Massachusetts Appellate Tax Board Upholds Use Tax On Common Carrier Trucks Domiciled In State

The Massachusetts Appellate Tax Board recently upheld the imposition of use tax on vehicles that were used by a freight business headquartered in Massachusetts, but were titled and registered outside the state.1 Specifically, the Board found that the tax did not violate the Commerce Clause of the U.S. Constitution.2

Background

The taxpayer, an operator of a trucking company which is licensed by the Interstate Commerce Commission (ICC)3 as a for-hire interstate carrier to operate a fleet of tractors and trailers, was headquartered in Massachusetts. While all of the administrative staff and the sole officer of the company were located in Massachusetts, the company had terminals, warehouses, and maintenance facilities in both New Jersey and Massachusetts. The vehicles were purchased from vendors in New Hampshire, New Jersey, Indiana, and Pennsylvania and were delivered to the taxpayer outside Massachusetts. All of the vehicles were registered in New Jersey and bore New Jersey license plates.

During the tax period at issue, the taxpayer operated several hundred vehicles to carry and deliver goods throughout various states. As each of the states where the vehicles were purchased either did not impose sales tax or allowed an applicable exemption from sales and use tax for vehicles engaged in interstate commerce,4 the taxpayer paid no sales tax with respect to its vehicle purchases. The taxpayer also did not file use tax returns or pay use tax to Massachusetts based on the purchase price of the vehicles, believing that the vehicles were exempt from sales and use tax.5

Pursuant to an audit of the taxpayer's books and records for the period from October 1, 2002 through January 31, 2008, the Massachusetts Commissioner of Revenue issued an assessment of more than $1.4 million, including interest and penalties, based on the imposition of use tax on the full purchase price of each tractor and trailer in the taxpayer's fleet. The taxpayer requested a full abatement of the assessment, which was denied. Thus, the taxpayer filed a petition with the Appellate Tax Board alleging that the imposition of use tax on its vehicles which were engaged in interstate commerce violated the Commerce Clause6 and the Equal Protection Clauses of the U.S. and Massachusetts Constitutions.7

Massachusetts Law

Massachusetts generally imposes sales and use tax on the storage, use or other consumption of tangible personal property in Massachusetts.8 Specifically, use tax applies to transfers of title or possession of a motor vehicle where the vehicle transferred is ultimately stored or used in Massachusetts.9 An exemption from use tax is available for vehicles purchased outside Massachusetts if the purchaser properly paid a sales tax to the jurisdiction where the original purchase took place and other requirements are met.10 Massachusetts regulations provide that the sale or transfer of a vehicle that is subsequently brought into Massachusetts for purposes of interstate commerce is exempt from Massachusetts use tax pursuant to this exemption or if the taxation is impermissible under the U.S. Constitution.11 Also, taxpayers may generally offset use tax liability with a qualifying amount paid to another jurisdiction.12

Since the taxpayer in this instance ultimately used its vehicles in Massachusetts, use tax generally applied. No exemption for sales tax paid to other jurisdictions was available, as the taxpayer did not remit sales tax to any other jurisdiction with respect to its vehicle purchases. Thus, pursuant to Massachusetts law, the use tax applied unless, as argued by the taxpayer, the tax was impermissible under the U.S. Constitution.

Commerce Clause Limitations

The Board relied upon the well-established four-prong test first applied by the U.S. Supreme Court in Complete Auto Transit13 to determine whether the use tax violated the Commerce Clause. Specifically, the Board considered whether the tax: (i) was applied to an activity with a substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state. Generally, a tax must sustain all four challenges in order to withstand constitutional challenge.

Substantial Nexus

The taxpayer at issue had...