Intralot, Inc. v. Nebraska Dept. of Rev.

276 Neb. 708Neb

Full text

the Faa governed the contract. The Court concluded that the
notice statute directly conflicted with § 2 of the Faa. The stat
ute “condition[ed] the enforceability of arbitration agreements
on compliance with a special notice requirement not applicable
to contracts generally.”34 because the Faa is substantive law,
it preempted the Montana statute regarding arbitration agree
ments governed by the Faa.35 Thus, when a contract is gov
erned by the Faa, the state notice requirements are preempted
by the Faa.
The Montana statute analyzed in Doctor’s Associates, Inc. v.
Casarotto36 is similar to the Nebraska statute. Like the Montana
statute, Nebraska’s notice requirement in § 25 2602.02 applies
only to arbitration provisions and renders the arbitration clause
unenforceable upon failure to provide the notice requirement.
Just like the Montana statute in Doctor’s Associates, Inc.,
§ 25 2602.02 places arbitration agreements “in a class apart
from ‘any contract,’ and singularly limits their validity.”37
because the Faa governs the service contract, we must yield to
the precedent set by the Court’s holding in Doctor’s Associates,
Inc. We hold that the Faa preempts § 25 2602.02 for the con
tract. We reverse the district court’s judgment and remand the
cause with directions to confirm the arbitration award.
reversed ANd remANded With directioNs .
34 Doctor’s Associates, Inc., supra note 9, 517 U.S. at 687.
35 Id.
36 Id.
37 Id., 517 U.S. at 688.
iNtrAlot , iNc ., AppellANt , v . NebrAskA
depArtmeNt of reveNue , Appellee .
757 N.W.2d 182
Filed October 31, 2008. 	No. S 07 933.
1. Administrative Law: Final Orders: Appeal and Error. Under the administrative
procedure act, Neb. rev. Stat. §§ 84 901 to 84 920 (reissue 1999 & Cum. Supp.
2006), an appellate court may reverse, vacate, or modify a district court’s judg
ment or final order for errors appearing on the record.
708 	276 NebraSka repOrTS
Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
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2. Administrative Law: Judgments: Appeal and Error. When reviewing a district
court’s order under the administrative procedure act, Neb. rev. Stat. §§ 84 901
to 84 920 (reissue 1999 & Cum. Supp. 2006), for errors appearing on the record,
an appellate court looks at whether the decision conforms to the law, is supported
by competent evidence, and is not arbitrary, capricious, or unreasonable.
3. ____: ____: ____. an appellate court, in reviewing a district court judgment for
errors appearing on the record, under the administrative procedure act, will not
substitute its factual findings for those of the district court when competent evi
dence supports those findings.
4. Taxation. The general theory behind the sales and use taxes is to impose a tax
on each item of property, unless specifically excluded, at some point in the chain
of commerce.
5. ____. Nebraska’s statutes provide an exemption from the sales and use taxes for
items purchased for the purpose of reselling the items in the normal course of
business, either in the form or condition in which the property is purchased, or as
an attachment to or integral part of other property.
6. Taxation: Proof. The burden of establishing a tax exemption is placed on the
party claiming the exemption.
appeal from the District Court for Lancaster County: pAul
d. merritt , J r ., Judge. affirmed.
Douglas r. aberle and andrew D. Strotman, of Cline,
Williams, Wright, Johnson & Oldfather, L.L.p., for appellant.
Jon 	bruning, attorney 	general, 	and 	L. 	Jay 	bartel 	for
appellee.
heAvicAN, c.J., coNNolly , gerrArd , stephAN, mccormAck ,
and miller -lermAN, JJ.
coNNolly , J.
SUMMarY
In February 2005, the Nebraska Department of revenue
(Department) issued a deficiency determination to Intralot, Inc.,
for consumer’s use tax on thermal paper and play slips. Intralot
purchased the items to fulfill its contractual obligations with the
Department’s lottery division. It contended that the items were
purchases for resale and not subject to taxation. In October
2006, the Tax Commissioner sustained the Department’s defi
ciency determination. Intralot appealed, and the Lancaster
County District Court affirmed the Tax Commissioner’s order.
We conclude that the Tax Commissioner correctly determined
that Intralot’s purchases were not purchases for resale and that
INTraLOT, INC. v. NebraSka DepT. OF reV. 	709
Cite as 276 Neb. 708
Intralot made a taxable use of the thermal paper and play slips.
The judgment of the district court is affirmed.
baCkgrOUND
The parties do not dispute the essential facts. On april
25, 2003, the Department’s lottery division (Lottery) issued
a comprehensive “request for proposals for On Line Lottery
gaming System and related Services” (rFp). The rFp’s pur
pose was to secure competitive proposals to allow the Lottery
to continue with an on line lottery gaming system. The rFp
requested all proposals to provide the related operational and
marketing services required to operate on line lottery games.
This required “an On line gaming System consisting of hard
ware, software, retailer terminals, communications network,
and all other equipment and technology [necessary] to support
On line game operations.”
In addition, the rFp required that the contractor supply,
warehouse, distribute to on line retailers, and provide inventory
control of all ticket stock, play slips, and other terminal con
sumables for all on line terminals.
In response to the Lottery’s rFp, Intralot submitted its pro
posal to the Lottery. Section 2.2.5 of the proposal addressed
“Ticket Stock and playslips.” Concerning these items, the
proposal identified a primary and a secondary paper supplier
for the ticket stock, as required by the rFp. Intralot’s proposal
offered two options for the weight of the paper stock. It pro
vided that the 3.3 mm paper would be included in the base
price of a contract and that the 4.5 mm paper would be offered
as an option, with separate pricing. The proposal provided that
Intralot would “design and procure all consumable supplies
[i.e., ticket stock and play slips] required by the on line gaming
terminals” and that Intralot would “deliver [those] supplies to
all Lottery sites and retailers.” The proposal described a secu
rity system to track inventory of ticket stock from the supplier
to Intralot’s warehouses to the retailer.
The Lottery selected Intralot to provide the on line lottery
gaming system and related services for the State of Nebraska.
In December 2003, the Lottery and Intralot entered a “Contract
for On Line Lottery gaming System and related Services.”
710 	276 NebraSka repOrTS
The contract provided that Intralot would install, implement,
maintain, and operate for the Lottery an on line gaming sys
tem, as specified in the rFp and as described in the proposal.
Intralot was to install the gaming system and have it opera
tional by July 1, 2004. as compensation, Intralot was to receive
2.39 percent of the Lottery’s net on line sales.
as part of its contractual obligation, Intralot purchased
thermal paper, or ticket stock, and play slips. Thermal paper is
used by Lottery retailers with the on line terminal to print the
on line lottery tickets purchased by Lottery players. Lottery
players use the play slips to indicate the numbers, games, and
number of draws for the lottery games they purchase for play at
retailer locations. The on line retailer then uses the play slips to
produce a lottery ticket reflecting the player’s specific choices.
both items are integral components of the Lottery’s on line
gaming system.
In October 2004, the Department notified Intralot it was
being audited. The audit was to verify that Intralot had properly
reported and paid the appropriate sales, use, withholding, and
any other required taxes. The audit resulted in Intralot’s being
assessed a consumer’s use tax liability of $272,914.25, with
$11,298.14 in interest and $27,291.41 in penalties. Intralot
petitioned for a redetermination of its tax liability. at an
informal conference, the Department and Intralot agreed on
all issues except the consumer’s use tax assessed on Intralot’s
purchases of thermal paper and play slips.
between January 1 and November 30, 2004, Intralot pur
chased $297,839.89 worth of thermal paper and $67,070.67
worth of play slips for distribution to Lottery retailers. The
unpaid consumer’s use tax assessed for these purchases of
thermal paper and play slips was $25,543.74. The corre
sponding interest was $2,108.29. Intralot was also assessed
$2,554.38 in penalties; however, the Tax Commissioner abated
the penalties.
Intralot claims that its purchases of thermal paper and play
slips are purchases for resale to the Lottery and therefore are
not subject to Nebraska’s consumer’s use tax. In contrast, the
Department asserts that Intralot makes a taxable use of the ther
mal paper and play slips in fulfilling its contract obligations.
INTraLOT, INC. v. NebraSka DepT. OF reV. 	711
Cite as 276 Neb. 708
aSSIgNMeNT OF errOr
Intralot asserts, restated, that the district court erred in deter
mining that Intralot’s purchases of thermal paper and play slips
are subject to a use tax.
STaNDarD OF reVIeW
[1 3] Under the administrative procedure act,1 an appellate
court may reverse, vacate, or modify a district court’s judgment
or final order for errors appearing on the record.2 When review
ing a district court’s order for errors appearing on the record,
we look at whether the decision conforms to the law, is sup
ported by competent evidence, and is not arbitrary, capricious,
or unreasonable.3 an appellate court will not substitute its
factual findings for those of the district court when competent
evidence supports those findings.4
aNaLYSIS
The question presented is whether Intralot acquired the
ticket stock and play slips for its own use in fulfilling its agree
ment with the Lottery and, therefore, is a purchase subject to a
use tax. Or, did Intralot purchase the ticket stock and play slips
for resale to the Lottery, exempting it from taxation?
NebrAskA sAles ANd use tAx
[4] The Nebraska sales and use tax imposes a tax on each
item of tangible personal property in this state at some point in
the chain of commerce, unless specifically excluded from taxa
tion.5 as stated in the Tax Commissioner’s order, the sales and
use tax laws “are complementary in that . . . the use tax is to
protect the state’s revenues and the business of local merchants
1 See Neb. rev. Stat. §§ 84 901 to 84 920 (reissue 1999 & Cum. Supp.
2006).
2 Orchard Hill Neighborhood v. Orchard Hill Mercantile, 274 Neb. 154, 738
N.W.2d 820 (2007).
3 Id.
4 Utelcom, Inc. v. Egr, 264 Neb. 1004, 653 N.W.2d 846 (2002).
5 Interstate Printing Co. v. Department of Revenue, 236 Neb. 110, 459
N.W.2d 519 (1990). See Neb. rev. Stat. §§ 77 2701 to 77 27,135.01 and
77 27,222 (reissue 2003).
712 	276 NebraSka repOrTS
by eliminating any advantage to residents in purchasing goods
from out of state without the payment of the tax.” If the item
is purchased in Nebraska, the sales tax applies. If the item is
purchased outside Nebraska, the use tax applies.6 Together, the
sales and use taxes provide a uniform tax upon the sale, lease,
rental, use, storage, distribution, or other consumption of all
tangible personal property.7
Intralot claims that its purchases of thermal paper and play
slips are exempt from taxation because it resells the items to
the Lottery. If Intralot purchases the items for resale to the
Lottery, Intralot would not have to pay sales or use tax on the
items because purchases made for reselling the items in the
normal course of business are not subject to sales and use tax.8
Furthermore, the Lottery would also not pay a sales tax when
it purchases the items from Intralot because items purchased by
the state are exempt from taxation.9 Thus, if Intralot correctly
contends that its purchases of thermal paper and play slips are
purchases for resale to the Lottery, then the items are not sub
ject to sales and use tax.
[5] Intralot’s position hinges upon purchases made for the
purpose of reselling the items, i.e., sales for resale, are explic
itly exempt from sales and use tax.10 “Sale for resale” includes
“a sale of property . . . to any purchaser who is purchasing
such property . . . for the purpose of reselling it in the normal
course of his or her business, either in the form or condition in
which it is purchased or as an attachment to or integral part of
other property.”11
[6] The burden rests on Intralot to establish that its pur
chases of ticket stock and play slips were purchases for resale
to the Lottery. If Intralot cannot establish that it purchased the
thermal paper and play slips for resale to the Lottery, then the
6 See Interstate, supra note 5.
7 316 Neb. admin. Code, ch. 1, § 002.01 (1998).
8 § 77 2703(1); 316 Neb. admin. Code, ch. 1, § 002 04b (1998).
9 § 77 2704.15(1).
10 § 77 2703(1); 316 Neb. admin. Code, ch. 1, § 002.04b.
11 § 77 2701.34.
INTraLOT, INC. v. NebraSka DepT. OF reV. 	713
Cite as 276 Neb. 708
items are subject to a consumer’s use tax.12 as stated in the
Department’s rules and regulations,
[i]t is presumed that any property . . . sold . . . in this
state is sold . . . for storage, use, distribution, or other
consumption in this state until the contrary is established.
The burden of proving that any property . . . delivered in
this state is delivered for a purpose other than storage,
use, distribution, or other consumption in this state is on
the person who purchases . . . the property . . . .13
Whether a resale to the Lottery occurred requires an examina
tion of the relationship between the Lottery and Intralot.
iNtrAlot ’ s purchAses A re N ot
purchAses for resAle
Woven into the fabric of the parties’ relationship are the
Lottery’s rFp, Intralot’s proposal, and the parties’ contract.
The Lottery, through its rFp, sought to secure proposals from
vendors to “provide an On line gaming System for the sale of
On line tickets for the Nebraska Lottery and its retailers.” The
rFp required the on line gaming system to include “hardware,
software, retailer terminals, communications network, and all
other equipment and technology [necessary] to support On line
game operations.” The vendor had to “provide the ticket stock,
play slips and other terminal consumables [needed] for all
On line terminals.” Intralot understood the purpose and require
ments of the rFp when it submitted its proposal. Intralot
acknowledged that, if selected, it would “provid[e] a state of
the art on line gaming system complete with all of the required
and related support services necessary to achieve the Lottery’s
sales and performance objectives.”
The contract required Intralot to provide the Lottery with
an up and running, on line lottery system in exchange for 2.39
percent of the Lottery’s net on line sales. Neither the rFp,
the proposal, nor the contract contains any indication that the
purchases of thermal paper and play slips were not part of the
12 § 77 2703(2). See American Totalisator Co., Inc. v. Dubno, 210 Conn.
401, 555 a.2d 414 (1989).
13 316 Neb. admin. Code, ch. 1, § 002.02 (1998).
714 	276 NebraSka repOrTS
on line system Intralot contracted to provide. The rFp required
that each proposal include a statement of “proposed compen
sation for providing all phases of the On-line ticket produc-
tion, equipment, and related services.” (emphasis supplied.)
In response to the rFp, Intralot confirmed it understood the
Lottery’s requirements for providing the equipment and ser
vices specified in the rFp. In addition, the quoted cost covered
all expenses.
The contract shows that the parties included ticket stock
and play slips in the lottery system and as part of the agreed
compensation.
paragraph 6.19 of the contract provides as follows:
Ticket Stock: INTraLOT agrees that it will provide
delivery of all ticket stock to retailers no later than the
next day after request or as per retailer timetable. Ticket
stock will be of 4.5 mil weight and all ticket stock art
must have prior approval of the Lottery. The extra cost
of the 4.5 mil paper above the 3.3 mil paper cost will be
shared equally by both parties.
(emphasis supplied.)
This language shows that the base cost of the 3.3 mm ticket
stock was included in Intralot’s compensation. Intralot’s pur
chases of thermal paper and play slips are part of the overall
cost incurred by Intralot under the contract. because Intralot
contracted to, and is compensated for, providing the Lottery
with a complete on line lottery system, Intralot’s purchases of
thermal paper and play slips were not purchases for resale to
the Lottery.
A ffirmed .
W right, J., not participating.
INTraLOT, INC. v. NebraSka DepT. OF reV. 	715
Cite as 276 Neb. 708

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