Servomation Corp. v. State Tax Commission, 51 N.Y.2d 608 (1980)

Disposable items like cups and containers, purchased by food service vendors and transferred to customers, are exempt from sales tax under the resale exclusion of New York Tax Law § 1101(b)(4)(i)(A).

Summary

Servomation, a company operating vending machines and food service facilities, challenged a New York State Tax Commission regulation that subjected disposable paper and plastic products (cups, plates, containers) to sales tax. The Court of Appeals held that these items, when transferred to customers, qualify for the resale exclusion under Tax Law § 1101(b)(4)(i)(A), thus are not subject to sales tax. The court reasoned that the regulation was inconsistent with the statute, as interpreted in the companion case, Matter of Burger King v. State Tax Commission, and therefore unenforceable.

Facts

Servomation Corp. operates vending machines, cafeterias, and restaurants. In its food service business, it buys disposable paper and plastic products (cups, plates, containers). New York Tax Law § 1115(a)(19) exempts containers used in packaging tangible personal property for sale. The State Tax Commission issued a regulation (20 NYCRR 528.20(c)(5)) stating that containers used by restaurants are taxable, regardless of whether a separate charge is imposed.

Procedural History

Servomation sued for a declaratory judgment that the regulation was invalid. The Supreme Court initially sided with the Tax Commission. The Appellate Division reversed, citing its decision in Matter of Burger King v. State Tax Comm., which was later modified by the Court of Appeals. The Court of Appeals then reviewed the Appellate Division’s decision regarding Servomation.

Issue(s)

Whether the State Tax Commission regulation (20 NYCRR 528.20(c)(5)), which subjects disposable containers used by restaurants to sales tax, is valid in light of Tax Law § 1101(b)(4)(i)(A) and § 1115(a)(19).

Holding

No, because the disposable items fall within the resale exclusion provided by Tax Law § 1101(b)(4)(i)(A), making the regulation unenforceable as it is inconsistent with the statute.

Court’s Reasoning

The Tax Commission argued that section 1115(a)(19) only exempts containers used to package tangible personal property, and that restaurant food is not tangible personal property. However, the court relied on its holding in Matter of Burger King v. State Tax Comm., which determined that similar paper products purchased by fast-food chains for sale to customers fall within the resale exclusion of Tax Law § 1101(b)(4)(i)(A). The court stated that an administrative agency cannot override a statute enacted by the Legislature with its own regulations, quoting Matter of Jones v. Berman, 37 NY2d 42, 53. The Court emphasized that when a regulation is disharmonious with the statute it intends to implement, it must be deemed void. The court distinguished this case from situations where deference to agency interpretation is appropriate, stating, “Where, however, the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations are therefore to be accorded much less weight” (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459).