NOTICE: All slip opinions and orders are subject to formal
revision and are superseded by the advance sheets and bound
volumes of the Official Reports. If you find a typographical
error or other formal error, please notify the Reporter of
Decisions, Supreme Judicial Court, John Adams Courthouse, 1
Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-
1030; SJCReporter@sjc.state.ma.us
SJC-12260
D & H DISTRIBUTING COMPANY vs. COMMISSIONER OF REVENUE.
Suffolk. April 3, 2017. - July 31, 2017.
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd,
& Cypher, JJ.
Taxation, Sales and use tax. Internet. Constitutional Law,
Commerce clause, Interstate commerce, Taxation. Interstate
Commerce.
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.
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
2
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
3
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)
4
(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. 64I, 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. 64I, § 2, that was not subject to sales tax
upon the original sale. G. L. c. 64I, § 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
1
The United States Supreme Court's decision in Quill v.
North Dakota, 504 U.S. 298 (1992), has been roundly criticized,
including in a recent Supreme Court concurrence, but remains
binding on this court. See Direct Mktg. Ass'n v. Brohl, 135 S.
Ct. 1124, 1134-1135 (2015) (Kennedy, J., concurring) (describing
Quill as "inflicting extreme harm and unfairness on the States"
in light of "the dramatic technological and social changes that
[have] taken place in our increasingly interconnected economy,"
and comparing $180 billion of United States mail-order sales in
1992 to $3.16 trillion of electronic commerce sales in 2008).
5
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
2
The Commonwealth Magazine article is available at
https://commonwealthmagazine.org/economy/003-dor-to-taxpayers-
dont-forget-use-tax [https://perma.cc/6NPJ-7BZX]. See also N.
Manzi, Use Tax Collection on Income Tax Returns in Other States,
Research Department of the Minnesota House of Representatives,
at 8 (updated Apr. 2015), http://www.house.leg.state.mn.us
/hrd/pubs/usetax.pdf [https://perma.cc/B9PZ-E7QV] (Massachusetts
use tax revenues have increased in wake of more explicit
reporting structures).
3
See also Direct Mktg. Ass'n v. Brohl, 814 F.3d 1129, 1133
(l0th Cir.), cert. denied, 137 S. Ct. 591 (2016) ("The regimes
differ greatly in effectiveness -- compliance with the sales tax
is extremely high, and compliance with the use tax is extremely
low"); D. Bruce, W.F. Fox, & L. Luna, State and Local Government
Sales Tax Revenue Losses from Electronic Commerce, at 4 (2009)
(forecasting across Federal, State, and local uncaptured 2012
electronic commerce tax revenue at $11.4 billion). But see
Henchman, Internet Sales Tax Collections Falling Far Short of
Experts' Estimates, Tax Found. (Mar. 18, 2013),
https://taxfoundation.org
/internet-sales-tax-collections-falling-far-short-experts-
estimates [https://perma.cc/2U43-27QM] (tax revenue in
California and New York from online sales, although substantial,
was much lower than forecast).
6
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, § 1.4 Because the sales and use tax schemes are
"complementary," Town Fair Tire Ctrs., Inc. v. Commissioner of
Revenue, 454 Mass. 601, 605 (2009), transactions subject to tax
under the drop shipment rule, as retail sales, are exempt from
use tax. G. L. c. 64I, § 7 (a).
The commissioner has consistently interpreted and enforced
the statutory drop shipment rule in the manner just described
4
Specifically, the drop shipment rule, which is set out as
part of the definition of "[s]ale at retail," provides:
"When tangible personal property is physically
delivered by an owner, a former owner thereof, a factor, or
an agent or representative of the owner, former owner or
factor, to the ultimate purchaser residing in or doing
business in the commonwealth, or to any person for
redelivery to the purchaser, pursuant to a retail sale made
by a vendor not engaged in business in the commonwealth,
the person making or effectuating the delivery shall be
considered the vendor of that property, the transaction
shall be a retail sale in the commonwealth by the person
and that person, if engaged in business in the
commonwealth, shall include the retail selling price in its
gross receipts, regardless of any contrary statutory or
contractual terms concerning the passage of title or risk
of loss which may be expressly or impliedly applicable to
any contract or other agreement or arrangement for the
sale, transportation, shipment or delivery of that
property. He shall include the retail selling price of the
property in his gross receipts." (Emphases added.)
G. L. c. 64H, § 1.
7
since the sales tax statute became effective in 1968, following
the Supreme Court's National Bellas Hess decision that the Court
reaffirmed in the Quill case. See, e.g., Letter Ruling 79-43
(Oct. 25, 1979); Letter Ruling 80-76 (Oct. 27, 1980); Letter
Ruling 81-85 (Sept. 17, 1981); Letter Ruling 84-26 (Apr. 27,
1984); Letter Ruling 85-35 (Feb. 27, 1985); and Technical
Information Release 04-26 (Oct. 21, 2004), 1 Official MassTax
Guide, at PWS-112, PWS-451, PWS-481, PWS-521, PWS-640, PWS-696
(Thomson Reuters 2017). See also National Bellas Hess, Inc.,
386 U.S. at 758. The rule is undergirded by the separate
statutory presumption that a sale is a taxable retail sale, with
the burden of proving otherwise placed upon the vendor. G. L.
c. 64H, § 8 (a).5
2. Background. D & H sells consumer goods to retailers at
wholesale and delivers the goods to Massachusetts consumers and
others on behalf of those retailers. D & H appeals from a
decision of the board rejecting its claim to abate sales taxes
5
General Laws c. 64H, § 8, provides in relevant part:
"(a) It shall be presumed that all gross receipts of a
vendor from the sale of services or tangible personal
property are from sales subject to tax until the contrary
is established. The burden of proving that a sale of
services or tangible personal property by any vendor is not
a sale at retail shall be upon such vendor unless he takes
from the purchaser a certificate to the effect that the
service or property is purchased for resale, and such
certificate is received and made available to the
[Commissioner of Revenue] . . . ."
8
assessed by the commissioner pursuant to the drop shipment rule
for the period from September 1, 2006, to March 31, 2009. D & H
challenges the manner in which the commissioner applied the rule
to its business, arguing that the drop shipment rule required
the commissioner to prove, for each challenged sale transaction,
that the out-of-State retailer was not engaged in business in
the Commonwealth and thus not itself compelled to collect sales
tax. For the reasons that follow, we conclude that the
commissioner and the board correctly determined that D & H was
responsible as the vendor for collecting and remitting the sales
tax due on products it sold to the out-of-State retailers and
then delivered to consumers where it failed to meet its burden
of proving that the retailers were engaged in business in
Massachusetts. Accordingly, we affirm the decision of the
board.
a. Facts. We summarize the findings of fact made by the
board. See G. L. c. 58A, § 13 ("The decision of the board shall
be final as to findings of fact"). D & H is a wholesale
supplier of consumer products, including computer products, home
electronics, and sporting goods, which it sold primarily to
retailers like "big box stores" and their electronic commerce
equivalents. At all times relevant to this case, D & H was
incorporated and headquartered in Pennsylvania and had six
warehouse distribution centers throughout the country. It
9
employed a sales representative who lived and worked in
Massachusetts. D & H considered this presence sufficient to
establish nexus for sales tax purposes.6
Before contracting with retailers to sell and deliver
goods, D & H required that all retailers submit a customer
application. As part of that application, retailers were
required to list all States in which they did business, and to
provide copies of resale certificates swearing that all goods
were purchased for resale, with sales tax to be collected by the
retailer on ultimate sale to the end consumer. See G. L.
c. 64H, § 8. The terms and conditions of the application stated
that retailers would be billed sales tax until they furnished
such certificates. This was an attempt by D & H to ensure that
sales by D & H would not be characterized as taxable sales.7
The drop shipment transactions at issue were structured as
follows. First, a Massachusetts consumer purchased a product
from an out-of-State retailer. Second, the out-of-State
6
"Engaged in business in the commonwealth" is one means of
establishing nexus for sales tax purposes; in this opinion, we
use "engaged in business" interchangeably with "nexus." See
Technical Information Release 96-8 (Oct. 16, 1996), 1 Official
MassTax Guide PWS-37 (Thomson Reuters 2017).
7
Specifically, the application required retailers to
certify, "[I]f any property or service so purchased tax-free is
used or consumed by the firm to make it subject to a Sales or
Use Tax, we will pay the tax due directly to the proper taxing
authority when the state law so provides or informs the seller
for added tax billing."
10
retailer purchased the product from D & H. Finally, at the
retailer's direction, D & H packaged and shipped the product
directly to the Massachusetts consumer. Neither D & H nor the
retailer collected sales tax on these drop shipment sales.
The commissioner conducted an audit of D & H records for
the years 2006-2009, focusing on drop shipment transactions.
The auditor identified the drop-shipment transactions as those
with a ship-to address (i.e., the address of the end consumer)
in Massachusetts but a bill-to address (that of the retailer)
outside Massachusetts. From this group, the auditor first
eliminated sales to retailers known to be engaged in business in
Massachusetts, such as Best Buy and Target. The auditor
similarly removed from consideration sales to retailers
registered as Massachusetts vendors for sales tax purposes.
Having thus winnowed the list of taxable drop-shipment
transactions, the auditor provided the list to D & H so that it
had an opportunity to demonstrate the nontaxable nature of any
contested transaction. D & H provided several resale
certificates that were sufficient to establish a nontaxable
transaction. As to the rest, D & H offered no evidence that the
sales at issue were made to retailers engaged in business in the
Commonwealth that would thus be responsible for collecting sales
tax. At the audit's conclusion, the commissioner assessed D & H
additional taxes, interest, and penalties totaling $525,024.17
11
for the periods at issue. The auditor used the wholesale resale
price as a proxy for the final sales price.
b. Procedural history. Following the audit, D & H sought
an abatement, which the commissioner denied. D & H then
appealed from this decision to the board. In its hearing before
the board, D & H offered documentary evidence and the testimony
of its comptroller, and the commissioner presented her case
through the auditor's testimony. The board issued its decision
for the commissioner in October, 2014, followed by findings of
fact and report in April, 2016. D & H then filed its appeal in
the Appeals Court, and we transferred the case to this court on
our own motion.
3. Discussion. a. Standard of review. "We will not
disturb the board's findings so long as they are supported by
substantial evidence and a correct application of the law."
Bell Atl. Mobile of Mass. Corp. v. Commissioner of Revenue, 451
Mass. 280, 283 (2008). Although we resolve questions of law de
novo, in doing so we give "substantial deference" to the board's
reasonable interpretation of tax statutes because the board is
an agency charged with administration of tax law (citation
omitted). Attorney Gen. v. Commissioner of Ins., 450 Mass. 311,
319 (2008).
b. Burden of proof. D & H argues that before the
commissioner may assess sales tax against a wholesale deliverer
12
of retail goods pursuant to the drop shipment rule, the
commissioner must establish that the retailer in the
transactions at issue did not do business in Massachusetts.
Although the commissioner must provide an evidentiary basis for
an assessment, we reject D & H's contention that the
commissioner failed adequately to do so here.
The validity of a tax assessment is presumptively correct,
and the taxpayer bears the burden of proving he or she is
entitled to an abatement as a matter of law. Schlaiker v.
Assessors of Great Barrington, 365 Mass. 243, 245 (1974). See
Boston Professional Hockey Ass'n v. Commissioner of Revenue, 443
Mass. 276, 285 (2005), quoting Koch v. Commissioner of Revenue,
416 Mass. 540, 556 (1993) ("The taxpayer has the burden of
proving as a matter of law [its] right to an abatement of the
tax"). See generally General Elec. Co. v. Assessors of Lynn,
393 Mass. 591, 599 (1984) ("taxpayer bears the burden of
persuasion of every material fact"). This is consistent with
the general principle that the moving party bears the burden of
proof, and finds additional support in several "compelling
rationales" unique to tax law. Raleigh v. Illinois Dep't of
Revenue, 530 U.S. 15, 21 (2000). "[N]ot to be disregarded
lightly," these "powerful justifications" for the taxpayer's
burden include "the vital interest of the government in
acquiring its lifeblood, revenue"; "the taxpayer's readier
13
access to the relevant information," and "the importance of
encouraging voluntary compliance by giving taxpayers incentives
to self-report and to keep adequate records in case of dispute"
(citations omitted). Id.
Certainly, the taxpayer's burden of proof does not relieve
the department of its obligation to provide support for the
validity of its assessment.8 See First Nat'l Stores, Inc. v.
Assessors of Somerville, 358 Mass. 554, 559 (1971). See also In
re Healthco Int'l, Inc., 257 B.R. 379, 382-383 (Bankr. D. Mass.
2001), aff'd as to sales tax issue, U.S. Dist. Ct., No. 01-
40047-JLT (D. Mass. July 8, 2001) (commissioner failed to meet
burden of production where department had destroyed all audit
records and could neither substantiate nor even explain
assessment amount). In the absence of supporting evidence for a
tax assessment, a taxpayer will be entitled to an abatement.
See First Nat'l Stores, Inc., 358 Mass. at 559. See also In re
Healthco Int'l, Inc., 257 B.R. at 383, citing Waban, Inc. v.
Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 31, 38
(1997) (taxpayer entitled to abatement where department
8
The Department of Revenue (department) may verify by audit
the accuracy of any filed tax return. G. L. c. 62C, § 26 (b).
When such an audit identifies a deficiency, the department may
assess the proper tax and make a demand for payment. G. L.
c. 62C, §§ 26 (b), 31. A taxpayer disputing the assessment may
apply for abatement, and any tax found "excessive in amount or
illegal" shall be abated, in whole or in part. G. L. c. 62C,
§ 37.
14
introduced no documentary evidence and scant testimony
supporting its assessment); Coan v. Commissioner of Revenue, 25
Mass. App. Tax Bd. Rep. 763, 766 (2000) (same, where department
was unable to establish evidentiary basis for its assessment
despite readier access to relevant records).
In this case, the department established a factual basis
for the validity of its assessment, which D & H failed to rebut.
D & H had a business practice of requiring any retailer customer
to disclose the States in which it did business; the auditor
compiled a list of drop shipment transactions in which the
retailer was not registered as a Massachusetts vendor and no tax
had been collected, affording D & H the opportunity to rebut the
conclusion that the retailers did not do business in
Massachusetts; and D & H did not do so. Particularly where
D & H has "readier access to the relevant information" than does
the commissioner, its failure to demonstrate that its retail
customers were doing business in the Commonwealth ends the
inquiry. See Raleigh, 530 U.S. at 21; William Rodman & Sons,
Inc. v. State Tax Comm'n, 373 Mass. 606, 611 (1977) ("[a]s a
matter of sound policy," burden should be placed on wholesaler
with best access to records). Moreover, D & H bore the burden
of proving otherwise pursuant not only to the general principle
that the burden rests with the taxpayer claiming an abatement,
but also to G. L. c. 64H, § 8 (a) (absent resale certificate
15
from purchaser, "[t]he burden of proving that a sale of services
or tangible personal property by any vendor is not a sale at
retail shall be upon such vendor").
c. Dormant commerce clause.9 D & H also challenges the
drop shipment rule on constitutional grounds, contending that
the rule discriminates against interstate commerce. See art. I,
§ 8, cl. 3, of the United States Constitution; Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) (State tax does
not unconstitutionally burden interstate commerce if tax is
applied to activity having substantial nexus with State, is
fairly apportioned, does not discriminate against interstate
commerce, and is fairly related to services provided by State).
Addressing a constitutional challenge to a tax measure "begin[s]
with the premise that the tax is endowed with a presumption of
validity and is not to be found void unless its invalidity is
established beyond a rational doubt." Andover Sav. Bank v.
Commissioner of Revenue, 387 Mass. 229, 235 (1982).
A tax is discriminatory in violation of the dormant
commerce clause when it results in "differential treatment of
in-[S]tate and out-of-[S]tate economic interests that benefits
9
Article I, § 8, cl. 3, of the United States Constitution -
- the commerce clause -- expressly grants Congress broad power
to regulate interstate commerce. Comptroller of the Treasury of
Md. v. Wynne, 135 S. Ct. 1787, 1794 (2015) (Wynne). Where
Congress has neither preempted nor approved State regulation,
the negatively implied dormant commerce clause still operates to
limit State interference with interstate commerce. Id.
16
the former and burdens the latter." Oregon Waste Sys., Inc. v.
Department of Envtl. Quality of Or., 511 U.S. 93, 99 (1994).
D & H argues that wholesale suppliers with a Massachusetts nexus
are penalized for doing business with out-of-State retailers,
because transactions with in-State retailers do not cast
wholesale suppliers as vendors obligated to collect sales tax.
But even assuming this disparity for the sake of argument, such
a scheme would establish for Massachusetts retailers a
disadvantage at odds with the concerns animating the dormant
commerce clause. See Department of Revenue of Ky. v. Davis, 553
U.S. 328, 337-338 (2008) ("The modern law of what has come to be
called the dormant [c]ommerce [c]lause is driven by concern
about 'economic protectionism -- that is, regulatory measures
designed to benefit in-[S]tate economic interests by burdening
out-of-[S]tate competitors'" [citation omitted]).
Moreover, by focusing on the party collecting the tax,
D & H fails to demonstrate any unconstitutional burden created
by the tax itself.10 See Quill Corp., 504 U.S. at 312 ("the
10
Because the drop shipment rule requires that vendors
include the retail selling price in gross receipts, G. L.
c. 64H, § 1, D & H Distributing Company (D & H) argues that it
lacks the necessary information for compliance because it has
knowledge only of the wholesale price. But a wholesale supplier
like D & H is better positioned than the Commissioner of Revenue
(commissioner) to solicit this information in its contractual
dealings with thousands of out-of-State retailers. See Lyon
Metal Prods., Inc. v. State Bd. of Equalization, 58 Cal. App.
4th 906, 912 n.3 (1997), cert. denied, 524 U.S. 916 (1998).
17
[c]ommerce [c]lause and its nexus requirement are informed not
so much by concerns about fairness for the individual defendant
as by structural concerns about the effects of [S]tate
regulation on the national economy"). See also Genentech, Inc.
v. Commissioner of Revenue, 476 Mass. 258, 272 (2017). Such an
unconstitutional burden exists when a State taxes a transaction
"more heavily when it crosses [S]tate lines than when it occurs
entirely within the State." Comptroller of the Treasury of Md.
v. Wynne, 135 S. Ct. 1787, 1794 (2015), quoting Armco Inc. v.
Hardesty, 467 U.S. 638, 642 (1984).11 Here, "the same sales tax
would be imposed on the transaction if it had happened entirely
within [Massachusetts]." Lyon Metal Prods., Inc. v. State Bd.
of Equalization, 58 Cal. App. 4th 906, 912 (1997), cert. denied,
524 U.S. 916 (1998) (finding no commerce clause violation under
Alternatively, a standard markup may be codified. See 2 J.R.
Hellerstein & W. Hellerstein, State Taxation § 18.04[1][b][iv]
(3d ed. 2002) (citing Cal. Code Regs. tit. 18, § 1706[c][2],
which calculates retail price using ten per cent markup on drop
shipper's price absent other evidence). We do not resolve the
issue here, where the commissioner assessed sales tax based only
on the lower wholesale price.
11
A State tax subjecting interstate commerce to the burden
of "multiple taxation" also creates an undue burden. Wynne, 135
S. Ct. at 1794. D & H argues that the drop shipment rule does
this by subjecting the same transactions to both sales and use
tax. This argument misapprehends the complementary nature of
our sales and use tax schemes, discussed supra, under which any
transaction subject to sales tax is exempt from use tax. G. L.
c. 64I, § 7 (a). Even ignoring the low consumer compliance with
the use tax, any use tax collected in error on a drop shipment
entitles the consumer to a credit.
18
California's cognate rule). Because transactions with retailers
in and out of State are equally subject to tax, there is no
greater burden on the interstate transaction and thus no
violation of the dormant commerce clause.
Decision of the Appellate
Tax Board affirmed.