Montgomery Ward & Co., Inc. v. State, Dept. of Revenue
| Decision Date | 16 March 1981 |
| Docket Number | No. 28396,28396 |
| Citation | 628 P.2d 85 |
| Parties | MONTGOMERY WARD & CO., INC., Plaintiff-Appellant, v. STATE of Colorado, DEPARTMENT OF REVENUE and Alan Charnes, Executive Director, Defendants-Appellees. |
| Court | Colorado Supreme Court |
Ireland, Stapleton & Pryor, P.C., Benjamin F. Stapleton, Edward O. Byrne, Denver, Jerome J. Lutz, Chicago, Ill., for plaintiff-appellant.
J. D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Edward G. Donovan, Sol. Gen., Chris J. Eliopulos, Sp. Asst. Atty. Gen., Denver, for defendants-appellees.
The primary issue in this case is whether, under the "Emergency Retail Sales Tax Act of 1935," article 26 of title 39, C.R.S.1973 (Sales Tax Act), the Executive Director (Director) of the Department of Revenue (Department) can force Montgomery Ward & Co., Inc. (Wards) to abandon its use of the cash receipts basis for paying sales tax on credit sales and require it to use the accrual basis for paying said tax.
As the result of an audit, the Department served Wards with a notice of deficiency and tax assessment. Additionally, the Director issued a revocation which withdrew Wards' permission to use the cash receipts basis for remitting sales tax. After a hearing, the Director issued his final determination and assessment. Wards filed an appeal in the district court challenging the assessment and actions of the Director, and the district court affirmed. Wards appealed to the court of appeals. Based on the representation of the Department of Revenue that this case presents legal issues of major significance, the court of appeals certified the case to this Court. We accepted jurisdiction and now affirm the judgment of the district court.
Wards' credit accounts are in the form of a revolving charge account. Under the agreement signed by the customer at Wards, the customer may pay off the entire amount of the charge within 30 days or elect to make payments over an extended period of time. In 1964, Wards requested permission from the Department of Revenue to change its method of paying Colorado sales tax from the accrual basis to the cash receipts basis. C.R.S. '53, 138-6-11 (now section 39-26-111, C.R.S.1973). A retailer using the accrual basis must at the time of a credit sale pay the entire amount of sales tax due on that sale. On the other hand, a retailer using the cash receipts basis waits until the customer actually pays the tax and then remits that sum to the state.
Wards' 1964 request to the Department set forth that:
The Department granted Wards the right to use the cash receipts basis in a letter which stated: "Permission is herewith granted to make the change in the method of reporting from the sales basis to the cash receipts basis, effective January 1, 1964...."
Subsequent to obtaining permission from the Department to change its method of reporting and paying sales tax to the cash receipts basis, Wards began selling a large percentage of its accounts receivable to Montgomery Ward Credit Corporation (Credit Corporation), a wholly owned subsidiary.
Thereafter, Wards established the following method for computing the amount of sales tax to be remitted monthly to the state. At the end of each month Wards calculated its total gross taxable sales, both cash and credit. Wards then determined the difference between the prior month's accounts receivable beginning and ending balances. The difference in the prior month's accounts receivable balance was then subtracted from the gross taxable sales. Sales tax was then remitted to the state based on the resulting balance. Any increase in the accounts receivable would mean an excess in credit sales over and above collection for a particular month with a decrease of the balance on which sales tax is computed and remitted. Conversely, any decrease in accounts receivable would mean an excess in collections over credit sales thereby increasing the balance on which sales tax is computed and remitted.
Significantly, the accounting method used by Wards did not attempt to reflect the actual amount paid by customers on particular items or components in a credit account of a customer at the time a payment was made. The accounting procedure also did not make allowance for non-taxable items included in the accounts receivable. Wards' procedure was to apply any payment made by a credit customer first to finance charges and then on a pro rata basis towards the payment of other charges on the account. 1 By charging a finance fee on the balance of the account, Wards collects interest on a sales tax liability that has not been paid.
The Department commenced an audit of Wards in September, 1975. Following the audit, a notice of deficiency was served on Wards showing additional sales tax due, as of February 29, 1976, of $2,105,924.46. The Department's deficiency determination was based on the following facts: (1) The sale of accounts receivable triggered the requirement to pay the sales tax on the entire amount due on the sale. See 1 Colorado Code of Regulations, Regulation 138-5-11 (hereinafter Regulation 138-5-11, C.C.R.). (2) Wards' method of remitting sales tax was based on assumptions and estimates and not on the basis of cash actually received. (3) The effect of not making allowances for non-taxable items (finance charges, state and local sales taxes, insurance sales, installation charges and service charges are exempt from a sales tax) was to defer and delay the remittance of sales tax to the state on taxable items when Wards has been paid the sales tax on such items by its customers.
Between the time period when the audit commenced and service of the notice of deficiency, Wards remitted an additional $260,282.80 in its February return. The additional sales tax was remitted after the auditor expressed concern that non-taxable items were included in Wards' method of estimating its taxes. The $260,282.80 sum was based upon an estimate by Wards' national sales tax manager to reflect that approximately 11% of the total receivables were non-taxable items. 2
After service of the notice of deficiency, Wards filed a timely protest and the matter came on for hearing before the Director of the Department of Revenue. The Director entered a final determination sustaining the Department's assessment and imposed a penalty of $41,881.86, plus interest of $15,735.27 on the $260,282.80. The Director specifically found that Wards had "employed a method that effectively deferred payment to Colorado of sales tax due not in accordance with the statutes and regulations thereunder." Additionally, by letter dated January 28, 1977, the Director revoked Wards' permission to remit sales tax on the cash receipts basis. See section 39-26-111, C.R.S.1973.
Wards appealed and a trial de novo was held in the district court. The district court upheld the Director's final determination except as to the penalty and interest that had been assessed. In its conclusions of law regarding the issue relating to the $260,282.80 sum remitted by Wards to the state in its February, 1976 return, the court declared:
Wards raises the following issues on appeal: (1) Whether the Director's revocation is void for non-compliance with the Administrative Procedure Act, article 4 of title 24, C.R.S.1973. (2) Whether the transfer of accounts receivable from Wards to Credit Corporation causes the entire sales tax to be due and payable. (3) Whether the Sales Tax Act authorized the Director to compel a retailer to remit sales tax on credit sales on the accrual basis. (4) Whether the Department's deficiency assessment can be upheld for more than the correct amount of sales tax due.
The Administrative Procedure Act
The district court found that the Director's revocation of Wards' permission to remit sales tax on a cash basis was accomplished summarily without a hearing, but concluded that the State Administrative Procedure Act, article 4, title 24, C.R.S.1973, did not apply to the revocation.
Wards asserts that the 1964 letter from the Department permitting Wards to make returns on the cash basis was a "license" as defined in section 24-4-102(7), C.R.S.1973 (1979 Supp.):
"(7) 'License' includes the whole or any part of any agency permit, certificate, registration, charter, membership, or statutory exemption."
Wards then claims that the Director's letter revoking permission to remit sales tax on the cash basis amounted to a revocation of a "license" and that the Director could not effect a revocation without complying with the notice and hearing requirements of sections 24-4-104 and 24-4-105, C.R.S.1973.
The Department takes the position that the Director followed the procedure required by the Sales Tax Act for the assessment, protest, hearing, and appeal of tax matters, and that the State Administrative Procedure Act is not applicable. Specifically, section 39-26-111, C.R.S.1973, makes the withdrawal of the authorization to make returns on the cash basis...
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