Massachusetts State and Local Tax Update—Second Quarter 2023 (1)

The rules on litigating a tax appeal in Massachusetts are about to undergo a significant overhaul, which will provide taxpayers and their representatives with additional guidance when preparing and trying their cases.

On April 20, the Massachusetts Appellate Tax Board issued a notice of proposed revision of its Rules of Practice and Procedure. It aims to make litigation of tax appeals more transparent and understandable, and to encourage parties to confer at various stages of the litigation process to narrow contested issues or resolve disputes prior to hearings.

The board hopes to adopt permanently many of the procedures successfully implemented during the pandemic, including options for remote hearings, email pleadings filing and service, and mandatory exchange of exhibits prior to hearing. To promote increased cooperation among litigants, the board’s rules will better emphasize status conferences, mediation conferences, stipulations and agreed statements of fact, and conferences prior to discovery-related motions.

The proposed rules come while the board is aggressively scheduling appeals for hearings after nearly three years of inactivity because of the pandemic and office renovations. Suggestions on the rules have come in from local bar associations, municipal officials, and Department of Revenue attorneys. Public hearings are scheduled for September, and the amended rules are expected to be in place by October.

In Melissa Pixley v. Commissioner of Revenue, the Massachusetts Appeals Court ruled in favor of cellphone purchasers who brought a class action lawsuit against the Commissioner of Revenue. The case concerned sales tax that is collected when a consumer purchases a discounted cellphone, bundled with the consumer’s agreement to use the carrier’s wireless services for a period into the future.

Department of Revenue Directive 11-2 provides that the taxable sales price of a cellphone sold in a bundled transaction is the higher of the cellphone’s wholesale cost to the carrier or the cash price the consumer pays, and that the sales tax must be paid on that amount. The directive also permits wireless service carriers and independent retailers to collect from their customers the full amount of the sales tax, even when the sales tax is based on the higher wholesale cost of a cellphone rather than the discounted retail price.

The commissioner, relying on the directive, assessed sales tax on the cellphones purchased based on the higher of the phone’s wholesale cost or the cash price the consumer paid. Typically, the tax would be based on the higher wholesale cost rather than the discounted price to the consumer.

The plaintiffs argued that the directive’s approach exceeded the commissioner’s statutory authority because it required consumers in such bundled transactions to pay a tax on more than the price they paid for the cellphone and the services. The commissioner conceded that the tax was assessed on more than the consumer pays in money. He justified the tax on the theory that the cellphone and services contract have a taxable value apart from the money the consumer pays.

The court agreed with the plaintiffs. The sales tax statute taxes the vendor on the gross receipts the vendor receives from sales at retail. “Gross receipts” is defined as “the total sales price received by a vendor as consideration for retail sales.” The directive was determined to be at odds with this statutory definition because it directed the collection of a tax on more than the “total sales price received” by the vendor.

The case may not turn out to be a total victory for the plaintiffs. The court only determined that the directive exceeded the commissioner’s authority and that the sales tax must be based on the price received by the vendor.

However, the plaintiffs aren’t the taxpayers under the statute; the vendors are the ones required to remit the tax to the states. Any potential refunds would have been payable to the vendors, and thereafter to the consumers, but only if the vendors had applied for tax abatements. That wasn’t done, and it appears that the plaintiffs ultimately won’t be entitled to refunds of the overpaid tax.

On the administrative side, the Department of Revenue issued a draft regulation, 830 Code of Massachusetts Regulations 64H.1.9, to “explain the Massachusetts sales and use tax registration and collection obligations of remote retailers, which include both remote marketplace sellers and remote marketplace facilitators.” The regulation also includes an explanation of the registration and collection obligations of in-state marketplace facilitators.

Remote retailers that have no traditional in-state contacts generally must collect sales or use tax as vendors when they exceed $100,000 in Massachusetts sales in a calendar year. Such retailers may sometimes sell their products and services through intermediaries known as marketplace facilitators, who facilitate sales on behalf of third-party vendors and may also make direct sales on their own behalf.

Marketplace facilitators that have no traditional in-state contacts are themselves remote retailers both as to their direct sales and the sales that they facilitate. They also are required to collect sales or use tax as vendors when they exceed $100,000 in total Massachusetts sales in a calendar year. Total sales include the marketplace facilitator’s direct Massachusetts sales and the state sales it facilitates on behalf of marketplace sellers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Philip S. Olsen is a tax attorney at the Boston law firm of Davis Malm, where he focuses on state and local tax consulting and litigation. He has over 25 years of experience litigating and resolving major tax controversies before courts and administrative boards.

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