I have been puzzling for the last three days on what to write about the Business Court’s first opinion of the year, in Technocomm Business Systems, Inc. v. North Carolina Department of Revenue, 2011 NCBC 1. It involves an opinion about the sales and use tax and whether the taxpayer (Technocomm) was entitled to a refund.
You might be wondering: what is The Business Court doing writing about sales and use taxes? The answer is that in 2008, the Business Court became the route of review for tax cases decided in the Office of Administrative Hearings by an Administrative Law Judge. This was the first opinion from the Court acting in its judicial review capacity in a tax case.
What standard of review applied? Since it was a question of law, the standard of review was de novo. That meant that Judge Tennille could "freely substitute [his] own judgment for the [ALJ’s] judgment." Op. ¶28. And he did that.
Who won? The Department of Revenue or the taxpayer? Judge Tennille reversed the determination by an ALJ and remanded the case for the ALJ to determine the amount of a tax credit due Technocomm which the DOR had refused to allow. Along the way, he condemned the Department’s position as "harsh at best and potentially fatal at worst." Op. ¶25
What was the basis for the credit claim? Technocomm said it was due a credit against use taxes as a result of sales taxes it had collected from its customers in error, and which it had remitted to the DOR. The sales taxes had been collected in connection with service agreements sold by Technocomm simultaneously with the sale of office equipment. The agreements included parts and supplies estimated by Technocomm to be necessary for it to fulfill its maintenance obligations.
Technocomm had been told by the DOR in 1999 following an audit that it should not collect sales tax on its service agreements. The Department said that Technocomm should pay a use tax based on the dollar value of the actual parts and supplies used to meet its service obligations. But Technocomm disregarded that instruction, and continued to charge its customers the estimated sales tax in what it conceded to be "bad business practice." Op. ¶23.
The department and Technocomm were at war over which section of the state tax law applied: section 105-164.41 (titled Excess payments; refunds) or section 105-164.11 (titled excessive and erroneous collections). After some statutory construction of how to deal with the conflict between a general and specific statute, and the obligatory Latin phrase generalia specialibus non derogant (general words do not derogate from special), the Court applied the more general provisions of 164.41 which says that when excess tax is paid "then the amount in excess shall be credited against any tax . . . then due from the taxpayer."
Now, wait a minute, you might say. Isn’t Technocomm generating this credit from money paid by its own customers? Shouldn’t they, as opposed to Technocomm, get the credit since they provided the dollars that will result in the credit? Judge Tennille covered that point extensively, in Paragraphs 40 through 53 of the Opinion. The bottom line, as I saw it, was that the service agreements allocated the risks and costs of repair in advance between Technocomm and its customers. Technocomm carried the risk of having to provide more parts and supplies than it had anticipated and built into the cost of the service agreement.
Part of the cost of that repair risk flows from a human trait observed by Judge Tennille in my favorite part of the Opinion:
Some employees display a tendency to punish technological devices when frustrated by their complicated displays and complex workings despite well crafted corporate policies designed to encourage the ethical treatment of office equipment.
Op. . ¶48. I did not punish any computers in writing this post.