Commissioner of Revenue v. JC PENNEY COMPANY, INC

Citation431 Mass. 684,730 NE 2d 266
CourtUnited States State Supreme Judicial Court of Massachusetts
Decision Date09 March 2000
PartiesCOMMISSIONER OF REVENUE v. J.C. PENNEY COMPANY, INC.

Present: ABRAMS, LYNCH, GREANEY, IRELAND, SPINA, & COWIN, JJ.

John E. Bowman, Jr., Assistant Attorney General, for the Commissioner of Revenue.

Kathleen King Parker for the taxpayer.

LYNCH, J.

The Commissioner of Revenue (commissioner) appeals, pursuant to G. L. c. 58A, § 13, from a decision of the Appellate Tax Board (board) ordering an abatement of a use tax assessed on catalogs that J.C. Penney Company (taxpayer) mailed from out-of-State locations to Massachusetts residents between the years 1991 and 1993.1 See G. L. c. 641, § 2. The commissioner argues that the board erred in concluding that the taxpayer's distribution of these catalogs did not constitute a taxable "use" of property, as that term is statutorily defined. G. L. c. 641, § 1. We transferred the case here on our own motion and now reverse the board's decision. 1. Facts. The taxpayer, a Delaware corporation with its principal place of business in Plano, Texas, is engaged in the business of retail merchandising. During the relevant tax periods, it operated retail stores in all fifty States, including ten stores in Massachusetts, and a direct mail catalog business, which it administered separately from the retail store division.

In connection with its catalog business, each year the taxpayer issued three major seasonal catalogs, as well as various small sale or specialty catalogs, that described and illustrated merchandise available for purchase by mail order. The planning, artwork, design, and layout for these catalogs were completed and paid for outside of Massachusetts, primarily in Texas, and the taxpayer contracted with independent printing companies located outside the Commonwealth to produce the catalogs. During the relevant time period, the three major catalogs were printed in Indiana, while the specialty catalogs were printed in South Carolina and Wisconsin. The taxpayer supplied the printers with paper, shipping wrappers, and address labels for the catalogs; the printers supplied the ink, binding materials, and labor. None of these materials was purchased in Massachusetts.

Printed catalogs, with address labels and postage affixed, were transported by a common carrier from the printer to a United States Postal Service office located outside Massachusetts, where they were sent to Massachusetts addressees via third or fourth class mail. Title to the catalogs passed from the printer to the taxpayer when the common carrier assumed possession. Although the taxpayer made no effort to recall or to change the time or method of delivery of the catalogs after they left the printers' facilities, it instructed the postal service, from its offices outside Massachusetts, to return any undeliverable catalogs to its catalog distribution center in Connecticut.

The catalogs advertised a broader range of merchandise than was available for purchase in the taxpayer's retail stores. The taxpayer's express purpose for mailing these catalogs, free of charge, to residents of, among other places, Massachusetts, was to solicit mail order purchases from current and potential customers. Catalog recipients were selected by the taxpayer at its offices outside Massachusetts. Purchases of catalog merchandise were made by telephoning or returning an order form to the taxpayer at a location outside Massachusetts, and the merchandise was shipped to customers from the taxpayer's Connecticut distribution center. For each sales and use tax period in the years 1991-1993, the taxpayer filed Massachusetts sales and use tax returns and paid the taxes reflected thereon as due. On August 3, 1993, the commissioner notified the taxpayer that these tax returns had been selected for audit, and on April 26, 1995, assessed the taxpayer for unpaid use taxes, of which $314,674.42, plus interest and penalties, represented a tax on the value of the catalogs the taxpayer mailed to Massachusetts residents during the relevant tax periods. The taxpayer paid the assessment and applied for an abatement. Following the commissioner's denial of this application, the taxpayer appealed to the board. In ordering an abatement of the use tax assessed on the mailed catalogs, the board held that the taxpayer, in causing the catalogs to be mailed from out-of-State locations to Massachusetts residents, had not made a taxable "use" of these items of tangible personal property in Massachusetts, as required by the use tax statute, G. L. c. 641, § 2.

2. Discussion. Our review of a decision by the board is limited to questions of law, see G. L. c. 58A, § 13; Towle v. Commissioner of Revenue, 397 Mass. 599, 601 (1986), and "encompasses issues of statutory construction." Associated Testing Labs., Inc. v. Commissioner of Revenue, 429 Mass. 628, 631 (1999), citing Tilcon-Warren Quarries Inc. v. Commissioner of Revenue, 392 Mass. 670, 672 (1984). The taxpayer has the burden of proving as a matter of law its right to an abatement of the tax. See Towle v. Commissioner of Revenue, supra at 603. The sole question presented by this appeal is whether the term "use" in G. L. c. 641, § 2, as defined in G. L. c. 641, § 1, encompasses a taxpayer's distribution of merchandise catalogs to Massachusetts addressees by means of interstate mail for the purpose of soliciting retail business. We answer this question in the affirmative and, therefore, reverse the board's decision.

General Laws c. 641, § 2, imposes an excise tax, at the rate of five per cent, on "the storage, use or other consumption in the [C]ommonwealth of tangible personal property or services purchased from any vendor for storage, use, or other consumption within the [C]ommonwealth." "Use" is defined, in relevant part, to "mean and include ... the exercise of any right or power over tangible personal property incident to the ownership of that property, except that it does not include the sale of that property in the regular course of business." G. L. c. 641, § 1. Significantly, tangible personal property shipped or brought into Massachusetts by the purchaser within six months after its outof-State purchase is presumed to have been purchased for storage, use, or other consumption in the Commonwealth. G. L. c. 641, § 8 (f). The use tax established by G. L. c. 641, together with the sales tax in G. L. c. 64H, are complementary elements of a unitary taxing program intended to "reach all transactions, except those expressly exempted, `in which tangible personal property is sold inside or outside the Commonwealth for storage, use, or other consumption within the Commonwealth.'" M & T Charters, Inc. v. Commissioner of Revenue, 404 Mass. 137, 140 (1989), quoting Boston Tow Boat Co. v. State Tax Comm'n, 366 Mass. 474, 477 (1974); Towle v. Commissioner of Revenue, supra at 604. The use tax was thus designed "to prevent the loss of sales tax revenue from out-of-State purchases," M & T Charters, Inc. v. Commissioner of Revenue, supra,

and to protect local merchants from loss of business to merchants in other States with lower or nonexistent sales taxes. See New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 192 (1997), aff'd, 427 Mass. 399 (1998). See also 2 J. & W. Hellerstein, State Taxation § 16.03[3] (3d ed. 1998).

In concluding that the taxpayer had not made a taxable "use" of the catalogs mailed to Massachusetts residents, the board reasoned that the taxpayer's activities with respect to the catalogs did not constitute an exercise in the Commonwealth of a right or power incident to the ownership of tangible personal property situated in Massachusetts. G. L. c. 641, §§ 1, 2. In the board's view, the "exercise" of a right or power over property, such as control, equates with "some degree or form of activity," yet "none of the [taxpayer's] activities undertaken to arrange the in-State distribution of the catalogs occurred in Massachusetts [n]or did [the taxpayer's] relevant activities occur while the catalogs were in the Commonwealth." The board further reasoned that, had the Legislature intended a taxpayer's mailing of catalogs to Massachusetts residents to be subject to the use tax, it would have expressly designated the "distribution" of property as a taxable use in G. L. c. 641, § 1, as other States have done. Finally, the board interpreted this court's decision in George S. Carrington Co. v. State Tax Comm'n, 375 Mass. 549, 552-553 (1978), to imply that the use tax cannot apply in the circumstances presented by this case, and rejected as unpersuasive numerous decisions from other jurisdictions that have held to the contrary. In urging us to affirm the board's decision, the taxpayer argues that assessment of a use tax is improper where, as here, the taxpayer "did not do anything with the catalogs in Massachusetts."2 While this proposition is not objectionable in principle, we reject its application to the undisputed facts of this case. For, contrary to the board's conclusion and the taxpayer's contention, the taxpayer here did, in a very real sense, "do something" with its catalogs in the Commonwealth by distributing them, via the United States Postal Service, to Massachusetts residents, thereby deploying them in the service of its Massachusetts direct mail retail business.

It is a settled principle of our taxation jurisprudence that tax statutes are "to be construed as imposing taxes with respect to matters of substance and not with respect to mere matters of form." Green v. Commissioner of Corps. & Taxation, 364 Mass. 389, 394 (1973), quoting Commissioner of Corps. & Taxation v. Second Nat'l Bank, 308 Mass. 1, 6 (1941). It is apparent from the board's findings that the taxpayer, even though it did not itself physically possess the catalogs in Massachusetts, nevertheless exercised substantive rights and powers over the catalogs in the Commonwealth by effectuating...

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