Opinion
No. 19-P-114.
10-07-2020
BAY STATE GAS COMPANY & AFFILIATES v. COMMISSIONER OF REVENUE.
Richard C. Call (Robert J. Cordy also present), Boston, for the plaintiff. Brett M. Goldberg for the defendant.
Richard C. Call (Robert J. Cordy also present), Boston, for the plaintiff.
Brett M. Goldberg for the defendant.
Present: Rubin, Blake, & Wendlandt, JJ.
RUBIN, J. This is an appeal from so much of a decision of the Appellate Tax Board (board) as upheld the Commissioner of Revenue's (commissioner) disallowance of a deduction by the plaintiff, Bay State Gas Company (Bay State) and Affiliates, for amounts remitted to the State of Indiana as payment of the Indiana Utility Receipts Tax (URT) for the tax years ending in 2012 through 2014. Because we conclude that the URT is not a "franchise tax[ ] for the privilege of doing business" within the meaning of G. L. c. 63, § 30(4)(iii) (disallowance statute or act), we reverse.
Neither party has appealed from so much of the board's decision as granted Bay State an abatement of penalties imposed by the commissioner.
Background. During the relevant tax period, the tax years ending December 31, 2012, through December 31, 2014, Bay State operated in Massachusetts and was subject to the Massachusetts corporate excise tax. Through two of its affiliates, it also operated in Indiana. In general, taxes imposed by other States on corporations in Massachusetts that are subject to Massachusetts corporate excise tax, G. L. c. 63, §§ 30 through 42B, were deductible during those tax years from income for purposes of calculating Massachusetts net income, as "deductions ... allowable under the provisions of the Federal Internal Revenue Code." G. L. c. 63, § 30(4). An exception, however, is created by the disallowance statute, which provides that no deduction is allowed for "taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any [S]tate." G. L. c. 63, § 30(4)(iii).
The Indiana URT, paid by Bay State's Indiana affiliates for the relevant tax period, imposes what Indiana denominates "[a]n income tax" on "(1) the entire taxable gross receipts of a taxpayer that is a resident or a domiciliary of Indiana; and (2) the taxable gross receipts derived from activities or businesses or any other sources within Indiana by a taxpayer that is not a resident or a domiciliary of Indiana." Ind. Code § 6-2.3-2-1 (2017). Gross receipts subject to taxation under the URT are defined as "anything of value ... that a taxpayer receives in consideration for the retail sale of utility services for consumption ...." Ind. Code § 6-2.3-1-4. They include, among others, those receipts (a) derived from "furnishing utility services to an end user in Indiana for consumption in Indiana," Ind. Code § 6-2.3-3-11 ; (b) "received for installation, maintenance, repair, equipment, or leasing services provided to a commercial or domestic consumer that are directly related to the delivery of utility services to the commercial or domestic consumer or the removal of equipment from a commercial or domestic consumer upon the termination of service," Ind. Code § 6-2.3-3-10 ; and (c) from "any legal settlement or judgment received to compensate the taxpayer for lost retail sales of utility services." Ind. Code § 6-2.3-3-3.
Receipts that are not taxed under the URT, however, include those derived (a) from "a wholesale sale to another generator or reseller of utility services," Ind. Code § 6-2.3-3-5 ; (b) from the "occasional sale of utility services by a taxpayer that is not regularly engaged" in the sale of utilities, Ind. Code § 6-2.3-4-4 ; and (c) from "sales to the United States government" insofar as the United States Constitution prohibits the taxation of receipts from such sales. Ind. Code § 6-2.3-4-1. Thus, the URT is essentially a tax on retail sales in Indiana of utility services.
After the passage of the URT in 2002, retail natural gas customers in Indiana, presumably in order to avoid the additional costs of the URT that Indiana retailers passed through to them, began purchasing natural gas from out-of-State suppliers. In response, in 2006, the Indiana Legislature adopted a complementary use tax, the Utility Services Use Tax (USUT) "on the retail consumption of utility services in Indiana ...." Ind. Code § 6-2.3-5.5-1 (2017). This use tax on utility consumption was imposed "at the same rate as the [URT]" to level the playing field between in-State and out-of-State retailers. Ind. Code § 6-2.3-5.5-3. See Mirant Sugar Creek, LLC v. Indiana Dep't of State Revenue, 930 N.E.2d 697, 701 n.3 (Ind. Tax Ct. 2010).
Although the commissioner suggests that such use taxes appear in other contexts, they are ordinarily, and, so far as we are aware, universally utilized by States imposing taxes on retail sales made by in-State sellers; these States adopt use taxes in tandem with retail sales taxes to attempt to ensure that in-State sellers are not disadvantaged in comparison to out-of-State sellers. See South Dakota v. Wayfair, Inc., ––– U.S. ––––, 138 S. Ct. 2080, 2088, 201 L.Ed.2d 403 (2018) ("Many States employ this kind of complementary sales and use tax regime" to ensure that either the seller or the in-State consumer pays taxes on the in-State retail sale of goods and services).
The URT itself allows a deduction, with respect to resource recovery systems, for the "total depreciation deductions that the taxpayer is allowed, with respect to the system, for that taxable year under Sections 167 and 179 of the Internal Revenue Code." Ind. Code § 6-2.3-5-3(a)(2). In addition, although the label used by Indiana is not dispositive, see Liberty Mut. Ins. Co. v. Commissioner of Revenue, 405 Mass. 352, 355, 541 N.E.2d 566 (1989), cert. denied, 494 U.S. 1055, 110 S.Ct. 1523, 108 L.Ed.2d 763 (1990), the Indiana statutes refer to the URT as an "income tax" and describe the URT as a tax on the "gross receipts" of utility service providers for their retail activities in Indiana. Ind. Code § 6-2.3-2-1. The URT is also described in a subsequent section as a tax imposed "in addition to all other licenses and taxes imposed by law as a condition precedent to engaging in any business, privilege, occupation, or activity." Ind. Code § 6-2.3-8-2.
Bay State timely filed a combined Massachusetts corporate excise return, reporting its combined income from its taxable member affiliates with a deduction in the amount paid for the URT to Indiana, and paid the corporate excise tax shown thereon. During an audit, however, the commissioner maintained that the URT could not be deducted under the disallowance statute because it was an "income tax." On August 11, 2016, the commissioner issued a notice of assessment assessing additional Massachusetts corporate excise tax, interest, and penalties.
Bay State challenged the assessment within the Department of Revenue by filing a form application for abatement on October 6, 2016, and the commissioner denied the abatement of the tax, interest, and penalties on December 6, 2016.
Bay State timely filed a petition with the board challenging the tax, interest, and penalties. Before the board, the commissioner abandoned his previous argument that the URT is an "income tax" and argued, as he does here, that the URT is, instead, a "franchise tax for the privilege of doing business" in Indiana, and, for that reason, is not deductible. The commissioner expressly forswore the argument that the URT is an income tax.
On cross motions for summary judgment, the board ruled in favor of the commissioner with respect to the tax but in favor of Bay State on penalties, explaining that "[t]he [c]ommissioner himself came to different interpretations, initially contending that the URT is an income tax and later contending that it is a franchise tax."
From the board's determination with respect to the nature of the Indiana tax, Bay State has appealed. " ‘A decision by the board will not be modified or reversed if the decision "is based on both substantial evidence and a correct application of the law." ’ Capital One Bank v. Commissioner of Revenue, 453 Mass. 1, 8, 899 N.E.2d 76, cert. denied, 557 U.S. 919, 129 S.Ct. 2827, 174 L.Ed.2d 553 (2009), quoting Boston Professional Hockey Ass'n v. Commissioner of Revenue, 443 Mass. 276, 285, 820 N.E.2d 792 (2005). ‘Because the board is authorized to interpret and administer the tax statutes, its decisions are entitled to deference. Ultimately, however, the interpretation of a statute is a matter for the courts’ (citation omitted). Onex Communications Corp. v. Commissioner of Revenue, 457 Mass. 419, 424, 930 N.E.2d 733 (2010)." Genentech, Inc. v. Commissioner of Revenue, 476 Mass. 258, 261, 67 N.E.3d 1183 (2017).
Although we will assume without deciding that the board and the commissioner have correctly construed the act to disallow the deduction of taxes imposed "for the privilege of doing business" in another State, we conclude that they have erred in application of that law by determining that the URT is such a tax. Consequently, we reverse.
Discussion. Before us, the commissioner, as he did before the board, explicitly forswears any claim that the URT is a tax "on or measured by income" within the meaning of G. L. c. 63, § 30(4)(iii). Apparently, the commissioner has concluded that the URT, a tax on "gross receipts," is not an income tax for the purposes of this statute because, as explained in Department of Revenue Directive 08-7, the URT must be paid on gross receipts, regardless of whether the business is profitable, rather than on net income. Department of Revenue Directive 08-7 (Dec. 18, 2008). In any event, the argument that the URT is an income tax is therefore waived, and we do not express any opinion on the matter.
The commissioner argues instead that the URT is a franchise tax for the privilege of doing business in Indiana. Adhering to a longstanding Department of Revenue position, the commissioner argues that the defining feature of all tax deductions disallowed under G. L. c. 63, § 30(4)(iii), is that they are imposed on the corporation's business as a whole, rather than on discrete events, or parts of the corporation's activities, or ownership, within a State. Department of Revenue Directive 99-9 (August 10, 1999). And, in particular, the commissioner argues that franchise taxes are those imposed on the business enterprise as a whole, in the sense that they are taxes imposed either for the privilege of existing in corporate form, or for the privilege of doing business in the State.
The commissioner argues that the URT is imposed on the corporate enterprise as a whole for the privilege of doing business in Indiana. He argues that a high percentage of Bay State's affiliates' gross receipts for the relevant tax years were subject to the URT: ninety-seven percent for 2012, ninety-two percent for 2013, and ninety-three percent for 2014. Those percentages, however, are a happenstance. They reflect the business in which Bay State's affiliates are engaged. The tax, however, is not imposed on the business in its entirety: it is imposed on the receipts received from retail sales of, in this case, natural gas and electricity.
The commissioner also notes that a provision of the URT, Ind. Code § 6-2.3-8-2, states that the URT is imposed "in addition to all other licenses and taxes imposed by law as a condition precedent to engaging in any business, privilege, occupation, or activity that is taxable under such other license or tax," and argues that the word "other" in this provision compels the conclusion that the URT, too, is a tax imposed as a condition precedent for doing business in Indiana. We are not persuaded by this textual argument. It ignores that the URT titles itself an "income tax," see Ind. Code § 6-2.3-2-1, as opposed to a franchise tax or a tax for the privilege of doing business in Indiana. And the URT is imposed, as discussed above, not on all of the taxpayer's business, but on enumerated revenues excluding certain receipts from wholesale sales, sales to the Federal government, and occasional sales. Ind. Code § 6-2.3-3-5 ; Ind. Code § 6-2.3-4-1 ; Ind. Code § 6-2.3-4-4. This isolated language of Ind. Code § 6-2.3-8-2 does not convince us that the URT was intended to be a franchise tax for the privilege of doing business in the State of Indiana.
Assuming without deciding that the commissioner's construction of "franchise taxes for the privilege of doing business" is correct, see supra at 662, we conclude that the URT does not fall within this category of tax. Rather, Bay State has demonstrated that the URT does not come within the commissioner's definition of a franchise tax imposed for the privilege of doing business in Indiana, that is, a tax on the entity as a whole, but is a tax on utilities' retail sales. Consequently, under the act, the URT is deductible from Bay State's net income for the tax years in question.
In this regard we note that in upholding the commissioner's conclusion that Bay State could not deduct the amounts remitted in payment of the URT, the board said only that the URT was the type of tax covered by the disallowance statute as a whole and that it was "a tax on the privilege of doing business," but never concluded that it was, as the commissioner argued, a "franchise tax." As we describe in the text, assuming, as the board concluded, that a tax on the privilege of doing business is not deductible, we nonetheless conclude that the board erred in concluding the URT meets the board's definition of a tax on the privilege of doing business.
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While the commissioner contends that the URT cannot be considered a sales tax, we are not persuaded by the commissioner's arguments. The commissioner contends that the URT does not, as sales taxes do, instantiate a philosophy that the tax should rest on the consumer. That conclusion rests on the commissioner's assertion that the businesses on which the URT is imposed do not separately collect the tax from their purchasers. But as the commissioner must be aware, with or without separate collection, as a matter of economics, a rational economic actor can always be expected to attempt to pass increased costs from taxes on to the consumer. This is what natural gas retailers in Indiana sought to do after passage of the URT: "Subsequent to the enactment [of the URT], many Indiana utility vendors increased the costs associated with utility service sales in order to minimize the impact of the tax on their bottom lines." Mirant Sugar Creek, 930 N.E.2d at 701 n.3. The perceived need for the Legislature to adopt a use tax to prevent the migration of retail purchasers of natural gas from in-State to out-of-State suppliers indicates that the burden of the URT did, in fact, shift to the consumer. See id.
The commissioner argues that because several States utilize complementary use taxes outside the sales and use tax context, we should not consider the Indiana Legislature's adoption of the USUT to be evidence that the URT is a sales tax. While we do not doubt that States use complementary taxes in a variety of contexts to close gaps in their taxation schemes, this does not undermine our conclusion that the existence of the USUT, among other features of the URT, suggests that the URT is essentially a tax on retail sales. That Indiana adopted a use tax on the consumption of utility services to complete the URT's taxation of receipts from the retail sale of utility services suggests that the URT is, ultimately, a tax on certain individual transactions, as opposed to a franchise tax for the privilege of doing business.
Although the Indiana URT has some aspects which appear to render it sui generis -- for example the ability to deduct depreciation on certain capital expenses from the tax (typically a feature of income taxes), see Ind. Code § 6-2.3-5-3 -- it is in substance fundamentally similar to transaction taxes on retail sales, which are deductible.
The board's affirmance of the denial of an abatement of Bay State's corporate excise taxes is reversed.
So ordered.