Heard: April 3, 2017.
from a decision of the Appellate Tax Board.
Supreme Judicial Court on its own initiative transferred the
case from the Appeals Court.
S. Olsen (Jonathan A. Block also present) for the taxpayer.
E. Green, Assistant Attorney General, for Commissioner of
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, &
consumer enters his or her neighborhood sporting goods store
in Massachusetts and purchases a baseball glove, the store,
as the "vendor, " collects the Massachusetts sales
tax owed from the consumer and remits it to the Department of
Revenue (department). See G. L. c. 64H, §§1, 2.
This case evaluates a more complex transaction in which a
Massachusetts consumer instead finds a hypothetical baseball
glove online, and purchases it from an out-of-State retailer
who then orders the glove from a Massachusetts wholesaler and
directs the wholesaler to deliver the glove directly to the
doorstep of the Massachusetts consumer. In that more
complicated transaction, known as a "drop shipment sale,
" the wholesaler is considered to be the vendor, and is
obligated to collect sales tax and remit it to the
taxpayer, D & H Distributing Company (D & H), is a
company in the position of the hypothetical wholesaler just
described. It appeals from a decision of the Appellate Tax
Board (board) in which the board concluded that under a
provision of the Massachusetts sales tax statute known as the
"drop shipment rule, " D & H was responsible
for collecting and remitting the sales tax due on products it
sold to the out-of-State retailers and then delivered to
consumers. G. L. c. 64H, § 1. We agree with the
board's conclusion, and also reject D & H's
argument that the statutory drop shipment rule violates the
dormant commerce clause of the United States Constitution.
Accordingly, we affirm the decision of the board.
Laws c. 64H distinguishes between retail sales transactions
and sales-for-resale transactions. Retail sales of goods and
services are subject to tax in Massachusetts. G. L. c. 64H,
§ 2. In contrast, sales for resale -- that is, sales of
goods by a wholesale supplier to a retailer that will
ultimately sell to an end consumer -- are not subject to tax;
only the subsequent retail sale is. See G. L. c. 64H, §
1 (defining "retail sale" as "a sale of
services or tangible personal property or both for any
purpose other than resale"); G. L. c. 64H, § 2
(imposing sales tax upon "sales at retail") .
statute also distinguishes between a retailer that is engaged
in business in Massachusetts and one that is not. Where a
retailer is engaged in business in Massachusetts but
purchases the goods it sells a Massachusetts consumer from a
wholesaler, sales tax is charged on the final sale to the
customer, and the retailer is the "vendor, " G. L.
c. 64H, § 1, responsible to pay the tax. G. L. c. 64H,
§ 2. However, if a retailer is not engaged in business
in Massachusetts in the sense that the retailer does not have
any in-State physical presence, Massachusetts cannot require
the retailer to collect and remit sales tax. See Quill
Corp. v. North Dakota, 504 U.S. 298,
314-315 (1992) (retailers without in-State physical presence
may not be compelled to collect State sales tax);
National Bellas Hess, Inc. v.
Department of Revenue of Ill., 386 U.S. 753, 758
(1967) (same). In light of the Supreme Court's
physical presence requirement, in the previously described
hypothetical, if the out-of-State retailer of the baseball
glove purchased online by the Massachusetts consumer had no
physical business presence here, it could not be compelled to
collect Massachusetts sales tax.
tax, under G. L. c. 641, was designed to prevent loss of
sales tax revenue from such out-of-State retail purchases.
Commissioner of Revenue v. J.C. Penney
Co., 431 Mass. 684, 687 (2000). The use tax obligates
consumers to remit tax to the Commissioner of Revenue
(commissioner) "upon the storage, use or other
consumption in the commonwealth of tangible personal property
or services purchased from any vendor, " G. L. c. 641,
§ 2, that was not subject to sales tax upon the original
sale. G. L. c. 641, § 3. In practice, however, consumers
seldom remit use tax of their own volition, and are not
likely even to be aware of the requirement. See Tenczar, DOR
to Taxpayers: Don't Forget Use Tax, Commonwealth Mag.
(Winter 2014) (Massachusetts 2012 use tax compliance rate
estimated at under two percent; commissioner believes
"people don't pay because they really don't
understand how the use tax works"). States that rely
on use tax lose substantial tax revenue. See Direct Mktg.
Ass'n v. Brohl, 135 S.Ct. 1124,
1127 (2015) (low compliance with use tax leads to significant
revenue loss) .
The drop shipment rule.
drop shipment rule, G. L. c. 64H, § 1, offers an
alternative to the consumer-reported use tax scheme. The rule
applies to a sales transaction such as the hypothetical
online baseball glove purchase. When the wholesale supplier
is engaged in business in the Commonwealth but the retailer
is not, the drop shipment rule requires the Massachusetts
wholesale supplier to collect and remit the sales
tax due on the ultimate retail sale to the consumer. G. L. c.
64H, § l. Because the sales and use tax schemes are
"complementary, " Town Fair Tire Ctrs.,
Inc. v.Commissioner of Revenue, 454