TRM Copy Centers (USA) Corp. v. Commissioner of Revenue (February 1, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


TRM COPY CENTERS (USA) CORP.	v.  COMMISSIONER OF REVENUE

Docket Nos. F246124, F251053		Promulgated:
							February 1, 2001
	

	These are appeals under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee Commissioner of Revenue ("Commissioner") to abate sales taxes assessed against appellant for periods spanning 1990-95.
	Commissioner Gorton heard these appeals and was joined in the decisions for the appellant by Chairman Burns and Commissioners Scharaffa, Egan, and Rose.
	These findings of fact and report are made at the requests of the appellant and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.


John S. Brown, Esq., George P. Mair, Esq., Donald-Bruce Abrams, Esq., Darcy A. Ryding, Esq., and Matthew D. Schnall, Esq. for the appellant

Frances M. Donovan, Esq. for the appellee


FINDINGS OF FACT AND REPORT

	
	Appellant TRM Copy Centers (USA) Corporation ("TRM" or "appellant") is an Oregon corporation doing business in the Commonwealth. TRM owns, supplies, and maintains self-service, manual photocopiers situated in pharmacies, stationery stores, hardware stores, convenience stores, and other similar retail establishments. Approximately 1100 TRM copiers were sited at Massachusetts retail businesses during the periods at issue.  TRM had a service center in Walpole, Massachusetts, to which were attached two salesmen who approached retailers about the possibility of siting copiers on their business premises.

JURISDICTIONAL FACTS
	During the periods at issue, TRM timely filed sales and use tax returns on an annual basis. TRM's returns for the 1990-92 periods were selected for audit. Notices of Intention to Assess ("NIA's") for these periods followed April 5, 1994. 
A subsequent hearing and review before the Appeal and Review Bureau of the Department of Revenue led to the recasting of the theory behind the NIA's. Instead of treating TRM as the vendor of photocopies, as the Audit Bureau had proposed, the Appeal and Review Bureau found TRM subject to tax as the lessor of the photocopiers, with the Location Agreements being regarded as leases in substance. The Appeal and Review Bureau, in its August 25, 1995 determination letter, returned the matter to the Enforcement Bureau to consider this basis of taxability.
	A Notice of Assessment ("NOA") against TRM for the 1990-92 periods issued on March 24, 1997. TRM paid the assessment in full on April 22, 1997. TRM proceeded to timely file abatement applications for the 1990-92 assessment.
	No action on the abatement application having been taken by March 11, 1998, TRM that day withdrew its consent to extended consideration of the abatement applications. The abatement applications were accordingly deemed denied as of that date. TRM timely filed its Petition for the 1990-92 sales tax periods on March 12, 1998.
	TRM also timely filed annual sales and use tax returns for the periods 1993-95. Also selected for audit, these periods were the subject of an NIA dated June 6, 1997. The assessment rested on the same theory as had been adopted in the 1990-92 NOA.  An extension of time was executed to allow for Appeal and Review Bureau consideration of the proposed deficiency. 
	An NOA for 1993-95 was issued on January 14, 1998. On February 12, 1998, TRM paid the assessed deficiency in full. TRM timely filed its abatement applications relating to the 1993-95 periods on May 7, 1998. On December 16, 1998, no action having been taken on the abatement applications, appellant withdrew its consent to consideration beyond six months. A deemed denial of the abatement applications resulted as of that date. Appellant's Petition with this Board with respect to the 1993-95 periods timely followed on January 6, 1999. 
	The foregoing facts establish the Board's jurisdiction over this matter.

TRM'S BUSINESS ARRANGEMENTS
	The copiers in TRM's inventory were generally acquired by TRM second-hand then reconstructed. The copiers had minimal features, and were based on obsolete liquid toner technology, necessitating the use of special "duplicator" paper. The copiers were intended for use by customers of the various retailers.
	In seeking to persuade retailers to accept a TRM copier on their premises, the TRM sales force would emphasize the advantage to the retailer's business of drawing customers into the store. These TRM salespersons would decide, in conjunction with the retailer, where in a given store the copier would be situated. Signs would be posted at various locations in the store to highlight the copier's availability.
In placing copiers at given retail locations, TRM entered into a standardized "Location Agreement" with each retailer. The Location Agreement structured TRM's commercial dealings with the retailer. Under the standardized agreement TRM retained ownership of the copier. The retailer assumed responsibility for routine care and maintenance tasks like replacing paper and toner. TRM supplied the paper and toner. Repairs were the responsibility of TRM. 
TRM delivered and installed each copier at the retailer's location. The copiers came loaded with an initial supply of paper, toner, and dispersant. TRM also supplied a copier stand, signs, and decals to identify TRM and indicate the per-copy price. The retailer paid a one-time $95 start-up fee, pursuant to the standard Location Agreement.	The total number of copies made on a given copier during a period was recorded on an unresettable internal meter. Customers operated copiers on a self-service basis, by pressing a green button on the machine for each copy desired. The copiers were not coin-operated. Customers paid the retailer at the specified per-copy price for copies made. A resettable meter kept track of the number of copies each user made.
	TRM derived its revenues from a share of the gross receipts paid to retailers by customers purchasing copies. The share was determinable according to a formula in the Location Agreement, and decreased as a percentage of gross receipts the greater the overall number of copies made. The retailer's payment of the applicable share of gross receipts was made in exchange for TRM's carrying out of its obligations under the Location Agreement. TRM received $1600-$2400 in estimated average annual gross sales receipts per retailer.
	The retailer supervised day-to-day operation of the copier by its customers, but lacked a general right of control over the machine. The retailer was prohibited by the Agreement from putting its own signage or displays on the copiers. The retailer could not move the copier from the agreed-upon location, without the special consent of TRM. The retailer could not vary the posted per-copy price. The retailer was not entitled to use the copier for its own photocopying needs, except as any third-party purchaser might use the copier. That is, copies made by the retailer for its own use were counted and subject to the per-copy price. Proceeds from copies made by a retailer for its own needs fell subject to the sharing agreement on the same basis as revenue from copies made by the general public.
	The Location Agreement assigned to the retailers the responsibility for collecting sales tax on copies sold to the public. The use of resale certificates made clear the parties' agreement that any sale of copies by TRM to the retailer occurred for the purpose of resale to the public. The parties' arrangement, therefore, treated the relevant retail transaction, subject to sales tax, as the sale of copies by the retailer to its customer. Finally, the Location Agreement was terminable by either party upon thirty days' notice.
	On the basis of the foregoing, the Board found that TRM did not transfer control of its copiers to the retailers with which it dealt. The retailers were not free under the Location Agreement to use the copiers for their own exclusive business purposes, as might an owner or true lessee. Rather, a joint venture between TRM and each of the retailers arose from the operation of the Location Agreement. The copiers remained the property of TRM and were restricted when under a Location Agreement to use for the purposes of the joint venture. At no point did the retailer acquire title or possession of TRM copiers sited on its premises under the joint venture agreement.
	Given the lack of a transfer of control of the copiers, the retailers did not take possession of or lease the machines from TRM under the Location Agreements. There is accordingly no basis to tax TRM's share of the proceeds of the joint venture on a rental theory. The Board decided this matter for the appellant, and ordered an abatement in the amount of $463,271.00.

OPINION

	The parties are agreed as to the threshold taxability question this case presents. The correct sales tax treatment of copies made by members of the public using TRM machines situated on retailers' premises is undisputed. Each copy made by a customer amounts to "tangible personal property" which is being sold at retail. Accordingly, the 5% of sales price excise imposed under c. 64H falls upon a customer's total purchase of copies. No claim is made that these taxes are in arrears.
	The question for decision concerns the post-tax proceeds of the copying operations which arose under the Location Agreement. A variable share of the after-tax gross receipts from the sale of copies must be paid over by the retailer to TRM. These payments represented consideration for TRM's performance of its obligations under the Location Agreement.
	The Commissioner adopted the position that the Location Agreement between TRM and the retailers amounted in substance to a lease of the photocopiers by TRM. See generally Syms Corp. v. Commissioner of Revenue, 2000 A.T.B. Adv. Sh. 711, 761-62 (Nos. F215484, F228324, Sept. 14, 2000)(Tax falls on the substance, not form, of transaction.)(Cites omitted.) The share of copying proceeds assigned to TRM pursuant to the Location Agreement, under this theory, constituted rental payments for the lease of the copiers. As the consideration for a lease of tangible personal property, the payments to TRM would fall subject to the c. 64H excise. See G.L. c. 64H, §1 (10). The disputed assessment rests on this theory, which requires our close analysis of the Location Agreement to discern its substance.
	Leases typically confer upon the lessee possession of, though not title to, leased property, usually in consideration of periodic payments being made to the lessor over the term of lease. See generally New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 191 (1997), aff'd on other grounds, 427 Mass. 399 (1998); Carey's, Inc. v. Carey, 25 Mass. App. Ct. 290, 298 (1988). Indeed, a "lease" of tangible personal property is defined as a "contract by which one owning such property grants to another the right to possess, use and enjoy it for [a] specified period of time in exchange for periodic payment of a stipulated price, referred to as rent." BLACK'S LAW DICTIONARY 889 (6th ed. 1990).
	Thus, the lessee's possession of tangible personal property, such as the photocopying machines at issue, characterizes the lessee-lessor relationship. Possession, in turn, is defined to mean "[h]aving control over a thing with the intent to have and to exercise such control." BLACK'S LAW DICTIONARY 1163 (6th ed. 1990). Accord Browning-Ferris Indus. v. State Tax Comm'n, 375 Mass. 326, 330 n.4 (1978). Although having the subject property on one's own business premises is a factor suggestive of control, possession further requires that the putative lessee have the right to use property for its own purposes, separate and distinct from the purposes of the would-be lessor. See New York Times Co., 22 Mass. App. Tax Bd. Rep. at 188-89. Mere receipt of property still under the control of its owner is insufficient to make out a possession. Id.
	Careful review of the Location Agreement TRM used in contracting with retailers makes clear that TRM did not surrender control of the photocopiers. Crucially, the retailers were barred from using the copiers, as might an owner-to make copies for their own unique business purposes, distinct from the purposes of TRM, without incurring any further cost. The record was clear that, if a retailer used a photocopier to make copies strictly for itself, e.g., its business ledger or a sale circular, the copies were counted as would be any sold to the public, were subject to 5% sales tax, and were applied in determining the amount of the payment the retailer owed to TRM.
	The Location Agreement was replete with restrictions on the retailers' disposition of the photocopiers. The photocopiers could not be moved to suit the convenience of the retailer. The photocopiers could not be used to display the retailer's own advertisements, or bedecked to fit in with the store's decorative scheme. Not even the price set per copy could be varied at the sole instance of the retailer. In sum, the retailer entering into a Location Agreement with TRM did not thereby acquire control, and hence possession, of the photocopier.
	If the Location Agreement is to be characterized as to the legal relation thereby created, the Board observes that the arrangement was most nearly a "joint venture". See Ross v. Health and Retirement Properties Trust, 46 Mass. App. Ct. 82, 85 (1998). "'A joint venture is a partnership of a sort'. … It arises when the parties 'intend to associate themselves as such'…" for a business they "share as 'co-owners'". Id.  The joint business here was the sale at retail of photocopied documents to the public. The copier was dedicated to the business of the joint venture, and proceeds were to be divided between the parties according to a sharing formula in the Location Agreement. The indicia of a joint venture, as expounded by the Supreme Judicial Court, were present in the TRM-retailer transaction. See Gurry v. Cumberland Farms, Inc., 406 Mass. 615, 623-24 (1990). The substance of the Location Agreement, in creating a joint venture relationship, precludes any attempt to recharacterize the arrangement as a lease of the photocopiers.
	The conclusion that the Location Agreement was not, in substance, a taxable lease transaction accords with the logic of the sales tax statutes. A basic consideration guiding the excise imposed at c. 64H is to "prevent the pyramiding of taxes on successive buyers and sellers." Jan Co. Central, Inc. v. Commissioner of Revenue, 405 Mass. 686, 690 (1989). Only sales at retail are made subject to sales tax. Impermissible "[p]yramiding of tax occurs when a product is taxed at the preretail stage and thus, the tax is imposed on successive pairs of buyers and sellers rather than only at the final sale of the product to the ultimate consumer." Id. at n.2.
	The Commissioner's lease theory departs from this policy of the sales tax law. Under his view, the sales tax would fall at two distinct points in the production chain leading to  one  final, retail sale. Of  course,  sales  of
copies to the public are taxable, and, indeed, these taxes were paid and are not in dispute. Such taxation was correct, as the retail purchase of the copies is the final exchange occurring in this chain of production. 
The Commissioner's "double-dipping" is exposed as one observes that TRM's share of the after-tax proceeds of copy sales pursuant to the Location Agreement are treated as the lease payments separately subject to tax. Taxation of the supposed "lease" transaction is in error because possession and use of the photocopying machine was not the final object of the consumer's bargain. See id. at 690. No party was seeking a copying machine as a final acquisition for its sole, exclusive use. The end-consumer here desired quick, convenient, and inexpensive copies, not a copying machine. Arrangements regarding the disposition of the copier itself were pre-retail, and thus anterior to the imposition of the c. 64H tax. 
For the foregoing reasons, the Board decided these appeals in favor of the appellant. Abatement was granted in the amount of $463,271.00.

					Appellate Tax Board

				BY:____________________________
                        Abigail A. Burns, Chairman




A true copy,


Attest:_____________________
        Clerk of the Board
                       
	

	

 The Location Agreement entailed that copiers be located in well-trafficked spots, near the cash registers and convenient for public, self-service use.
 Retailers agreeing to accept a TRM copier on their premises were required to complete three separate documents:  the standard form Location Agreement, a "delivery request", and a sales tax resale certificate.
 This estimate appears to represent that portion of overall gross receipts paid over to TRM by retailers, not the gross receipts of the joint ventures.
 The Commissioner places emphasis on trifling exercises of "control" to contend possession passed to the retailers: the retailers are charged with overseeing the use and operation of the copiers, and handling money paid for copies. These indicia of "control" fall far short of the threshold for a transfer of possession. Cf. New York Times Co., 22 Mass. App. Tax Bd. Rep. at 189 ("A pilot's mechanical operation of an aircraft in flight … do[es] not eclipse the customer's prerogative to dictate travel activities otherwise.")
 An alternative theory might treat the Location Agreement as the lease of the space required to accommodate the photocopier in the retailers' establishment. As a lease of real property, this arrangement would likewise deflect sales taxation of the retailers' agreed payments to TRM. Still the attenuation of TRM's control rights entailed in having the photocopiers on another's business premises, dedicated to retail use, makes "joint venture" the more plausible characterization.
 Both parties plausibly had a "joint property interest" in the photocopiers under the Location Agreement: the machines were required to be used in the course of the joint business, and were not available for either party's exclusive business purposes.
 The foregoing is not to say that parties might not structure two retail transactions if they so chose. A copier could be rented out under a true lease, and the lessee use its control of the machine to sell photocopies to the public at retail. Only if the true lease fell within the scope of the exemptions qualifying the definition of taxable sales would it be possible for the lease to escape sales taxation as a pre-retail transaction. See generally DiStefano v. Commissioner of Revenue, 394 Mass. 315, 325 (1985)("the exemption provisions in G.L. c. 64H, § 6(m),(r), and (s) '…are merely part of the statutory definition of the types of sales and uses of tangible personal property which are to be employed in measuring the excises and of those which are not so to be used.''" (Cite omitted.)

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