PPC Constructors, Inc. v. Commissioner of Revenue (May 7, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD



PPC CONSTRUCTORS,  INC.	    v.    COMMISSIONER OF REVENUE

Docket No. F251047			     Promulgated:
                                   May 7, 2001
	       				 

This is an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the appellee to abate sales taxes assessed against the appellant under G.L. c. 64H, § 2. 
Commissioner Scharaffa heard the appeal and was joined in the decision for the appellee by Chairman Burns and Commissioners Gorton, Egan and Rose.
	These findings of fact and report are made at the request of the appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.

Michael D. Parker, Esq. and Catherine K. Coolidge, Esq. for the appellant.
	
Timothy Stille, Esq. for the appellee.


	
FINDINGS OF FACT AND REPORT
On the basis of testimony and exhibits introduced in the hearing of this appeal, the Appellate Tax Board ("Board") made the following findings of fact.  The appellant, PPC Constructors, Inc. ("PPC Constructors"), is a mechanical engineering firm in the business of providing both consulting services and design and installation of mechanical systems for its customers' businesses.  Generally, when PPC Constructors performs work for its customers, it is charged a sales tax by its vendors on the materials it purchases and it then passes the tax through to its customers on its invoices.
PPC Constructors had filed sales tax returns only as a seasonal business for tax years 1981 through 1985 and for tax years 1987 and 1988.  However, it did not file tax returns for tax years thereafter.  In 1995, the Department of Revenue (the "Department") Audit Bureau issued notices of failure to file returns to PPC Constructors, requesting annual returns for tax years 1988 through 1994. The taxpayer filed all requested returns in November of 1995.  

In 1995, the Department audited PPC Constructors for sales and use tax compliance for calendar years 1988 through and including 1995 (the "tax years at issue").  The Department audit resulted in the issuance of a notice of intention to assess ("NIA") on April 14, 1997.  On March 21, 1996, PPC Constructors requested a waiver of penalties, which was denied on February 19, 1997.  A notice of assessment ("NOA") was issued on April 15, 1998.  PPC Constructors filed an abatement application on June 12, 1998 and paid the undisputed portion of the assessed tax in June and July of 1998.  On December 14, 1998, PPC withdrew its consent for an extension of time during which the Commissioner of Revenue (the "Commissioner") could act upon the abatement application.  PPC Constructors timely filed its petition with the Board.  On this basis, the Board found it had jurisdiction over this appeal.

I.	Purchases of materials for use in contracts.
PPC Constructors identified itself on all federal and state tax returns as a construction contractor.  It did not register as a vendor with the Department.  Since its incorporation on April 1, 1981, PPC Constructors generally paid sales or use tax for materials purchased and used in the performance of all its contracts with its customers, with the exception of contracts for the government and the five contracts at issue.  Moreover, PPC Constructors described itself on its financial statements as "an industrial contractor." 
However, for the five disputed contracts at issue in this appeal, PPC Constructors claimed it was a vendor with respect to these tax-exempt customers ("the Customers").  Of all its customers, only these five Customers had supplied PPC Constructors with exempt use certificates, and it was only with respect to these five Customers that PPC Constructors claimed it was performing work as a vendor rather than as a contractor.
	PPC Constructors claimed that each of the disputed contracts involved "highly specialized work" that was "unique" to each of these five Customers.  The abatement application submitted by PPC Constructors provided the following descriptions of the five contracts at issue: (1) for its customer, Bio-Shelters, the taxpayer "fabricated and installed water filtration equipment, hydroponics support deck and fish tank water heating systems"; (2) for its customer, polyORGANIX, the taxpayer "installed a heat exchanger and related piping associated with the existing chemical reaction vessel, and made modifications to the chemical process systems including vacuum piping, reactor heating and cooling piping and reagent and product piping"; (3) for its customer, Hardwick Kilns, the taxpayer "repaired and replaced explosion and fire damaged boiler plant equipment including fuel handling, fuel storage and controls"; (4) for its customer, Ware Cogen, the taxpayer made "modifications to the coal unloading and conveyor equipment"; and (5) for its customer, EDI, the taxpayer "fabricated and installed an ASME code autoclave" used in EDI's facility.  
	PPC Constructors did not maintain a warehouse in the Commonwealth for storage of customers' goods, nor did it maintain an inventory in the Commonwealth of items for the performance of its contracts.  For the contracts in dispute, PPC Constructors ordered materials from various vendors, pursuant to its customers' specifications, and in most instances had these materials shipped directly to its customers.  In some instances, its customers ordered the materials themselves.
PPC Constructors claimed that for each of the above contracts, it performed work on a "time and materials basis" such that the Customers were billed for the amount of time that PPC Constructors invested in performing the contract and for the cost of the materials used in the performance of the contracts, rather than on a "turn-key" or lump-sum basis as is typical of most construction contracts.  The Commissioner, however, argued that the contracts at issue were "cost plus markup" contracts, involving the hourly rate for the taxpayer's labor plus a ten-percent markup for materials used.  James Malandrinos, the president, treasurer and sole stockholder of the corporation, testified that PPC Constructors invoiced the Customers for labor on an hourly basis and for materials at the corporation's cost plus an agreed-upon markup.
	The Board found that PPC Constructors' claim that it was a vendor for the five contracts at issue was not supported by the evidence.  First, the Board found that PPC Constructors was a construction contractor in connection with the contracts it had entered into since its incorporation, including the five contracts at issue.  The Board based this finding on the fact that PPC Constructors had never registered as a vendor with the Department, nor had it ever collected and remitted sales tax in connection with its prior contracts.  Moreover, PPC Constructors identified itself as in the "construction business" on its state and federal tax returns and as "an industrial contractor" on its financial statements.  
The Board also found that, based on the descriptions of the contracts as given in the abatement application and in the testimony of Mr. Malandrinos, the five contracts at issue all involved "the construction, reconstruction, alteration, improvement, remodeling or repair of real property," the traditional functions of a construction contractor, thus falling squarely within the definition of a construction contract as provided in Emergency Reg. No. 12.  PPC Constructors did not present sufficient evidence to support its claim that these five contracts, each of which required the taxpayer to perform some improvement to the real property of the Customers, merely involved the delivery of tangible personal property to the Customers.  Furthermore, based on the testimony of Mr. Malandrianos, the Board was persuaded by the Commissioner's description of the contracts at issue as payable on a "cost-plus-markup" basis which, as explained in the Opinion, is typical of a construction contract.
Accordingly, the Board found that, because it was a construction contractor performing construction contracts, PPC Constructors could not relieve itself of the duty to pay sales or use tax on the items it used in the performance of its contracts based on exempt use certificates from the Customers.

Purchases of machinery used in manufacturing. 

In 1994, PPC Constructors purchased two pieces of equipment, a band saw and a milling machine, for the purpose of manufacturing a product for one of the Customers, Bio-Shelters.  The machines were installed in a portion of PPC Constructors' shop facility and were used to manufacture rotary drum filters.  PPC Constructors claimed that the band saw and milling machine were exempt from sales tax pursuant to the exemption in G.L. c. 64H, § 6(s) for machinery used directly and exclusively in an industrial plant in the manufacture of tangible personal property to be sold.  The rotary drum filters were to be used by Bio-Shelters in their hydroponic agriculture production for the removal of fish wastes from the water.   
	The Board found that PPC Constructors did not meet its burden of proving that the band saw and milling machine were exempt from sales or use tax.  For the reasons stated more fully in the Opinion which follows, the Board found that, as to these items, PPC Constructors was a contractor and not a vendor of personal property, because the rotary drum filters produced were not sold to Bio-Shelters as tangible personal property, but rather were used and consumed by PPC Constructors in its contracting business.  Therefore, PPC Constructors was not manufacturing tangible personal property to be sold.  Accordingly, the Board found that PPC Constructors was not entitled to a sales or use tax exemption on these pieces of machinery.  

Assessment of interest and penalties.
  
	The Board also found and ruled that the penalties assessed against PPC Constructors did not merit abatement, because PPC Constructors did not have reasonable cause to justify the late filing of the returns and the late payment of taxes due.  In addition, the Board found that, because the underlying tax was validly due, PPC Constructors could cite no rationale for the Board to justify an abatement of the interest which had accrued.  Accordingly, the Board found and ruled that PPC Constructors was not entitled to an abatement of the interest or penalties assessed by the Commissioner.  
The Board accordingly issued a decision for the appellee in this appeal.
OPINION
The present appeal raises three principal issues:  (1) whether the taxpayer owes sales or use tax on its purchase or use of materials used in the performance of its contracts with the five Customers who produced exempt use certificates; (2) whether the taxpayer's purchases of machinery were exempt from sales and use tax under G.L. c. 64H, § 6(s) and G.L. c. 64I, § 7(b); and (3) whether the interest and penalties should be abated. 

Taxability of PPC Constructors' purchases of materials.

 Pursuant to G.L. c. 64H, § 2, Massachusetts imposes a sales tax of five percent upon a sale of tangible personal property by a vendor that is not otherwise exempt.  Massachusetts also imposes a corresponding use tax, pursuant to G.L. c. 64I, § 2, upon the storage, use or consumption of tangible personal property in the Commonwealth which was purchased for storage, use or consumption in the Commonwealth.  "A purpose of the use tax is to make it futile to attempt to avoid the Massachusetts sales tax (imposed by G.L. c. 64H, § 2) by buying a product in a State where there is no sales tax.  The use tax is complementary to the sales tax and bites when the sales tax does not."  Morton Buildings, Inc. v. Commissioner of Revenue, 43 Mass. App. Ct. 441, 442 (1997). 
If a construction contractor performs services that include the incorporation of items of tangible personal property into real property, then the contractor is responsible for payment of sales or use tax as a consumer of the materials or supplies that will be used in fulfilling its construction contract.  See Lawrence-Lynch Corp. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 245, 253 n.9 (1997)(For sales and use tax purposes, "[c]ontractors are deemed consumers of building materials used in the construction of buildings and other facilities.'") quoting BJ-Titan Services v. State Tax Comm'n, 842 P.2d 822, 827 (Utah 1992).  See also Letter Ruling 86-4 ("[A] contractor must pay the sales tax as a consumer upon the purchase of all materials or supplies used by it in fulfilling a lump-sum contract, a cost-plus contract, or a time and material contract with an upset or guaranteed price which may not be exceeded.")  
The Supreme Judicial Court has espoused this principle as the "contractor rule," which the Department adopted in Emergency Reg. No. 12.  See Ace Heating Service Co. v. State Tax Commission, 371 Mass. 254, 256 (1976)("To the extent there is ambiguity" in the taxation of construction contracts, "it is resolved by Emergency Reg. No. 12 . . . .").  A "construction contract" is defined as "a contract for the construction, reconstruction, alteration, improvement, remodeling or repair of real property."  Emergency Reg. No. 12 at (1).  Accordingly, where a customer has contracted with a construction contractor for an improvement to real estate, the contractor, not the customer, is responsible for sales or use tax on the contractor's purchase of the raw materials that are to be used in the performance of the contract.  See Ace Heating, 371 Mass at 255 (Sales of materials to construction contractors, in their performance of lump-sum contracts, were "sales at retail" for which the construction contractors were responsible for sales tax).
PPC Constructors, however, argued that its acceptance of exempt use certificates from these Customers relieved it from proving that the sales were not taxable.  See G.L. c. 64H, § 8, and c. 64I, § 8.  PPC Constructors contended that it qualified under the exception available when "the contractor contracts to sell materials or supplies at an agreed price and to render service in connection therewith, either for an additional agreed price or on the basis of time consumed."  Emergency Reg. No. 12 at (2)(a).  In such situation, the contractor is considered to be a vendor of tangible personal property and responsible for collecting and remitting the sales or use tax from the customer to whom he sells the property. 
However, the acceptance of exempt use certificates from customers will not relieve a contractor of its duty to pay a sales or use tax on the items used in the performance of construction contracts.  See The Salem Glass Co. v. State Tax Commission, ATB No. 60903 (1974)(The exemption of the tax-exempt customer did not flow through to the contractor for the use or consumption of materials and supplies in the performance of a construction contract).  The relevant inquiry for the Board, therefore, was whether the contracts at issue were construction contracts.
PPC Constructors argued that these five contracts were payable on a "time and materials basis," which method indicated that these contracts did not fall within the definition of a construction contract.  See LR 86-4.  However, the Board found, as the Commissioner maintained, that the contracts were paid on a "cost-plus-markup" basis, as is typical of construction contracts.  See Emergency Reg. No. 12 at (2)("A contractor shall pay the sales or use tax as a consumer upon the purchase of all materials or supplies used by him in fulfilling . . . a cost-plus contract . . . or any other kind of construction contract . . . .").  More importantly, the Board also found and ruled that the "time and materials basis" of payment is not sufficient, in and of itself, to transform an otherwise identifiable construction contract into a contract for the sale of tangible personal property.  Instead, the Board must look beyond the mere payment method and analyze the substance of a contract.  See Anderson v. Commissioner of Corporations & Taxation, 312 Mass. 40, 44 (1942)("Substance and not form is to be regarded in the application of the tax laws"); Commissioner of Corporations & Taxation v. The Second National Bank of Boston, 308 Mass. 1, 6 (1941)("Tax laws are to be construed as imposing taxes with respect to matters of substance and not with respect to mere matters of form").  
In reviewing the contracts at issue, the Board found that they were construction contracts, involving improvements to real property, and thus subject to the rules of Emergency Reg. No. 12.  See Ace Heating,  371 Mass. at 256.  Like the taxpayer in Galluzzo Corporation v. Commissioner of Revenue, 21 Mass. App. Tax Bd. Rep. 72 (1997), PPC Constructors did not maintain a warehouse for storage of items, nor an inventory of items for use in its contracts with Massachusetts customers.  Likewise, "it cannot be disputed that the Appellant purchased the items in question for use in Massachusetts" and "the Appellant did in fact use the items in question in the performance of its contracts."  Id. at 76.  
Moreover, as PPC Constructors admitted, the contracts at issue involved the "highly specialized" construction of items customized to each customer's "unique" specifications.  These contracts for custom-made improvements to real property were not contracts for the sale of tangible personal property but rather construction contracts.  Therefore, the items were subject to sales or use tax payable by the contractor pursuant to Ace Heating.  See also Letter Ruling 88-8 (Recognizing that a contract for the simple sale and installation of a completed unit of standard cabinets would be a contract for the sale of tangible personal property, but a contract for custom-made cabinets "is not a contract for a complete unit of standard tangible personal property.").  Accordingly, the Board found and ruled that PPC Constructors was liable for Massachusetts sales or use tax on the items used in the performance of the five disputed contracts. 
The Board further found and ruled that the exception to Emergency Reg. No. 12, at paragraph (4), did not apply to the five contracts at issue in this appeal.  This exception applies to a contractor who "acts as a vendor selling tangible personal property in the same manner as other vendors and is required to install a complete unit of standard equipment, requiring no further fabrication but simply installation, assembling, applying or connecting services.  In such instances, the contract will not be regarded as a construction contract."  Id.  See New England Homes, Inc. v. Commissioner of Revenue, 10 Mass. App. Tax Bd. Rep. 95, 96 (1988)(When "control, possession, and title [of materials] is transferred before [the materials] have been affixed to the real estate," construction contractor "is a vendor of tangible personal property").
The Board, however, found that the contracts at issue involved changes to real estate beyond "simply installation, assembling, applying or connecting services."  As explained in the Findings, the Board found that each of the five contracts, as described in the abatement application, involved substantial improvement to real property beyond the mere assembly or installation of tangible personal property.  These contracts as so described were not the type of contract cited in the examples provided in the Emergency Reg. No. 12 exception:  hanging a blind, installing electrical fixtures, installing a washing machine and installing cabinets.  Such contracts involve the installation of tangible personal property that does not substantially change the real estate.  However, the five contracts at issue each involve the installation of complex and intricate systems, such as water filtration, heating, fuel and hydroponic systems, that would substantially change the real estate.  See Seltzer and Co., Inc. v. State Tax Commission, ATB Nos. 68887 and 68888 (1975) aff'd sub nom., Ace Heating, 371 Mass. 254 (1976)(Contracts for installing and servicing hot water and steam generating boilers were "construction contracts" within the meaning of that term in Emergency Reg. No. 12, rather than contracts for the sale of the separate components such as "power, gas, water, steam, etc.") 
PPC Constructors failed to present sufficient evidence to prove that the contracts at issue did not involve substantial changes to real estate beyond simple installation.  Therefore, the Board found and ruled that these five contracts were "construction contracts" and that PPC Constructors was subject to sales or use tax on the purchase or use of items used in the performance of these contracts.  See Staples v. Commissioner of Corp. & Tax., 305 Mass. 20, 26 (1940)(The burden is on the taxpayer to establish its right to an abatement).  
PPC Constructors also argued that it could not be subject to sales or use tax on the items used in performance of its contracts, because it was acting as an agent for these exempt Customers who were the actual users of the items.  "The relationship of principal and agent arises 'from the manifestation of consent by one person to another that the other shall act on his behalf and be subject to his control, and consent by the other so to act.'"  Araserve, Inc. v. Commissioner of Revenue, 25 Mass. App. Tax Bd. Rep. 345, 348 quoting Harrison Conference Service of Massachusetts, Inc. v. Commissioner of Revenue, 394 Mass. 21, 24 (1985).  See also Hart and McGinley v. Commissioner of Revenue, 24 Mass. App. Tax Bd. Rep. 162 (1998).    
The taxpayer in Araserve was engaged in the business of providing food services to various tax-exempt institutions within the Commonwealth.  Araserve provided management services, but "with the institutions retaining final oversight of all decisions."  25 Mass. App. Tax Bd. Rep. at 345.  The Board found that Araserve acted as an agent of the tax-exempt institutions and was accordingly relieved from use tax in the performance of its contracts.  Crucial to the Board's decision was the control that the institutions exerted over Araserve's performance of the contracts and over the supplies and materials used:  
Pursuant to the contracts, all purchases were subject to the institutions' approval.  In addition, the contracts clearly indicated that all supplies remained the property of the institutions and Araserve could use the supplies only to perform its contractual obligations for the respective institutions.  Accordingly, the Board found that the contracts and the course of dealings demonstrated the institutions' intent to have Araserve act as its agent and Araserve's willingness to so act and that the supplies were purchased on behalf of and were owned by the respective tax-exempt institutions.  Since the tax-exempt institutions purchased the supplies, and not Araserve, Araserve was not subject to the use tax on the supplies.

Id. at 348.  
In Hart and McGinley, the Board reached the same result where the taxpayers entered into a contract with the Massachusetts Department of Public Works to provide "consultative services" for the agency.  Pursuant to the contract at issue there, "the facts unambiguously showed that appellants had neither ownership nor control over the subject property."  24 Mass. App. Tax Bd. Rep. at 164.  The taxpayer had neither ownership nor control over the reports, the reproduction costs of which the Commissioner argued were subject to use tax, nor over the information contained within those reports.  "Accordingly, appellants' activities with respect to the reports did not rise to the level of a statutory 'use' for purposes of G.L. c. 64I, §§ 1 and 2.  The Board, therefore, ruled that appellants functioned as an agent of an exempt purchaser, a state agency . . . .  Hence, no tax under G.L. c. 64I fell on the purchases of reproduced reports by G.L. c. 64I, § 7(b) and G.L. c. 64H, § 6(d)."  Id.  
In this appeal, the Board found and ruled that the agency theory did not apply to the present appeal, because PPC Constructors was not under the control of the Customers as would be required for it to be an agent of the Customers.  PPC Constructors did not demonstrate that it relinquished ownership or control over the materials used in the construction contracts as was the case in Araserve, where the agent was required to seek approval from the principal for all purchases, and where the supplies used were actually owned by the principal.  Nor did PPC Constructors demonstrate that it relinquished control over the performance of its contracts.  In fact, PPC Constructors as a mechanical engineering firm was expected to advise its Customers, and was in the business of providing both design services as well as consulting services.  The Board thus found that none of the tax-exempt Customers exerted the requisite control over PPC Constructors in the performance of the contracts at issue.  Unlike the appellants in Araserve and Hart and McGinley, PPC Constructors did not purchase items for use in its Customers' businesses but rather for use in its own business.  Accordingly, the Board found and ruled that PPC Constructors was not an agent of the these Customers but an independent contractor.  Therefore, PPC Constructors was not exempt from sales or use tax on the materials it used in the performance of the contracts at issue.

Availability of exemptions under G.L. c. 64H,    § 6(s) and   G.L. c. 64I, § 7(b) for taxpayer's purchases of milling machine and band saw.  

PPC Constructors argued that the milling machine and the band saw that it purchased in 1994 were exempt from sales or use tax as machinery that is: 
used directly and exclusively . . . in an industrial plant in the actual manufacture of tangible personal property to be sold. . . .  [T]he term "industrial plant" shall mean a factory at a fixed location primarily engaged in the manufacture, conversion or processing of tangible personal property to be sold in the regular course of business; and machinery shall be deemed to be used directly and exclusively in the actual manufacture, conversion or processing of tangible personal property to be sold only where such machinery is used solely during a manufacturing, conversion or processing operation to effect a direct and immediate physical change upon the tangible personal property to be sold.  G.L. c. 64H, § 6(s) and c. 64I, § 7(b).  

Citing LR 99-14, PPC Constructors contended that its facility need not fit the "common perception of a factory with its billowing smokestacks" to come within the manufacturing exemption, because the "broad definition of a 'factory'" as contemplated by the statute "is a facility at a fixed location where machinery is used to effect a change on raw materials that produces a new end product for sale."  Id.  PPC Constructors also cited Maxymillian Technologies, Inc. v. Commissioner of Revenue, 1999 ATB Adv. Sh. 132, 147 (Docket Nos. F239614, F239615, April 2, 1999) to contend that "regular course of business" in the statute does not require the sales to be in the primary line of business, but rather "reasonably related to a legitimate business purpose."  Finally, PPC Constructors cited San-Vel Concrete Corporation v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 41 (1993) aff'd, 38 Mass. App. Ct. 1114 (1995), for the proposition that a manufacturer who installs its products is not necessarily treated as a contractor for tax purposes.  Therefore, PPC Constructors concluded, because the machinery at issue was used in a fixed location in its facility and for the exclusive purpose of producing rotary drum filters for its customer, Bio-Shelters, the milling machine and band saw should be exempt from sales and use tax.  
The Board agreed with these basic principles cited by PPC Constructors.  However, they are not relevant to this appeal, where PPC Constructors was not a vendor of tangible personal property and, more importantly, each of the five contracts at issue were "construction contracts" within the meaning of Emergency Reg. No. 12.  The rotary drum filters it produced for Bio-Shelters were not sold as an item of tangible personal property and, accordingly, the tax did not accrue to Bio-Shelters.  See Ace Heating, 371 Mass. at 255.  Instead, the rotary drum filters were used by PPC Constructors in the performance of its construction contract with Bio-Shelters, and neither control, possession nor title had passed to the customer before PPC Constructors affixed these items to the customer's real estate.  Cf. New England Homes, 10 Mass. App. Tax Bd. Rep. at 96 (where "control, possession and title to the panels is transferred before the panels have been affixed to real estate," then the contract is one for tangible personal property, and the customer is responsible for sales or use taxes).  
The facts of this appeal are thus distinguishable from those of Lawrence-Lynch Corp. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 245 (1997).  In that appeal, the Board found that the taxpayer, a manufacturer of asphalt, was entitled to the exemptions at G.L. c. 64H, § 6(s) and G.L. c. 64I, § 7(b) for the machinery and tools used to create the asphalt, which it later installed "at customers' sites pursuant to contracts for the paving of roads, parking lots, driveways, tennis courts, and similar projects."  22 Mass. App. Tax Bd. Rep. at 246.  A previous Board decision had determined that mixed concrete is tangible personal property and that a taxpayer who installs the concrete he mixes does not loose his status as a manufacturer of tangible personal property.  See Universal Prestressed Concrete Co., Inc. v. State Tax Commission, ATB No. 57176 (1973).  Starting with this premise, the Board in Lawrence-Lynch then analyzed when title to or possession of the asphalt was transferred: "Viewed from any of these vantage points, Appellant's asphalt and gravel had not yet become a real property improvement at the time of sale."  Id. at 257.   Accordingly, the Board there found the contracts at issue to be for tangible personal property.  Therefore, while San-Vel stands for the proposition that the installation of an item will not necessarily transform a contract for tangible personal property into a construction contract, there still must be a sale of tangible personal property for a sales or use tax to apply at the point when the contract with the customer is completed.  
Unlike the taxpayers in Lawrence-Lynch and San-Vel, PPC Constructors did not sell the rotary drum filters to Bio-Shelters as tangible personal property, but rather used the filters in the performance of its construction contract in which, as described in the abatement application, PPC Constructors "fabricated and installed water filtration equipment, hydroponics support deck and fish tank water heating systems."  Based on the substance of the transaction, see Anderson, 312 Mass. at 44, the Board found and ruled that the milling machine and band saw purchased by the appellant did not fall within the exception for machinery used in the actual manufacture of tangible personal property to be sold in the regular course of business.  Accordingly, the Board found and ruled that PPC Constructors was liable for the payment of sales tax on their purchase of these pieces of machinery.

Interest and penalties assessed against taxpayer.

PPC Constructors sought an abatement of all penalties for failure to file sales tax returns pursuant to G.L. c. 62C, § 33, arguing it had "reasonable cause" to believe it was not liable for any sales tax and therefore, its nonpayment of taxes was not due to "willful neglect" or intentional disregard of the tax laws.  PPC Constructors claimed its reasonable belief was based on the fact that it either was paying the sales tax to its vendors, or it was exempt from paying sales tax on the transactions for which the Customers had issued to them an exempt use certificate.  PPC Constructors did not dispute that it missed some transactions which should have been taxed, but argued it may have overlooked some transactions due to the volume of invoices with which it dealt.  
PPC Constructors cited Administrative Procedures 633, Example A(7a), in which a partnership did not file a partnership return in a jurisdiction in which it had a usual place of business but which was not its principal place of business.  After the Department issued a letter ruling which specified that "'a usual place of business' did not have to be a principal place of business," the partnership filed a return late and requested a waiver of penalties.
PPC Constructors argued that, like the partnership in this example, it did not file a sales tax return because it believed it did not meet the requirements of filing.  Moreover, it argued, once the Department's auditor raised the issue, it filed the returns.  Finally, PPC Constructors claimed that the auditor provided misleading legal advice by instructing the appellant to call itself a contractor on its request for a waiver of penalties.
However, the Board found that PPC Constructors' circumstances varied significantly from those of the partnership in the example.  In that situation, the partnership was unaware of its need to file because the requirement was unclear, but then filed its return "[o]nce the Department's position was clarified" by means of the letter ruling.  By contrast, the Department has already clarified its position on the payment of sales and use taxes by contractors on the materials they use in the performance of their contracts.  Such guidance is found primarily in Emergency Reg. No. 12 and was also promulgated in Letter Ruling 86-4.  Simply because PPC Constructors misinterpreted such guidance, it cannot successfully demonstrate that the Department did not provide guidance in this area of the law, especially since PPC Constructors did not seek the advice of competent tax counsel in determining whether it needed to file returns.  See Samia v. Commissioner of Revenue, 15 Mass. App. Tax Bd. Rep. 73, 78 (1993)("The taxpayer exercises 'ordinary business care and prudence' when he selects a competent tax expert to provide an opinion on a tax matter, makes all relevant facts and papers available to him, and then relies on his opinion with respect to the tax matter in question").  PPC Constructors failed to provide the Board with any authority for its claim that it did not consult a tax advisor on this matter because it reasonably believed no taxes were due.  
In addition, the appellant cannot reasonably allege ignorance of the law as a defense.  The Board found particularly unfounded PPC Constructors' argument that the auditor somehow had an obligation to provide accurate "legal advice" to a taxpayer.  The role of an auditor is to advance the position of the Commissioner as it applies to the taxpayer's compliance history, not to render tax advice to the taxpayer.  Moreover, the auditor's "advice" that the taxpayer call itself a "contractor" on its request for waiver of the penalty also had no impact on the fundamental issue of whether the taxpayer had reasonable cause for its failure to file the required returns timely.  PPC Constructors had filed only seasonable returns for some tax years and had failed to file returns at all for other tax years.  However, as a business taxpayer, PPC Constructors was expected to know the law or, at a minimum, to consult competent tax counsel.  See Syms Corp. v. Commissioner of Revenue, 2000 ATB Adv. Sh. 711, 776 (Docket Nos. F215484, F228324, September 14, 2000)("Reasonable cause" for failure to file returns was not found where a corporate taxpayer did not seek advice of competent tax counsel, even though its principal officers understood the risks inherent in the aggressive tax plan they pursued).  "[A]t a minimum the taxpayer must show that he exercised the degree of care that an ordinary taxpayer in his position would have exercised."  Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 665 (1990).  Furthermore, PPC Constructors cannot now argue that the auditor somehow mislead it to describe itself as a contractor on its request for a waiver of penalties, when PPC Constructors previously defined itself on its own financial statements as a contractor and has never registered as a vendor.
PPC Constructors also argued that the Board should abate the interest assessed against it for late payment of taxes due.  It cited G.L. c. 62C, § 32 for the proposition that notices provided to the taxpayer, such as the NIA or NOA, must disclose a "clear and accurate calculation of the accrual of penalties and interest assessed.  Each notice is to display the interest rates, periods and the taxes and penalties upon which these amounts are calculated."  G.L. c. 62C, § 32(d).  However, PPC Constructors contended, the NIA and NOA do not disclose such a "clear and accurate calculation" and therefore, it is not possible for a taxpayer to determine whether interest has been correctly calculated without additional information from the Commissioner.  PPC Constructors also contended that, because interest accrued during periods where the Commissioner caused an unreasonable delay of process, adding interest to this increased amount was an excessive tax which should be abated.  
However, the Board has previously held that "interest can be abated only if it is shown to have been incorrectly calculated or if the underlying tax is abated as excessive or illegal."  Moss v. Commissioner of Revenue, 12 Mass. App. Tax Bd. Rep. 27, 31 (1989).  "There is no provision for abating interest accrued on a tax validly due."  Blue Jay Corp. v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 134, 135 (1994).  
The Board found and ruled in the present appeal that the sales and use taxes assessed against PPC Constructors were validly due.  Accordingly, no provision in Massachusetts law exists for the abatement of interest in these circumstances.  Furthermore, any perceived flaws with the Commissioner's notice do not justify an abatement of interest, because interest accrues automatically by statute.  "[I]nterest accrues by operation of law in accordance with G.L. c. 62C, § 32, and penalties accrue by operation of law in accordance with G.L. c. 62C, § 33.  They need not be separately assessed under G.L. c. 62C, § 26(b)."  Fields Corner Plate Glass Co., Inc. v. Commissioner of Revenue, 16 Mass. App. Tax Bd. Rep. 157, 161-62 (1994).  See also Commissioner of Revenue v. Molesworth, 408 Mass. 580, 582 (1990)("[T]here is no statutory due date for a penalty or interest assessment.").
Accordingly, the Board found and ruled that no abatement of interest or penalties was warranted under the circumstances of this appeal.

IV.  Conclusion.
Based on the foregoing, the Board found and ruled that PPC Constructors failed to prove that it was exempt from paying sales or use tax on materials used in the performance of the five disputed contracts at issue in this appeal, that the milling machine and band saw were exempt as machinery used in the manufacturing of tangible personal
property to be sold or that it was entitled to an abatement of penalties and interest for its failure to file sales tax returns.  
Accordingly, the Board issued a decision for the appellee.				
	      APPELLATE TAX BOARD
	
				
			
  By:____________________________
					      Abigail A. Burns, Chairman
A true copy:

Attest: _______________________
	              Clerk of the Board

   Katherine Santaniello, an employee of the Department of Revenue's Audit Bureau, testified at the hearing that she could not verify whether a seasonal return for tax year 1986 had been filed "because we did not have a drop tape available for that period."

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