Household Retail v. Commissioner of Rev.

859 N.E.2d 837

448 Mass. 226

HOUSEHOLD RETAIL SERVICES, INC., & another¹ v. COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued November 9, 2006.

Decided January 16, 2007.

Peter O. Larsen, Jackson, FL (Nicholas J. Rosenberg, Boston, with him) for the taxpayers.

Amy Spector, Assistant Attorney General, for Commissioner of Revenue.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

MARSHALL, C.J.

The sole issue in this appeal is whether a financial services company that contractually obtained a retailer's rights to certain consumer credit accounts is entitled to a reimbursement of sales tax on the consumer accounts subsequently determined to be worthless, pursuant to G.L. c. 64H, § 33 (bad debt statute). Household Retail Services, Inc., and Household Bank (SB), N.A. (collectively Household), appeal from a decision of the Appellate Tax Board (board) denying Household's claim that it is entitled to such relief because it "step[ped] into the shoes" of the assignor vendors, whose right to tax recovery under the bad debt statute is unquestioned. Resolution of this case turns on whether Household, as assignee of the accounts at issue, may be considered a "[v]endor" under the bad debt statute. See G.L. c. 64H, § 1.² We conclude that the board correctly held that the term "vendor" did not apply to Household, which did not collect the sales tax from the consumers or remit those taxes to the Commonwealth, and which was not engaged in selling the underlying goods to the consumers who later defaulted on their credit accounts.

Background. We summarize the relevant background from the joint stipulation of facts filed with and adopted by the board. Household is a consumer lender providing financing for private label credit card programs to Massachusetts retailers. Household has never registered with the Commonwealth as a vendor nor sold any tangible personal property in Massachusetts. Household entered two types of merchant agreements with Massachusetts furniture retailers (vendors) to provide financing for the vendors' customers.³ Under the contracts, Household extended credit to the vendors' customers to enable them to purchase the vendors' goods, and acquired the rights of the vendors to receive instalment payments and to pursue collection remedies if customers defaulted.⁴ The merchant agreements between the vendors and Household were "without recourse" to the vendors.

For each consumer account sold to Household under the merchant agreements, the vendors, as required, computed the tax on the full sales price of the goods at the time of sale, reported the full tax on their sales tax returns, and remitted sales tax to the Commissioner of Revenue based on the full price at which the items were sold to customers. See G.L. c. 64H, § 1. When certain customers whose credit accounts had been purchased by Household defaulted on the accounts, and when Household subsequently deemed those accounts to be worthless, Household wrote off the accounts for financial accounting and for Federal income tax purposes.

On January 16, 2001, and September 16, 2002, respectively, Household submitted to the commissioner claims for reimbursement pursuant to G.L. c. 64H, § 33. Household claimed reimbursement of $1,655,336.50, as the amount of sales tax paid on accounts determined to be worthless for the periods of January 1, 1997, through August 31, 2000, and of $448,570.24, as the sales tax paid on such accounts from January 1, 2001, through December 31, 2001. The commissioner denied the claims. Household then petitioned under formal procedure before the board. The board affirmed the decision of the commissioner in an opinion dated May 6, 2004. Household appealed, the case was entered in the Appeals Court, and we transferred the matter here on our own motion.

Discussion. There is no factual dispute, and we review decisions by the board for errors of law. Towle v. Commissioner of Revenue, 397 Mass. 599, 601, 492 N.E.2d 739 (1986). The taxpayer "has the burden of proving as matter of law its right to an abatement of the tax." Circuit City Stores, Inc. v. Commissioner of Revenue, 439 Mass. 629, 633, 790 N.E.2d 636 (2003), citing Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 43, 686 N.E.2d 436 (1997), cert. denied, 523 U.S. 1059, 118 S.Ct. 1386, 140 L.Ed2d 646 (1998), and M & T Charters, Inc. v. Commissioner of Revenue, 404 Mass. 137, 140, 533 N.E.2d 1359 (1989). In construing the provisions of G.L. c. 64H, we apply familiar canons. "Where the language of a statute is plain, it must be interpreted in accordance with the usual and natural meaning of the words." Gurley v. Commonwealth, 363 Mass. 595, 598, 296 N.E.2d 477 (1973), citing Commonwealth v. Thomas, 359 Mass. 386, 387, 269 N.E.2d 277 (1971). We construe the bad debt statute to effectuate its evident purpose. See Continental-Hyannis Furn. Co. v. State Tax Comm'n, 366 Mass. 308, 309, 318 N.E.2d 618 (1974). We now turn to the words of the statute.

The bad debt statute provides that any vendor who has paid to the commissioner a tax for a sale on credit is "entitled" to reimbursement if the account "is later determined to be worthless." The statute expressly provides reimbursement only for a "vendor." G.L. c. 64H, § 33. A "[v]endor" is "a retailer or other person selling tangible personal property or services of a kind the gross receipts from the retail sale of which are required to be included in the measure of the tax imposed by this chapter." G.L. c. 64H, § 1. A "[p]erson" who may be a vendor encompasses both actual and juridical persons, including an "assignee."⁵ Id. Household claims, in essence, that, as the assignee of the vendors' consumer credit accounts, it is entitled to assert all rights that the vendors might have asserted to the accounts, including the statutory right to a tax reimbursement under the bad debt statute.⁶ We disagree.

The board concluded that, to be eligible for tax relief under the bad debt statute, the "assignee" of the "vendor" must meet the requirement of making retail sales in its own right. It reached this conclusion because a "vendor" is defined by the statute as "a person `selling tangible property.'" Because it did not itself make any retail sales of tangible personal property in the Commonwealth and has not registered with the Commonwealth as a vendor, Household did not meet the statutory requirement for relief. This is a commonsense reading of the words of the bad debt statute, and one we readily accept. The contrary interpretation suggested by Household would impermissibly read the requirement to "sell[ ] tangible property" out of the statute any time an assignee assumed the financial rights of the seller. "The general rule of construction is that where the language of the statute is plain, it must be interpreted in accordance with the usual and natural meaning of the words.... This rule has particular force in interpreting tax statutes." Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 674, 683 N.E.2d 270 (1997), quoting Commissioner of Revenue v. AMIWoodbroke, Inc., 418 Mass. 92, 94, 634 N.E.2d 114 (1994).

The board's interpretation is buttressed by an examination of the statute's purpose. The Legislature enacted G.L. c. 64H, § 33, inserted by St.1990, c. 121, § 56, in response to our decision in Continental-Hyannis Furn. Co. v. State Tax Comm'n, supra. There, we held that a taxpayer vendor of tangible personal property could not recover the portion of the sales tax paid on a sale in which the buyer received credit and later defaulted because no statute specifically authorized a recovery of the sales tax on a bad debt. Id. at 309, 318 N.E.2d 618. The statute thus was designed to afford some relief under the Massachusetts advance tax system to vendors who must, on behalf of the Commonwealth, compute, collect, and file sales tax returns, and remit full sales tax for each customer transaction, even if the customer subsequently defaults on its payment obligation to the vendor. It is, in essence, a statutory courtesy offered to vendors who serve as trustees for the Commonwealth's retail sales taxes. See DaimlerChrysler Servs. N. Am. v. Commissioner of Revenue Servs., 274 Conn. 196, 206-207, 875 A.2d 28 (2005); General Elec. Capital Corp. v. State Div. of Tax Appeals, 2 N.Y.3d 249, 255-256, 778 N.Y.S.2d 412, 810 N.E.2d 864 (2004).

To take advantage of relief under the bad debt statute, an entity must be a seller of tangible personal property. Household cannot avoid the requirement that it act as a vendor regarding the sale of goods and services. It is undisputed that Household made no retail sales to the consumers whose credit accounts it purchased. It neither collected sales tax nor accounted for it to the Commonwealth or others, and indeed, unlike vendors, it has no statutory obligation to do so. See G.L. c. 64H, § 2. See also General Elec. Capital Corp. v. State Div. of Tax Appeals, supra at 256, 778 N.Y.S.2d 412, 810 N.E.2d 864 (no entitlement to relief under State's bad debt statute where "[t]hird-party finance companies do not carry the burden of collecting sales taxes as a trustee of the State, nor does the [commissioner] have any trustee relationship with assignees ... to provide a basis for tracking the underlying transactions").⁷ The sales transactions, or taxable events, that triggered the potential application of the bad debt statute were arrangements between the vendors and their customers. The vendors were obligated to remit sales taxes on the full purchase price of the consumer goods on the completion of the sale, when title or possession to the property passed to the consumer. Circuit City Stores, Inc. v. Commissioner of Revenue, 439 Mass. 629, 633, 790 N.E.2d 636 (2003). See G.L. c. 64H, § 2. The advance tax system thus provides an orderly, reasonable, and efficient means of collecting State taxes on consumer purchases. Without more explicit direction, we...