International Business MacHines Corp. v. Levin

[Cite as Internatl. Business Machines Corp. v. Levin, 125 Ohio St.3d 347, 2010-Ohio-1861.]

INTERNATIONAL BUSINESS MACHINES CORPORATION ET AL., APPELLANTS, v.

LEVIN, TAX COMMR., APPELLEE.

[Cite as Internatl. Business Machines Corp. v. Levin,

125 Ohio St.3d 347, 2010-Ohio-1861.]

Taxation — Sales and use tax — R.C. 5739.071 — R.C. 5741.10 — Electronic

information services.

(No. 2009-1296 — Submitted February 17, 2010 — Decided May 5, 2010.)

APPEAL from the Board of Tax Appeals, Nos. 2007-Z-1140,

2007-Z-1141, and 2007-Z-1143.

__________________

CUPP, J.

{¶ 1} Appellants, International Business Machines Corporation (“IBM

Corp.”) and IBM Credit Corporation (“IBM Credit”) (collectively, “IBM”),

appeal from a decision of the Board of Tax Appeals (“BTA”) that affirmed three

final determinations of the Tax Commissioner, each of which declined to award

interest on certain refunds. We hold that the commissioner and the BTA properly

denied the interest claims.

Facts

{¶ 2} The factual record in this case is sparse, and there are no

evidentiary disputes. Citing R.C. 5739.071 and 5741.10 as the statutory bases, the

Tax Commissioner issued separate final determinations granting use-tax refunds

to IBM Corp. and IBM Credit. The refunds to IBM Corp. amounted to

$1,137,811.31 in the aggregate, and the refunds to IBM Credit amounted to

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$2,825,920.79.1 Additionally, citing only R.C. 5739.071, the commissioner

granted IBM Corp. a sales-tax refund of $321,005.26.

{¶ 3} With each refund, IBM requested an award of interest; in each

instance, the commissioner denied that request. IBM appealed each case to the

BTA on the sole issue of the denial of interest. The parties waived an evidentiary

hearing and submitted briefs on the legal arguments.

{¶ 4} On June 23, 2009, the BTA issued a single decision covering all of

the refund claims. The BTA rejected IBM’s claim that the reference in R.C.

5739.071(A) to the general refund provisions, R.C. 5739.07 (sales tax) and

5741.10 (use tax), incorporated the statutory right to interest under those

provisions. See R.C. 5739.132(B). IBM appealed. We affirm the decision of the

BTA.

Analysis

{¶ 5} In 1983, Ohio first imposed sales and use taxes on the provision of

“automatic data processing and computer services” (“ADPCS”). Am.Sub.H.B.

No. 291, 140 Ohio Laws, Part II, 2872, 3215, 3220. In 1993, the General

Assembly amended the taxation of ADPCS in two principal ways. Am.Sub.H.B.

1. Particularly unclear is the status of IBM Credit with respect to the transactions for which it

received refunds. The BTA recited that “IBM Credit Corporation [ ] collected sales and use taxes

for tax years 1997 through 2006.” (Emphasis added.) Internatl. Business Machines Corp. v. Levin

(June 23, 2009), BTA Nos. 2007-Z-1140, 2007-Z-1141, and 2007-Z-1143, at 2. In its brief, IBM

further explains that “IBM Credit Corporation collected Ohio use taxes during the years 1997

through 2006 for computers and related items sold or leased to International Business Machines

Corporation.” (Emphasis added.) This makes it appear that IBM Credit acted as a use-tax seller

(the use-tax equivalent of a sales-tax vendor) with respect to the transactions, rather than as a

“consumer” who purchased and used the items as a “provider of electronic information services”

pursuant to R.C. 5739.071(A). We have stated that one of the statutory prerequisites a claimant

must show to obtain a 25 percent refund is that the claimant “is a provider of electronic

information services.” Key Servs. Corp. v. Zaino (2002), 95 Ohio St.3d 11, 16, 764 N.E.2d 1015.

We must presume, however, that the commissioner properly evaluated the refund claims when he

authorized the grant of refunds. See Wheeling Steel Corp. v. Evatt (1944), 143 Ohio St. 71, 28

O.O. 21, 54 N.E.2d 132, paragraph seven of the syllabus (“The action of an administrative officer

or board within the limits of the jurisdiction conferred by law is presumed, in the absence of proof

to the contrary, to be valid and to have been done in good faith and in the exercise of sound

judgment”).

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No. 152, 145 Ohio Laws Part II, 3341, and Part III, 4287, 4294, 4305-4306.

First, the broader category ADPCS was broken down into three categories of

taxable services: automatic data processing services (“ADP”), electronic

information services (“EIS”), and computer services. R.C. 5739.01(B)(3)(e) and

5739.01(Y). Second, the legislature enacted a partial tax refund provision only

for “providers of EIS.” R.C. 5739.071. This case concerns that tax benefit.

{¶ 6} R.C. 5739.071(A) states that the Tax Commissioner “shall refund

to a provider of electronic information services twenty-five per cent” of the sales

tax or use tax it pays on its purchases of computers, related equipment, and

software. The equipment and software must be “primarily used to acquire,

process, or store information for use by business customers or to transmit or

disseminate such information to such customers.” The tax benefit is also

available when the provider pays taxes on the purchase of “the services of

installing or repairing such property, and agreements to repair or maintain such

property.” As for the refund procedure, R.C. 5739.071(A) provides:

“Applications for a refund shall be made in the same manner and subject to the

same time limitations as provided in sections 5739.07 and 5741.10 of the Revised

Code.” R.C. 5739.07 is the general refund provision in the sales-tax law; R.C.

5741.10 is the general refund provision in the use-tax law. Both provisions

premise refunds on illegal or erroneous payments made by the taxpayer.

{¶ 7} With respect to interest on refunds, division (F) of R.C. 5739.07,

applicable to sales tax, explicitly states that “[w]hen a refund is granted under this

section, it shall include interest thereon as provided by section 5739.132 of the

Revised Code.” R.C. 5741.10, applicable to use tax, relies on a comprehensive

incorporation of sales-tax refund provisions into the use tax: refunds of use-tax

amounts “paid * * * by a seller or consumer illegally or erroneously shall be

made in the same manner as refunds are made to a vendor or consumer under

section 5739.07 of the Revised Code.” Finally, for tax payments due on or after

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January 1, 1998, R.C. 5739.132(B) expressly requires interest to be “allowed and

paid on any refund granted pursuant to section 5739.07 or 5741.10 of the Revised

Code from the date of overpayment.”

{¶ 8} Against this statutory backdrop, IBM argues that the 25 percent

refunds the commissioner allowed under R.C. 5739.071(A) should bear interest.

We cannot agree, and we must affirm the denial of interest.

R.C. 5739.071(A) does not incorporate the entitlement to interest because the

incorporation language is limited, and because R.C. 5739.132(B) does not

call for interest when refunds are allowed under R.C. 5739.071(A)

{¶ 9} IBM first argues that the second sentence of R.C. 5739.071(A), by

referring to the general refund provisions, incorporates the right to interest that is

allowed on refunds that are granted under those provisions. In opposition, the

commissioner points out that the plain terms of the language of incorporation are

limited and do not – certainly do not expressly – encompass a right to interest.

{¶ 10} As noted, R.C. 5739.071(A) states that “[a]pplications for a refund

shall be made in the same manner and subject to the same time limitations as

provided in sections 5739.07 and 5741.10 of the Revised Code.” We agree with

the Tax Commissioner that the express terms of this incorporation are limited to

two aspects of a refund claim: the manner and the timing of making an

application for the refund. Indeed, the language of R.C. 5739.071 is strikingly

more restrictive than that of R.C. 5741.10, which broadly calls for refunds of use

tax to “be made in the same manner” as sales tax refunds. Instead of referring to

the making of the refunds themselves, R.C. 5739.071 refers narrowly to the

making of the application for a refund.

{¶ 11} Moreover, the interest provision in R.C. 5739.132(B) by its

express terms does not apply to refunds granted under R.C. 5739.071(A). The

interest provision states that interest shall be “allowed and paid on any refund

granted pursuant to section 5739.07 or 5741.10 of the Revised Code.” But the 25

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percent refunds at issue are not granted under those general refund provisions.

Rather, they are authorized under R.C. 5739.071(A) itself, which states that the

“tax commissioner shall refund to a provider of electronic information services

twenty-five per cent of the tax it pays” on the purchase of qualifying equipment

and software. In plain language, R.C. 5739.071(A) “grants” the 25 percent

refunds. The consequence is that such refunds do not qualify as refunds

authorized, or “granted,” pursuant to the general refund provisions, R.C. 5739.07

and R.C. 5741.10. Because R.C. 5739.132(B) by its terms allows interest only on

refunds granted under the general provisions, no interest may be allowed on the

25 percent refunds granted pursuant to R.C. 5739.071(A). See Gen. Elec. Co. v.

DeCourcy (1979), 60 Ohio St.2d 68, 69, 14 O.O.3d 270, 397 N.E.2d 397, citing

State ex rel. Cleveland Concession Co. v. Peck (1954), 161 Ohio St.31, 52 O.O.

476, 117 N.E.2d 429 (absent express legislative allowance of interest, taxpayer

may not obtain interest on illegally or erroneously collected real estate taxes).

{¶ 12} IBM additionally argues that the portion of R.C. 5739.132(B) that

relates to refunds of tax payments due on or after January 1, 1998, specifically

does not, in so many words, link the award of interest to the status of the refunded

amount being an “illegal or erroneous” payment. It is true that the first sentence

of division (B), which relates to refunds of taxes due prior to January 1, 1998,

does refer to “payment of an illegal or erroneous assessment.” However, IBM

misconstrues the legislative purpose for not using the term “illegal or erroneous”

in the second sentence of that division. The different language reflects the

expansion of circumstances under which interest on refunds is allowed: formerly,

interest was awarded on refunds of taxes that had been paid under the compulsion

of a mistaken tax assessment, but not on voluntary overpayments. Beginning in

mid-1998, interest was allowed on all overpayments, including voluntary ones

based on the taxpayer’s own mistake. Because the allowance of interest was now

triggered by any refund under the general refund provisions, there was no need to

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mention the terms “illegal” and “erroneous” in the body of the statute. But the

“illegal or erroneous” requirement was still relevant, because both R.C. 5739.07

and R.C. 5741.10 link refunds to illegal or erroneous payments (be they voluntary

or compulsory in character).

{¶ 13} In summary, because R.C. 5739.132(B) only authorizes payment

of interest with respect to refunds granted under the general refund provisions,

interest is not available on the 25 percent refunds granted under R.C.

5739.071(A).

Because the amounts refunded under R.C. 5739.071(A) were legally

required to be paid at the time they were paid, they do not qualify as

“overpayments” or as “illegal or erroneous payments”

{¶ 14} In an attempt to bring its claim within the ambit of the general

refund statutes — and thereby trigger the requirement of R.C. 5739.132(B) to pay

interest on the refund — IBM argues in the alternative that the 25 percent sum

subject to rebate is really an “illegal or erroneous” payment in the sense that, as

counsel stated at oral argument, “it has to be prepaid, but it also has to be

refunded.” We do not believe that this assertion accurately describes the

situation. In fact, conceding that the full amount of the tax — which includes the

25 percent refundable portion — must be “prepaid” under R.C. 5739.071(A)

defeats this argument. Because the full sales or use tax is, in law, required to be

paid upfront, that is, at the time of the sales transaction, it cannot be a payment

that is either “illegal” or “erroneous.” It is legally required. Indeed, it would be

illegal or erroneous (or both) if IBM did not to make the upfront payment to its

vendor or seller, who, in turn, is then required to remit the money to the state.

{¶ 15} This reasoning accords with our discussion of R.C. 5739.071(A) in

Key Servs. Corp. v. Zaino (2002), 95 Ohio St.3d 11, 15, 764 N.E.2d 1015. In that

case, we considered an argument advanced by the taxpayer that R.C. 5739.071

constituted a type of refund statute that should be accorded “liberal construction”

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in favor of the taxpayer. In rejecting that argument, we stated that a taxpayer

seeking the 25 percent refunds under R.C. 5739.071(A) “is not seeking the return

of an illegal or erroneous payment.” Instead, we found that R.C. 5739.071(A) is

“more analogous to a tax exemption than it is to an illegal or erroneous payment.”

Similarly, the 25 percent refunds granted under R.C. 5739.071(A) cannot be

considered as “illegal or erroneous payments” for purposes of the interest statute.

There is no basis for an in pari materia reading of the statutes in this case

because there are no statutory conflicts to harmonize

{¶ 16} IBM also suggests that R.C. 5739.071(A) should be read in pari

materia with the general refund statutes, which provide that interest must be paid.

We find this argument unavailing. Because the general refund statutes and R.C.

5739.071(A) address different subject matters, there are no inconsistencies to

reconcile.

{¶ 17} As previously discussed, the general refund statutes furnish a

remedy when taxes have been paid in excess of what is legally owed. By

contrast, R.C. 5739.071(A) constitutes a partial tax exemption, which,

procedurally, is statutorily effected through a refund mechanism. Even though

the procedural mechanism by which a refund is effected is the same in both

statutes, the two statutes still address different underlying subjects: the need to

afford a remedy for overpayment of taxes on the one hand and, on the other hand,

the public-policy desirability of affording a limited tax reduction for the

statutorily specified transactions. Accord Key Servs. Corp., 95 Ohio St.3d at 15,

764 N.E.2d 1015 (R.C. 5739.071 is “analogous to a tax exemption”).

{¶ 18} A review of our cases in which statutes have been read in pari

materia clarifies the distinction. In State ex rel. Cordray v. Midway Motor Sales,

Inc., 122 Ohio St.3d 234, 2009-Ohio-2610, 910 N.E.2d 432, we used the doctrine

to reconcile statutes and an administratively prescribed odometer-disclosure

affidavit. We held that the violation of the odometer-disclosure statute must be a

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“knowing” violation in order to harmonize all of the provisions relating to the

subject; as we observed, “if we were to read the statutes any other way, the

odometer disclosure affidavit would be rendered meaningless.” Id. at ¶ 26.

{¶ 19} In United Tel. Co. of Ohio v. Limbach (1994), 71 Ohio St.3d 369,

643 N.E.2d 1129, we addressed the Tax Commissioner’s claim that by deleting

from R.C. 5727.06 the phrase “used in connection with or as incidental to the

operation,” the General Assembly had made all property of a public utility taxable

even though R.C. 5709.01 limited personal-property taxation in general to

property “located and used in business in this state.” We resolved the disputed

significance of deleting the language from the public-utility property tax by

construing those statutes in pari materia with the general limitation on personal-

property taxation: the court declined to construe the deletion of the language as

eliminating the used-in-business requirement for public-utility property, given

that the general statutes continued to prescribe that requirement for all personal

property taxation. Id. at 372.

{¶ 20} Nothing resembling the contradictions at issue in Midway Motor

and United Tel. is at issue in this case. The absence of statutory authorization of

interest for one category of refunds does not inherently contradict the

authorization of interest for another category of refunds.

Conclusion

{¶ 21} In light of the above discussion, the Tax Commissioner correctly

denied an allowance of interest with respect to refunds granted under R.C.

5739.071(A), and the BTA correctly affirmed that denial. The BTA’s decision is,

therefore, affirmed.

Decision affirmed.

PFEIFER, LUNDBERG STRATTON, O’CONNOR, O’DONNELL, and

LANZINGER, JJ., concur.

BROWN, C.J., not participating.

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__________________

Baker & Hostetler, L.L.P., Edward J. Bernert, and Kelvin M. Lawrence,

for appellants.

Richard Cordray, Attorney General, and Barton A. Hubbard and Sophia

Hussain, Assistant Attorneys General, for appellee.

______________________

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