204 Conn. 122 (1987) | Cited 35 times | Supreme Court of Connecticut | June 16, 1987

This matter, which comesto us by way of reservation from the Superior Court,seeks advice on the following question: "Whether acomponent part of a machine must constitute a machinein and of itself or be purchased in conjunction with amachine in order to be exempt from the Connecticutsales and use tax pursuant to Section 12-412 (34)1 ofthe Connecticut General Statutes."

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On March 12, 1985, the plaintiff, Phelps Dodge CopperProducts Company, received a "Statement ofAmount Due, Sales and Use Tax" which imposed asales and/or use tax in the amount of $119,695.58, plusinterest and penalty. The plaintiff protested the amountof the tax on the basis that its purchase of certainmachinery and devices was not taxable by virtue of theexemption from tax on the sale and use of machineryused directly in a manufacturing process provided forin General Statutes 12-412 (34). As a result of the protest, the defendant commissioner of revenue services(commissioner) reduced the assessment and issued a"Revised Statement of Tax" in the amount of$60,329.83 plus interest of $36,529.30. On September 9,1985, the plaintiff, under protest, paid the total amountdue pursuant to the "Revised Statement of Tax."

On September 11, 1985, the plaintiff instituted anaction in the Superior Court against the commissionerrequesting that the assessment be reduced to zero andthat the plaintiff be reimbursed for any tax and interestpaid as a result of the assessment. The plaintiff andthe commissioner filed a joint request to reserve thematter for consideration by the Appellate Court. OnJune 5, 1986, the trial court, A. Aronson, J., grantedthat request. On August 4, 1986, the parties filed a jointmotion to transfer the case to the Supreme Court. OnAugust 12, 1986, the case was transferred to this court.

The parties have stipulated to the following backgroundfacts: The plaintiff is a division of Phelps DodgeIndustries, Inc., a Delaware corporation authorized todo business in Connecticut. The plaintiff is engaged inthe business of manufacturing continuous cast copperrod and related products at its production facility inNorwich.

Between December, 1980, and July, 1983, the plaintiffinstalled a new production line at its Norwich copper

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     plant for the production of cast copper rod. Inconnection with the installation of the new productionline, the plaintiff "purchased machines, equipment,devices, components, belts, pulleys, ducts, shafts,valves, tubing, coils, retainers, and other relateddevices (`The Installed Devices') from various sources"and incorporated the installed devices into the newproduction line at the Norwich plant.

After the plaintiff had installed the new productionline, the commissioner audited the plaintiff's recordsfor the period December 1, 1980, through November 3,1983. As a result of the audit, the commissioner issueda deficiency assessment plus interest and penaltythereon. In assessing the amount of tax due, the commissionerdetermined that some of the installed devices,the "disputed devices," were not entitled to the exemptionprovided in 12-412 (34). As stipulated by the parties,the commissioner made this determination becauseby regulation he has interpreted this exemption asapplying "(i) to an item or device which, when purchased,is a `basic machine itself' within the meaningof 12-412 [34], or (ii) to `component parts and contrivances,such as belts, pulleys, shafts, moving parts,operating structures and all equipment or devices usedor required to control, regulate or operate the machinery'. . .only when purchased in conjunction with a`basic machine itself.'. . . [U]nder [the commissioner's]interpretation [of 12-412 (34)], such componentparts [and] contrivances . . . qualify for theexemption only if purchased from the same vendor ofthe `basic machine itself' and at the same time as the`basic machine itself.' "The assessment was thereforebased on the finding of the commissioner that the disputeddevices did not constitute a "basic machine" orwere not purchased from the same vendor of the "basicmachine" and at the same time as the purchase of the"basic machine."

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The parties have also expressly stipulated that all thedisputed devices will be used in a "manufacturing andproduction process" as required by 12-412 (34) andthat the disputed devices, by themselves, do not eithersingly or jointly constitute a "basic machine" as thatterm is used in 12-412 (34). Additionally, the partieshave stipulated that all of the disputed devices werepurchased at the same time and all were necessary forthe initial operation of the new production line.2 Theplaintiff concedes that but for the exemption providedin 12-412 (34), the disputed devices would be subjectto tax.


General Statutes 12-412 (34) exempts from the salesand use tax the sale and use of "machinery used directlyin a manufacturing . . . production process." Thestatute defines "machinery" as "the basic machineitself, including all of its component parts and contrivances,such as belts, pulleys, shafts, moving parts,operating structures and all equipment or devices usedor required to control, regulate or operate the machinery. . . ." Section 12-426-11b (c)(1) of the regulationsof Connecticut state agencies provides: "The [sales anduse] tax shall apply to sales of and the storage, use orother consumption of contrivances, such as belts, pulleys,shafts and operating structures accessory tomachinery, spare parts for the repair of machinery, andcomponent parts, when purchased separately."(Emphasis added.)

The commissioner argues that his regulatory interpretationof 12-412 (34) is consistent with that statuteand, therefore, "a component part of a machinemust constitute a machine in and of itself or be purchasedin conjunction with a machine in order to be

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     exempt from the Connecticut Sales and Use Tax. . . ." The plaintiff argues that the commissioner'sregulatory interpretation of 12-412 (34) is "invalid,unreasonable, arbitrary, contrary to law and an unconstitutionalexercise of administrative powers"3 andthat, under the statute, component parts of a machineare exempt from the Connecticut sales and use taxwhether they constitute a basic machine in and of themselvesor are purchased in conjunction with a basicmachine. The issue before this court, therefore, is essentiallythe proper interpretation and application of thelanguage of 12-412 (34).

The plaintiff claims that items such as the disputeddevices fall within the clear meaning of the term"machinery" as it is used in the exemption statute. Itargues that in enacting 12-426-11b (c)(1) of the regulations,the commissioner was not attempting to interpret12-412 (34) but was instead enacting newlegislation. The plaintiff contends that the commissioner'sregulation is invalid and, therefore, "shouldnot be applicable in determining the tax exempt statusof the Disputed Devices since [the regulation] establishesan artificial distinction between component partspurchased from a separate vendor and component partspurchased from the same vendor on the same invoiceas the basic machine." The plaintiff argues that the distinctioncreated by the regulation frustrates the legislativepurpose of 12-412 (34)4

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The commissioner in his brief sets forth three argumentswhich, when considered together, support hisregulatory interpretation of General Statutes 12-412(34). First, the commissioner points out that 12-412(34) is an exemption from tax and as such must bestrictly construed against the party claiming the exemption.Second, the regulation, which sets forth his interpretationof the statute, has received approval from thestanding legislative regulation review committee andhas been in effect for the past six years. Third, the commissioner'sregulatory interpretation is "fully supportedby the legislative history of and circumstancessurrounding the enactment of 12-412 (34)."

It is fundamental that" `[t]he power conferred [uponadministrative agencies] to make regulations for carryinga statute into effect must be exercised within thepowers delegated . . . and it cannot be extended toamending or adding to the requirements of the statuteitself.'" Loglisci v. Liquor Control Commission,123 Conn. 31, 37, 192 A. 260 (1937); Page v. WelfareCommissioner, 170 Conn. 258, 262, 365 A.2d 1118(1976); Ingham v. Brooks, 95 Conn. 317, 329,111 A. 209 (1920). In Fusco-Amatruda Co. v. Tax Commissioner,168 Conn. 597, 604, 362 A.2d 847 (1975), weheld that" `[n]o administrative or regulatory body canmodify, abridge or otherwise change the statutory provisionsunder which it acquires authority unless thestatute specifically grants it that power.' State ex rel.Huntington v. McNulty, 151 Conn. 447, 449,199 A.2d 5 [1964]." It is equally fundamental, however, that"`[s]tatutes are to be construed in light of their legislativehistory, their language, the purpose they are toserve, and the circumstances surrounding their enactment.' "Kellems v. Brown, 163 Conn. 478, 502-503,313 A.2d 53 (1972), appeal dismissed, 409 U.S. 1099,93 S.Ct. 911, 34 L.Ed.2d 678 (1973). We also notethat the commissioner's regulatory interpretation of

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     the statute, which he is charged with administering,is entitled to great deference and weight. Board of Educationv. Connecticut State Board of Labor Relations,190 Conn. 235, 241, 460 A.2d 1255 (1983).

We agree with the commissioner that General Statutes12-412 (34) provides an exemption from taxationand that under our case law "[a] statutory provisiongranting an exemption from a tax is to be strictly construedagainst the party claiming the exemption. HartfordHospital v. Board of Tax Review, 158 Conn. 138,147, 256 A.2d 234 (1969)." Oxford v. Beacon Falls,183 Conn. 345, 346, 439 A.2d 348 (1981); SchlumbergerTechnology Corporation v. Dubno, 202 Conn. 412, 420,521 A.2d 569 (1987). This canon of construction, however,is not itself dispositive of the issue before usbecause" `such strict construction neither requires norpermits the contravention of the true intent and purposeof the statute as expressed in the language used.'Jewett City Sans Bad v. Board of Equalization,116 Conn. 172, 185, 164 A. 643 [1933]." Hartford Hospitalv. Hartford, 160 Conn. 370, 375, 279 A.2d 561(1971). Keeping this consideration in mind, we musttherefore assess the other arguments proffered by thecommissioner.

The commissioner also points to the fact that theregulation has been approved by the legislative regulationreview committee as required by General Statutes4-170. General Statutes 4-170 provides in partthat "[n]o adoption, amendment or repeal of any regulation . . .shall be effective until the original of the proposedregulation approved by the attorney general, asprovided in section 4-169 . . . [has] been submittedto the standing legislative regulation review committee . . . .The committee . . . in its discretion, may. . . approve [or] disapprove . . . any such regulation."The fact that the commissioner's regulation hasbeen approved by the standing legislative regulation

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     review committee, although not dispositive of the issuebefore us, is an important consideration in our determinationof whether the commissioner's regulationcomports with the legislative intent behind 12-412(34). Texaco Refining & Marketing Co. v. Commissioner,202 Conn. 583, 599-600, 522 A.2d 771 (1987); ConnecticutHospital Assn. v. Commission on Hospitals &Health Care, 200 Conn. 133, 144, 509 A.2d 1050 (1986).The committee's "ratification" of the regulation showssupport for the proposition that the commissioner'sregulatory interpretation of the statute "is part of thegeneral statutory scheme" that the legislature has providedfor the imposition of the sales and use tax. SeeTexaco Refining & Marketing Co. v. Commissioner,supra; Connecticut Hospital Assn. v. Commission onHospitals & Health Care, supra.

The commissioner also points to the fact that hisregulatory interpretation of 12-412 (34) has existedsince 1977 and that since that time, the legislature hastwice amended the statute without changing the definitionof "machinery." The fact that the regulation hasbeen in existence for a substantial period of time,although not itself determinative, is persuasive as toits validity. Sutton v. Lopes, 201 Conn. 115, 120,513 A.2d 139 (1986); Oral Roberts University v. OklahomaTax Commissioner, 714 P.2d 1013, 1015-16 (Okla.1985); see Cammarano v. United States, 358 U.S. 498,511, 79 S.Ct. 524, 3 L.Ed.2d 462 (1959).

The most important of the commissioner's argumentsis that his regulatory interpretation of the statute is"fully supported by the legislative history and circumstancessurrounding the enactment of [12-412 (34)]."Although the legislative history does not speak preciselyto this point, we agree that it can be read to supportthe commissioner's interpretation of the statute.That fact, considered together with his other arguments,which we have already discussed, lead us to conclude

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     that the commissioner's regulatory interpretationof the statute is consistent with the language of thatstatute and does not contravene the legislative intentbehind it.

The definition of "machinery" which is under considerationin this case was first enacted in 1959. PublicActs 1959, No. 578, 11. It was enacted as part ofan amendment to the predecessor of General Statutes12-412 (18)5 which provides a sales and use tax exemptionfor materials and tooling consumed in the manufactureof tangible personal property. The amendmentprovided an exception to this exemption and establishedthat machinery, as defined, is subject to the sales anduse tax. There is no discussion in the legislative historyof No. 578, 11, of the 1959 Public Acts as to themeaning of the term "machinery."

In 1976, the legislature partially reduced the rate ofsales tax for machinery used in a manufacturingproduction process. In doing so, it incorporated the

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     aforementioned definition of "machinery." Public Acts1976, No. 76-114, 1. The legislative history of No.76-114, 1, of the 1976 Public Acts reveals that thelegislature intended the term "machinery" to includemachine parts." On the floor of the House, RepresentativeJames J. Clynes noted, inter alia, that "machineryis defined in Section 1 as `machinery used in theproduction of manufacturing goods,' and this alsoincludes machine parts." 19 H.R. Proc., Pt. 5, 1976Sess., p. 1688. In response to this legislation, the commissioner,in 1977, promulgated 12-426-11 (A) of theregulations of Connecticut state agencies, the predecessorof 12-426-11b. This regulation, which is in substantialaccord with 12-426-11b,6 provided: "Contrivances,such as belts, pulleys, shafts and operating structuresaccessory to such basic machine and equipment anddevices used to control, regulate or operate it . . .will be subject to the 7% tax rate when purchased separately.The 2 1/2%7 tax rate is applicable only and ifany of these accessory parts are purchased as a packagewith the basic machine." (Emphasis added.)

In 1977, the legislature amended No. 76-114, 1, ofthe 1976 Public Acts. Public Acts 1977, No. 77-370, 1.This amendment further reduced the sales and use taxon the sale of machinery used in manufacturing oragricultural production and reenacted the definition of"machinery," specifically broadening the scope of thatdefinition by including within it "numerically controlledmachinery used directly in the manufacturing process."Public Acts 1977, No. 77-370, 1. The legislative history

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     of that act is clear that the legislature was put onnotice of the commissioner's regulatory interpretationof the statute. The remarks of Senator Lawrence J.DeNardis demonstrate this legislative awareness:"What Senator [B. Patrick] Madden and other supportersof the amendment [to include repair andreplacement parts within the definition of `machinery']want to do is to eliminate an inconsistency under thepresent law and statute . . . . Because when welowered the sales tax on manufacturing productionmachinery from 7 to 3 1/2%, the statute was silent withrespect to repair and replacement parts, and subsequentlythe State Tax Department in regulation 11Asaid that repair and replacement parts were taxableat higher rates, so we have an illogical situation wherebya manufacturer who desires to invest in a new machinebuys his component parts separately and assembles themachine himself but because of the Tax Department rulingthat it is an administrative impossibility to distinguishbetween new components and repair parts, eachpart purchased by the manufacturer in this particularcase, is taxable at 7%, so the new machine in effect, iseffectively taxed at a pre-1976 rate, and so we are askingthat in the interests of consistency and fairness andequity, that this amendment be adopted." (Emphasisadded.) 20 S. Proc., Pt. 6, 1977 Sess., pp. 2244-45.8

The following year, the legislature eliminated thesales and use tax on machinery used in manufacturingand agricultural production. Public Acts 1978, No.78-71, 4. In doing so, it again reenacted the definitionof "machinery" and rejected an amendment, similarto one proposed and rejected in 1977, which would

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     have included repair and replacement parts within thedefinition of "machinery" 21 S. Proc., Pt. 3, 1978 Sess.,pp. 1184-86; 21 H.R. Proc., Pt. 5, 1978 Sess., p. 1962.

This court has recently made it clear that the legislatureis presumed to be aware of the interpretationof a statute and "that its subsequent nonaction maybe understood as a validation of that interpretation."Ralston Purina Co. v. Board of Tax Review, 203 Conn. 425,439, 525 A.2d 91 (1987); Shell Oil Co. v. Ricciuti,147 Conn. 277, 285, 160 A.2d 257 (1960). This presumptionis strengthened in this case because the legislativehistory of the statute demonstrates that thelegislature is in fact aware of the commissioner'sregulation, but has taken no action to correct thatinterpretation. See 20 S. Proc., Pt. 6, 1977 Sess., pp.2244-45, remarks of Senator Lawrence J. DeNardis.The legislature has not only taken no action, it has ontwo occasions affirmatively reenacted the definition of"machinery." "[D]eference is due an Agency's constructionof a statute when [the legislature] becomesaware of and fails to correct such a construction." 2AJ. Sutherland, Statutory Construction (4th Ed. Sands)49.05, p. 363, and cases cited therein. We also notethat the "[i]nterpretations and application of regulationsby . . . administrative agencies . . . chargedwith the duty of administering and enforcing a statute[although not binding,] have great weight in determiningthe operation of a statute." 2A J. Sutherland,supra, p. 362. Regulations promulgated by an agencyhaving authority to do so are presumed valid.DiFederico v. McNamara, 181 Conn. 54, 56,434 A.2d 320 (1980).

The plaintiff argues that the legislature did not intendthe term "machinery" to be defined "so narrowly asto include only the basic machine itself' and maintainsthat the commissioner's regulation frustrates the legislativepurpose of 12-412 (34). We disagree.

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Contrary to the plaintiff's assertion, the commissioner'sregulation does not limit the definition of "machinery""so narrowly as to include only the basic machineitself." (Emphasis added.) The regulation interprets thestatutory definition of "machinery" conjunctively. Underthe commissioner's regulation, the term "machinery,"at a minimum, is the basic machine itself; at its maximum,however, the term "machinery" is the basicmachine itself together with all its components, contrivances,and all its equipment when purchased in thesame transaction. Thus, the commissioner's interpretationlooks at the "transaction" in which the item is purchased.If in that "transaction" the taxpayer purchasesa basic machine plus component parts, the machine andits component parts are exempt. If in the "transaction"only component parts are purchased, the exemptiondoes not apply because there has not been a purchaseof "machinery" in that transaction, i.e., not a purchaseof a basic machine. The regulation, therefore, is notas narrow as the plaintiff argues.

We disagree with the plaintiff's argument that theregulation frustrates the policy behind 12-412 (34).The legislative history of the statute makes it clear thatone of the purposes behind the exemption is to stimulatemanufacturing industries in Connecticut.9 While,

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     arguably, the plaintiff's interpretation of the statutecould further this goal, we do note that in 1977 and1978, the legislature refused to expand the definitionof "machinery" to include separately purchased parts,specifically, repair and replacement parts. In refusingto expand the definition, the legislature responsiblyrecognized the counterbalancing revenue considerationswhich are inherent in any exemption from tax.We, therefore, cannot accept the plaintiff's argumentthat a decision upholding the validity of the commissioner'sregulation would necessarily frustrate the legislativepurpose of 12-412 (34).

Taken together, the foregoing considerations lead usto the conclusion that the commissioner's regulationis valid and not inconsistent with the statute. A componentpart of a machine must constitute a machinein and of itself or be purchased in conjunction with amachine in order to be exempt from the Connecticutsales and use tax pursuant to 12-412 (34) of the GeneralStatutes. The answer to the reserved question,therefore, is yes.10

No costs will be taxed in this court to either party.

In this opinion the other justices concurred.

1. General Statutes 12-412 (34) provides: "Machineryused in manufacturing or agricultural production. Sales ofand the storage, use or other consumption of machinery useddirectly in a manufacturing or agricultural production process.The word `machinery' as used in this subsection means thebasic machine itself, including all of its component partsand contrivances, such as belts, pulleys, shafts, movingparts, operating structures and all equipment or devicesused or required to control, regulate or operate the machinery,but excluding office equipment or data processing equipmentother than numerically controlled machinery used directlyin the manufacturing process."

2. The parties have stipulated that none of thedisputed devices constitutes repair or replacement parts.

3. At oral argument, the plaintiff withdrew itsclaim that the commissioner's interpretation amounted toan unconstitutional exercise of administrative power.

4. In support of this position, the plaintiff arguesthat the definition of "machinery" was not intended to beviewed so narrowly as to include only the basic machineitself. It claims that the statute nowhere requires thatcomponent parts be purchased at the same time from the samevendor. Rather, the term "machinery" was intended to be usedin a broad sense, i.e., "to include the entire machine withits necessary component parts at the point when it is readyfor operation."

5. The predecessor of General Statutes 12-412 (18),General Statutes (Rev. to 1977) 12-412 (r), provided:"Production materials. Sales of and the storage or useof materials, rope, fishing nets, tools and fuel or anysubstitute therefor, but excluding machinery or replacementparts thereof used in production, which become an ingredientor component part of tangible personal property to be soldor which are used directly in agricultural production orin the fishing industry or in an industrial plant in theactual fabrication of the finished product to he sold.The word `machinery' as used herein shall mean the basicmachine itself, including all of its component parts andcontrivances, such as belts, pulleys, shafts, moving parts,operating structures and all equipment or devices used orrequired to control, regulate or operate the machinery.For the purpose of this subsection, the raising of poultryand livestock shall be construed to be included in the term`agricultural production.' Sales of and the storage or useof materials, tools and fuel or any substitute therefor,but excluding machinery or replacement parts thereof, whensuch products are used directly in the furnishing of powerto an industrial manufacturing plant or in the furnishingof gas, water, steam or electricity when delivered to consumersthrough mains, lines or pipes." In 1978, the legislature deleted, inter alia, the sentencewhich referred to the definition of "machinery." Public Acts1978, No. 78-71, 3.

6. The stated purpose of 12-426-11b of the regulationsof Connecticut state agencies is: "To consolidate 12-426-11and 12-426-11 (A) to eliminate any contradictory languagebetween the two and to have the new regulation conform withchanges made by Public Act 78-71, which exempted the saleof machinery from the sales tax when used directly in amanufacturing or an agricultural production process."

7. In 1978, the legislature reduced the tax on exemptedmachinery from 2.5 percent to zero. Public Acts 1978, No. 78-71.

8. We point out that the remarks of Senator LawrenceJ. DeNardis were made in support of a legislative bill toinclude repair and replacement parts within the exemption.Although the disputed devices in this case are not repairor replacement parts, the comments of Senator DeNardis arerelevant to the issue of legislative awareness of the commissioner'sregulatory interpretation of General Statutes 12-412(34).

9. Senator Audrey P. Beck stated: "After meetingwith a large number of sectors of the business community,we began this tax reduction and today will complete theelimination of the Sales Tax on machinery and equipment.. . . "We do this for two reasons, Mr. President. The first isthat in the judgment of the Committee, the sector of thebusiness community having the greatest difficulties is themanufacturing sector and, therefore, by eliminating the SalesTax on machinery and equipment, we feel that we will be stimulatingthe manufacturing sector to modernize, to improve, to remainefficient and competitive "We will provide relief for the business sector by wayof this complete elimination of the Sales Tax on machineryand equipment . . . It is a great pleasure to be able tocompletely repeal a tax . . ." 21 S. Proc., Pt. 3, 1978Sess., pp. 1151-52; see also 21 S. Proc., Pt. 3, 1978 Sess.,pp. 1149-60; 21 H.R. Proc., Pt. 5, 1978 Sess., pp. 1949-66.

10. At oral argument before this

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