TAX APPEAL OF BAKER & TAYLOR v. Kawafuchi

• Decision Date: 14 January 2004
• Docket Number: No. 23376.,23376.
• Citation: 82 P.3d 804,103 Haw. 359
• Court: Hawaii Supreme Court
• Parties: In the Matter of the TAX APPEAL OF BAKER & TAYLOR, INC., Taxpayer-Appellant v. Kurt KAWAFUCHI, Director of Taxation, State of Hawai'i, Appellee.

82 P.3d 804

103 Haw. 359

In the Matter of the TAX APPEAL OF BAKER & TAYLOR, INC., Taxpayer-Appellant v. Kurt KAWAFUCHI,¹ Director of Taxation, State of Hawai'i, Appellee.

No. 23376.

Supreme Court of Hawaii.

January 14, 2004.

Ronald I. Heller (Torkildson, Katz, Fonseca, Jaffe, Moore & Hetherington), on the briefs, for taxpayer-appellant.

Christopher J. Muzzi, Deputy Attorney General, State of Hawai'i, on the briefs, for appellee.

MOON, C.J., LEVINSON, NAKAYAMA, ACOBA, and DUFFY, JJ.

Opinion of the Court by ACOBA, J.

We hold that Appellant Baker & Taylor, Inc. (Baker) is subject to the general excise tax of 4% under Hawai'i Revised Statutes (HRS) § 237-13(2)² (1993) & (Supp. 1994)³ on its sales made to the Hawai`i State Library (the Library), but not subject to a use tax of 0.5% under HRS § 238-2(2) (1993)⁴ on such transactions. Baker appeals from the March 29, 2000 orders and judgment of the Tax Appeal Court (the court)⁵ denying Baker's Motion for Summary Judgment and granting the Cross-Motion for Summary Judgment of Appellee State of Hawai'i Director of Taxation (Director) which had argued Baker was subject to both the general excise and use taxes. On appeal, Baker argues that it did not conduct operations in Hawai'i sufficient to be subjected to the general excise tax because 1) title to the property sold passed to the Library outside of Hawai'i and 2) imposition of the tax would violate the Commerce Clause of the United States Constitution.⁶ Baker argues that it is not subject to Hawaii's use tax as well. We affirm the court's grant of summary judgment insofar as it relates to general excise taxes but vacate the judgment insofar as it relates to use taxes, on the grounds set forth below, and remand the matter to the tax appeal court for entry of partial summary judgment in Baker's favor and against the Director on the issue of Baker's susceptibility to the use tax with respect to the sales in question.

I.

A.

Baker is a Delaware corporation and has its headquarters and principal place of business in Charlotte, North Carolina.⁷ During the time period covered by the tax assessments, Baker had no office in Hawai'i, no employees based in Hawai'i, and no real property in Hawai'i. The firm was never registered with the Department of Commerce and Consumer Affairs of the State of Hawai'i. The firm did hold a Hawai'i General Excise Tax ID license at one time but it sent notice on February 1, 1996 to the Department of Taxation (Department) of its decision to cancel its registration. Baker used common carriers, such as the United Parcel Service, to deliver its goods to Hawai'i.

Prior to February 1, 1996, Baker made a series of sales to customers, including the Library, and included in its contracts a clause that made the sales FOB ("free on board") Hawai'i. The term FOB generally designates where title to goods passes from the seller to the buyer. See Black's Law Dictionary 642 (6th ed.1990). Thus, "FOB Hawai'i" meant that title to the goods passed from Baker to the customer when it reached Hawai'i.

On or about April 25, 1995, Baker sent a letter to the Department, inquiring whether it would be subject to the general excise tax if it used the FOB shipping point terms and, if not, whether the Department could require its competitor to pay the general excise tax. On April 15, 1995, the Department responded that Baker was subject to the general excise tax of 4% and a use tax of 0.5%.⁸ On March 28, 1996, Baker contracted with the Library to furnish books and other educational materials (the Library Contract). For the March 28, 1996 contract, however, Baker altered the terms of the contract to FOB point of shipment. This meant that title passed from Baker to the customer at the loading docks on the mainland from which the goods would be shipped to Hawai'i. Baker made this change after it determined its competitor for the 1996 contract did not hold a general excise tax license and, consequently, reasoned that the competitor was absolved from paying general excise taxes on sales made with an FOB point outside Hawai'i.⁹

The sales made under the Library Contract constituted roughly 70% of the transactions at issue in this case. The remaining 30% of sales involved other customers located in Hawai'i. Under the terms of the Library Contract, the Library had a right to inspect the ordered goods upon possession in Hawai'i and to reject any nonconforming goods. The company requested that the Library notify it of any books damaged by the carrier to enable Baker to arrange for the return of the rejected materials. Baker paid for the shipping costs of any defective or improperly shipped items.

Baker did have contacts with its customers in Hawai'i, including the Library, during the time period covered by the Tax Assessments (1994, 1995, 1996, 1997). It sent catalogs to its customers in Hawai'i, who used software supplied by Baker. It accepted orders by facsimile and via the Internet from its customers in Hawai'i, who used software supplied by Baker. It provided toll free 800 numbers "for customer service, placing orders, pricing, technical support, etc."

Baker sent employees to Hawai'i to meet customers and potential customers. The employees came for at least one day and stayed as long as one month. Since 1993, Baker's School Library sales representative had come to Hawai'i once per year and spent three to four days visiting existing customers and had attended a school trade show. From March 1993 until November 7, 1998, on at least eleven separate occasions, between one and four Baker employees had met with representatives of the State Libraries Material Processing Center (SLMPC) in Hawai'i. These meetings involved (a) training Department of Education (DOE) staff on how to use software from Baker, (b) updating and informing DOE employees of Baker's new and changing services, and (c) face-to-face meetings with DOE employees regarding (i) business services provided by Baker, (ii) recurring problems with computer disk and barcode materials purchased from Baker, (iii) Baker's quality control, and (d) problems that arose from the goods and services purchased by the Library from Baker. Baker did not charge additional fees for any of these services.

On at least eleven separate occasions between July 31, 1995 and December 28, 1998, Baker employees (from one to six) met members of the Library or others in Hawai'i, with respect to the March 28, 1996 Library Contract. In January 1996, a Baker employee was in Hawai'i for approximately one month. The purposes of Baker's visits to Hawai'i included (a) preparation of a proposal for the Library contract, (b) visiting with libraries to meet library employees about the Library Contract and to discuss problems and concerns with the Contract, (c) meeting employees regarding the creation and updating of profiles of the individual libraries, and (d) consulting with the Board of Education's Blue Ribbon Panel regarding the contract.

B.

The Department filed a notice of assessment dated September 18, 1998 to Baker for collection of the 4% general excises taxes due on transactions during the fiscal years ending on June 30, 1994, 1995, 1996, and 1997, as well as interest and penalties pursuant to HRS §§ 237-36¹⁰ and 238-7¹¹ (1993). It also took the position that, based on HRS § 238-2, Baker was liable for use taxes of 0.5% on the transactions. Baker refused to pay taxes under HRS § 237-13, explaining that the State can only tax transactions made in Hawai'i. Arguing that title to the goods had passed to the Hawai'i customer on the mainland (by the new contract term of FOB point of shipment), Baker claimed it no longer engaged in taxable activities in Hawai'i.

On October 2, 1998, Baker paid $256,386.46 to the Department under protest. It later conceded that $27,010.70 of the assessment was correct. Based on this concession, the Department waived part of the penalties in the amount of $5,183.80. Baker also argues that it is not liable for the use tax assessment because under HRS §§ 238-2¹² and 238-1,¹³ it did not "use in this State ... tangible personal property." Therefore, Baker contends that it did not have ownership of the property while that property was within the state.

According to Baker, a lawsuit, Baker & Taylor v. State of Hawai'i, Civil No. 97-4646-11, was filed on November 10, 1997 between the Library and Baker in the circuit court of the first circuit involving a claim of breach of contract. Faced with the issue of where delivery of the goods had occurred, the trial court in that case ruled that delivery and passing of title had occurred on the mainland in accordance with the FOB point of shipment terms. The Department was not a party to the litigation, but the State of Hawai`i was a party. According to Baker the case was settled and dismissed by stipulation. The record does not indicate whether an appeal was filed in that case.

On October 6, 1998, Baker filed a notice of appeal to the court contesting the general excise taxes and use taxes assessed. In that regard, Baker filed a motion for summary judgment on October 25, 1999 with the court, and the Director filed its own motion for summary judgment on October 25, 1999. As mentioned before, the court granted the Director's motion and denied Baker's motion on March 29, 2000.

II.

We review an award of summary judgment de novo under the same standards applied by the trial court. Kamikawa v. Lynden Air Freight, Inc., 89 Hawai'i 51, 54, 968 P.2d 653, 656 (1998). "The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Hawai'i Rules of Civil Procedure Rule 56(c).

III.

Baker contends that: (1) the term "sale" should be accorded the definition consistent with that found in the Uniform...