The Emerald Trust v. Commissioner of Revenue (April 12, 2005)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


THE EMERALD TRUST          v.	 	COMMISSIONER OF REVENUE


Docket No. C271812			 	Promulgated:
						 	April 12, 2005



	This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee Commissioner of Revenue ("Commissioner") to abate use tax assessed against the appellant under G.L. c. 64I, § 2, for the monthly period concluding on February 29, 2000.
	Commissioner Gorton heard this appeal and was joined in the decision for the appellee by Commissioners Scharaffa, Egan, and Rose. Chairman Foley took no part in the consideration and decision of this appeal.
	These findings of fact and report are promulgated on the Board's own motion pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

	D. Sean McMahon, Esq. for the appellant.
	Kevin M. Daly, Esq. for the appellee.



FINDINGS OF FACT AND REPORT

	On the basis of the testimony and exhibits introduced at the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings:
Through correspondence and meetings during the summer of 2002, the Department of Revenue ("Department") became aware that during the year 2000 Jack E. Robinson had owned the yacht styled "Excalibur", as Trustee of the Emerald Trust. No use tax return has been filed for his acquisition of the Excalibur for any period.
	Initiating the assessment process, Tax Examiner Theodore Polonski sent a letter to Mr. Robinson, accompanied by a Notice of Failure to File a Return, both dated August 19, 2002. A Notice of Intent to Assess, dated October 7, 2002 was later sent to Mr. Robinson.
	Mr. Robinson responded by letter, dated October 28, 2002, requesting a G.L. c. 62C, § 26(b) conference and filed a Form DR-1, initiating intradepartmental appeal procedures against the proposed assessment of use taxes relating to the Excalibur. Michael E. Feinberg, a Supervisor in the Department's Bureau of Desk Audit, requested by letter dated October 7, 2002 that Mr. Robinson execute Form B-37, Special Consent Extending the Time for Assessment of Tax. Mr. Robinson signed the consent on November 25, 2002 and Mr. Feinberg signed for the Department on December 2, 2002.
	Because Mr. Robinson was unavailable for a timely pre-assessment hearing, the Department proceeded to issue a Notice of Assessment, dated March 4, 2003. Mr. Robinson applied for abatement by filing Form CA-6 on March 12, 2003. A hearing in the Department's Office of Appeals was held on April 27, 2003.
	Mr. Robinson was denied abatement by notice, dated October 3, 2003. The instant appeal followed with the filing of the Petition Under Formal Procedure with the Appellate Tax Board ("Board") on November 13, 2003. The foregoing facts establish the Board's jurisdiction, over at least the question of taxability. Cf. G.L. c. 62C, § 38.
	According to Mr. Robinson, he began investigating the purchase of a yacht in the fall of 1999. He developed interest in the product line offered by Beneteau USA and received information relevant to purchase of a Beneteau yacht from Cape Yacht Sales of Harwich Port, Massachusetts. 
	Mr. Robinson, identifying himself as "Trustee" of "The Excalibur Trust" and using an address in Greenwich, Connecticut, entered into a Marine Purchase Agreement with Cape Yacht Sales on December 4, 1999, for the acquisition of a Beneteau 50 Yacht. The contract included a $500 charge for Rhode Island delivery. The total "cash sale price" specified in the contract was subsequently reformed via a second Marine Purchase Agreement dated September 9, 2000, to correspond to the amount Mr. Robinson actually paid, or $399,187.00. 
A "Certificate of Construction Survey", signed by Mr. Robinson on December 23, 1999, attested to the "general structural strength of the hull, deck, and superstructure" of the subject Beneteau 50, to be called the "Excalibur". The hull and basic structure of the vessel, as manufactured by Beneteau in France, was delivered by truck from Beneteau's U.S. headquarters in South Carolina to MacDougalls' Cape Cod Marine Services, Inc. ("MacDougalls'") in Falmouth, Massachusetts on January 21, 2000. There it was to undergo the custom fitting work prerequisite to its formal "commissioning".
Correspondence from Tom Stainton of MacDougalls', dated February 4, 2000, indicates that work on the Excalibur was being held up by Mr. Robinson's delay in giving necessary approvals, e.g. to alter the boat by painting. Mr. Robinson's reply of February 17, 2000 indicated that the delay was unavoidable given his overseas travel schedule. The scope of the commissioning work was eventually agreed to between Messrs. Robinson and Stainton as of March 6, 2000, when Mr. Robinson signed off on a three-page letter from Mr. Stainton detailing the job. 
Meanwhile, the Bill of Sale for the vessel was executed on February 15, 2000. The buyer is reflected as "Jack E. Robinson, Trustee of the Emerald Trust", at the Greenwich, Connecticut address. The Bill of Sale bears a stamp affixed by the United States Coast Guard, indicating that it was filed and recorded with the "National Vessel Documentation Center" on April 24, 2000.
	Mr. Stainton, testifying at trial, elaborated on the nature of the work entailed in "commissioning". This process generally consists of customizing the vessel to the owner's preferences in fittings and equipment. For example, the boat would be painted the owner's preferred color. Devices such as a "radar reflector", a "wind indicator" and a "spare halyard" would be installed. The boat would be equipped with such features as a VHF radio, radar, and a chart plotter. A device called the "EPIRB" would be added to aid tracking the vessel should it sink. Navigational equipment, autopilot systems, and various electrical features would be installed. "Commissioning" also entailed calibrating instruments. The commissioning was scheduled for completion by May 12, 2000, a date Mr. Stainton considered realistic.
	"Commissioning" work in the Commonwealth was largely unnecessary if the purchaser's objective was simply to transport the vessel out-of-state. The vessel was tested at the factory to ensure that it would float, and had come with basic capabilities to travel short distances, i.e., out of Massachusetts waters. "Commissioning" work was not so extensive a process as to, in itself, result in the transformation of an "unseaworthy" hulk of metal into an ocean-ready sailboat.
	However, on May 2, 2000, Mr. Robinson decided to offer the Excalibur for sale, executing a "Yacht Brokerage Central Agency Agreement" with Cape Yacht Sales. About that time Mr. Robinson contacted Mr. Stainton and told him to discontinue the nearly-completed commissioning work. Mr. Robinson indicated that he wanted the yacht stored indoors, which would have the effect of minimizing ordinary wear and tear.
The Coast Guard Certificate of Documentation for the Excalibur issued on May 12, 2000, reflecting "Jack E. Robinson, Trustee of the Emerald Trust" as owner. The "hailing port" is given as Newport, RI. The boat is described on the Certificate of Documentation as being self-propelled and built in 1999.
	The yacht remained on offer for sale throughout the summer of 2000, still situated at MacDougalls' in Falmouth. With losses mounting in the stock market, Mr. Robinson became increasingly concerned about finding a willing and able buyer. 
A buyer was found at the end of the summer: Mr. Michael Hochberg of Windham, New Hampshire. A "Yacht Purchase and Sale Agreement" was entered into between Mr. Hochberg and Mr. Robinson on August 31, 2000. The sale price was recited as $365,000 in the Agreement. The agreement called for delivery to occur "at Falmouth Harbor in the water." Prodded by his broker to meet the purchaser's September 22, 2000 deadline for having the yacht commissioned and ready to sail, Mr. Robinson wrote Mr. Stainton on September 5, 2000 to instruct that the then-suspended commissioning work be urgently resumed, with time being of the essence.
	With delivery of the boat to Mr. Hochberg in Massachusetts already agreed-to, Mr. Robinson and Cape Yacht Sales re-executed the documentation whereby Mr. Robinson had purchased the boat. The purchase agreement was reformed to correspond to the actual price Mr. Robinson had paid. A document styled "Affidavit of Out of State Delivery" was signed by Mr. Robinson and an agent of Cape Yacht Sales on September 9, 2000. The document recites that Mr. Robinson had represented to Cape Yacht Sales on September 7, 2000 that he was a resident of Massachusetts, but "that the residence of my boat will be at Newport, RI mooring". It is further recited that the Excalibur had been delivered to him in Newport, Rhode Island. 
The Board gives no weight to the foregoing assertions because Mr. Robinson had no intention at that time to base the Excalibur in Newport: he had already sold off his interest in the vessel, which was being urgently commissioned for delivery in Falmouth at the instance of its new owner. Whatever Mr. Robinson's intentions had been before, he could have had no plans to use the boat himself in Rhode Island after selling it. Nor was the Excalibur ever delivered to him in Rhode Island.
	The Bill of Sale conveying the Excalibur to Mr. Hochberg was executed on September 28, 2000. The new owner promptly renamed the vessel the Stagger Lee and applied for a certificate of documentation from the Coast Guard, which was forthcoming on January 18, 2001. The hailing port was reflected as "Newport, R.I." Mr. Stainton testified, and the Board finds, that Mr. Hochberg "picked up" the Stagger Lee himself at the MacDougalls', in the waters of Falmouth Harbor, as the applicable Purchase and Sale Agreement provided.
	On the basis of the foregoing, the Board finds that Mr. Robinson took possession of the already manufactured Excalibur, with only customization and fitting work yet to be performed at MacDougalls' in Falmouth before formal commissioning. Mr. Robinson's unavailability to attend to the project slowed down the commissioning process, yet work was nevertheless nearing completion when Mr. Robinson decided to sell the boat and discontinued further commissioning activity in early May of 2000. While Mr. Robinson had contracted for Rhode Island delivery, his decision to sell before commissioning was complete rendered his delivery destination moot. The Excalibur sat in storage, nearly finished, for over three months in Falmouth, with no future destination other than Massachusetts by default.
	Mr. Robinson was "desperate" to find a buyer given reverses in the stock market. One emerged at the end of August. Mr. Hochberg of New Hampshire arranged for commissioning work to be completed, then took delivery of the vessel in September of 2000 in Falmouth. Though he had a choice as to the "hailing port" of the vessel he had renamed the Stagger Lee, he decided to retain the same "hailing port" Mr. Robinson had designated, Newport, RI.
	Accordingly, the Board finds that Mr. Robinson purchased a vessel he named the Excalibur in February, 2000. He proceeded to exercise the rights, powers, and incidents of ownership of that vessel while it was situated in Massachusetts. His exercise of rights included directing the customization work referred to as "commissioning", on a schedule suiting his convenience. When he decided to sell the Excalibur, he stored the vessel in Massachusetts for over three months, with no other destination definite at the time.
	In sum, Mr. Robinson used and stored his vessel within the Commonwealth, and his activities relating to the vessel were not confined to the exclusions from use and storage in Massachusetts appearing in G.L. c. 64I, § 1, ¶ 6. The Board denied abatement and decided this case for the appellee.                                                 
	                                
OPINION

	At issue is whether appellant, in his activities with respect to the Excalibur, fell subject to the tax imposed at G.L. c. 64I, § 2, upon "the storage, use or other consumption in the commonwealth of tangible personal property … purchased from any vendor for storage, use or other consumption within the commonwealth …". At the threshold, the Board observes that appellant's bringing the Excalibur into Massachusetts, i.e. to MacDougalls' in Falmouth within six months of purchase (actually before the purchase was complete), triggered the statutory presumption of purchase for use in Massachusetts. See G.L. c. 64I, § 8(f). Moreover, appellant's actions regarding the Excalibur, in Massachusetts for virtually the entire period he owned it, rose to the level of control over the vessel sufficient to make out a statutory use of the property under Commissioner of Revenue v. J.C.Penney Co., Inc., 431 Mass. 684, 689-90 (2000) and New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 189-90 (1997), aff'd, 427 Mass. 399 (1998).
	Appellant disputes applicability of the use tax, however, on the strength of the last paragraph of § 1 of c. 64I, which provides that:
The terms "store" and "storage", and "use" shall not include the keeping, retaining, or exercising of any right or power over tangible personal property for the purpose of subsequently transporting it outside of the commonwealth for use thereafter solely outside of the commonwealth, or for the purpose of being processed, fabricated or manufactured into other tangible personal property to be transported outside of the commonwealth and thereafter used solely outside of the commonwealth.

The first of the two disjunctive clauses at ¶ 6 carves out an exclusion from the tax for property kept in Massachusetts only to be "subsequently transport[ed]" out-of-state permanently. The second alternative clause of ¶ 6 excludes from the tax activities in the nature of manufacturing, which change one article of property into something else, to be removed from and never used in Massachusetts.
Appellant argues that the use tax does not reach his purchase of the Excalibur because, from January to early May of 2000, the "hull" he acquired was "being processed, fabricated or manufactured into other tangible personal property to be transported outside of the commonwealth" for exclusively out-of-state use. (Emphasis added.) From May to September of 2000, the argument continues, the Excalibur was merely being kept or retained in Massachusetts "for the purpose of subsequently transporting it outside of the Commonwealth", likewise for exclusively out-of-state use. See G.L. c. 64I, § 1, ¶ 6.
	Canons of statutory construction counsel that the foregoing provision, as "an exception from the coverage of a statute is ordinarily to be construed narrowly so as to prevent the purposes of the statute from being rendered ineffective". Singer Friedlander Corp. v. State Lottery Commission, 423 Mass. 562, 565 (1996) (Cites and internal quotation marks omitted.) Accord Baker Transport, Inc. v. State Tax Commission, 371 Mass. 872, 877 (1977). The Board further recognizes that the Legislature "defined 'use' broadly to 'mean[] and include[] … the exercise of any right or power over tangible personal property incident to the ownership of that property[.]'" J.C. Penney Co., 431 Mass. at 692 ("'It is hard to find language broader in sweep and scope than that used [in G.L. c. 64I, § 1…'") (cites omitted) (emphasis in original).  As the Board has held, "'[a]n extremely limited use is sufficient to constitute a 'taxable use' under the use tax.'" Thomson v. Commissioner of Revenue, 13 Mass. App. Tax Bd. Rep. 51, 54 (1990), quoting Magic II v. Dubno, 206 Conn. 253, 537 A.2d 998, 1001 (1988). Accord Miller v. Commission of Revenue, 359 N.W.2d 620,621 (Minn. 1985).
	The Thomson case represents the only prior instance in which the Board has interpreted the "manufacturing" exclusion from the application of the use tax in Massachusetts. At issue was a boat undergoing work in-state before being removed from the Commonwealth. The Board observed that "most of the work done could be useful even if the boat remained in Massachusetts, and … not all of it was essential to removing the boat from the state." 13 Mass. App. Tax Bd. Rep. at 54. The boat was held subject to tax notwithstanding the claim of manufacturing use.	
	As the Board's caution in applying the exclusion suggests, the manufacturing exception to taxation of use in Massachusetts is limited in scope. Contemplated are only those instances in which tangible personal property is turned into "other tangible personal property" to be taken out of state. See G.L. c. 64I, § 1, ¶ 6 (emphasis added).  A "new commodity [must come] of the labor expended. [It is insufficient that] an existing article of property received a superficial refurbishment or repair." Palma v. Commissioner of Revenue, 24 Mass. App. Tax Bd. Rep. 107, 111 (1998). 
Thus, only transformative work which changes one article into something different comes within the exclusion at G.L. c. 64I, § 1, ¶ 6. Work which stops short of manufacturing in this sense falls within the more general rule, that "[o]verhauling, repairing, and rebuilding a boat and replacing its parts … constitute an exercise of rights and powers over it incident to its ownership." Thomson, 13 Mass. App. Tax Bd. Rep. at 54. Hence the Board viewed as falling outside the exclusion work which was not "essential to removing the boat from the state". Id. Such activity could hardly have the required transformative effect when the process started with a boat already capable of interstate travel. 
	The Board need not belabor whether commissioning work in the abstract might turn one thing into a seaworthy vessel as something different. Clearly the work described by Mr. Stainton at trial fell short of being transformative in character. Most of the commissioning work was cosmetic, enhancement-related, and idiosyncratic to the owner, Mr. Robinson, like the work held not excluded in Thomson. 
	Accordingly, the Board rules that Mr. Robinson put the Excalibur to use in Massachusetts distinct from carrying out manufacturing activity of the kind excluded at G.L. c. 64I, § 1, ¶ 6. He clearly exercised the prerogatives of an owner in customizing an already-manufactured vessel to his particular nautical likings.
	Nevertheless, the manufacturing exclusion is relevant only to May 2, 2000, when Mr. Robinson abruptly discontinued work on the Excalibur. A second, adequate and independent basis for use tax liability rests on the storage of the Excalibur in Massachusetts prior to its late August sale to Mr. Hochberg. Mr. Robinson owes the use tax assessment irrespective of our resolution of the manufacturing question, unless he can demonstrate that subsequent to May 2, 2000 he was keeping the Excalibur in Massachusetts "for the purpose of subsequently transporting it outside the commonwealth for use thereafter solely outside the commonwealth …". See G.L. c. 64I, § 1, ¶ 6. He argued that his choice of a delivery destination controlled even after he decided to sell the boat. 
The Board has given this clause of the last paragraph of § 1 of c. 64I a flexible, substance-over-form interpretation. The exclusion has been upheld even where the taxpayer received materials destined for out-of-state delivery pre-packaged and intermingled with items intended to remain within the Commonwealth, and only later sorted them for distribution. See Massachusetts Mutual Life Insurance Co., Inc. v. State Tax Commission, slip op. at 8 (Docket No. 61077, July 18, 1975). See also Houghton Mifflin Co. v. Commissioner of Revenue, 12 Mass. App. Tax Bd. Rep. 120 (1990). In Rule Industries, Inc. v. Commissioner of Revenue, 23 Mass. App. Tax Bd. Rep. 41, 46 (1997), the appellant purchased custom-made catalogs from printers both in-state and out-of-state, and received the catalogs in bulk packaging. The packages were opened and catalogs sorted into smaller packages for mailing. The repackaged materials were then delivered to the United States Post Office within five to ten days. The Board held that the catalogs prepared and sorted for delivery outside the Commonwealth were excluded from the scope of the use tax. Id. The form in which the materials had been packaged originally was not decisive.
	In the foregoing cases, the materials held excluded from tax were from inception destined for out-of-state delivery. In-state activities were confined to identifying and preparing these articles to be shipped out-of-state, quickly and efficiently. The Excalibur, by contrast, was destined for no place in particular from the time Mr. Robinson put it up for sale until it was purchased three months later by Mr. Hochberg. 
While Mr. Robinson had instructed that delivery be made to him in Rhode Island, that direction was no longer operative when it became clear that Mr. Robinson would never take delivery of the commissioned yacht. Delivery would occur wherever a hypothetical new buyer might want it. Massachusetts was as likely a destination for the yet-to-be-resold yacht as any other place, during the period it was being stored at MacDougalls'. In fact, delivery was ultimately made to the new buyer in Massachusetts. While the purchaser named Newport, RI as his hailing port, there is no indication in the record that Mr. Hochberg intended to use the yacht exclusively outside the Commonwealth. 
	Accordingly, once Mr. Robinson had decided to part with the Excalibur, the vessel was no longer being kept in Massachusetts pending definite out-of-state delivery, and subsequent use solely outside the Commonwealth. The vessel was simply being stored in Massachusetts with no particular future home being fixed. These circumstances do not satisfy the terms of the exclusion from use in Massachusetts specified in the first clause of G.L. c. 64I, §1, ¶ 6.
	In conclusion, Thomson gives authority to the holding that the Excalibur was being used or stored in Massachusetts for purposes of the tax imposed at c. 64I. See 13 Mass. App. Tax Bd. at 54. Mr. Robinson proved neither that the vessel's presence in Massachusetts was for the excluded purpose of manufacturing only, nor that the Excalibur was being kept here for subsequent transportation out-of-state.
	Because Mr. Robinson stands subject to use tax on his purchase of the Excalibur, abatement must be denied. Moreover, our resolution of the question of taxability has the effect of recognizing a jurisdictional bar to relief under G.L. c. 62C, § 38, given appellant's failure to file a use tax return.  The Board issued its decision for the appellee simultaneously with promulgation of these Findings of Fact and Report.
					APPELLATE TAX BOARD

				BY:____________________________________
                        Donald E. Gorton, III, Commissioner




A true copy,

Attest:_____________________________
	  Assistant Clerk of the Board

   Mr. Robinson used a mortgage to pay for the vessel. The September 9, 2000 Purchase Agreement recites and gives dates for separate payments of $2000; $60,000; $57,187; $240,000; and $40,000, with the largest amount being paid contemporaneously with the execution of the Bill of Sale. Mr. Robinson established no error in the Department's computing the use tax on the basis of the actual "cash sale price". 
   The execution of the Bill of Sale, subsequent to delivery of the Excalibur to a Massachusetts shipyard, was treated as the taxable event by the Commissioner for purposes of the Notice of Assessment. The Bill of Sale, necessary for Mr. Robinson to obtain mortgage financing, records Mr. Robinson's taking of title to the Excalibur, and was appropriately treated as the date of sale of the vessel for purposes of the assessment.
   Appellant's case over-characterizes the extent of commissioning work in the overall process of completing a yacht for use by its purchaser. Simply putting the mast in place did not make a boat from what had been something different. 
   Mr. Stainton indicated at trial that work on the yacht was about two weeks short of completion when Mr. Robinson called a halt. It thus appears that the vessel would have been finished more or less on schedule notwithstanding the initial delays occasioned by Mr. Robinson's overseas travel.
   As far as appears from the record, the yacht never berthed at its "hailing port" in Rhode Island while owned by Robinson as Trustee of the Emerald Trust.
   Mr. Robinson asserts in his trial testimony that a buyer was bound per the original transaction to take delivery of the yacht in Newport, Rhode Island. Of course, the terms of the original purchase and sale agreement were not binding on Mr. Hochberg, or any subsequent purchasers, as non-parties to the agreement. Moreover, as Mr. Robinson conceded on cross-examination, the hailing port of the vessel could be changed at any time.
 The Stagger Lee probably did sail Rhode Island waters after Mr. Hochberg took possession, as his designation of the "hailing port" would suggest. However, this fortuity was irrelevant to Mr. Robinson's mooted intent to accept delivery of the Excalibur in Rhode Island, when he planned on sailing the yacht himself.
  He was in no position to insist on a non-Massachusetts buyer, nor is there any suggestion he tried to. Intrastate use of the vessel was thus a possibility when it was on offer in 2000.
   Appellant did not undertake an evidentiary showing specifically to rebut the presumption of § 8(f). See generally Macton Corp. v. Commissioner of Revenue, 15 Mass. App. Tax Bd. Rep. 53, 57-58 (1993). Rather, appellant sought to place his intrastate activities with respect to the Excalibur within the scope of the exclusions at G.L. c. 64I, § 1, ¶ 6.
  In this respect, the manufacturing exclusion from use in Massachusetts may be more restrictive than definitions of manufacturing prevailing in other contexts. Cf. William F. Sullivan & Co., Inc. v. Commissioner of Revenue, 413 Mass. 576, 581 (1992). Under the William F. Sullivan doctrine, processes which may not be transformative viewed in isolation, acquire manufacturing character "as an essential and integral part of [a] total manufacturing process as that phrase has been used in our cases." Id. Accord The Sherwin-Williams Co. v. Commissioner of Revenue, 2003 ATB Adv. Sh. 200, 210-11 (Docket No. C259901, May 9, 2003).

    Mr. Stainton's testimony warrants a finding that too little work remained once the commissioning process started to effect a transformation of a "hull" into a "boat", as something different. Mr. Robinson's attempts to characterize commissioning work as manufacturing were neither persuasive nor credible. 
 Even if a transformation had occurred at some point in the commissioning process, it was well nigh complete as the date for the scheduled commissioning drew near. Only two weeks of work remained to be completed when Mr. Robinson discontinued the commissioning process. By the beginning of May, 2000, MacDougalls were performing relatively minor tasks to customize, tweak, and troubleshoot a nearly-finished vessel.

  This intervening period of storage/use in Massachusetts distinguishes the instant case from the situation contemplated in G.L. c. 64H, § 6(b), where the vendor transports goods directly to an out-of-state recipient.
 The ruling on taxability, with its jurisdictional character, forecloses consideration of issues such as the correct sales price of the vessel for purposes of calculating the tax.

ATB 2005-188