In re Laptops Etc. Corp.
| Decision Date | 20 December 1993 |
| Docket Number | Bankruptcy No. 90-54319-SD. Adv. No. 92-5473-SD. |
| Citation | 164 BR 506 |
| Parties | In re LAPTOPS ETC. CORPORATION, Debtor. LAPTOPS ETC. CORPORATION, et al., Plaintiffs, v. DISTRICT OF COLUMBIA, Defendant. |
| Court | U.S. Bankruptcy Court — District of Maryland |
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Howard A. Rubenstein, John A. Carlton, Adelberg, Rudow, Dorf, Hendler & Sameth, Baltimore, MD, for debtor/plaintiffs.
Nancy Smith, Asst. Corp. Counsel, DC, Washington, DC, for defendant.
MEMORANDUM & ORDER DISALLOWING THE PREPETITION PRIORITY AND POSTPETITION ADMINISTRATIVE TAX CLAIMS OF THE DISTRICT OF COLUMBIA & GRANTING JUDGMENT IN FAVOR OF THE PLAINTIFFS
The plaintiff-debtor, Laptops Etc. Corporation (Laptops), and Edward Dow (Dow) commenced the above-entitled adversary proceeding by complaint filed on October 6, 1992, in order to appeal the assessment of "sales" and franchise income taxes together with penalties and interest by the District of Columbia Department of Finance and Revenue (Department). Laptops, by amended objection filed on October 28, 1992, further seeks the disallowance of the prepetition priority and postpetition administrative tax claims (tax claims) filed by the District of Columbia in the amounts of $85,593.99 and $39,811.15 respectively.
Both the aforementioned complaint and amended objection challenge the legal and factual basis for the tax assessment and concomitant tax claims. On October 5 and 6, 1993, a consolidated trial was held before the undersigned judge sitting by special designation on the merits of both the complaint and amended objection. From the evidence presented and arguments made, the court makes the following findings of fact and conclusions of law:
FINDINGS OF FACT
Laptops Etc. Corporation is a Virginia Corporation with its principal place of business located at 305 York Road, Towson, Maryland. Laptops has a secondary place of business located at 98 North Washington Street, Falls Church, Virginia. The debtor has operated a retail establishment selling laptop computers through its Falls Church, Virginia location since 1988. Although retail sales encompassed the primary source of revenue for the Virginia outlet, Laptops also engaged in some computer leasing and repair through this facility. Edward Dow, a Virginia domiciliary, is the president and sole stockholder of Laptops.
The debtor has never had any subsidiaries or affiliated companies, offices, outlets, storage facilities, or registered agents within the District of Columbia. It never owned any tangible property, real or personal, in the District of Columbia or did it ever store any stock of goods therein. Nor did the debtor engage employees to actively solicit business within the jurisdiction. Presumably, the debtor was not licensed to do business within the District of Columbia, although no direct evidence was presented on this point.
Due to the geographic proximity of the Virginia retail store to the District of Columbia and the extensive circulation of the periodical, the debtor occasionally advertised in the Washington Post Newspaper. Additionally, the debtor maintained an advertisement in the District of Columbia Yellow Pages for a period of time but withdrew the advertisement in early 1990 due to the costs involved and the debtor's view that it was not having an impact on sales.
Sales or lease transactions of laptop computers from the Virginia retail outlet were typically effectuated in one of the following three ways: (1) a customer would patronize the Virginia retail establishment, purchase or lease a computer(s), and then personally take the purchased or leased computer(s) with him or her after payment of the purchase price or rental fee which included an assessment of a Virginia sales tax; (2) a customer would patronize the Virginia retail establishment, purchase or contract to purchase a computer(s), and then that computer(s) would be shipped tax free to that customer by common carrier; or (3) the customer would mail or fax a purchase order(s) to the Virginia store and the computer(s) would be shipped tax free after acceptance at the Virginia location to the customer by common carrier. Repair transactions were accomplished by the customer returning the item to the Virginia store for servicing either personally or by the mails and subsequently returning to the facility to retrieve the computer or having it shipped by common carrier to his or her location. In all instances, the sold or leased merchandise or parts utilized in connection with repairs were not located in the District of Columbia at the time the agreements for sale, lease, or repair were reached. At the time the sales, lease, or repair agreements were reached, the merchandise or parts subject to the contract were physically located at the Virginia retail store, warehoused at the Maryland outlet, or a part of the general inventory of a manufacturer or supplier located outside the District of Columbia.1
With the limited exception of government contracts which usually prohibited the imposition or assessment of shipping charges related to the purchased or leased items, the purchaser or lessee of the merchandise paid the shipping costs associated with all goods delivered by common carrier to the buyer's or lessee's location. The risk of loss for the merchandise shipped by common carrier, however, fell upon the debtor until the purchased or leased merchandise reached the buyer's or lessee's location. Consequently, the debtor maintained an insurance policy to cover the goods in transit. Additionally, the contracts for sale on all goods shipped by common carrier into the District of Columbia were via F.O.B. place of destination.
Although the District of Columbia Department of Finance and Revenue attempted to establish that agents of the debtor frequently delivered merchandise by their own vehicles and actively assisted in the installation of computer hardware and software, the greater weight of the evidence was inapposite to the Department's position. Contrary to the department's assertions, the testimony established that the virtually all interstate deliveries were effectuated by common carrier and that this was indeed company policy since the debtor's insurance policy would only cover those goods in transit if shipped by common carrier. It was only under rare circumstances, for instance when a component or computer was missing from an order and an agent was in the area or when time was of the essence, that an interstate delivery was effectuated by the debtor's personnel in the District of Columbia. Again, these instances were isolated and were rare exceptions to the manner in which interstate deliveries were effectuated.2
It was readily acknowledged, however, that with respect to a large contract with the United States Department of Labor and possibly several other accounts that an agent for the debtor accompanied the common carrier in his own vehicle on a number of occasions to the customer's location in the District of Columbia. This was done incident to the sale predominantly for customer relations purposes as well as to ensure that certain computers were delivered to specific offices within a multi-officed building. Since the debtor's primary business activity was the sale of laptop computers, no installation of the sold or leased merchandise was a necessary incident to the sale or lease of the computers. On rare occasions, the debtor would demonstrate the basic operation of the computer. Again, these instances were isolated as the sold merchandise was quite simplistic in terms of operation.
Due to reasons not germane to the issue at hand, the debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on October 9, 1990, in the District of Maryland. During a postpetition period from February 21 to April 8, 1992, the Department conducted a routine audit of the debtor. The audit covered a review of all sales, lease, and repair transactions from 1987 through February 1992. As a direct result of the audit, the Department issued a Notice of Jeopardy Assessment on April 9, 1992, for unpaid corporation and sales taxes in the amount of $1,063,637.00. Since the debtor did not collect sales or use taxes from any of the identified interstate sales and challenged the propriety of the aforementioned assessment, the debtor did not remit any moneys toward the payment thereof. Following the Jeopardy Assessment, the Department filed a Notice of District Tax Lien for Corporation Income Taxes and Sales and Use Taxes (tax lien) on August 26, 1992, against both the debtor and Dow personally in the amount of $1,096,372.17 stemming from unpaid taxes which the debtor ostensibly owed the District of Columbia. Pursuant to the Federal Rules of Bankruptcy Procedure, the debtor filed a proof of claim on behalf of the Department on September 8, 1992, and listed the amount set forth in the tax lien as a priority claim in the amount of $1,096,372.17. On the basis of a tax return subsequently submitted by the debtor, the Department filed amended prepetition priority and postpetition administrative tax claims in the amounts of $85,593.99 and $39,811.15 respectively.3 (See Plaintiffs' Exhibits 5 & 6).
The aforementioned tax claims emanated from an assessment on interstate sales and income generated from the debtor's location in Virginia. The Department, through a singular auditing agent, merely went through purchase orders or invoices maintained by the debtor during the course of the audit and ascertained those sales, lease, or repair transactions in which the invoice or purchase order specified a District of Columbia address. From those purchase orders or invoices which indicated that goods sold or leased in Virginia were ostensibly delivered to the customer in the District of Columbia, the auditing agent created a worksheet which specified the invoice...
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