Should New Hampshire businesses have to collect Massachusetts sales taxes from border-crossing shoppers? That’s the issue in Town Fair Tire v. Massachusetts, a case before the Bay State’s Supreme Judicial Court with ramifications for commerce and constitutional law well beyond New England.

In 2003, a Massachusetts Department of Revenue audit uncovered invoices from three New Hampshire outlets of the Town Fair Tire company (TFT) to customers with Massachusetts addresses. Because Connecticut-based TFT also has locations in Massachusetts—and therefore benefits from various public services there, from police protection to road maintenance—the Massachusetts Appellate Tax Board argued that the company’s New Hampshire locations had an obligation to collect taxes from Massachusetts customers and remit them to Massachusetts. As soon as TFT’s technicians noticed a customer’s Massachusetts license plate and inspection sticker, the board said, they should have informed store clerks—unaccustomed to collecting sales taxes in tax-free New Hampshire—to collect Massachusetts taxes on those purchases. So Massachusetts presented TFT with a bill for $108,947, the state’s estimate of the taxes that border-crossing customers should have paid from October 2000 through April 2003.

Massachusetts has dubbed these taxes not “sales” taxes but “use” taxes. They date to the mid-sixties, when the state passed a permanent sales tax and, to keep residents from evading it and ostensibly to protect local merchants, began requiring its residents to pay the same 5 percent on items bought elsewhere that they would “use” within Massachusetts. Until recently, no one advanced the interpretation that out-of-state merchants had to collect the taxes from Massachusetts customers; indeed, the law outlining the use tax clearly states that it “shall be paid by the taxpayer” upon filing state income taxes. But with compliance from its 6 million residents minimal—and enforcement impossible—Massachusetts has shifted focus to three out-of-state stores that some of those residents patronize.

TFT, in turn, has sued Massachusetts. In response, the state’s attorney general’s office hasn’t attempted to prove the “use” on Massachusetts roads of the tires that TFT sold in New Hampshire. Instead, it simply deduces that such a conclusion is “inescapable,” “certain enough,” “a virtual certainty,” and “highly probable.” The state doesn’t know whether the customers connected with Massachusetts addresses on TFT’s invoices registered their vehicles in Massachusetts. Massachusetts also doesn’t know how many of its residents subsequently paid their use tax; the state assumes, apparently, universal noncompliance. Its argument, then, rests upon a series of assumptions. Several seem reasonable, but even reasonable assumptions don’t constitute legal proof.

Massachusetts faces another legal obstacle to its use-tax plan: the United States Constitution. The arbitrary enforcement of a law against a single business in a single state raises equal-protection concerns. Why Town Fair Tire and not, say, Sears? Why tires and not refrigerators, automobiles, and flat-screen TVs? Further, the Constitution’s interstate-commerce clause forbids any state from intruding into the internal business affairs of another. Massachusetts may have the muscle to bully out-of-state merchants belonging to chains that happen to have other outlets in Massachusetts, but the legality of doing so is another matter.

If TFT loses the case, the consequences for commerce could be considerable. Will Rhode Island merchants have to start collecting the Massachusetts 5 percent use tax as well as their own state’s 4.5 percent sales tax? Or would they merely remit the difference between the two levies to Massachusetts? For that matter, will Massachusetts merchants have to start collecting taxes from shoppers visiting from Connecticut, since Connecticut, too, has a use tax? Though ostensibly protecting in-state businesses, Massachusetts has potentially exposed them to the same kind of onerous, out-of-state intrusions that it has thrust upon Town Fair Tire.

As TFT’s lawsuit asserts, such head-spinning scenarios would transform merchants into “detectives” tasked with figuring out where the merchandise they sell will wind up being used, “traffic” cops charged with inspecting drivers’ licenses and plates, and “customs officers” interrogating patrons about their state of residency. (And “accountants,” one might add, with knowledge of the various tax rates of all 50 states.) If the Massachusetts Supreme Judicial Court finds the myriad legal arguments against cross-border sales taxes unpersuasive, then perhaps the specter of merchants dealing with 50 separate tax codes, and 50 sets of auditors, will dissuade it from radically reinterpreting an old law. Should interstate sales taxes somehow survive, many businesses certainly will not.


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