CIRCUIT CITY STORES, INC. vs. COMMISSIONER OF REVENUE.

GREANEY, J. At issue in this tax appeal is whether Circuit City Stores, Inc. (Circuit City), is liable for Massachusetts excise with respect to its sales of its products to customers in stores located in Massachusetts, who subsequently travel to stores in another State to pick up their purchased merchandise. The Appellate Tax Board (board) rejected Circuit City's challenge to the refusal by the Commissioner of Revenue (commissioner) to abate $172,460 (plus interest and penalties) in "sales/use" tax assessed against it for transactions in which merchandise purchased in Massachusetts was picked up by the customer in New Hampshire, between April 1, 1993, and March 31, 1996. Circuit City argues that the transactions were sales occurring in New Hampshire and, therefore, no tax is due under G. L. c. 64H, § 2, which imposes sales tax on "sales at retail in the commonwealth, by any vendor, of tangible personal property . . . at the rate of five percent." Circuit City contends that the purchases became taxable in Massachusetts, if at all, under the use tax statute, G. L. c. 64I, § 2, when the customer brought the purchased items into the Commonwealth for "storage, use or other consumption" and after Circuit City's involvement with the transaction had ended. We transferred to this court Circuit City's appeal from the decision of the board that taxes properly were assessed. We conclude that the transactions were taxable under G. L. c. 64H, § 2, and now affirm the board's decision.

1. The board found the following facts. Circuit City, a Virginia corporation with its principal place of business in Henrico County, Virginia, is a national retailer of electronic equipment. During the relevant tax period, Circuit City operated eighteen retail stores and a distribution center in Massachusetts, as well as a number of stores in New Hampshire, Rhode Island, and Connecticut. As a convenience to its customers (part of an over-all philosophy "to wow the customer"), Circuit City offers a sales option that allows a customer to purchase merchandise at one Circuit City store but elect to pick up the merchandise at an alternative store location. Circuit City refers to such transactions as "alternative location sales" and determines the taxability of these sales based on the location where the item is

Page 631

released to the customer. Because New Hampshire collects no State excise tax, customers of Circuit City stores in Massachusetts willing to travel to a Circuit City store in New Hampshire to pick up their purchases are able to save the five per cent sales tax that otherwise would be added to the retail price pursuant to G. L. c. 64H, § 2.

All Circuit City's so-called "alternative location sales" transactions are specifically coded in the company's inventory computer, or distributive process, system (DPS system) to differentiate them from transactions in which purchased merchandise is carried from the cash register by the customer, delivered by Circuit City to a recipient, or picked up by the customer at the pick-up counter of the store where purchased. The DPS system also records other pertinent information, including the store locations where the item is purchased and where it is to be picked up; the name, address, and telephone number of the purchaser; the item purchased, including the brand, model, and sales price of the item; and the imposition of any sales tax due on the item, based on the location where pick up is to occur.

Circuit City's customer receipt, generated at the time of the purchase and given to the customer, contains information similar to that recorded in the DPS system. Specifically, the customer receipt indicates the store location where the item was purchased and a description of the item, including its brand, model, and sales price. For alternative location sales, the customer receipt also includes the notation "reserved" and the location of the Circuit City store designated for pick up. The "reserved" designation does not mean that a particular item with a particular serial number physically has been set aside for the customer, but, rather, that one less item is available for sale to other customers in the designated store's inventory.

When the customer arrives at the designated alternative location store, the customer presents the customer receipt to the store's customer service representative. The pertinent information is entered into the DPS system, and a pick-up ticket is generated in the store's warehouse. A Circuit City employee then removes an item matching the make and model specified on the pick-up ticket from the warehouse inventory, verifies the item by entering its serial number into an electronic scanner,

Page 632

and releases the item to the customer at the pick-up counter. Circuit City's DPS system then credits the sale to the Massachusetts store and credits a sales commission to the sales associate who initiated the sale at the Massachusetts store. Until the merchandise is picked up, customers may demand a refund or exchange at the store where the original sale occurred or choose to pick up the merchandise there instead of traveling to the designated alternative location. [Note 1]

The board heard testimony of three Circuit City customers who had entered into alternative location sales. All three witnesses, who had been sequestered during each other's testimony, testified that they had purchased items (a television, a videocassette recorder, and computer equipment) at a Circuit City store in Massachusetts and, following advice from a Circuit City employee that Massachusetts sales tax could be avoided by picking their purchases up in New Hampshire, elected to do so. According to the testimony of two customers, one Circuit City sales associate drew a map indicating driving directions to the nearest New Hampshire store. All three witnesses stated that the pick up of their respective items in New Hampshire involved simply presenting their customer receipts to claim the merchandise. No additional amounts were charged, and no other transactions transpired at that time. [Note 2]

After conducting a tax audit, the commissioner assessed Circuit City for "sales/use" taxes relating to alternative location sales occurring between April 1, 1993, and March 31, 1996, in which customers purchased merchandise at three different

Page 633

Circuit City stores in Massachusetts and designated that they would travel to a New Hampshire Circuit City store to pick up the item. [Note 3] Circuit City paid the assessment in full and filed a timely application for an abatement that was deemed denied. It then filed a petition with the board pursuant to G. L. c. 62C, § 39, challenging the denial of the abatement. In its decision, the board concluded that the alternative location sales at issue qualified as Massachusetts sales and, thus, were properly subject to "sales/use" tax. [Note 4]

2. We now consider the merits of this appeal, which involve issues of statutory interpretation and no constitutional claims. As a general rule, a decision of the board will not be disturbed unless unsupported by substantial evidence or based on an error of law. Factual findings of the board ordinarily are final, and the taxpayer has the burden of proving as matter of law its right to an abatement of the tax. See Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 43 (1997), cert. denied, 523 U.S. 1059 (1998); M & T Charters, Inc. v. Commissioner of Revenue, 404 Mass. 137, 140 (1989).

Only retail sales [Note 5] that occur in Massachusetts are subject to the sales tax imposed by G. L. c. 64H, § 2. The parties agree that the statutory definition of a sale in G. L. c. 64H, § 1, applies and, thus, a sale, for purposes of this appeal, includes "any transfer of title or possession . . . of tangible personal property . . . by any means whatsoever." The focus of the parties' disagreement is when, and where, title passed from Circuit City to the customers in connection with the purchased

Page 634

merchandise in the alternative location sales at issue. [Note 6] The commissioner asserts that title passed at the cash register when Circuit City received payment for the merchandise and the customer sales receipt, representing ownership of the purchased goods, was handed to the customer. Circuit City argues that title did not pass until the purchased merchandise was physically placed in the customer's hands in New Hampshire. [Note 7] So far as we are aware, the concept of title in circumstances, as here, where modern inventory computer systems allow a multi-State corporation to accept full payment in one State for merchandise located in another State, while simultaneously "reserving" the merchandise (purchased "sight unseen") with the understanding that the customer will take physical possession of the merchandise

Page 635

at his or her convenience, has yet to be considered by an appellate court.

Our tax statutes provide no explicit definition of the term "title," and so we look for guidance to the Uniform Commercial Code (UCC), incorporated into the General Laws as chapter 106. See Associated Testing Lab., Inc. v. Commissioner of Revenue, 429 Mass. 628, 633-634 (1999); Sherman v. Commissioner of Revenue, 24 Mass. App. Ct. 64, 66-67 (1987). See also 830 Code Mass. Regs. § 64H.6.7 (1993) (passage of title for sales tax purposes defined as in UCC). Section 2-401 of the UCC instructs on the concept of title. [Note 8] With respect to situations, as here, where "matters concerning title become material," § 2-401 (2) provides that, "[u]nless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods." [Note 9]

Page 636

We discern no explicit agreement between the parties concerning passage of title. Circuit City claims that testimony at the hearing with respect to its handling of alternative location sales (i.e., that Circuit City does not book the sale, credit the sale, or consider the sale to have occurred until the product is physically released to the customer) indicates an understanding between the parties that the transaction that takes place in Massachusetts constitutes, not a concluded sale, but only an order for merchandise. We disagree. The events transpiring at the cash register in Massachusetts reflect a significant degree of understanding between Circuit City and its customers that a sale, and not a mere deposit on an order, has occurred. The customer sales receipt, although not a document of title, contains a description of the item or items purchased, as well as the time and date of the sale. The record suggests that, in an ordinary case, any period of warranty relevant to the purchase begins as of this date. The purchase price reflected on the receipt represents full consideration paid for the merchandise. From the vantage point of the customer, the sales receipt represents proof of his or her right to the purchased merchandise. The fact the sale is credited to the Massachusetts store, and the commission accorded the sales associate in Massachusetts, in our view, is indicative of an intent on Circuit City's part that more than an order for merchandise takes place in Massachusetts. [Note 10]

The physical retention of the merchandise by Circuit City is not dispositive of "the time and place at which the seller completes his performance with reference to the physical delivery of the goods" under the UCC. G. L. c. 106, § 2-401 (2). [Note 11] Section § 2-503 (1) describes acceptable methods of a seller's tender

Page 637

of delivery and states the following: "Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery. The manner, time and place for tender are determined by the agreement and this Article, and in particular . . . tender must be at a reasonable hour, and if it is of goods they must be kept available for the period reasonably necessary to enable the buyer to take possession . . . ."

Under common law as well, title may pass although the goods are still in the actual possession of the vendor. See Bristol Mfg. Co. v. Arkwright Mills, 213 Mass. 172, 176-177 (1912). As under the UCC, the inquiry centers, not on physical transfer of the goods, but on whether goods are placed within the actual or constructive possession of another. See Mitchell v. LeClair, 165 Mass. 308, 310-311 (1896) ("Under a contract of sale, when the goods have been . . . appropriated and set apart, the vendor has done that which by the terms of the agreement makes the whole consideration payable; and so long as he remains ready to do whatever else is to be done to give the vendee the benefit of his purchase, he is entitled to receive the agreed price without deduction on account of his retention of his lien upon the property"). [Note 12]

Here, Circuit City performed its obligations with respect to delivery when the sale was entered as an alternative location sale into Circuit City's DPS system and the purchased merchandise was "reserved" for the customer at the designated location. It was the customer from that point on who assumed responsibility for acquiring physical receipt of the purchased

Page 638

merchandise. The time of such receipt was placed by Circuit City within the customer's control and packaged as a sales option offered as part of Circuit City's over-all philosophy to "wow the customer." See 3A R.A. Anderson, Uniform Commercial Code § 2.401.90 (3d ed. rev. 2002) (seller always obligated to deliver goods, but performance of this duty may range from merely making goods available to buyer, shipping goods to buyer, delivering goods at specified destination, making delivery of documents of title, or transferring title without delivery of goods or documents).

It is clear that, under the UCC, no title can pass under a contract for sale "prior to their identification to the contract." G. L. c. 106, § 2-401 (1). This was also true in common law. See G.E. Lothrup Theatres Co. v. Edison Elec. Illuminating Co., 290 Mass. 189, 193 (1935) ("title cannot pass until goods are set apart and appropriated to the contract"). We reject, however, Circuit City's argument that "identification to the contract" cannot be made in alternative location sales prior to the time that the merchandise is physically removed from inventory and the serial number is scanned in the New Hampshire store. [Note 13] The reserve notation marked on the customer sales receipt for the purchased merchandise sufficiently reflects its status of being set aside, or identified, to that particular transaction. [Note 14] The Circuit City district manager described the reserving system as moving merchandise to a "phantom" location to await customer pick up, and, indeed, the situation presented to the customer is just as though the merchandise actually is set aside and waiting

Page 639

for the customer at the pick-up counter. The purchased merchandise in the alternative location sales at issue is, by its nature, fungible. [Note 15] Because customers do not choose items in a store such as Circuit City by a particular serial number, but only by make and model, identification by serial number is unnecessary to the sale. See Chokel v. First Nat'l Supermarkets, Inc., 421 Mass. 631, 637 (1996); Cushing v. Breed, 14 Allen 376, 380 (1867).

Based on the principles expressed above, we reject Circuit City's attempt to portray the alternative location sales at issue as exempt from G. L. c. 64H, § 2, by virtue of falling within one or both of two statutory exclusions. The first, G. L. c. 64H, § 1, specifically excludes from the statutory definition retail sales "in which the only transaction in the commonwealth is the mere execution of the contract of sale in which the tangible personal property sold is not in the commonwealth at the time of such execution." Although the merchandise was physically located in New Hampshire at the time of its purchase, far more than the "mere execution of the contract of sale" took place in Massachusetts: the buyer and the seller were in Massachusetts at the time of purchase, and, as has been discussed, title to the purchased goods passed there.

The second statutory exclusion claimed by Circuit City is set forth in G. L. c. 64H, § 6 (b), which exempts from the sales tax "[s]ales of tangible personal property . . . which the vendor is obligated under the terms of any agreement to deliver (1) to a purchaser outside the commonwealth or to a designee outside the commonwealth of a purchaser outside the commonwealth or (2) to an interstate carrier for delivery to a purchaser outside the commonwealth or to a designee outside the commonwealth of a purchaser outside the commonwealth." By its plain language, G. L. c. 64H, § 6 (b), applies only to transactions where terms of a sales agreement obligate a vendor to deliver its merchandise to a purchaser (or a purchaser's designee) who is outside

Page 640

Massachusetts. [Note 16] There was no such scenario in this case. As has been explained, Circuit City performed its obligations with respect to delivery of the purchased merchandise at the time the merchandise was reserved for customer pick up and when the customer was in Massachusetts. The terms of the sales agreement did not require Circuit City physically to transport merchandise to a customer, or a customer's designee, in New Hampshire by its own vehicle or by interstate carrier. See Clark Franklin Press Corp. v. State Tax Comm'n, 364 Mass. 598, 603-604 (1974) (holding also that "the plain meaning of § 6 [b] is that an exemption applies only when the direct purchaser . . . is located outside of Massachusetts"). [Note 17] See also George S. Carrington Co. v. State Tax Comm'n, 375 Mass. 549, 551 (1978) (sales tax imposed on out-of-State delivery because taxable event [delivery to post office] occurred in Massachusetts). [Note 18] We conclude that the alternative location sales in issue were taxable in Massachusetts under G. L. c. 64H, § 2.

As a final matter, we reject Circuit City's claim that the board ignored evidence with respect to the "national scope" of

Page 641

its alternative location sales procedure. The fact that Circuit City chose to program its DPS system (albeit on a nationwide basis) to compute sales tax according to the State where customer pick up occurs is wholly irrelevant to the question we are asked to decide, whether sales tax is due on those sales under Massachusetts law. Circuit City presents no evidence to support its assertions that other national retail chains base taxability of sales in a likewise manner or that Massachusetts is now "out of sync" with other taxing jurisdictions. [Note 19]

"It is a settled principle of our taxation jurisprudence that tax statutes are 'to be construed as imposing taxes with respect to matters of substance and not with respect to mere matters of form.' Green v. Commissioner of Corps. & Taxation, 364 Mass. 389, 394 (1973), quoting Commissioner of Corps. & Taxation v. Second Nat'l Bank, 308 Mass. 1, 6 (1941)." Commissioner of Revenue v. J.C. Penney Co., 431 Mass. 684, 688 (2000). In construing other terms of our tax statutes, we have "reject[ed] a technical construction . . . that would permit vendors to escape sales and use tax liability by artful drafting." Commissioner of Revenue v. Jafra Cosmetics, Inc., 433 Mass. 255, 261 (2001). See Clark Franklin Press Corp. v. State Tax Comm'n, supra at 603. The transactions here involved sales to customers who were within the Commonwealth at the time of purchase. Circuit City credited the sales to the Massachusetts stores and the sales representative in the Massachusetts store received a commission on the sale. The sales occurred in Massachusetts and were taxable here.

3. There may remain unresolved matters with respect to Circuit City's tax liability for the tax period at issue. The board

Page 642

determined that it was not until April, 1995, that Circuit City programmed its DPS system to isolate receipts from alternative location sales and determine taxability of those sales based on the location where the item would be released to the customer. During the quarterly period beginning on April 1, 1993, through the period ending on March 31, 1995, Circuit City apparently was still remitting five per cent of all sales attributable to its Massachusetts stores, regardless of the location at which the merchandise was released to the customer. The board determined that, during this time, Circuit City (unwittingly) remitted $91,866.88 of Massachusetts sales tax on alternative location sales originating in Massachusetts. The record also indicates that, during the audit period, Circuit City may have collected and remitted to the commissioner excise from alternative location sales initiated out of State but concluded by customer pick up at a Massachusetts store.

Any amount of credit owed to Circuit City based on tax payments remitted to the Commonwealth during the tax period at issue is a matter to be determined by the commissioner on the bringing of an application for abatement by Circuit City pursuant to G. L. c. 62C, § 37.

4. The board's decision is affirmed.

So ordered.