July 31, 2000

You request a letter ruling on behalf of *************** ("Company") that no Massachusetts sales or use tax is due on a part purchased by Company in Massachusetts, placed in inventory in Massachusetts, and subsequently taken out of inventory and used pursuant to a Preventive Maintenance Agreement outside of Massachusetts, where an exempt use or resale certificate was given to the vendor.

Facts

Company is a Massachusetts corporation that manufactures and sells security and alarm systems. It also sells Preventive Maintenance Agreements ("PMAs") that provide repair services for a fee paid at the beginning of the contract term. About one tenth of Company's suppliers are located in Massachusetts. When it purchases a part, it gives the Massachusetts suppliers a resale certificate (ST-4) when parts are large and likely to be resold, and an exempt use certificate (ST-12) for raw materials. The purchased parts and raw materials are used both within and outside Massachusetts for manufacturing, as components of finished goods, as parts for repair services both covered and not covered under PMAs, and in contracts for the improvement of real property. The raw materials and parts purchased from Massachusetts suppliers are received by Company at various locations within and outside of Massachusetts. You have requested a ruling on the proper taxation of the parts purchased in Massachusetts, placed in inventory in Massachusetts, and used in PMAs outside of Massachusetts.

Discussion of Law

Massachusetts imposes a five- percent sales tax on all sales of tangible personal property at retail in Massachusetts. G.L. c. 64H, § 2. As a general rule, a sale is a Massachusetts sale subject to sales tax under G.L. c. 64H if title to or possession of the property sold is transferred in Massachusetts, G.L. c. 64H, § 1. The sale is generally subject to Massachusetts tax even if the property will not be used in Massachusetts. A complementary use tax is imposed on tangible personal property purchased for storage, use, or other consumption in Massachusetts, unless otherwise exempt. G.L. c. 64I, § 2.

In performing under its PMAs, Company may be characterized as either a contractor or a service enterprise. Either characterization will lead to the same tax result here. Contractors are considered consumers of parts they purchase for the performance of their contracts. See Ace Heating Service, Inc. v. State Tax Commission, 371 Mass. 254, 256-7; Letter Rulings 85-68, 88-8; Emergency Regulation No. 12. Service enterprises are also considered consumers of the parts they use in fulfilling their contracts. 830 CMR 64H.1.1(5)(g). As consumers of the parts they purchase, contractors and service enterprises must pay sales tax on parts purchased from registered Massachusetts vendors.

For the sales at issue, Company gave Massachusetts resale and exempt use certificates for parts purchased in Massachusetts that were later taken out of inventory and used in PMAs outside of Massachusetts. Had Company not given the certificates to the vendor, the vendor would have collected sales tax from Company. Company's later use of parts in PMAs is inconsistent with the certificates that were given. The statute treats subsequent use inconsistent with a resale certificate as follows:

If a purchaser who gives a [resale] certificate makes any use of the service or property other than retention, demonstration or display while holding it for sale in the regular course of business, the use shall be deemed a retail sale by the purchaser as of the time the service or property is first used by him, and the cost of the service or property to him shall be deemed the gross receipts from such retail sale.

G.L. c. 64H, § 8(d) (emphasis added).

Likewise, regarding subsequent use inconsistent with an exempt use certificate, the statute states:

If a purchaser who gives an exempt use certificate makes any use of the property other than the one therein certified, the use shall be deemed a retail sale by the purchaser as of the time the property is first so used and the cost of the property to him shall be deemed the gross receipts from such retail sale.

G. L. c. 64H, § 8(h) (emphasis added).

Once Company uses an item purchased under one of these certificates in a non-exempt manner, the use becomes taxable as a retail sale, and Company becomes liable for paying sales tax. By giving a certificate, the purchaser is, in effect, telling the vendor that no sales tax is due, and the purchaser thereby takes the sales tax liability upon itself. Giving the certificate has the effect of postponing the sale transaction and the tax until the time of inconsistent use. The statutory language in G.L. c. 64H, § 8(d), (h), deeming a sale to occur when a purchaser uses an item it bought under a resale or exempt use certificate, requires this result.

Company has requested that the use tax, not sales tax, apply to the parts at issue. This request is motivated by a difference between the two taxes. Taxable use does not include the exercising of any right over property for the purpose of subsequent transport outside the Commonwealth. G.L. c. 64I, § 1. If the use tax statute applied to these parts, they would be exempt from Massachusetts tax under this provision. The sales tax statute contains a similar exemption, but its scope is much narrower, exempting only sales of property in transit, stored at points of entry intended for export or import, or which the vendor is obligated under the terms of any agreement to deliver either to a purchaser outside the Commonwealth or to an interstate carrier for delivery outside the Commonwealth. G.L. c. 64H, § 6(b). [1]

Sales and use taxes are complementary taxes, and have the same economic effect in most circumstances, but they rest on different justifications. The Supreme Court has observed that the sales and use tax "are different in conception, are assessments upon different transactions, and in the interlacings of the two legislative authorities within our federation may have to justify themselves on different constitutional grounds. A sales tax is a tax on the freedom of purchase. … A use tax is a tax on the enjoyment of that which was purchased." McLeod v. J. E. Dilworth Co., 322 US 327, 330 (1943). The use tax was designed to prevent the loss of sales tax revenue by out of state purchases. "The sales and use excises are complementary components of a unitary taxing program created to reach all transactions (unless specifically exempted by G.L. c. 64H, § 6 or 64I, § 7) in which tangible personal property is sold inside or outside the Commonwealth for storage, use, or other consumption within the Commonwealth." Boston Tow Boat Company v. State Tax Commission, 366 Mass. 474, 476-477 (1974).

The interpretation the taxpayer proposes would permit taxpayers to transform a transaction taxable under the sales tax into a use tax situation simply by giving a certificate, and then later using the property in a manner inconsistent with the certificate. Giving a certificate could thus become a means not just to postpone the sales tax, but to avoid it altogether. This approach would render meaningless the sales tax exemption under G.L. c. 64H, § 6(b) for deliveries out of state. It is axiomatic that every clause of a statute should be given effect. Bankers Life and Cas. Co. v. Commissioner of Ins., 427 Mass. 136, 140 (1998).

State sales and use taxes are part of a nationwide tax system. Double taxation can be avoided through the use of credits. Forty-four of the forty-five states that impose sales and use taxes allow a credit for such taxes paid to other states . See KSS Transp. V. Baldwin, 9 NJ Tax 273 (1987). Credit for another state's sales tax may be constitutionally required. Oklahoma Tax Comm. V. Jefferson Lines, 514 US 175, 194 (1995). If Company faces another state's use tax on property initially subject to Massachusetts sales tax, the remedy should be to obtain a credit from the other state.

Company relies on Rule Industries, Inc. v. Commissioner of Revenue, 23 Mass. App. Tax Bd. Rep. 41 (1997) for the proposition that the temporary use exemption in the use tax statute, G.L. c. 64I, § 1, applies to the initial presence of parts that have been received or stored in Massachusetts and are later shipped and used outside Massachusetts. The use tax temporary use exemption applies to purchases of parts from suppliers with no nexus in Massachusetts. Rule Industries was decided under the use tax statute, not the sales tax statute. Under the facts here, the vendors have nexus in Massachusetts. Accordingly, Rule Industries is inapposite.

Conclusion

We rule that where a purchaser has given a Massachusetts vendor an exempt use or resale certificate at the time of sale, and sales tax would otherwise have been due, if the part is later used in a manner inconsistent with the certificate, sales tax is due from the purchaser under G.L. c. 64H, § 8. The statute is clear that a sales tax is due on property purchased for a non-exempt purpose and not resold. G.L. c. 64H, § 8(d),(h). Since materials purchased for use in PMAs are not sales for resale, they are subject to tax. The fact that the parts may also be subject to use tax in another state is not relevant for Massachusetts sales tax purposes, although the company should be able to take a credit against later use tax paid in another state for sales tax paid in Massachusetts.

Very truly yours,

/s/Frederick A. Laskey

Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:lab

LR 00-10



[1] Company has not expressly asked, and we do not rule on, whether the property at issue meets the sales tax exemption under G.L. c. 64H, § 6(b).