American Cyanamid & Chemical Corp. v. Joseph

Peck, P. J. This is an article 78 (Civ. Prac. Act) proceeding to review a final determination of the comptroller of the city of New York assessing a deficiency in sales tax with respect to the business of petitioner American Cyanamid and Chemical Corporation. Although the record is large wdth facts relating to the sales in question, the issue before us has been simplified and reduced to a matter of law. The legal question is whether a vendor may rely implicitly and conclusively upon a resale certificate received from its vendee, certifying that the vendee is purchasing for resale, and thus absolve itself absolutely from responsibility for collecting the sales tax, or whether the comptroller can go behind the certificate and, upon a finding that the vendor had knowledge that the products it sold were not actually to be resold, hold the vendor responsible for the tax. This case revolves around the exemption from tax of sales of articles which are to be used in manufacturing processes in such a way that the articles become a physical component of the manufactured product (Administrative Code of City of New York, § N41-1.0, subd. 7). Purchases of such articles are regarded as being for the purpose of resale and come within the coverage of a resale certificate which a registered purchaser may issue to its vendor and avoid payment of the sales tax (Administrative Code, §§ N41-16.0, N41-2.0, subd. a). Petitioner is a manufacturer and distributor of chemicals. The factual questions before the comptroller were whether the chemicals sold by petitioner to certain customers would or would not be incorporated in the manufactured products of those customers, and whether petitioner had knowledge of the actual use its customers would make of the chemicals sold. The comptroller found that in specified cases the chemicals were not and could not be so incorporated and fonnd that petitioner had knowledge of the facts. Petitioner denies having the knowledge attributed to it, but before us has waived the factual dispute and elected to stand upon what it asserts to be the legal protection of the certificates it received from its customers. Hence, we have not nicely weighed the facts in the case of each sale in an attempt to make separate factual determinations. We are satisfied that there [101] was a sufficient basis for the comptroller’s factual determination to hold petitioner liable for the tax unless petitioner must be accorded the full protection it claims from the resale tiertificates. As petitioner states its position “as a matter of law it not only was permitted, but was required to rely upon properly executed resale certificates and to refrain from collecting the tax.” Both parties rely for their argument upon the same section of the Administrative Code (§ N41-2.0, subd. i): “ For the purpose of the proper administration of this title and to prevent evasion of the tax hereby imposed, it shall be presumed that all receipts for property and services mentioned in this section are subject to tax until the contrary is established, and the burden of proving that a receipt is not taxable hereunder shall be upon the vendor or the purchaser. Unless the vendor shall have taken from the purchaser a certificate signed by and bearing the name and address of the purchaser and the number of his registration certificate to the effect that the property or service was purchased for resale, the sale shall be deemed to be a taxable sale at retail.” The comptroller puts the emphasis upon the first sentence which casts the burden of proof upon the vendor; petitioner puts the emphasis upon the second sentence and urges the implication that if the vendor shall have taken a resale certificate, the sale shall be deemed not to be taxable. While the language of the section is not precise, we think its import is clear. It must be given a reasonable interpretation for practical administration as an administrative measure. Undoubtedly the purpose of the provisions of the law for registration by purchasers of products for resale and the issuance by them of resale certificates was to control the field and afford a basic measure of regulation and protection against fraud or abuse. To make the arrangement workable and in turn afford any measure of protection to vendors who rely in good faith upon resale certificates received from customers, it is necessary to give such certificates a presumption of validity. A vendor would not be expected to disregard the certificate and rely upon it at his peril. We think, however, that it was not intended, nor is it necessary as an administrative matter to hold, that the vendor enjoys an absolute protection from a certificate and may shut his eyes to what may be quite apparent, that his vendee is not going to use the articles sold in a way that would exempt the sale from tax. A vendor in this situation might be culpable in degrees from carelessness to fraud. [102] Not even petitioner contends that a vendor could act fraudulently and enjoy the protection of a certificate. The comptroller does not charge fraud here, however, in the sense of complicity between petitioner and its customers. He does charge petitioner with such information as to the use of its products and the business of its customers as to constitute knowledge that the sales in question were not for resale. We cannot attempt to lay down a formula which would govern every case, but a general standard can be stated. We would say that the vendor was entitled to a presumption of protection from a resale certificate and is not obliged, as a matter of course, to look behind it and make inquiry as to the actual use that its vendee may make of the products sold. The degree of scrutiny of its sales which a vendor can reasonably and in good faith be expected to exercise must depend on circumstances. A wholesaler of products normally resold at retail would not be expected to question the purchases of retailers in the business of retailing those products. Where the products are not normally resold or the purchaser is not a retailer and rests upon a tax exempt use of the products, the vendor may be expected to make some fair check on the contemplated use. Assurances then reasonably given by customers may be accepted. But a bland assurance cannot be taken against an obvious reality to the contrary. Here, for example, petitioner knew from its own chemist’s report that certain chemicals it sold would not become ingredients of any article manufactured by its vendees. We would add that, in the absence of enabling a vendor to clear any doubts he may have and procure a ruling of the tax authorities in advance, the vendor on any accounting should be given the benefit of any doubts as to whether he has acted reasonably toward his customers and fairly toward the tax authorities. The facts in the present case have been resolved by the comptroller against the petitioner and there is sufficient warrant for the comptroller’s determination to require our confirmation. On the issue tendered by this appeal we are obliged to hold with the comptroller that petitioner was not entitled to immunity by receipt of resale certificates. The determination of the comptroller should be confirmed, with costs.