Aug 07, 2017
From KPMG TaxWatch
Under Massachusetts’ so-called “drop shipment rule,” a wholesaler engaged in business in the Commonwealth is required to collect and remit sales tax due on sales shipped to Massachusetts consumers when the selling retailer is not engaged in business in the Commonwealth. Recently, a wholesaler challenged a sizeable assessment arising under the rule. On audit, the Department assessed sales tax on each transaction made by the drop shipper in which the retailer was not a registered Massachusetts vendor and no sales tax had been collected. In challenging the assessment, the wholesaler argued that the Commissioner must prove—for each transaction— that the out-of-state retailer was not engaged in business in Massachusetts and was not required to collect and remit Massachusetts sales tax.
The Massachusetts Supreme Judicial Court disagreed that the Commissioner had to prove that each retailer was not engaged in business in Massachusetts as a prerequisite to assessing the taxpayer for the uncollected sales tax under the drop shipment rule. The court noted that the Commissioner must have a basis for assessing tax and when such basis is present, the assessment is presumptively correct and the burden is on the taxpayer to disprove the findings of the Commissioner. The taxpayer had been given an opportunity to rebut the Commissioner’s conclusion that the non-registered vendors did not do business in Massachusetts, but had failed to do so. The taxpayer also argued that the drop shipment rule was discriminatory in violation of the dormant Commerce Clause. In the taxpayer’s view, wholesale suppliers with Massachusetts nexus were penalized for doing business with out-of-state retailers because transactions with in-state retailers did not cast wholesale suppliers as vendors obligated to collect sales tax. The court again rejected this argument. The taxpayer, the court noted, erroneously focused on the party collecting the tax, not the burden created by the tax itself. Because transactions with both in-state and out-of-state retailers were equally subject to tax, there was no greater burden placed on the interstate transactions and thus no violation of the dormant Commerce Clause occurred. Please contact Joe Senier at 617-988-1025 with questions on D&H Distributing Company v. Commissioner of Revenue.
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