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D & H Distributing Co. v. Commissioner of Revenue

Supreme Judicial Court of Massachusetts, Suffolk

July 31, 2017

D & H DISTRIBUTING COMPANY
v.
COMMISSIONER OF REVENUE

          Heard: April 3, 2017.

         Appeal from a decision of the Appellate Tax Board.

         The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Philip S. Olsen (Jonathan A. Block also present) for the taxpayer.

          Julie E. Green, Assistant Attorney General, for Commissioner of Revenue.

          Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, & Cypher, JJ.

          CYPHER, J.

         If a 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 department.

         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.

         1. Statutory framework.

         a. Sales tax.

         General 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") .

         The 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).[1] 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.

         b. Use tax.

         The use 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").[2] 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) .[3]

         c. The drop shipment rule.

         The 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.[4] Because the sales and use tax schemes are "complementary, " Town Fair Tire Ctrs., Inc. v.Commissioner of Revenue, 454 ...


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