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Big Sur Waterbeds, Inc. v. City of Lakewood

Court of Appeals of Colorado, Seventh Division

October 4, 2018

Big Sur Waterbeds, Inc.; Denver Mattress Company, LLC; and Sofa Mart, LLC, Plaintiffs-Appellees,
v.
City of Lakewood, Colorado; and Larry Dorr, in his official capacity as Finance Director of the City of Lakewood, Colorado, Defendants-Appellants.

          Jefferson County District Court No. 16CV30877 Honorable Laura A. Tighe, Judge

          Silverstein & Pomerantz LLP, Neil I. Pomerantz, Mark E. Medina, Michelle Bush, Denver, Colorado, for Plaintiffs-Appellees

          Hoffman, Parker, Wilson & Carberry, P.C., M. Patrick Wilson, M. Keith Martin, Denver, Colorado, for Defendants-Appellants

          OPINION

          NAVARRO J. JUDGE.

         ¶ 1 Plaintiffs, Big Sur Waterbeds, Inc., Denver Mattress Co., LLC, and Sofa Mart, LLC, purchase furniture (tax free) from wholesalers worldwide and resell it in stores across the country, including in the City of Lakewood. At each Lakewood store, plaintiffs provide a showroom in which they display some furniture for customers to peruse and try out. Plaintiffs also maintain warehouses, where they store the bulk of their inventory. They ultimately sell all the furniture - including the displayed furniture - and fill customer orders from either the warehouses or the showrooms. Plaintiffs' customers pay Lakewood's sales tax on each purchase.

         ¶ 2 Lakewood assessed use tax on plaintiffs' purchases of the displayed furniture from 2012 to 2015, on the theory that plaintiffs purchased the displayed furniture at retail for their own use in advertising their products. Plaintiffs challenged the assessments in the district court, which held a bench trial. They argued that, like all the furniture they buy, they purchased the displayed furniture at wholesale - that is, primarily for resale - and thus those purchases were exempt from use tax. Employing the "primary purpose" test from A.B. Hirschfeld Press, Inc. v. City and County of Denver, 806 P.2d 917, 918-26 (Colo. 1991), the court agreed with plaintiffs and cancelled Lakewood's use tax assessments. Addressing an issue of first impression, we also conclude that plaintiffs purchased the displayed furniture primarily for resale. Therefore, we affirm the judgment cancelling the assessments.

         I. Standard of Review

         ¶ 3 We review de novo a district court's interpretation of a tax code. Leggett & Platt, Inc. v. Ostrom, 251 P.3d 1135, 1140 (Colo.App. 2010). Generally, when interpreting tax provisions, we resolve doubts in favor of the taxpayer. Noble Energy, Inc. v. Colo. Dep't of Revenue, 232 P.3d 293, 296 (Colo.App. 2010). When a taxpayer claims a statutory exemption from taxation, however, we presume that taxation is the rule and resolve doubts in favor of the taxing authority. Id.

         ¶ 4 "Following a bench trial, we defer to a trial court's factual findings unless they are so clearly erroneous as to find no support in the record." Target Corp. v. Prestige Maint. USA, Ltd., 2013 COA 12, ¶ 24.

         II. Lakewood's Code and Regulations

         ¶ 5 Lakewood's municipal code imposes a three percent use tax "for the privilege of storing, using, or consuming in the City any articles of tangible personal property or taxable services purchased at retail." Lakewood Mun. Code 3.01.210 (emphasis added). The use tax does not apply if the purchaser has already paid sales tax on the item, either to Lakewood or to another municipality, in an amount equal to or greater than the amount of Lakewood's tax. Id. at 3.01.220(A)(1), (E).

         ¶ 6 "Retail sale" is defined as "all sales except wholesale sales made within the city." Id. at 3.01.020. A "[w]holesale sale" is "a sale by wholesalers to retail merchants, jobbers, dealers, or other wholesalers for resale and does not include a sale by wholesalers to users or consumers not for resale . . . ." Id.

         ¶ 7 Consistent with the definitions of retail sale and wholesale sale, the code also expressly exempts from use tax "the storage, use, or consumption of any tangible personal property purchased for resale in the city, either in its original form or as an ingredient of a manufactured or compounded product, in the regular course of a business." Id. at 3.01.230(B).[1]

         ¶ 8 Lakewood's sales and use tax regulations supply guidance on interpreting the code. See id. at 3.01.070 ("The City Council shall adopt rules and regulations in conformity with this chapter for the proper administration and enforcement of this chapter."). One such regulation explains that "[u]se tax is a complement to sales tax." Lakewood Sales and Use Tax Reg. 3.01.300(1)(b) (adopted June 24, 1985), https://perma.cc/2LGV-L4B7.[2] Because sales tax is imposed only on retail sales, which are sales to the user or consumer of property or services sold, "use tax shall not apply to the storage, use[, ] or consumption of tangible personal property purchased by a licensed retailer for resale within the regular course of a business." Id.

          ¶ 9 Regulation 3.01.300(1)(b) also cautions, however, that

[t]angible personal property that was purchased tax-free for resale or as an ingredient of a manufactured or compounded product and subsequently withdrawn from stock for the purchaser's own use or consumption shall be taxed at the acquisition cost of all materials. The tax liability attaches at the time that the tangible personal property is withdrawn from stock.

Id. (emphasis added).

         ¶ 10 In addition, a special regulation entitled "Initial Use of Property" states:

Any item purchased for use or consumption by the purchaser is subject to sales or use tax at the time of purchase, even though the item shall be resold later in either its original or altered form. A tax-free purchase is taxable in full at the first time it is used by the purchaser for a nonexempt purpose.
(Example: A junkman may not buy a new car tax-free under the theory that the car is going to be junked someday and resold through his business for scrap.)

Lakewood Sales and Use Tax Special Regs., at 41.

         III. Purchased "At Retail" or "At Wholesale?"

         ¶ 11 Lakewood contends that plaintiffs' "initial purchase and subsequent use of display furniture is a taxable event." According to Lakewood, "all of [plaintiffs'] inventory purchases were initially treated as exempt wholesale purchases for resale." But "[l]ater, when [plaintiffs] withdrew a portion of this wholesale inventory for use as demonstration and promotion tools, the transactions in which the display models were purchased were properly recharacterized as taxable retail transactions."

         ¶ 12 For its taxation theory, Lakewood relies on the Initial Use of Property special regulation as well as regulation 3.01.300(1)(b). Respectively, those regulations ask whether the displayed furniture was (1) primarily purchased for use, not for resale; or (2) purchased for resale initially but later withdrawn from stock for plaintiffs' own use (i.e., whether their placing the furniture on display revealed that the primary purpose of their purchase was for their own use rather than for resale). Because both regulations turn on plaintiffs' primary purpose, we first look to the Hirschfeld test.

         A. The Primary Purpose Test

         ¶ 13 In Hirschfeld, 806 P.2d at 918-26, the supreme court considered use tax provisions from Denver's tax code that are nearly identical to Lakewood's code. The supreme court explained that, in assessing whether a purchase was made "at retail" or "for resale," courts should apply "a primary purpose" test. Id. at 921.

          Under this test, "a purchase of an item of tangible personal property is a purchase for resale and therefore not a purchase at retail if the primary purpose of the transaction is the acquisition of the item for resale in an unaltered condition and basically ...


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