Rowe-Genereux, Inc. v. Vermont Dept. of Taxes

• Decision Date: 05 February 1980
• Docket Number: INC,ROWE-GENEREU,No. 226-79,226-79
• Citation: 411 A.2d 1345,138 Vt. 130
• Parties: v. VERMONT DEPARTMENT OF TAXES.
• Court: Vermont Supreme Court

Page 1345

411 A.2d 1345

138 Vt. 130

ROWE-GENEREUX, INC. v. VERMONT DEPARTMENT OF TAXES.

No. 226-79.

Supreme Court of Vermont.

Feb. 5, 1980.

Kiel & Freeman, Springfield, for plaintiff.

M. Jerome Diamond, Atty. Gen., and Edwin L. Hobson, Jr., Asst. Atty. Gen., Montpelier, for defendant.

Before BARNEY, C. J., DALEY, BILLINGS and HILL, JJ., and SMITH, J. (Retired), Specially Assigned.

HILL, Justice.

This case involves a constitutional challenge, under both the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of Article I, Section 8, of the United States Constitution, to Vermont's power to impose a use tax collection obligation on an out-of-state seller. ¹

The out-of-state seller, Rowe-Genereux, Inc. (Rowe), a New Hampshire-based corporation located seven miles from the Vermont border, was assessed tax deficiencies in the amount of $11,038.83 ² for its failure to collect the 3% Vermont use tax, 32 V.S.A. §§ 9772-9773, from its Vermont customers on sales of carpet and furniture delivered into Vermont. The State did not seek to impose a collection obligation on Rowe for any sales other than those in which delivery was made into Vermont in Rowe's own truck. Rowe appealed the assessment to the Vermont Commissioner of Taxes who affirmed the assessment in full, holding that Rowe's deliveries of furniture and carpet into Vermont constituted "Vermont sales" under 32 V.S.A. § 9701(6), since transfer of both title and possession took place in Vermont. As the Commissioner found that the Vermont sales tax was properly collectible, the applicability of the complementary use tax provisions of 32 V.S.A. § 9773 was not discussed.

Rowe subsequently appealed the Commissioner's decision to the Washington Superior Court, 32 V.S.A. § 9817, again raising its constitutional claims. The superior court, analyzing the situation presented as a use tax collection obligation rather than as a sales tax collection obligation, upheld the Commissioner's determination in full, stating that the "nexus" required by the constitution between a taxing state and the party on which it seeks to impose a collection obligation was more than adequate in light of the facts presented. It is from this decision that Rowe appeals.

I. The Tax

Vermont law imposes a 3% tax on the sale of tangible personal property at retail in Vermont, and a complementary compensating use tax on the privilege of using such property within the state when the transaction is not subject to the sales tax. 32 V.S.A. §§ 9771-9773. In either case, while the tax is imposed on the purchaser, the seller must collect the tax from the purchaser and remit it to the State of Vermont, or else the seller is held personally liable. 32 V.S.A. §§ 9703, 9775-9776, 9778. The out-of-state seller is compensated, however, for services rendered in collecting and remitting the tax, 32 V.S.A. § 9776, and a credit is provided for sales and use taxes paid on the same property to another state. 32 V.S.A. § 9744(a)(3).

Relying on the definitions contained in the sales and use tax statutory scheme, the State argues that the sales of furniture and carpet by Rowe were "Vermont sales" and that, therefore, they are subject to the Vermont sales tax. Rowe, on the other hand, contends that the sales occurred in New Hampshire, that the use of the goods was in Vermont, and that, as a result, if any tax is applicable it is the Vermont use tax.

A sale is defined as "any transfer of title or possession or both, . . . in any manner or by any means whatsoever for a consideration, or any agreement therefor." 32 V.S.A. § 9701(6). The sales that the State seeks to characterize as "Vermont sales" occurred as a result of Vermont residents travelling to Rowe's store in New Hampshire, where they entered into transactions that varied from payment on the spot, to cash on delivery, to some form of financing. A sales slip was generally prepared and subsequent delivery, if necessary, was arranged. If installation of the goods purchased was required, Rowe would offer to take care of the arrangements. In light of these facts, and despite the State's reliance on the fact that transfer of title or possession occurs on delivery in Vermont under 9A V.S.A. § 2-401(2), which while persuasive is not the controlling definition here, we fail to see how the present transactions do not fit into the plain meaning of 32 V.S.A. § 9701(6) as being, at the very least, an agreement for the transfer of title or possession. Because the sales took place in New Hampshire, the superior court properly analyzed this case as involving a use tax collection obligation.

A use tax is a necessary complement to a state's sales tax, and is used as a revenue-raising device in almost all fifty states. See (Current) 1 All State Sales Tax Rep. (CCH) P 301. It is designed to protect a state's revenues by taking away the advantages to residents of travelling out-of-state to make untaxed purchases, and to protect local merchants from out-of-state competition which, because of its lower or nonexistent tax burdens, can offer lower prices. See Miller Brothers Co. v. Maryland, 347 U.S. 340, 343, 74 S.Ct. 535, 538, 98 L.Ed. 744 (1954). See also Note, State Use Taxes After National Geographic Society v. California Board of Equalization, 64 Va.L.Rev. 145, 148-50 (1978). Since the collection of the use tax from individual resident purchasers, however, would be an administrative nightmare, all states, including Vermont, which have such taxation schemes place the collection obligation on the out-of-state seller. See 32 V.S.A. §§ 9701(14), 9778.

The constitutionality of compensating use tax schemes is well settled. Henneford v. Silas Mason Co., 300 U.S. 577, 582-83, 57 S.Ct. 524, 526-27, 81 L.Ed. 814 (1937). And, although the constitutionality of imposing a collection obligation on the out-of-state seller is equally well settled, Felt & Tarrant Manufacturing Co. v. Gallagher, 306 U.S. 62, 67-68, 59 S.Ct. 376, 378, 83 L.Ed. 488 (1939), there has been controversy over the requisite degree of in-state activity that an out-of-state seller must have before a state may require the seller to act as its collection agent. The Supreme Court has not pronounced a precise standard by which to judge whether an out-of-state seller has the requisite level of local activity, but instead has chosen to consider each case on its particular facts. It is necessary, therefore, to briefly review these cases so that we may discern those factors to which the Supreme Court has attached significance.

II. The Supreme Court's "Nexus" Standard

In the seminal case of Miller Brothers Co. v. Maryland, supra, Mr. Justice Jackson articulated the often quoted requirement that for a state to impose a collection obligation on an out-of-state seller there must be "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax." Id., 347 U.S. at 344-45, 74 S.Ct. at 539. The factual situation in Miller Brothers involved a Delaware retailer which only sold directly to customers at its store in Delaware. Residents of neighboring Maryland would to go Miller Brother's store to make purchases, and occasionally Miller Brothers would arrange for delivery into Maryland either by common carrier or in its own truck. Miller Brothers had no resident agent or outlets in Maryland, nor did it advertise in Maryland media, although its advertisements in the Delaware media did make their way into Maryland. The State of Maryland sought to require Miller Brothers to collect a use tax from Maryland residents who purchased goods at the Delaware store. Based on these facts, the Supreme Court held that Maryland could not constitutionally impose a use tax obligation on Miller Brothers.

The Court placed emphasis on a number of considerations. First, it concluded that because, under the facts, Maryland could not have reached the Delaware vendor with its sales tax, "(i)t would be a strange law that would make (the vendor) more vulnerable to liability" for use taxes due from Maryland residents. Id. at 345-46, 74 S.Ct. at 539. Second, as pointed out in subsequent Supreme Court opinions, "it was impossible for Miller (Brothers) to determine that the goods sold for cash to a customer over the counter at its store" were destined for use in Maryland. Scripto, Inc. v. Carson, 362 U.S. 207, 212, 80 S.Ct. 619, 622, 4 L.Ed.2d 660 (1960); National Geographic Society v. California Board of Equalization, 430 U.S. 551, 561-62, 97 S.Ct. 1386, 1392-93, 51 L.Ed.2d 631 (1977). Lastly, even though Miller Brothers made "occasional" deliveries into Maryland, and despite the fact that its Delaware advertisements reached the Maryland market, the Court found that Marylanders went to Delaware to make purchases, Miller Brothers did not go to Maryland to make sales. Accordingly, the Court held that there "was no invasion or exploitation of the consumer market in Maryland." Miller Brothers Co. v. Maryland, supra, 347 U.S. at 347, 74 S.Ct. at 540.

The next use tax obligation case to come before the Supreme Court was Scripto, Inc. v. Carson, supra, which involved a Georgia merchandising corporation that had no office, property or agents in the taxing state of Florida. Orders for Scripto's products were solicited in Florida by ten resident "jobbers," who would forward orders to Georgia for shipment of the ordered goods. Stating that the fact that the jobbers were independent contractors was of no constitutional significance, the Court applied the same general standard adopted in Miller Brothers, but concluded that based on the facts presented, the requisite minimum connections with Florida were adequately satisfied.

Following seven years after Scripto was National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), in which the state of Illinois sought to impose a use tax collection obligation on a Missouri based mail order house that had...