PROCEEDING under article 78 of the Civil Practice Act (transferred to the Appellate Division of the Supreme Court in the first judicial department by an order of the Supreme Court at Special Term, entered in New York County) to review a determination of the comptroller of the City of New York assessing petitioner with sales taxes and/or compensating use taxes in the amount of $498,482.33, inclusive of penalties and interest for the period from January 1, 1941, to June 30, 1943. (Administrative Code of City of New York, ch. 41, titles M, N.)
Albert R. Connelly of counsel (Hoyt A. Moore, George G. Tyler and Albert Rosenblum with him on the brief; Cravath, Swaine & Moore, attorneys), for petitioner.
Morris L. Heath of counsel (Stanley Buchsbaum with him on the brief; Adrian P. Burke, Corporation Counsel, attorney), for respondent.
This is a proceeding under article 78 of the Civil Practice Act to review a final determination made by the comptroller of the City of New York, after a statutory hearing, assessing petitioner with sales and use taxes in the sum of $498,482.33, inclusive of penalties and interest, covering the period from January 1, 1941, through June 30, 1943.
Petitioner seeks an order adjudging that the cost of materials it furnished in repairing vessels pursuant to contracts with the United States Maritime Commission (hereafter called Commission) and with the Navy Department of the United States (hereafter called the Navy) is exempt from New York City sales and compensating use taxes; and prays for an annulment of the comptroller's determination assessing petitioner with the taxes.
By statute, sales of tangible personal property to Federal agencies are exempt from taxes (Administrative Code of City of New York, § N41-2.0, subd. b, par. 2; Comptroller's Regulations, art. 41, filed with the city clerk Dec. 29, 1938). Article 41 provides in part that 'Receipts from sales and services to or by the * * * federal government for governmental or public purposes are not taxable.' Concededly, the Commission and the Navy are agencies of the Federal Government, and, admittedly, sales of materials to these branches of the United States Government for governmental purposes are not taxable.
Petitioner is engaged in the business of building, altering, and repairing seagoing vessels. In 1941, it entered into eight master contracts with the Commission and four master contracts with the Navy for the repair of certain vessels. One contract received in evidence is typical of the eight master ship repair contracts with the Commission and the four with the Navy. Each of these master contracts sets forth the price to be paid for labor and, in addition thereto, the price to be paid for materials furnished in connection with the repair work.
Contracts with the Commission provided that the Commission was to pay 110% of cost to petitioner of direct material. Those with the Navy provided that the Navy was to pay the actual cost to petitioner of direct material and in addition thereto a sum not in excess of 10% of materials cost; amounts calculated on the basis of rates specified with respect to labor to be performed were also stated. Obviously, if petitioner had been required to pay a city's sales tax or a use tax upon materials it supplied to the United States Navy and to the United States Maritime Commission, such tax would have been added to the cost of the materials, and petitioner would have been entitled to collect from these agencies of the Federal Government 110% of such cost with taxes included as part of the cost to petitioner. If this method of operation had been employed, it would have resulted, contrary to the express intent of our statute, in requiring the Federal Government, upon materials purchased by it, to pay to the City of New York a sales tax and
a use tax. Though the fact that the economic burden of a tax is passed on to the United States does not make it a tax upon the United States ( Alabama v. King & Boozer, 314 U.S. 1, 9) where, by agreement the materials are sold separately to agencies of the United States Government no tax under the laws of this State may be collected. Who, in any particular transaction is the ultimate purchaser within the meaning of State law and 'who is responsible under its law for payment to the state of the exaction' is for the particular State to determine. (Kern-Limerick, Inc., v. Scurlock, 347 U.S. 110, 121.)
Under the comptroller's regulations, promulgated on December 29, 1938, which have the force and effect of statute, and of which we must take judicial notice (Administrative Code, § 982-8.0) where the contractor for the alteration or repair of tangible personal property agrees to furnish the materials and supplies at a fixed price or at the regular retail price and to render services either for an additional agreed price or on the basis of time consumed, the contractor's sales to his customer is a sale at retail. In other words, the contractor's customer, not the contractor, is the final purchaser of the materials, with the result that the contractor's customer, not the contractor, is liable for the retail sales tax and 'the contractor is requiredto collect the tax thereon from such person, as the sale to the contractor's customer is a sale at retail'. This rule is set forth in article 96 of the comptroller's regulations, relating to the alteration or repair of personal property, as follows:
'Article 96.--Frequently, materials and supplies are consumed in improving, altering or repairing tangible personal property of others. The instances are innumerable. Automobiles, ships, boats, fur coats, other articles of clothing, watches and jewelry, are but a few of the kinds of tangible personal property frequently improved, ...