Massachusetts High Court Hears Oral Argument on Consumer’s Standing to Recover Sales or Use Tax

By Attorney Morris N. Robinson and Attorney Yale Yechiel N. Robinson of M. Robinson Tax Law.

An attorney representing a Massachusetts consumer (“Dedham Health”) argued this week that the Massachusetts Department of Revenue (DOR) must abate and refund the sales tax and/or use tax that the seller collected from Dedham Health and then paid to the DOR.  The seller, an entity that sold Dell computers and related services, argued alongside the DOR that Dedham Health was not entitled to receive a refund.

Oral argument at the Massachusetts Supreme Judicial Court (SJC) took place on (November 7, 2017).  The case is titled Worldwide Techservies LLC & others v. Commissioner of Revenue, docket number SJC-12328.

Facts of the Dispute

Dedham Health purchased a Dell computer over a decade ago, and it paid sales or use tax on both the computer itself (which everyone agrees is taxable) and on a related service contract for repair and maintenance of the computer hardware.  Later, the Dell entities sought abatement of the tax it collected from customers and paid to the DOR for the service contracts.  After the DOR denied abatement, the Dell entities petitioned the Massachusetts Appellate Tax Board (ATB).  Dedham Health intervened on the basis of its substantial interest as a member of a putative class of consumers who paid sales or use tax for nontaxable service contracts.

On December 17, 2013, the ATB issued a three-page interlocutory order (which is found at the end of the appellant’s brief), holding that the service contracts were nontaxable.  The DOR’s attorney disagreed with that decision “on the merits” and would have appealed it based on a regulation, 830 CMR 64H.1.1, which states in part:

“A service transaction is subject to the sales tax where…[t]he transfer of tangible personal property occurs, and the value of the property is not inconsequential in relation to the total charge, and the charge for the property is not separately stated on the bill to the customer.”

However, the ATB never issued a final decision that could be appealed “on the merits.”  Instead, the ATB suspended the litigation while Dedham Health pursued a class-action case under M.G.L. section 93A in Massachusetts Superior Court.   The Superior Court dismissed that case because it lacked jurisdiction. Meanwhile, the Dell entities withdrew their petition from the ATB “with prejudice.”  The ATB accepted the withdrawal and closed the case despite Dedham Health’s objection.  Dedham Health appealed, arguing that the ATB’s closing of the case after hearing arguments and issuing an interlocutory order violated the ATB’s procedural rules and left Dedham Health without a remedy to recover the tax it paid.

Our Legal Analysis

There are two issues:

(1) Are the class-action plaintiffs right on the merits?

(2) Have the class-action plaintiffs been denied due process?

The quoted regulation has stood the test of time. If the service fees were separately stated, they are not subject to the use tax. Otherwise, they are. In this case, sometimes the service fees were separately stated, and sometimes the service fees were not separately stated. Thus, the class-action plaintiffs might recover to the extent that the services fees were separately stated. The real question is whether the plaintiffs were denied due process when the Dell entities terminated their case, with prejudice. We believe these plaintiffs were not denied due process. The plaintiffs’ claim was against their vendor, the Dell entities. If these plaintiffs did not timely sue the Dell entities, they lost their rights under the normal statute of limitations considerations. The implementation of statutes of limitations generally do not involve the denial of due process. For these reasons, we believe that the Massachusetts Department of Revenue will win. Time will tell. We await the opinion of the Supreme Judicial Court.

(c) The Massachusetts Tax Alert, 2017.

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