United States: Massachusetts Appellate Tax Board Upholds Use Tax On Common Carrier Trucks Domiciled In State

The Massachusetts Appellate Tax Board recently upheld the imposition of use tax on vehicles that were used by a freight business headquartered in Massachusetts, but were titled and registered outside the state.¹ Specifically, the Board found that the tax did not violate the Commerce Clause of the U.S. Constitution.²

Background

The taxpayer, an operator of a trucking company which is licensed by the Interstate Commerce Commission (ICC)³ as a for-hire interstate carrier to operate a fleet of tractors and trailers, was headquartered in Massachusetts. While all of the administrative staff and the sole officer of the company were located in Massachusetts, the company had terminals, warehouses, and maintenance facilities in both New Jersey and Massachusetts. The vehicles were purchased from vendors in New Hampshire, New Jersey, Indiana, and Pennsylvania and were delivered to the taxpayer outside Massachusetts. All of the vehicles were registered in New Jersey and bore New Jersey license plates.

During the tax period at issue, the taxpayer operated several hundred vehicles to carry and deliver goods throughout various states. As each of the states where the vehicles were purchased either did not impose sales tax or allowed an applicable exemption from sales and use tax for vehicles engaged in interstate commerce,⁴ the taxpayer paid no sales tax with respect to its vehicle purchases. The taxpayer also did not file use tax returns or pay use tax to Massachusetts based on the purchase price of the vehicles, believing that the vehicles were exempt from sales and use tax.⁵

Pursuant to an audit of the taxpayer's books and records for the period from October 1, 2002 through January 31, 2008, the Massachusetts Commissioner of Revenue issued an assessment of more than $1.4 million, including interest and penalties, based on the imposition of use tax on the full purchase price of each tractor and trailer in the taxpayer's fleet. The taxpayer requested a full abatement of the assessment, which was denied. Thus, the taxpayer filed a petition with the Appellate Tax Board alleging that the imposition of use tax on its vehicles which were engaged in interstate commerce violated the Commerce Clause⁶ and the Equal Protection Clauses of the U.S. and Massachusetts Constitutions.⁷

Massachusetts Law

Massachusetts generally imposes sales and use tax on the storage, use or other consumption of tangible personal property in Massachusetts.⁸ Specifically, use tax applies to transfers of title or possession of a motor vehicle where the vehicle transferred is ultimately stored or used in Massachusetts.⁹ An exemption from use tax is available for vehicles purchased outside Massachusetts if the purchaser properly paid a sales tax to the jurisdiction where the original purchase took place and other requirements are met.¹⁰ Massachusetts regulations provide that the sale or transfer of a vehicle that is subsequently brought into Massachusetts for purposes of interstate commerce is exempt from Massachusetts use tax pursuant to this exemption or if the taxation is impermissible under the U.S. Constitution.¹¹ Also, taxpayers may generally offset use tax liability with a qualifying amount paid to another jurisdiction.¹²

Since the taxpayer in this instance ultimately used its vehicles in Massachusetts, use tax generally applied. No exemption for sales tax paid to other jurisdictions was available, as the taxpayer did not remit sales tax to any other jurisdiction with respect to its vehicle purchases. Thus, pursuant to Massachusetts law, the use tax applied unless, as argued by the taxpayer, the tax was impermissible under the U.S. Constitution.

Commerce Clause Limitations

The Board relied upon the well-established four-prong test first applied by the U.S. Supreme Court in Complete Auto Transit¹³ to determine whether the use tax violated the Commerce Clause. Specifically, the Board considered whether the tax: (i) was applied to an activity with a substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state. Generally, a tax must sustain all four challenges in order to withstand constitutional challenge.

Substantial Nexus

The taxpayer at issue had a significant physical presence in Massachusetts, including its headquarters, which housed the majority of its employees and regularly stored its fleet vehicles. Also, vehicle maintenance and freight operations regularly took place in Massachusetts. The Board recognized that such physical presence has generally been accepted as indicative of nexus for Commerce Clause purposes.¹⁴

However, the taxpayer maintained that because the vehicles upon which the sales tax was levied engaged in activities both within and outside Massachusetts, the requisite substantial nexus threshold was not met. Relying upon the logic applied in Jefferson Lines,¹⁵ the Board dismissed this argument as irrelevant to the substantial nexus determination and found that the tax met the first prong of the required Commerce Clause test.

Fairly Apportioned

To determine whether the use tax was fairly apportioned, the Board considered whether it was both internally and externally consistent.¹⁶ Because of the credit allowed by Massachusetts for sales tax paid to other jurisdictions, both the taxpayer and the Board agreed that the tax was internally consistent. As for external consistency, the taxpayer maintained that the assessment of use tax on the entire vehicle purchase price violated this requirement. Specifically, the taxpayer argued that the tax base on property engaged in interstate commerce must be apportioned in order to meet this external consistency requirement. Citing language used in the dismissal of a similar argument in Jefferson Lines,¹⁷ the Board noted the general acceptance of constitutionality of "taxation of sales without any division of the tax base among different States," as courts have "held such taxes properly measurable by the gross charge for the purchase, regardless of any activity outside the taxing jurisdiction that might have preceded the sale or might occur in the future."

Following the rationale applied by other jurisdictions, the Board then summarily rejected the concept of assigning an apportioned value to property used in interstate commerce for the purposes of charging use tax.¹⁸ In support of its position that the value of its vehicles subject to use tax violated the second prong of the Commerce Clause, the taxpayer referenced a case in which the Alabama Court of Appeals dismissed as unconstitutional an unapportioned use tax on the value of trucks used in interstate commerce.¹⁹ In denying this argument, the Board noted that that Court failed to address the issue of credit provisions in lieu of apportionment and deviated from a decision of its own state supreme court. Thus, the Board ruled that because the Massachusetts use tax is internally consistent and the taxpayer failed to demonstrate any credible threat of duplicate taxation by multiple jurisdictions on the vehicles, the use tax was fairly apportioned.

Discrimination against Interstate Commerce

In determining whether the Massachusetts use tax discriminated against interstate commerce, the Board noted that the use tax is applied at the same rate as the sales tax and is levied on both residents and nonresidents.²⁰ The taxpayer based its argument that the tax was discriminatory on its determination that imposition of the use tax inflicted additional costs per mile, which made the taxpayer less competitive relative to other transportation carriers. The Board rejected the taxpayer's argument as erroneously reliant upon previous decisions²¹ which both struck down flat, unapportioned user fees imposed upon trucking companies for the use of state roads. In both instances, courts had found these fees discriminatory.

In rejecting the taxpayer's argument, the Board noted that the user fees were found to violate the Commerce Clause because they were not internally consistent, not because they were found to discriminate against interstate commerce. In both decisions cited by the taxpayer, taxpayers could be subject to the same tax in multiple jurisdictions. Additionally, the Board rejected the argument because the Massachusetts use tax at issue is a tax on the storage or use of tangible property in the state, rather than a tax on the use of its roads or a tax on any activity taking place outside of Massachusetts. Noting that discrimination results when a state subjects taxpayers doing business outside of the state to disparate tax treatment from taxpayers doing business inside the state, not when a state subjects all taxpayers to a tax that another state may exempt, the Board found the taxpayer's argument inadequate.

Fairly Related to Services Provided

Finally, the Board considered whether the tax was fairly related to state benefits provided to the taxpayer. Pursuant to previous decisions, the receipt of police and fire protection and the use of public roads have been found to be sufficient state-provided services to satisfy the Commerce Clause requirements.²² The taxpayer in this instance clearly received these services while using and storing its vehicles in Massachusetts, so the use tax imposed met this requirement.

Having determined that the use tax at issue met each of the above requirements, the Board ruled that the tax did not violate the Commerce Clause.

Equal Protection Clause

The taxpayer further alleged that it was denied equal protection required under both the U.S. and Massachusetts Constitutions. Specifically, the taxpayer argued that the auditor improperly required it to provide a "fair apportionment" calculation and that the Department intentionally and arbitrarily singled out the taxpayer for hostile tax treatment by assessing use tax on its vehicles and not those of its competitors.

To determine whether these allegations were accurate, the Board focused on whether the taxpayer proved that: (i) it (relative to other taxpayers similarly situated) was "selectively treated; and (ii) such selective treatment was based on impermissible considerations such as race, religion, intent to inhibit or punish the exercise of constitutional rights, or malicious of bad faith intent to injure a person."²³ The taxpayer was able to provide only hearsay evidence to support its claim. Thus, the Board found and ruled that there was no violation of the taxpayer's constitutional right to equal protection.

Penalty Abatement

Massachusetts law generally allows imposition of a penalty for any failure to file a return or timely pay a tax, but provides for potential abatement in cases where the non-filing is due to reasonable cause and not to willful neglect.²⁴

The taxpayer relied upon a letter ruling,²⁵ which was issued by the Department in 1980 and based upon a regulation²⁶ which was amended in 1996, to conclude that it did not have a use tax filing responsibility. Pursuant to the ruling, vehicles were exempt from sales and use tax in Massachusetts if: (i) the motor vehicle was authorized by the ICC as an interstate carrier under a designated docket number or certificate; (ii) delivery and possession of the motor vehicle was taken by the purchaser outside of Massachusetts; and (iii) the motor vehicle entered Massachusetts for the first time with a load of passengers or freight in interstate commerce. Believing that it met the requirements to qualify for this exemption, the taxpayer failed to file use tax returns or pay use tax.

The 1996 amendment, however, removed the relied-upon exemption and replaced it with an exemption from tax for vehicles used in interstate commerce only when sales and use tax was paid in other jurisdictions or when imposition of the tax would violate the Constitution. Despite this regulatory change, the letter ruling continues to be published by the Department in its official guidance²⁷ and is available on the Department's Web site. No caveat or other warning regarding the regulatory change is included in the Department's publications. In addition, an experienced auditor testified before the Board that he was initially unaware that the exemption referenced in the letter ruling was no longer available.

The taxpayer had relied upon the guidance provided in the letter ruling, which addressed a taxpayer with identical facts to the taxpayer, for many years prior to the audit period to conclude that it owed no use tax and had no related filing responsibility. Due to this previous accurate reliance on the document, as well as the Department's continued publication of the ruling, the Board found that it was not unreasonable for the taxpayer to continue to believe the position was valid. Thus, the failure to file was based on reasonable cause and the penalty was abated.

In summary, the Board found that the imposition of use tax on the taxpayer's storage and use of its vehicles in Massachusetts did not violate the Commerce Clause of the U.S. Constitution nor the Equal Protection Clauses of the U.S. or Massachusetts Constitutions. However, the taxpayer had reasonable cause for its failure to file use tax returns or pay use taxes. While the assessment of tax and interest was upheld, related penalties were abated.

Commentary

As most states allow for a "rolling stock" exemption from sales and use tax, Massachusetts appears to be one of only a few states imposing use tax on vehicles used in interstate commerce that are purchased, titled, and registered in another jurisdiction. This decision further highlights this unique position (perhaps in this case motivated by Massachusetts' proximity to New Hampshire, a state that does not impose a sales and use tax) and could serve to encourage other jurisdictions with similar laws to more aggressively pursue similar taxpayers who have not paid sales or use tax on fleet vehicles.

Further, the cries of injustice from the taxpayer regarding the assessment, though unproven, are interesting. Certainly this taxpayer was not the first to assert that it was singled out for disparate treatment from its competitors. While it appears that the Department is well within its legal boundaries in enforcing payment of use tax in this instance, this practice could be perceived as egregious in light of the taxpayer's allegations.

The Board's decision also highlights the need for state tax authorities to regularly review the guidance that they release to the public. The taxpayer was able to argue that it had reasonable cause for its position, resulting in the elimination of nearly $400,000 in penalties, because the taxpayer followed an old letter ruling that remained on the Department's Web site following a change in Massachusetts law that made it obsolete. One might expect the Department to invest some level of time and resources to review previously issued guidance, and ensure that obsolete guidance is formally superseded and removed from its Web site.

Footnotes

1. Regency Transportation, Inc. v. Commissioner of Revenue, Mass. App. Tax Bd., Docket No. C310361, Dec. 4, 2014.

2. U.S. CONST. art. I, § 8.

3. Though the taxpayer was originally licensed by the ICC, that organization was dissolved in 1995. Since 1996, the U.S. Department of Transportation has licensed for-hire interstate carriers.

4. The exemption for vehicles engaged in interstate commerce is typically referred to as a "rolling stock" exemption from sales tax.

5. This understanding was based on Letter Ruling 80-22, Mass. Dept. of Rev. (1980). Note that the guidance provided in this document relied upon regulations which have since been modified. Guidance included in this document indicated that vehicles were exempt from sales and use tax in Massachusetts if: (i) the motor vehicle was authorized by the ICC as an interstate carrier under a designated docket number or certificate; (ii) delivery and possession of the motor vehicle was taken by the purchaser outside of Massachusetts; and (iii) the motor vehicle entered Massachusetts for the first time with a load of passengers or freight in interstate commerce.

6. U.S. CONST. art. I, § 8.

7. U.S. CONST. amend. XIV; MASS. CONST. art. CVI.

8. MASS. GEN. LAWS ch. 641, § 2.

9. MASS. REGS. CODE tit. 830, § 64H.25.1(3)(a).

10. MASS. REGS. CODE tit. 830, § 64H.25.1(7)(g). Additional requirements which must be met for the exemption to apply include: (i) the sales or use tax was paid and legally due to the state or territory; (ii) the purchaser did not have the right to receive a refund or credit of the sales or use tax from the state or territory where the sale occurred; and (iii) the state or territory to which the sales or use tax was paid allows a corresponding exemption with respect to motor vehicle sales and use taxes paid to Massachusetts.

11. MASS. REGS. CODE tit. 830, § 64H.25.1(7)(h).

12. MASS. GEN. LAWS ch. 641, § 7(c).

13. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

14. D.H. Holmes v. McNamara, 486 U.S. 24 (1988).

15. Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175 (1995). In this case, the U.S. Supreme Court upheld the imposition of a sales tax by Oklahoma on the full price of a bus ticket for travel that originated in Oklahoma but terminated elsewhere.

16. This test for fair apportionment was developed in Goldberg v. Sweet, 488 U.S. 252 (1989). Specifically, a tax is internally consistent if it is structured so that if every state imposed an identical tax, no multiple taxation would result. A tax is externally consistent if a state taxes only that portion of interstate activity which reasonably reflects the in-state component of the activity being taxed.

17. Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175 (1995). The taxpayer further argued in this case for the applicability of sales tax on an apportioned value of the bus ticket, rather than the gross purchase price. This argument was rejected and the sales tax applied to the full value of the ticket.

18. Citing, e.g., Irwin Industrial Tool Co. v. Illinois Department of Revenue, 938 N.E.2d 459 (Ill. 2010); Ex Parte Fleming Foods of Alabama, Inc., 648 So. 2d 577 (Ala. 1994); Fleming Foods v. Alabama Department of Revenue, 514 U.S. 1063 (1995).

19. Boyd Brothers Transportation, Inc. v. State Department of Revenue, 976 So. 2d 471 (Ala. App. 2007).

20. MASS. GEN. LAWS ch. 641, § 2.

21. American Trucking Associations, Inc. v. Scheiner, 483 U.S. 266 (1987); American Trucking Associations, Inc. v. Secretary of Administration, 613 N.E.2d 95 (Mass. 1993).

22. Goldberg v. Sweet, 488 U.S. 252 (1989).

23. Rubinovitz v. Rograto, 60 F. 3d 906 (1st Cir. 1995).

24. MASS. GEN. LAWS ch. 62C, §33(f).

25. Letter Ruling 80-22, Mass. Dept. of Rev. (1980).

26. MASS. REGS. CODE tit. 830, §64H.25.1.

27. Official MassTax Guide, PWS-580 (West 2014).

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