Revenue Cabinet v. Bryant-Burnett Co.

COOPER, Judge. This is an appeal from an order of the circuit court reversing a ruling by the Kentucky Board of Tax Appeals which held that the appellee, Bryant-Bumett Company, Inc., was liable for sales and usage tax assessments in the amount of $4,674.10. On appeal, the principal issue is whether the trial court abused its discretion in ruling that the Board’s decision was clearly erroneous as a matter of law. Reviewing the record below, we affirm. Given the fact that the circuit court, in reversing the decision of the Kentucky Board of Tax Appeals, more than adequately set forth the facts surrounding this litigation, as well as the legal issues involved, we adopt the trial court’s order in full as follows: This action is an appeal from a decision of the Kentucky Board of Tax Appeals. The appellant, Bryant-Bumett Company, is a closely held corporation with its principal office in Louisville, Kentucky. Bryant-Bumett engages in the business of a heating and air conditioning contractor. Basically and primarily that business revolves around the sale and installation of heating and air conditioning systems. However, as an adjunct of that business, Bryant-Burnett maintains a “service department”, the activities of which in large part are limited to servicing major items of heating and air conditioning equipment which the company had earlier installed under contract. The question presented on this appeal is: Which of two regulations promulgated by the Department of Revenue (103 KAR 27:150) properly governs Bryant-Bumett’s liability for the payment of Kentucky sales taxes? The Board of Tax Appeals held that 103 KAR 27:150, the repairer’s regulation, applies. Section 1 of that regulation reads in part: “Repairmen are retailers of parts and materials furnished in connection with repair work in which the value of the parts and materials is substantial in relation to the total charge.” Section 3 of this regulation states, in part: “Repairmen ordinarily considered consumers may, however, be retailers subject to the tax if the property used is of substantial value.” The appellant, Bryant-Burnett, argues that 103 KAR 26:070, the construction contractor’s regulation, applies. Section 1 of that regulation reads: “All sales to contractors, subcontractors, builders or owners of building materials, fixtures and supplies which are to be incorporated or fabricated into any structure or improvement to real estate by the process of erecting, remodeling, or repairing such structure or improvement are subject to the sales or use tax at the time of sale to the contractor, subcontractor, builder or owner. This rule applies irrespective of the type of contract (lump sum and materials, cost plus fixed fee, or other) for which the purchase is made. A person, firm, association, part21 nersMp or corporation engaged exclusively in construction work as a contractor or subcontractor is not required to hold a retail sales permit. Such permit will not be issued to these persons.” There is no argument but that during the initial installation of central heating and air conditioning equipment by the appellant Bryant-Bumett pursuant to contract or subcontract with owners of buildings is not subject to the imposition of a sales tax as a “retail sale.” This is clear from the regulation quoted above. The Cabinet, however, argues that when a heating and air conditioning contractor makes repairs to or affords service to heating and air conditioning installations earlier made by the contractor he is thrust into the posture of a “retailer” with respect to the parts and materials used. The position of the Cabinet was accepted by the Board of Tax Appeals in its conclusions of law wherein the Board concluded that the repairmen’s regulation applied. The Court disagrees. The correct regulation to govern this situation is 103 KAR 26:070. That regulation exempts from the classification of “retail sales” the sale, installation, servicing and repair of tangible personal property which falls into the category of “fixtures.” In the circumstances at issue here the parts and materials used in the repair, reconditioning, or remodeling of the fixtures, although are personalty (sic) at the beginning of the process, are transformed during the process into “fixtures” which fall within the classification of “real property.” Therefore, payment of sales tax thereon is governed by 103 KAR 26:070. Therefore, the liability of Bryant-Bumett for the payment of sales and use taxes on parts and materials used in both the “service” and the “contracting” aspects of its business should properly be determined and fixed by the provisions of 103 KAR 26:070. This cause is remanded to the Board of Tax Appeals with directions to set aside its order and to enter in lieu thereof an order vacating and setting aside the assessment of the Revenue Cabinet against the appellant Bryant-Bumett for sales and use taxes out of which this action arose. Finally, although the appellant argues that the appellee failed to perfect its appeal from the Kentucky Board of Tax Appeals to the circuit court, we find from a review of the record below, as well as an order issued by the circuit court in May of 1984, that it not only complied substantially with the statute in question — KRS 131.370(2), but as was determined by the circuit court, it strictly complied with the statute. Stated differently, we find no merit to the appellant’s argument. The order of the trial court reversing the decision of the Kentucky Board of Tax Appeals is affirmed. DUNN, J., concurs. WILHOIT, J., dissents and files a separate opinion.