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Trucklease Corp. v. Cozy Harbor Seafoods

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MAINE SUPREME JUDICIAL COURT					Reporter of Decisions
Decision:	2000 ME 36
Docket:	Cum-99-132
Submitted
on briefs:	September 29, 1999	
Decided:	February 28, 2000

Panel:WATHEN, C.J., and CLIFFORD, RUDMAN, DANA, SAUFLEY, ALEXANDER, and
CALKINS, JJ.




TRUCKLEASE CORP., d/b/a AMI LEASING v. COZY HARBOR SEAFOODS, INC.


CLIFFORD, J.

	[¶1]  Trucklease Corp., doing business as AMI Leasing, appeals from a
summary judgment entered in the Superior Court (Cumberland County,
Crowley, J.) in favor of Cozy Harbor Seafoods, Inc.  AMI seeks to recover
from Cozy Harbor taxes that AMI paid to the State on two refrigerator trucks
acquired by AMI and leased by AMI to Cozy Harbor.  AMI contends that the
tax liability arose when AMI leased the trucks to Cozy Harbor, not, as Cozy
Harbor contends, when AMI purchased the trucks.  AMI further contends
that pursuant to the lease agreement, Cozy Harbor has assumed the burden
of paying the tax assessed.  We agree with AMI, and we vacate the judgment.
	[¶2]  Cozy Harbor, a seafood processor, negotiated with AMI in 1995
to lease two refrigerator trucks.{1}  In June of 1995, the parties agreed that
AMI would purchase two refrigerator trucks and lease them to Cozy Harbor. 
Although the contract recited that the transaction was a lease and not a
contract of sale or security agreement, the agreement entered into was not a
traditional lease but what is known as a TRAC (Terminal Rental Adjustment
Clause) lease.  A TRAC lease lasts for an indefinite period of time and is very
similar to a financed sale.
	[¶3]  Under the TRAC lease, Cozy Harbor agreed to pay AMI a monthly
depreciation charge until the original value of the vehicles was fully
depreciated.  After that, Cozy Harbor would pay only a nominal monthly
service charge.  Cozy Harbor is obligated to pay all costs associated with
owning and operating the vehicles.  Paragraph nine of the lease addresses
Cozy Harbor's obligations:
Customer agrees to pay all taxes, fees, costs and expenses in
connection with the use, operation, maintenance, repair,
licensing, registration and titling of each Vehicle. . . . Customer
agrees to pay for any new or additional taxes, fees, or
governmental charges of any kind imposed with respect to any
Vehicle, its maintenance, use or operation, after completion of
the [depreciation] Schedule applicable to such Vehicle. . . . 
Customer acknowledges that it is the intent of the parties
that . . . all costs and obligations of any kind relating to a Vehicle,
whether or not specifically set forth in this Lease, shall be the
responsibility of and paid for by [Cozy Harbor].
	[¶4]  If either party decided to terminate the lease, the Terminal
Rental Adjustment Clause would govern the disposition of the vehicles.  This
clause requires Cozy Harbor to return the vehicles to AMI which would then
sell them at wholesale.  The proceeds would be applied to the remaining
depreciable value, and any excess would be paid to Cozy Harbor.  If the
proceeds fell short of the remaining depreciable value, Cozy Harbor would be
required to pay AMI the difference.
	[¶5]  Pursuant to the contract with Cozy Harbor, AMI purchased two
refrigerator vans in November of 1995.{2}  Shortly thereafter, AMI paid tax on
the value of the two chassis, basing its tax liability on the "cost" of the
vehicles.{3}  AMI billed Cozy Harbor for the tax and Cozy Harbor paid that bill
in December of 1995.
	[¶6]  The lease term commenced on January 1, 1996.  Several days
later Cozy Harbor took delivery of the trucks and began paying on the lease. 
AMI subsequently discovered that there was a mistake in calculating the tax
due on the trucks.  AMI had failed to pay any tax on the value of the truck
bodies, so the State had assessed an additional tax.  AMI paid the tax and
billed Cozy Harbor for that amount, but Cozy Harbor refused to pay the bill. 
Instead, it informed AMI that it had mistakenly paid the original tax bill and
demanded that AMI return that money.
	[¶7]  AMI filed a complaint in the Superior Court, alleging that AMI
and Cozy Harbor had entered into a TRAC lease and that "the Maine Tax
Assessor . . . treated TRAC leases as sales and charged sales tax on them." 
AMI further alleged that in this case "[t]he State of Maine assessed sales tax
on [the] vehicles" that were the subject of the TRAC lease.   Finally, AMI
claimed that the lease agreement obligated Cozy Harbor to reimburse AMI
for the sales tax paid by them.  Cozy Harbor answered that the contract did
not require it to pay the tax, and counterclaimed for reimbursement from
AMI of the money Cozy Harbor had already paid.
	[¶8]   "A party is entitled to summary judgment where there is no
genuine issue of material fact and the party, on the undisputed facts, is
entitled to judgment as a matter of law."  Briggs v. Briggs, 1998 ME 120,
¶ 5, 711 A.2d 1286, 1288.  In reviewing a grant of summary judgment, we
review the decision of the trial court for errors of law and view the evidence
in the light that is most favorable to the party against whom judgment was
entered.  See id.
	[¶9]  Both parties agree that AMI paid a tax on the value of the two
trucks, but they are in dispute on which tax AMI paid and, on which party
the law and the contract place the tax burden.{4}  Cozy Harbor argues that AMI
paid sales tax on the transaction between AMI and the truck vendor.  AMI
argues that Maine tax law treats TRAC leases as sales, and, in accordance
with the law, AMI paid sales tax on the TRAC lease transaction between it
and Cozy Harbor.
	[¶10]  In Maine, sales tax is a levy on the purchaser, but it may be
collected by the seller.  See 36 M.R.S.A. § 1753 (1990) (stating that sales tax
is a levy on the consumer and that "retailer shall add the amount of the tax
to the sales price"); see also 36 M.R.S.A. § 1812 (Supp. 1999) (stating that
sales tax is a "debt of the purchaser to the retailer until paid").  Thus, if AMI
paid tax as a purchaser of the two trucks, it is liable and it cannot collect
anything from Cozy Harbor unless the lease agreement shifts that
responsibility to Cozy Harbor.  See 36 M.R.S.A. § 1812 (Supp. 1999).  On the
other hand, if AMI paid the tax as a seller, it did so on behalf of Cozy Harbor
and Cozy Harbor is liable to AMI for the tax paid.  See id.  Based on the
record and on an analysis of Maine's sales tax provisions, we conclude that
the sales tax paid by AMI arose from the TRAC lease and not from AMI's
purchase of the vehicles.
	[¶11]  AMI is a Massachusetts corporation with an office in Maine.  Its
purchase of the trucks occurred entirely outside of Maine.  The invoices
disclose that AMI purchased the trucks and truck parts from vendors who
were not located in Maine and took delivery of the trucks in Massachusetts. 
Because title to the trucks passed outside of Maine, Maine sales tax
provisions do not apply to the transaction.  See John Swenson Granite v.
State Tax Assessor, 685 A.2d 425, 427 (Me. 1996).  Because AMI incurred
no Maine sales tax liability when it purchased the vehicles, it must have paid
sales tax for some other reason.  See id.
	[¶12]  Cozy Harbor contends that, even if the sale occurred entirely
outside of Maine, the vehicles were purchased for use in Maine, and AMI
was liable for Maine's use tax.  Maine imposes a tax on tangible property
purchased outside the state that is used in the state.  See 36 M.R.S.A.
§ 1861 (Supp. 1999).  By regulation, in the case of a bona fide lease, "the
lessor is considered the consumer of the property, and is liable for tax when
purchasing such property for rental purposes."  See Me. Bureau of Taxation
Reg. 316.01 (July 12, 1982).  Between 1985 and the time the parties
entered into the lease, however, TRAC leases were not considered bona fide
leases for Maine sales tax purposes.  See Bureau of Taxation, General
Information Bulletin, No. 86, September 19, 1997.  Rather, they were
treated as retail sales.{5}  See id.
	[¶13]  The characterization of a TRAC lease as a retail sale is important
to the result in this litigation.  First, it indicates that AMI did not incur tax
liability when it purchased the vehicles, even if the purchase had occurred
in Maine because Maine's sales tax does not apply to sales of tangible
property when the buyer intends to resell the property.  See 36 M.R.S.A.
§ 1752(11) (Supp. 1999) (stating that a "retail sale" does not include sales
where the purchaser intends to resell the property); 36 M.R.S.A. § 1811
(Supp. 1999) (stating that sales tax applies to "all tangible personal property
. . . sold at retail in this State").  AMI's purchase of the vehicles was for the
purpose of leasing them to Cozy Harbor under the TRAC lease.  Because the
State treats TRAC leases as sales for tax purposes, AMI's real purpose was to
"sell" the vehicles at retail.  Thus, AMI incurred no tax liability on the
purchase.
	[¶14]  Second, if AMI had entered into a bona fide or traditional lease
with Cozy Harbor, then it would have incurred "use tax" liability because it
would have been using (i.e. leasing) property within the state.  See
36 M.R.S.A. § 1861 (Supp. 1999).  Because the TRAC lease is considered a
sale, however, AMI did not use the vehicles in Maine and was not subject to
a use tax.  See id.; see also 36 M.R.S.A. § 1758 (1990) (charging use tax only
if the property bought for resale is leased before it is resold).  Instead, it is
Cozy Harbor who is liable for the sales tax arising from its "purchase" of the
vehicles from AMI.  See 36 M.R.S.A. § 1753 (1990).{6}
	[¶15]  Moreover, contrary to the contention of Cozy Harbor, the lease
agreement clearly allocates the burden of paying the tax to Cozy Harbor. 
Cozy Harbor agreed in paragraph nine "to pay all taxes, fees, costs and
expenses in connection with the use, operation, maintenance, repair,
licensing, registration and titling of each Vehicle."  The agreement further
provided that "it is the intent of the parties that . . . all costs and obligations
of any kind relating to a Vehicle, whether or not specifically set forth in this
Lease, shall be the responsibility of and paid for by [Cozy Harbor]."  The
Superior Court erroneously concluded that the tax paid by AMI was not on
the TRAC lease but rather was assessed on AMI's purchase of the vehicles in
Massachusetts, and it construed paragraph nine as not obligating Cozy
Harbor to reimburse AMI.
	[¶16]  Pursuant to the unambiguous language of the agreement,
however, Cozy Harbor has assumed the obligation to pay all taxes in
connection with the use and operation of the vehicles, and because the tax
paid is a tax on the lease of the vehicles, the obligation of Cozy Harbor to
reimburse AMI under the lease agreement is clear.
	The entry is:
Judgment vacated.  Remanded to the Superior
Court for entry of a judgment for the plaintiff.

Attorney for plaintiff: Arnold C. Macdonald, Esq. Burns Ray DeLano & Macdonald, P.A. P O Box 7486 Portland, ME 04112-7486 Attorney for defendant: Mark G. Furey, Esq. Thompson, Bull, Furey, Bass & MacColl, LLC, P.A. P O Box 447 Portland, ME 04112-0447
FOOTNOTES******************************** {1} . Cozy Harbor is a Maine corporation with its principal place of business in Maine. AMI is a Massachusetts corporation qualified to do business in Maine, with a place of business in Portland. {2} . The invoices reflect that AMI's purchase occurred entirely outside of Maine and that the trucks were delivered to AMI in Massachusetts. {3} . The parties dispute the precise characterization of the tax paid by AMI. Cozy Harbor argues that the tax arose from AMI's purchase of the vehicles. AMI contends that the tax arose from the TRAC lease, treated as it is by the State as a sale for sales tax purposes. {4} . Neither party argues that the contract shifts the burden for paying taxes from Cozy Harbor to AMI, and the contract contains no language that would support such a contention. {5} . After we decided Hannaford Bros., Co., v. State Tax Assessor, 487 A.2d 251 (Me. 1985), the Bureau of Taxation categorized TRAC leases as leases "in lieu of purchase" and treated them as retail sales. Though Hannaford did not explicitly address TRAC leases, the Bureau's treatment of TRAC leases as retail sales is consistent with Maine's sales tax law. We held in Hannaford that a lease requiring Hannaford to take title to vehicles at the expiration of the lease term fell squarely within the Bureau of Taxation's definition of a lease "in lieu of purchase" and was properly treated as a sale. See Hannaford Bros., Co., 497 A.2d at 255; see also Me. Bureau of Taxation Reg. 316.02 (July 12, 1982) ("A lease shall be deemed 'in lieu of purchase' when once the lessee enters into the so-called lease agreement, he must acquire title to the tangible personal property under the terms of the agreement.") Although its TRAC lease with AMI does not require Cozy Harbor to take title at the end of the lease, it does call for the vehicles to be sold and their value to be credited to Cozy Harbor. Hannaford made it clear that while "no single test will determine the 'true character' of every contract," the "most effective" test is "to examine what residual interest the 'lessor' retains at the end of the contract term." See Hannaford Bros., Co., 487 A.2d at 255. Here, AMI retains no interest in the vehicles at the expiration of the lease term, and Cozy Harbor receives the entire benefit from the sale of the vehicles. Accordingly, the treatment of TRAC leases as leases "in lieu of purchase" is consistent with Maine's sales tax law. {6} . Though Maine tax law places the tax burden for a TRAC lease squarely on the lessee, Cozy Harbor makes the procedural argument that the uncontested facts establish that AMI paid sales tax on its purchase of the vehicles and not on the lease. There is some support for this contention in AMI's Rule 7(d)(1) statement and in the affidavits. AMI does make clear, however, in an uncontroverted affidavit, that the tax it paid "is the sales tax on the TRAC lease from AMI to Cozy Harbor."