Third Circuit Sustains Objection to Claim of Massachusetts Taxing Authority for Sales Tax, Finding That Goods Drop-Shipped F.O.B. Debtor's California Warehouse Were Not "Delivered" in Massachusetts
In re Valley Media, Inc., 226 Fed. Appx. 120 (3d Cir. 2007) (Circuit Judge Maryanne Trump Barry)
The Massachusetts Department of Revenue filed a proof of claim in the bankruptcy case of Valley Media, Inc., asserting that Valley owed the commonwealth for uncollected sales tax for goods drop-shipped on behalf of retailers by Valley to customers in Massachusetts. The United States Bankruptcy Court for the District of Delaware sustained the debtor’s objection to the claim, finding that the term “delivery” is defined in accordance with the Uniform Commercial Code, and further finding that such shipments were not a “delivery in the commonwealth” subject to sales tax under Massachusetts law. The United States District Court for the District of Delaware sustained the objection, and the Third Circuit affirmed.
Debtor Valley Media was a wholesale music and video distributor based in California. Pursuant to various vendor contracts with internet retailers, Valley Media drop shipped sales of Valley products to customers of those internet vendors in Massachusetts. Under those transactions, a retail customer would order from internet vendors who were not subject to taxation in Massachusetts. The internet vendor would then order the product from Valley, who would ship the product directly to the customer in Massachusetts, F.O.B. Valley’s California warehouse.
Massachusetts asserted that Valley was obligated to collect sales tax on these transactions because the commonwealth’s tax code defined a retail sale, subject to sales tax, as follows:
The delivery in the commonwealth of tangible personal property by an owner or former owner thereof, or by a factor, or agent or such owner, former owner or factor, if the delivery is to a consumer or to a person for redelivery to a customer, pursuant to a retail sale made by a retailer not engaged in business in the commonwealth, is a retail sale in the commonwealth by the person making the delivery.
Massachusetts filed a proof of claim, asserting that Valley owed the commonwealth for uncollected sales tax during the period from 1997 through 2000. The amount in question (exclusive of interest and penalties) was $1,462,703.
On appeal to the Third Circuit, Massachusetts presented the question of whether the District Court erred in using the UCC and the agreements between the parties to determine that the drop shipments at issue were not subject to sales tax.
Massachusetts argued that delivery occurred in Massachusetts, while Valley argued that delivery occurred in California, when the goods left the debtor’s warehouse, and that, as a result, the sales tax statute was inapplicable.
Under the UCC definition of delivery, the Valley goods would have been delivered in California, when titled passed. Massachusetts argued that it was error to apply the UCC definition of the term. The Court noted, however, that the Supreme Judicial Court of Massachusetts has looked to the UCC definition in interpreting the word “title,” as used in the tax code. Accordingly, the Court held that delivery was not made in Massachusetts, and affirmed the order of the District Court.
