then applicable provisions of the Emergency Retail Sales Tax Act of 1935, differed from the ordinarily accepted general conception of those terms. Id., 102 Colo. at 543, 81 P.2d at 754. In Hirschfeld, we held a purchaser's transfer of title to tangible personal property to a third party does not establish that the property was initially purchased for resale within the meaning of the wholesale for resale exemption from the imposition of use tax. Hirschfeld, at 920; Regional Transp. Dist., at 1105; Carpenter v. Carman Distrib. Co., 111 Colo. 566, 144 P.2d 770 (1943); Craftsman Painters & Decorators v. Carpenter, 111 Colo. 1, 137 P.2d 414 (1942). A purchaser's use of property, not the purchaser's transfer of title thereto, is the pertinent inquiry for determination of the primary purpose for which the property was acquired. Hirschfeld, at 920-921; Regional Transp. Dist., at 1105. See Howard Elec. and Mech. v. Department of Revenue, 771 P.2d 475, 477 (Colo.1989); Tri-State Generation & Transmission Ass'n, Inc. v. Department of Revenue, 636 P.2d 1335, 1337 (Colo.App.1981). Other courts have adopted this mode of analysis to resolve cases arising under various taxing schemes. See Atlanta Americana Motor Hotel Corp. v. Undercofler, 222 Ga. 295, 149 S.E.2d 691 (1966); Hotels Statler Co. v. District of Columbia, 199 F.2d 172 (D.C. Cir.1952); Theo. B. Robertson Products Co. v. Nudelman, 389 Ill. 281, 59 N.E.2d 655 (1945); Kentucky Bd. of Tax Appeals v. Brown Hotel Co., 528 S.W.2d 715 (Ky. 1975). In the present case, Investment Ltd. used the hotel property located in guest rooms subsequent to its purchase thereof. Although it periodically rented the property to its guests, and such rental may satisfy the Code's definition of purchase or sale, we conclude that the primary purpose of the acquisition of the property was for Investment Ltd.'s use thereof in fulfilling its contractual obligations to its guests.