Male Speaker: SJC-13013,
Oracle USA, Inc. v. Commissioner of Revenue.
-: [Chief Justice Budd] Okay.
Welcome, Counsel.
Attorney Weitzel?
-: Thank you.
Good morning, Madame Chief Justice.
And may it please the court,
I'm Richard Weitzel.
I'm Assistant Attorney General
and I'm representing the Commissioner of Revenue.
If I may, I'd like to start this morning
by pointing out two facts in this case
that are undisputed
and may help frame the court's analysis of the issues.
First, the software sales in this case
occurred entirely in Massachusetts.
Hologic is a Massachusetts company.
It downloaded the software from Oracle
and Microsoft exclusively onto its servers in Massachusetts.
And that transaction was subject to Massachusetts sales tax,
and Oracle and Microsoft, the sellers here,
collected sales tax from Hologic
on the full amount of the sales proceeds.
And that was in 2009 to 2012.
The second point is
that years before those sales took place,
the Commissioner of Revenue had established a process
by which businesses
like the businesses that are involved in this case
could apportion sales tax on sales of computer software
based upon expected out of state usage of that software.
And that process was established by the Commissioner
through formal regulations,
which of course, have the force of law.
And there's no dispute that the taxpayers here
did not follow the process.
They did not comply with the regulations in any respect.
And the appellate tax board specifically found--
Justice Lowy: They say
they don't have to abide by the regulations.
The regulations, their position is,
is if you are seeking to have apportionment immediately,
you could use the regulations,
but yet you could still use the abatement in Chapter 63.
But I have a specific question for you
if I could, Mr. Weitzel. -: Yes.
-: So if the Commissioner never promulgated regulations,
would there be a statutory right to apportionment
under Chapter 64H, Section 1?
-: No, Your Honor.
Justice Lowy: The Commissioner gets to decide
whether or not there's an apportionment,
and that's constitutional?
-: Well, Your Honor, the statute is quite clear
that it's a permissive delegation of regulatory authority
to the Commissioner.
Justice Lowy: So, may means may?
-: May means may,
that that's a power
that he can exercise in his own discretion.
Of course, he has exercised it here
and he did it immediately after the statute was passed.
Justice Lowy: Not immediately. There was a period of time
you could have apportionment
even though the regulations didn't exist.
-: There was a period of time
where there were interim rules in place, Your Honor,
because it takes some amount of time
to put in place regulations.
That can't happen instantaneously.
So, there were interim rules.
Those were actually put in place
before the effective date of the statute.
But if I could,
Your Honor mentioned the word constitutional,
and I do want to point out that in this case,
the taxpayers are not making the argument
that this delegation of power
in the statute is unconstitutional,
that the statute is invalid or unconstitutional.
And I just want to be very clear.
Justice Lowy: I think what they're saying,
and (indistinct) made the point too,
is that besting the Commissioner
with the exclusive prerogative
to decide whether there can be apportionment or not
when you're dealing with multi-state sales taxes
raises constitutional concerns.
-: Well, again, they're not saying
that it's an invalid delegation
because that would render the statute invalid,
and we don't think it is an invalid delegation.
I think it's important to look at what the 2005 amendments
that are at issue here accomplish.
And big picture, the main policy purpose
and thrust of those amendments
was to essentially close an enormous loophole
that existed with respect to the taxation of software sales,
where only a hard copy
or sales of hard copy software was taxable
whereas all electronic transmissions were not taxable.
And that the purpose of the statute
was to close that loophole
and put everything into the taxable bucket.
And then the statute does have a second sentence
that allows the Commissioner to promulgate regulations
to alleviate or ameliorate that particular tax burden.
And the Commissioner, of course,
has gone ahead and done that.
So I think--
-: [Justice Wendlandt] But also,
I think Justice Lowy's question is
why is your interpretation of that statute constitutional?
That is if the Commissioner has,
as his or her sole authority to determine rules,
to set forth the rules for apportioning.
And if the Commissioner doesn't do that,
your position is or would be, I suppose,
that it would be constitutional
to delegate to the Commissioner the authority
as to whether or not apportionment would be required.
-: That is our position, Your Honor.
-: [Justice Wendlandt] And so I guess my question to you is,
why is that position a constitutional interpretation
of these amendments?
-: Well, first of all,
I think it's the plain reading
of the delegation that that's--
-: [Justice Wendlandt] But that doesn't answer
the constitutional question.
Tell me why that it's okay
to give the Commissioner sole authority
to determine whether or not
apportionment of the software sales will be allowed.
-: Well, again, Your Honor,
I think you have to go back to the legislative,
what is sort of the fundamental legislative policy
at issue here.
And again, that policy is to capture all sales
of standardized software as taxable sales.
-: [Justice Wendlandt] But Massachusetts can only tax sales
in Massachusetts, right?
That's the whole point of apportionment.
And the thing with software is
that it's not a tangible thing.
I know that the definition was changed,
but it actually isn't as a matter of fact, tangible.
-: Well, Your Honor, it can be tangible
in the sense that you can go into a store
and purchase the CD-ROM that's containing software.
-: [Justice Wendlandt] Right,
the CD-ROM is tangible but the software isn't.
But be that as it may,
I mean, I guess my question is
why is it okay under the Constitution
to delegate to the Commissioner entirely
the question whether apportionment will be allowed?
-: Well, because I think that goes into
giving the Commissioner some authority
to essentially work out the details
of how sales tax is gonna work for standardized software.
-: [Justice Wendlandt] But see,
now you're shifting the position.
I mean, your position now seems to be
that the details of apportionment are delegated.
That may be okay,
but whether or not to apportion,
I guess, my question is,
it sounds like your position originally was
whether or not to apportion
is entirely left to the whim of the Commissioner.
-: Well, that is our position, yes.
(faint speaking)
Sorry?
Justice Lowy: That would mean
the Commissioner would be making substantive tax flow.
I can understand the argument that,
okay, if you're going to seek an apportionment,
then you have to use these regs.
I know that your opposing counsel would disagree with that,
but I could understand the position
that you you have to use these regs.
You can't get an abatement.
And if you don't use these regs,
then you don't get an abatement.
Now, there's concerns raised by that
as Justice Wendlandt's suggesting,
because I mean, you don't necessarily know
at the moment of sale what the in-state,
out-of-state ratios of use are going to be.
-: Well, that may be, Your Honor,
but I don't think that poses an issue as far as taxability.
I mean, the fact of the matter is here,
the software was downloaded onto servers in Massachusetts.
There was clearly a transaction,
a taxable transaction that occurred in Massachusetts.
So our position is simply in this case
that in order to apportion,
one must comply with the regulations
that the Commissioner has established
to deal with the topic of apportionment,
and those were established long ago.
So the fact of the matter is here,
the Commissioner has promulgated regulations,
and that was specifically authorized by the statute.
He's done nothing more than take the steps
that the statute authorized him to take.
And now, what the Commissioner's position is
that taxpayers need to follow those regulations
in order to avail themselves of apportionment.
And it's also the case that this idea that abatement,
the abatement statute essentially saves the taxpayers here
and that they can always come back to the abatement statute
fundamentally misconstrues what the abatement statute does.
The abatement statute does not grant
substantive rights to taxpayers.
It's a vehicle for vindicating existing rights.
And again here, the taxpayers did have a right
to apportion by following the regulations,
but they didn't avail themselves of that.
And because of that--
-: [Justice Wendlandt] Can I ask you to address the argument
that there are some tax laws that specifically say,
you shall not be entitled to abatement
unless you follow this rule, right?
Your brother points some of those out in his brief.
And here, there is no such language.
-: There are some tax laws, Your Honor,
that say in the corporate,
and what's been focused on in this case
is in the corporate income tax context,
there are statutes that say,
or regulations that say,
if you adopt one methodology to start with,
you cannot change your methodology midstream
and try to do that through abatement.
Our position here is that the taxpayers here
never availed themselves of any methodology
that was required by the regulations,
so I don't think either party is putting a lot of stock
in those sort of comparators
'cause I think here,
there was no compliance at all even to begin with,
much less sort of a change in methodology.
Justice Lowy: And if your regulations,
the 15A through D,
are the only means to obtain apportionment,
then clearly, it seems that you're right,
that you couldn't use Chapter 62C for an abatement.
But their position is not the same.
Their position is that that's not the only means
to seek an apportionment.
That's the means to seek an apportionment
if you want it at the point of sale.
So it's not that they misunderstand what abatement is.
They have an indifferent interpretation of the statute.
They understand what abatement is under Section 37.
It just gets us right back to the initial question.
-: Well, Your Honor, I think there's also Subsection 15C,
which in the regulations,
which discusses what happens
if you do not follow 15A or 15B.
And what that subsection says that in that case,
you essentially default to another set of regulations,
sales tax related regulations,
that say when property is delivered into Massachusetts,
as was the case here,
that regardless of the use of that property,
it is taxable.
So subsection 15C,
certainly, our argument is it closes the loop on this.
But I do want to emphasize that there's a reason why
the Commissioner requires apportionment at the time of sale.
That's not an arbitrary distinction.
Sales tax is a transaction based tax.
It's a point of sales tax and it has ripple effects.
I do want to emphasize this.
It has ripple effects in other jurisdictions.
When you pay a certain amount of sales tax in Massachusetts,
it affects your potential use tax liability
in other jurisdictions
and whether or not you get a credit.
So it was entirely sensible for the Commissioner
to put in place a program
where you have to make that decision upfront,
not years later where this ripple effect
may be sort of unworkable at that point in time
because it'd be very difficult to figure out
how other states are affected.
So I think it was very purposeful by the Commissioner
as he was authorized to do under the statute
to set forth rules that require apportionment at
or around the time of sale and not at a later time,
which would be--
-: [Chief Justice Budd] Thank you, counsel.
Does anybody have any other questions?
Male Speaker: No.
-: [Chief Justice Budd] Okay, thanks so much.
-: [Attorney Weitzel] Thank you.
-: [Chief Justice Budd] Attorney Jones.
Attorney Jones: Morning, Your Honor.
May it please the court.
Richard Jones,
together with Joseph Donovan and Caroline Cooper.
-: [Chief Justice Budd] Hold on, we can't hear you quite.
We can't hear you very well.
Could you maybe turn up your volume?
Attorney Jones: Sure, I apologize.
I did test the speaker and the microphone before.
Let me try changing the microphone to a different one.
-: [Chief Justice Budd] That actually is a little better
if you just maybe get closer to the microphone and speak up.
Attorney Jones: Sure.
Is this better, Your Honor?
-: Yes. -: Yes.
-: Thank you.
There are three things we know about this case.
The first thing we know is that both the relevant statute
and the regulation provide for apportionment
of sales tax on software
that's used concurrently in more than one state.
The second thing we know is
that the sales at issue here were apportionable,
and we even know the exact amount of apportioned sales tax
for Massachusetts based on Hologic's users
in and out of Massachusetts.
That was stipulated to,
it was provided in the abatement applications.
It is not disputed here.
We know what the apportioned tax is.
What we have is the Commissioner of Revenue maintaining
that no apportionment should be allowed.
So instead of a 30% apportionment for Microsoft
and 18% apportionment for Oracle,
Commissioner says no, pay tax on 100% of the entire sale.
And the reason why is the Commissioner argues
its regulations impose certain limitations
that prevent taxpayers from being able to establish
the correct apportion tax through the abatement process,
the statutory abatement process.
The ATB below rejected the Commissioner's argument
in part because the third thing that we know.
And that third thing is
that the Commissioner's asserted limitations
actually cannot be found in its regulation.
The Commissioner's regulation has no language
saying that taxpayers cannot establish
the correct tax through the abatement procedures.
And the regulation also does not say
that apportionment is conditioned
on the production of certain buyer certifications
by the time the sales tax is due.
There was an MPU certificate with a deadline,
but that's a different entity
because that leaves the seller to not have to do anything.
So even if the seller doesn't give an MPU certificate,
the sales tax wouldn't be kicked over entirely to the buyer.
Instead, what happens is it's still apportioned.
It's just that the vendor
is still required to submit the apportioned amount.
And the Commissioner of Revenue was wrong to say,
as it did in its brief,
that if you don't get either of those certifications
that no apportionment is available.
That's incorrect--
Justice Lowy: Well, if we take your view, Mr. Jones,
how is the state going to be able to predict in any way
or create in any way an orderly prediction
of what the revenue's going to be and have any sense?
They've promulgated regulations
so that there can be apportionment.
It's a public policy decision to say
whether or not their regulations fit
into what the real world of software sales are.
And if you can just wait until later and use abatement,
we're going to have a big mess.
-: Well, I suppose, Your Honor,
that could be said for any kind of tax
that any tax payer pays.
If a taxpayer like Your Honor
were to submit an income tax return for Massachusetts
that incorrectly overstated the amount of income,
you would have three years under the abatement statute
to make a correction,
and you're entitled to that right.
And so that's the Department of Revenue's job
is to handle abatement applications, refund claims.
And the burden of proof remains on the taxpayer.
And it is no easy task to assert that proof.
Taxpayers did that here,
but we can't negate an abatement right under a statute
because the Department of Revenue
would like to have more predictability.
By the way,
I don't know if it really gives you that predictability
because by insisting
that if you don't get these certifications
during a very, very narrow window,
we tax you at 100%.
That doesn't make things terribly predictable either
because we don't know
who is going to submit the certifications in time or not.
In any event,
the regulation doesn't have any limitations
for processing this through the abatement application.
And I do refer the court--
Justice Lowy: Well, but the statute says
that the Commissioner may, by regulation,
provide rules for apportion of taxes
in the circumstances here,
dealing with software being used in more than one state.
Your interpretation and the board's interpretation
would allow ignoring those regulations
that the statute provides the Commissioner
with authority to promulgate.
-: No, I don't think that's right, Your Honor.
There is apportionment that's made effective by the statute.
And the Commissioner is given an option to issue regulations
as to how to implement those rules.
And so those regulations are still good regulations.
What the Commissioner was arguing in this case oddly
is something different
than what the regulations actually say.
I don't think we need to come in
and challenge that the regulations
shouldn't be honored or followed.
They should just be followed as they are written
and not to have language imputed to it
that wouldn't make sense,
that would deny taxpayers the right
to their abatement application,
or a fair ability to actually show in a timely matter
what their apportionment is.
And I did want to refer just to the counsel
on state taxation Amicus brief
because they can address the task that's at hand
with apportioning tax,
getting the buyer to certify that based on the users.
The Commissioner wants a 20 day window for that
or you don't get to apportion at all.
And that certainly wouldn't have been the intention
of the legislature in the statute
to negate abatement applications
or make it unreasonably unfair.
It does call for regulations
about how to apportion based on use.
I'd also add, Your Honor,
that the commissioner's position
about these time limitations,
they're actually contradicted
by the Commissioner's own regulation.
It came up earlier,
but the regulation does have this retroactive application.
And it was noted
that the regulation came out in October of 2006,
and it was made to apply to transactions
that happened previously,
back to April of 2006.
So there's a retroactive period where the only way
a taxpayer filing returns in that period
could apportion their tax
is by the abatement application process
because their returns are filed.
That's how it works.
So the Commissioner when it enacted this regulation
seemed to clearly bless the fact
that abatement applications are fine to establish that.
It's just a different position that we're hearing now
in this case from the Commissioner.
And I think that's one--
Justice Lowy: Well, their position,
their position is that without the regulations,
without the determination by the Commissioner
to have apportionment in the circumstances,
that there'd be no right to apportionment.
-: That's right, Your Honor.
And that's wrong.
I think just as a matter of law,
the Commissioner is focused on the word may in the statute.
And what the word may in the statute,
the Commissioner may issue regulations,
that tells us that the Commissioner had the option
if of issuing regulations of how to implement.
They're implementation regulations.
That's all the Commissioner can do.
And that's in fact exactly what the Commissioner did.
It explained by its regulation
what methodologies can be used to apportion.
What the statute isn't saying
is that the regulations were for the Commissioner
to determine whether to allow taxpayers to apportion.
Commissioner doesn't get that kind of authority
to decide whether it should be stowed upon the taxpayers
on its own belief to allow statewide apportionment
one way or another.
No, all the regulations the Commissioner authorize
are implementation regulations
under the authority of the statute.
And we know this because
we know the Massachusetts constitution
delegates taxing substantive tax law authority.
And what I mean by that is in position statutes,
exemption statues,
tax laws that determine the amount of tax that shall be due,
those are for the legislature.
The Commissioner was a creation of Chapter 14
and its authority is delineated in that chapter.
And it says the Commissioner can only administer
and enforce existing tax law.
And its regulations have to be reasonable,
not inconsistent with the law
as may be necessary to interpret and enforce any statute.
It's not allowed to decide on its own
whether a tax law should be applied.
It can't be delegated that authority
and this court has made that clear in other cases
where the Commissioner has at times
been mistaken in its interpretation of this authority.
And this court in (indistinct) said for this reason,
the judiciary has the power
to review the Commissioner's actions
to ensure that authority is delegated
and used in accordance with the standards
and policies adopted by the legislature.
So the statute only makes sense if we understand it
to mean the Commissioner is invited
to make rules about how to apportion.
It wouldn't make sense to assume that the legislature
wanted to give the Commissioner the power--
Justice Lowy: So once they meet those rules, again.
I'm not sure I understand your answer to this question.
So they, once they make those rules,
why can you wait and seek abatement
rather than using their rules?
I mean, we've got a definition of what tangible property is.
And software is included in the definition.
There is not a separate section
treating software differently.
Why are you able to just not follow their regulations?
-: This is an important point, Your Honor.
We actually did follow this regulation.
And that's important.
The Commissioner has argued
that taxpayers hadn't complied with the regulations.
Not so.
There are two avenues to get an exemption certificate
or an apportionment certificate,
and that would have shifted the burden of proof,
and that would have made their lives easier
for these taxpayers.
But because they didn't do it,
they had to do it through the abatement process.
That's not disallowed by regulation.
It couldn't be disallowed by regulation,
but in fact, it isn't.
And so we can't say the taxpayers didn't comply.
They just didn't take advantage of an abatement certificate
like there's a sales for resale certificates,
or there are other exemption certificates.
In fact, form ST-12--
-: [Justice Wendlandt] Counsel, is it your position
that the taxpayers here complied with the regulation
by not getting an MPU
and not getting the certification from Hologic?
I don't understand that.
-: What I'm saying is those are not prerequisites.
And so that's a key thing about this regulation.
And the appellate tax board noted this exactly.
Nowhere in the regulation does it say
that the production of these are prerequisites to apportion.
As I said earlier,
the Commissioner is arguing if you don't do these,
you lose the right to apportion.
Not what the regulation says.
And that's why it would be inaccurate to say
we failed to comply,
just as it would be inaccurate to say
that someone who didn't give a sales
and resale certificate, for example,
or an exemption certificate that's filed on form ST-12,
which is the same form used for the MPU,
they didn't fail to comply with anything.
They just have to overcome the burden of proof
of full taxability.
And so in order to do that, we use the abatement process.
And we filed an abatement to establish our facts.
And that's exactly what happened here.
So the language of the regulation is important.
It doesn't say
what the Commissioner is purporting to use it for.
Another example, by the way--
-: [Justice Wendlandt] Can you finish that thought, counsel?
What do you mean,
it doesn't say what the Commissioner
is purporting to use it for?
What does it not say?
-: Two things.
It does not say that tax taxpayers
are prevented from using the abatement process
in order to establish the correct apportionable sales tax.
It also does not say
that the production of one of those two certificates
that are referenced in there
is a absolute prerequisite to being able to apportion.
It does not say that.
The one thing it does say
is that there's a deadline for just the MPU certificate,
not for the other kind of certification,
just the MPU certificate.
The Commissioner wants you to get that certificate in
before the tax returns are filed.
And that makes sense
because that's such a powerful certification
because it just relieves the seller
of having to do anything.
It makes it entirely the buyers' responsibility.
But all that is is shifting obligations.
It doesn't have, if you don't get that,
it doesn't have anything to do
with not being allowed to apportion.
So in that sense,
the Commissioner is arguing
that you don't get to apportion
if you don't do those things.
the regulation doesn't say that.
And elsewhere in the regulation,
it's clear under 15D--
Justice Lowy: The regulation doesn't say that,
but the statute delegates to the Commissioner
the ability to apportion through these regulations.
And one has to wonder why the legislature
would give the Commissioner that power
to establish those apportioning rules
and then have a different vehicle for the taxpayer
to circumvent and not utilize those rules.
-: Well, Your Honor, it's common for the legislature
to ask the Commissioner of Revenue to do regulations
that implement and provide guidelines,
but there's no instance here of any circumventing.
If you look under Section 8 of 64H,
what you have there is exemption certificates
and other rules just like these exemption certificates.
There's no circumventing.
It's an advantage to a taxpayer
if you can provide this certification
because the burden of proof of full taxability,
as opposed to being apportionable
will remain with taxpayer or the vendor
if you don't supply that.
If you do supply one of those certifications,
the department will assume that it was properly apportioned,
but that's not a prerequisite.
And the law's clear,
and I'll refer to DNH Distributing Company,
a case this court decided in 2017.
The facts in that case made it clear
that even if you didn't provide an exemption certificate,
even after the appellate tax board,
you still get the exemption if you can establish it.
And even if--
-: [Chief Justice Budd] Thank you.
Counsel, I'm sorry, your time is up
so I'm gonna ask if there's any other questions.
Okay, I think we got your point.
Thank you both.
And we'll take our morning break at this time.