Despite dismissing a number of counts in a civil case brought by the State of New Hampshire against four online travel companies, a Superior Court judge has ruled that the Attorney General’s office had the right to file suit against the OTCs for non-payment of Meals and Rentals Tax without the matter first having gone through the normal audit and assessment procedures of the Department of Revenue Administration.
In a little-noticed ruling issued late last month, the Merrimack County Superior Court also refused to dismiss the State’s claim that the OTCs, which include Priceline, Orbitz, Expedia and Travelocity, had violated the NH Consumer Protection Act. The Court did, however, toss out the AG’s claims of unjust enrichment and conversion. It also rejected the State’s charges of civil conspiracy and breach of fiduciary duty and turned down a request that the OTCs be forced to provide an accounting of all their billings for rentals in NH since the inception of the M&R Tax.
OTCs contract with hotels to purchase rooms at reduced rates. The travel companies, in turn, will rent the rooms over the Internet to end users at a mark-up to the reduced rate, but for less than the going rate charged by the hotel. NH hotels, which frequently do not know the amounts actually charged by the OTCs to the end user, will normally only remit M&R Tax on what they are paid by the travel companies. The State is claiming that tax is due on the difference between the two amounts. The OTCs counter that they have no legal obligation to collect or remit the tax since they do not meet the statutory definition of an “operator”, a claim that they have made with a good deal of success in other states.
Attorney General Can Sue Even If DRA Doesn’t Assess Tax
In an unusual move, the AG’s office bypassed the DRA when it filed a lawsuit against the OTCs last October alleging that they didn’t pay M&R Tax as required by law.1 The AG also claimed that the OTCs had engaged in “deceptive business practices” related to their sales of hotel rooms and rental cars in the State.
In its lawsuit, the AG’s office justified its approach by stating that “[t]his is not a matter that should be dealt with at the administrative level” because, in other states, the defendants “have always denied legal liability and asserted constitutional defenses, and often try to tie up matters in the administrative process for years.”
In siding with the State, Judge Richard McNamara ignored the defendants’ alleged behavior with respect to legal proceedings in other states and instead relied on RSA 78-A:20, II, which states that the AG’s office “may” bring legal action to collect unpaid M&R Tax. In his order, McNamara ruled that:
“Considering the fact that RSA 78-A:20, I does not appear to mandate that proceedings to collect taxes must first proceed at the DRA, the fact that the OTCs have made a conscious decision by not filing tax returns to bypass the DRA’s procedures and have, thus, tacitly waived the procedural protections they would be entitled to in a tax assessment procedure,…the Court declines to dismiss the complaint on the ground that the proceeding to collect taxes must begin at the DRA.”
It is interesting that the Court focused on RSA 78-A:20, which is titled “Taxes as Personal Debt to State”, and not on RSA 78-A:11, “Assessment of Additional Tax”, which lays out the statutory authority under which the DRA “may” assess M&R Tax. The fact that the Legislature saw fit to enact RSA 78-A:20 suggests that it serves a different purpose from that of RSA 78-A:11. The distinction between the two might be found in RSA 78-A:7, I(b), which states that “[t]he occupant, purchaser, or renter shall pay the tax to the operator.” Since M&R Tax is ultimately owed by the party who receives the benefit of the meals or rentals, an argument can be made that all RSA 78-A:20 is meant to accomplish, as it title appears to suggest,2 is to make it clear that any taxes collected by an operator from a consumer are the personal debt of the operator until they are paid over to the State.3 If they are not remitted to the State, the statute also provides authority for the AG’s office to file suit against the operator to force collection of that personal debt.
In fact, there is also statutory authority under RSA 78-A:11 for the AG’s office to act “[i]f the department finds that an operator liable for a tax designs to leave the state, or to remove his property from the state, or to conceal himself or his property, or to discontinue business, or to do any other act tending to prejudice or to render wholly or partially ineffective proceedings to collect the tax…” (RSA 78-A:11, III). The law goes on to state that the AG’s office may bring suit for the collection of tax, but only “at the same time” that the DRA makes its demand for payment from the operator.
If the Court’s interpretation that the AG can file suit for collection of tax at any time under RSA 78-A:20 is correct , it’s not clear why it was necessary for the Legislature to enact RSA 78-A:11, III, which obviously deals only with situations where time is of the essence, but still requires that the DRA issue a tax notice before the AG can become involved. Perhaps the explanation is that RSA 78-A:20 is meant to make clear the fact that the unremitted tax, while originally payable by the consumer, also becomes the personal debt of the operator and can only be pursued by the AG’s office after the DRA has conducted an audit, issued a tax notice and the taxpayer has exhausted its rights of administrative appeal. 4
No Requirement for DRA’s Expertise
In its original complaint, the AG’s office also justified its action by claiming that “the threshold question, whether or not the online travel companies are subject to (M&R Tax) is one of law and does not require the Department of Revenue’s expertise” and that “judicial economy would be served where the legal issues involved would be resolved with less expense and more efficiently and expeditiously within the judicial system.”
The Court accepted that argument, ruling that “…the fact that the ultimate legal issue which (sic) upon which all of the (M&R Tax) claims pled turns is one which the DRA has no particular expertise to decide, the Court declines to dismiss the complaint on the ground that the proceeding to collect taxes must begin at the DRA.”
Not a Trustee Tax
Any interpretation that RSA 78-A:20 is solely intended to establish the operator’s liability for paying the tax as a fiduciary or a trustee of the State might have been undercut by the Court’s rejection of the AG’s companion charge that the OTCs had breached a fiduciary duty, either directly or under a constructive trust, to collect tax and remit it to the DRA.
“The State cites no authority, and the Court believes none exists, for the proposition that a person who collects taxes pursuant to a statutory scheme which requires the person to remit the taxes to the State thereby owes a fiduciary duty to the State,” Judge McNamara ruled.
The Court also rejected the AG’s claim that the OTCs held money owed the State under constructive trust. “Such an equitable remedy is only available where the defendant has no adequate remedy at law,” Judge McNamara ruled. “If the plaintiff is able to succeed, it may recover money damages.”5
Conspiracy and Consumer Protection Act
McNamara also dismissed the State’s allegation that the OTCs had conspired in not paying M&R Tax.
“The State has alleged only that the Defendants engaged in similar business practices; there is no allegation that they are acting in concert or in combination. Conclusory recitations of law, even under New Hampshire’s liberal pleading standards, are insufficient to survive a motion to dismiss.”
The Court did, however, allow the State’s claim that the OTCs had violated NH’s Consumer Protection Act (“CPA”) to go forward, ruling that the issue needed to be fully explored.
“Whether or not a fraudulent representation was made is a quintessential example of a fact intensive determination. As the Defendants argue, it is no doubt true that there is nothing deceptive about a business practice that is disclosed to the consumer. Cecere v. Loon Mountain Recreation Com., 155 N.H. 289, 297-98 (2007). But it is also true that such a determination cannot be made on a motion to dismiss and, therefore, the CPA claim cannot be dismissed.”
- There has apparently been only one other instance in which legal action for the failure to pay a tax administered by the DRA was initiated by a party other than the Department itself. In 2007, the Rockingham County Attorney’s office filed criminal charges against the owner of a crematorium for the failure to file business tax returns. The DRA had not issued a tax notice prior to the indictment. There is no specific provision in either the business tax statutes or the statutes governing the administration of the DRA (RSA 21-J) allowing a county attorney (or the attorney general for that matter) to initiate legal action based on alleged violations of tax law. The crematorium owner, who had been under indictment for non-tax-related charges that were subsequently dropped, entered a guilty plea to the tax offenses without ever having challenged the County’s authority to pursue a tax case prior to either the DRA’s issuing of a notice of assessment or having had the opportunity to exhaust his administrative appeal rights. (It appears, however, that the DRA did assist the county attorney in the case.) See Crematorium founder sentenced to up to to 3 years for tax evasion; Gloucester Times, 2/29/08 ↩
- Whether the title or heading of a revenue rule should be used in interpreting the rule has been a recurring issue over the years. In United States v. Fisher, 6 US 358, 386 (1805), the US Supreme Court stated that, “(n)either party contends that the title of an act can controul plain words in the body of the statute; and neither denies that, taken with other parts, it may assist in removing ambiguities. Where the intent is plain, nothing is left to construction. Where the mind labours to discover the design of the legislature, it seizes every thing from which aid can be derived; and in such case the title claims a degree of notice, and will have its due share of consideration.” ↩
- The Electricity Consumption Tax, which was enacted in 1997, states that any amounts collected by a provider become the personal debt of the provider until paid to the State (RSA 83-E:4, II). And when a serious (but ultimately unsuccessful) attempt was made to pass a statewide sales tax in 2001, the proposed legislation stated that any tax collected by a vendor would remain a personal debt until remitted to the State (HB 562). RSA 78-A:20, II, which was enacted in 1967, does not, however, specifically state the obvious that taxes collected are no longer a personal debt after they have been remitted to the State. ↩
- Putting the legal arguments aside, it’s not clear why the DRA didn’t just issue a “blue sky assessment” for a very large amount of tax, say a billion dollars, justifying the billing on the fact that the OTCs refused to provide an accounting of their NH revenues. That would have avoided all the wrangling over whether the AG’s office could act independently of the DRA. And, if the courts later agreed that the OTCs were actually operators under M&R Tax law, they would have been forced to provide details on their taxable billings at that time. Some might argue that it ultimately doesn’t matter whether it’s the AG or the DRA that initiates the legal action because, one way or another, it should end up with the same result. But making an end run around the administrative process deprives the taxpayer of important procedural rights. By being taken directly to court, OTCs were denied the opportunity to contest the assessment through the DRA’s confidential administrative process, during which they would have become better informed about the strength of the State’s positions and might have decided to enter into a settlement without being exposed to the opprobrium that often accompanies a public accusation of tax violations. ↩
- The AG did not, however, refer to RSA 78-A:20 in making its claims that the OTCs owed the State a fiduciary duty to collect and remit the tax or that they held funds due the State under a constructive trust. ↩