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Servomation Corp. v. State Tax Commission

51 N.Y.2d 608 Court N.Y. Decision date 1980-12-22 English

Judges Chief Judge Cooke and Judges Jasen, Gabrielli and Wachtler concur with Judge Fuchsberg; Judges Jones and Meyer concur in result on constraint of Matter of Burger King v State Tax Comm. (51 NY2d 614).

Delivered by Fuchsberg, J.

Contents

Majority

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Servomation Corp., Respondent, v State Tax Commission, Appellant.
Argued October 9, 1980;
decided December 22, 1980
p. 609
POINTS OF COUNSEL
Robert Abrams, Attorney-General (Maurice K. Peaslee and Shirley Adelson Siegel of counsel), for appellant.
I. The food and drink served by restaurants and similar establishments is not sold as tangible personal property within the meaning of article 28 of the Tax Law. (Toxaway Hotel Co. v Smathers, 216 US 439 .) II. Paper and plastic products purchased by restaurants and similar establishments are purchased at retail for their own use and consumption and are not exempt from the sales tax as purchases for resale. (Matter of Albany Calcium Light Co. v State Tax Comm., 44 NY2d 986 ; Matter of Colgate-Palmolive-Peet Co. v Joseph, 308 NY 333 ; Matter of American Molasses Co. of N. Y. v
p. 610
McGoldrick, 281 NY 269 ; Matter of Dairylea Co-op. v State Tax Comm., 41 AD2d 312 , 33 NY2d 513 ; Matter of Abraham & Strauss v Tully, 47 NY2d 207 ; Matter of Lockport Union-Sun & Journal v Preisch, 7 AD2d 502 , 8 NY2d 54 ; Matter of National Elevator Ind. v New York State Tax Comm., 49 NY2d 538 .) III. Paper and plastic products purchased by restaurants and similar establishments for use in serving food and drink are not exempted from the sales tax by section 1115 (subd [a], par [19]) of the Tax Law. (Matter of Grace v State Tax Comm., 37 NY2d 193 ; Matter of Central Off. Alarm Co. v State Tax Comm., 58 AD2d 162 , 44 NY2d 642 ; Matter of Colgate-Palmolive-Peet Co. v Joseph, 308 NY 333 ; Matter of American Molasses Co. of N. Y. v McGoldrick, 281 NY 269 .)
Eugene J. Steiner and Donald Zee for respondent.
I. The sales tax law and the regulations and examples in question should be strictly construed in favor of the taxpayer. (Matter of Bes Corp. v Tully, 46 NY2d 1038 ; Matter of Nehi Bottling Co. v Gallman, 39 AD2d 256 , 34 NY2d 808 ; Matter of American Locker Co. v Gallman, 38 AD2d 105 , 32 NY2d 175 ; Bathrick Enterprises v Murphy, 27 AD2d 215 , 23 NY2d 664 ; Matter of Grace v State Tax Comm., 37 NY2d 193 ; Matter of Burger King v State Tax Comm., 70 AD2d 447 ; Matter of Finch, Pruyn & Co. v Tully, 69 AD2d 192 .) II. Although administrative agencies by legislative grave, have power to promulgate interpretative and constructive rules and regulations, these regulations may not run afoul of the empowering statute or its underlying legislative intent. (Brown v University of State of N. Y., 242 App Div 85 , 266 NY 598 ; Matter of Kaplan v McGoldrick, 198 Misc 440 ; Matter of Humphrey v State Ins. Fund, 298 NY 327 ; Pollard v Trivia Bldg. Corp., 291 NY 19 ; Gerber v Seaich Realty Co., 259 App Div 667 .) III. Paper products purchased by plaintiff-respondent fall within the resale exclusion provided for by section 1101 (subd [b], par [4], cl [i], subcl [A]) of the Tax Law. (Matter of Burger King v State Tax Comm., 70 AD2d 447 ; Matter of Nehi Bottling Co. v Gallman, 39 AD2d 256 ; Matter of Maplecrest Sausage Co. v Tully, 67 AD2d 329 .) IV. Common sense dictates that food and beverages dispensed through a vending machine must be packaged in paper and related paper products.
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OPINION OF THE COURT

In this companion case to Matter of Burger King v State Tax Comm. ( 51 NY2d 614 ), the sole question is the enforceability of a State Tax Commission regulation interpreting section 1115 (subd [a], par [19]) of the Tax Law.

Servomation operates vending machines, cafeterias, “fast food” restaurants and dining facilities located throughout the United States and Canada. In conjunction with the operation of its food service business, it purchases large quantities of disposable paper and plastic products which consist of cups, plates and containers for hot and cold drinks.

Enacted in 1974 (L 1974, ch 581, § 1), section 1115 (subd [a], par [19]) of the Tax Law exempts from taxation “[cjartons, containers, and wrapping and packing materials and supplies, and components thereof for use and consumption by a vendor in packaging or packing tangible personal property for sale, and actually transferred by the vendor to the purchaser”. In 1977, the State Tax Commission promulgated the following regulation: “Cartons, containers and other packaging materials used in or by restaurants, taverns or other establishments, or by caterers, are subject to tax whether or not there is a separate charge for such containers or packaging material” (20 NYCRR 528.20 [c] [5]). Paragraph (5) of the regulation also includes examples of when such items are taxable.[1]

By this action Servomation seeks a judgment declaring this regulation invalid as conflicting with either or

1 The examples set out are as follows: “Example 5: A restaurant purchases paper bags, beverage containers and wrapping paper to use in packaging orders, and napkins and stirrers, whether for on- or off-premises consumption. Such purchases are taxable. “Example 6: A pizza parlor has a 10-cent surcharge for pizza which is taken out. The surcharge is intended to defray the cost of the cartons. Since the carton is not used to package tangible personal property, it is subject to tax. “Example 7: A food vending machine operator purchases stirrers, napkins, hot and cold cups and lids. Since these items do not become part of the products sold nor are they used to package tangible personal property, they are subject to sales tax.”

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of section 1101 (subd [b], par [4], cl [i], subcl [A])[2] or section 1115 (subd [a], par [19]) of the Tax Law insofar as it would make containers, cups, lids, and other wrappings taxable when purchased by its establishments. On cross motions for summary judgment the Supreme Court denied Servomation’s motion and granted that of the Tax Commission. But the Appellate Division reversed and granted Servomation’s motion, citing for authority its decision in Matter of Burger King v State Tax Comm. ( 70 AD2d 447 , mod 51 NY2d 614 ). For the reasons which follow, we believe that Servomation’s purchases are not subject to the tax.

The Tax Commission argues for the validity of its regulation on several grounds. It initially contends that section 1115 (subd [a], par [19]) only exempts containers and wrapping material used to package tangible personal property and that restaurant food is not tangible personal property within the meaning of the Tax Law, a contention we today accept in Matter of Burger King v State Tax Comm. ( 51 NY2d 614 , supra).

This alone, however, does not necessitate a finding in favor of the commission. For, in Matter of Burger King v State Tax Comm., ( 51 NY2d 614 , supra), we held that the paper products, purchased by a fast food chain operator for sale to customers, fall within the resale exclusion provided for by section 1101 (subd [b], par [4], cl [i], subcl [A]) of the Tax Law. An administrative agency cannot by regulatory fiat directly or indirectly countermand a statute enacted by the Legislature (Matter of Jones v Berman, 37 NY2d-42, 53). 20 NYCRR 528.20(c) (5), promulgated by the State Tax Commission, thus being disharmonious with the statute it was intended to implement, must be found void.

In so ruling the regulation unenforceable, we, of course, recognize that, where it is adopted in implementation of a broadly framed statute which the administrative agency that promulgated the regulation was authorized to administer, reviewing courts most often will defer to the

2 Tax Law (§ 1101, subd [b], par [4] cl [i], subcl [A]) excludes from taxation a sale “for resale as such” or “as a physical component part of tangible personal property”.

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interpretation that inheres in the regulation. “Where, however, the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations are therefore to be accorded much less weight” (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451 , 459). For the reasons we have stated, this is the case here.

It follows that the order of the Appellate Division should be affirmed.

Chief Judge Cooke and Judges Jasen, Gabrielli and Wachtler concur with Judge Fuchsberg; Judges Jones and Meyer concur in result on constraint of Matter of Burger King v State Tax Comm. ( 51 NY2d 614 ).

Order affirmed, with costs.

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