Marian Lisa Cocco d/b/a/ Opus v. Commissioner of Revenue (October 30, 2013)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


MARIAN LISA COCCO 	         v. 	 COMMISSIONER OF REVENUE
d/b/a OPUS   	 	 
 							 	   
Docket Nos. C310367, C311626, 	 Promulgated:
		  C314426				 October 30, 2013
				   

These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c) from the refusal of the appellee, Commissioner of Revenue ("Commissioner" or "appellee"), to grant an abatement of penalties assessed to the appellant, Marian Lisa Cocco d/b/a Opus ("appellant"), for the monthly tax periods ended February 28, 2010 through and including April 30, 2011 ("tax periods at issue").
Commissioner Scharaffa heard these appeals and was joined by Chairman Hammond and Commissioners Rose, Mulhern and Chmielinski in decisions for the appellant.  
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.  


Marian Lisa Cocco d/b/a Opus, pro se, for the appellant.

David T. Mazzuchelli, Esq. for the appellee.	

FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts and the testimony and exhibits offered into evidence at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.
At all relevant times, the appellant was the sole proprietor and operator of Opus, a small independent retail store selling handcrafted decorative items, which was located in Greenfield.  The appellant was registered with the Commissioner of Revenue ("Commissioner") as a vendor of tangible personal property and as such was required to collect and remit sales tax to the Commonwealth on its sales of tangible personal property subject to sales tax and to file monthly sales tax returns with the Commissioner.  
According to Technical Information Release 03-11 ("TIR 03-11"), in effect during the tax periods at issue, vendors were required to file sales and use tax returns and pay their taxes electronically once the vendor's aggregate tax liability had reached $10,000.00 in any taxable year.  Although the appellant met the threshold for filing tax returns and making tax payments under TIR 03-11, she filed paper sales tax returns and remitted sales taxes by check for the tax periods at issue. 
On November 12, 2009, the Commissioner issued to the appellant a notice of improper filing and payment under  G.L. c. 63, § 33(g), based on the Commissioner's determination that the appellant met the threshold for filing sales tax returns and remitting sales taxes electronically. The notice advised the appellant that filings and payments for subsequent periods were required to be made electronically.  The appellant filed her sales tax returns by paper and paid her sales taxes by check for the next two monthly tax periods.  
The Commissioner sent another notice to the appellant, dated March 2, 2010, notifying the appellant that she had submitted a paper return for the January, 2010 monthly tax period, and that the Department of Revenue ("DOR") "intend[ed] to impose a penalty of $100.00 on each subsequent non-electric return, informational filing, or payment for which DOR requires electronic filing or payment."  
The jurisdictional facts pertinent to each appeal are as follows:

Docket No. C310367
The appellant timely filed paper sales tax returns and paid by check the corresponding sales taxes due for the monthly tax periods ending February 28, 2010 through and including July 31, 2010. In response to the Commissioner's assessments of $100.00 penalties, plus interest, for each of these tax periods, the appellant timely filed abatement applications as follows:
	Abatement Application		Tax Periods Ending
	Filed
	
     July 14, 2010				2/28/2010 - 5/31/2010
	September 10, 2010			6/30/2010 - 7/31/2010

By Notice of Abatement Determination dated November 17, 2010, the Commissioner denied the abatement applications.  The appellant seasonably filed her appeal with the Board on January 13, 2011.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear the appeal for Docket No. C310367. 

Docket No. C311626
The appellant timely filed paper sales tax returns and paid by check the corresponding sales taxes due for the monthly tax periods ending August 31, 2010 through and including October 31, 2010.  In response to the assessments of $100.00 penalties, plus interest, for each of these tax periods, the appellant timely filed an abatement application on December 8, 2010.  By Notice of Abatement Determination dated March 29, 2011, the Commissioner denied the abatement application. The appellant seasonably filed her appeal with the Board on May 18, 2011.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear the appeal for Docket No. C311626. 

Docket No. C314426
The appellant timely filed paper sales tax returns and paid by check the corresponding sales taxes due for the monthly tax periods ending November 30, 2010 through and including April 30, 2011.  In response to the assessments of $100.00 penalties, plus interest, for each of these tax periods, the appellant timely filed abatement applications as follows: 
	Abatement Application		Tax Periods Ending
	Filed

March 7, 2011  			11/30/10 - 01/31/11
	June 16, 2011				02/28/11 - 04/30/2011

By Notice of Abatement Determination dated July 8, 2011, the Commissioner denied the abatement applications.  The appellant seasonably filed her appeal with the Board on September 7, 2011.  On the basis of these facts, the Board found and ruled that it had jurisdiction to hear the appeal for Docket No. C314426.
At the hearing of these appeals, the appellant testified that she did not own a computer and that she did not know how to use a computer.  She maintained that, "[a]t this stage of [her] life," it would be a hardship for her to file and pay electronically, because she would be forced to purchase a computer and learn to use it competently.  She had operated her business for over twenty years using paper records and paper returns, and she testified that she found the prospect of transferring to electronic filing and payment to be daunting.  She further testified that she did not trust the reliability or the security of filing by electronic means, including filing by telephone, for transmitting her confidential financial information to the Commissioner.  
The appellant also explained that the alternative of electronic filing and payment through a tax professional would create an additional cost for her small business, one that she would ultimately have to pass on to her customers, and she thus found the mandate to be particularly unfair to her small business.  She also pointed out that, despite its insistence that she file and pay sales tax electronically, the DOR generated paper forms for her to use to pay her penalties by check through the mail, and that the Commissioner had accepted these payments by check.  
The appellant had attempted to explain her position to the DOR.  Upon receipt of the notice advising her of the electronic-filing mandate, she contacted the Taxpayer Advocate at the DOR, and she requested that she be "grandfathered" into an exemption from the mandate, but the Commissioner denied her requests for exemption and for abatement of penalties.
At the hearing of these appeals, the Commissioner argued that, pursuant to G.L. c. 62C, §§ 5 and 33(g), she had the authority to mandate electronic filing for vendors.  Moreover, under § 33(g), failure to file sales tax returns and remit sales taxes electronically was considered a failure to file and pay, and the appellant was required to demonstrate reasonable cause for these failures.  However, the Commissioner maintained that the appellant did not establish reasonable cause in these appeals based on the following language from Administrative Procedure 633 ("AP 633"):  "The fact that a taxpayer does not own a computer or is uncomfortable with electronic data or funds transfer will not support a claim for reasonable cause."  
On the basis of these facts, the Board found that the appellant, using paper returns filed by mail and making payments by check, did, in fact, file her returns and pay her full sales tax liabilities within the required twenty days from the end of the filing period for each of the tax periods at issue.  However, under § 33(g) the paper returns and payments were "considered not to have been" filed and paid, thereby exposing the appellant to penalties absent "reasonable cause" for her failure to file and pay electronically. Therefore, the Board next considered whether the appellant's reasons for failing to conform to the Commissioner's prescribed filing and payment methods constituted reasonable cause.  
First, the appellant did not own a computer and had no experience using one. Compliance with the Commissioner's mandate would have required her not only to purchase a computer, but also to learn to operate it, and to learn to file her returns and pay her taxes with it.  The Board agreed with the appellant that she acted reasonably in failing to comply with a governmental mandate which would require her to purchase a computer, learn to use it competently and to alter significantly her business practices, particularly since she had consistently filed her returns and paid her taxes timely since opening her business in 1989.  
Further, the appellant credibly testified that her lack of familiarity with computers, her mistrust of their reliability, and her concern about the privacy of transmitting confidential financial information and payments by electronic means, also drove her decision to rely on paper returns and checks.  Finally, the alternative of hiring a professional tax preparer to file electronically would create an unreasonable additional cost for her small business, which she would have to pass on to her customers.  
On the basis of these facts, the Board found that the appellant established reasonable cause for her failure to abide by the Commissioner's electronic-filing mandate.  Accordingly, the Board issued decisions for the appellant abating a total of $1,500.00 in penalties, $100.00 for each of the monthly tax periods at issue, together with statutory additions.

OPINION
Pursuant to G.L. c. 62C, § 5, the Commissioner may regulate the form and manner of tax returns and tax payments:  "Any return, document or tax payment required or permitted to be filed under this chapter shall be filed with or transmitted to the commissioner in such manner, format and medium as the commissioner shall from time to time prescribe."  Under this statute, the Legislature granted to the Commissioner broad authority to require that all returns and payments of all Massachusetts taxes, including the sales taxes at issue in these appeals and even personal income taxes, be filed and paid electronically.
The Commissioner has exercised her authority to mandate electronic filing of sales tax returns and payment of sales tax liabilities by promulgating two technical information releases, TIR 02-22 and TIR 03-11.  In issuing TIR 03-11, the Commissioner modified and expanded, but did not revoke, the electronic filing and payment requirements that she announced in TIR 02-22.  Accordingly, although TIR 03-11 was applicable for the tax periods at issue, certain parts of TIR 02-22 also remained applicable. 
Through the promulgation of TIR 03-11, the Commissioner has mandated that a vendor, defined in G.L. c. 64H, § 1 as a retailer or other person required to collect and remit sales tax, is required to file returns and pay taxes electronically once the vendor's aggregate tax liability has reached $10,000.00 in any one taxable year.  This threshold marked a significant reduction from the one announced one year earlier in TIR 02-22, which required electronic filing and payment only when the vendor's sales tax liability reached $100,000.00 in one taxable year. In addition, TIR 02-22 provided that once a taxpayer reaches the threshold in one taxable year, the taxpayer must thereafter continue to electronically file in all subsequent years, regardless of whether the threshold has been reached in those subsequent years.
A very limited exception to electronic filing is permitted under TIR 02-22, which allows relief only if the failure to file electronically is the result of a "breakdown of the systems or equipment at the Department of Revenue, or other circumstances under which the commissioner may exercise discretion to waive penalties."  With respect to individuals who are not familiar with computers, TIR 02-22 provides: "[i]f, despite its best efforts, a filing entity has difficulty in its transition from paper to E-file returns, the filing entity should contact the Department's Customer Service Bureau . . . to inquire about the process for a waiver of penalties."  However, after seemingly offering relief for taxpayers such as the appellant who are unfamiliar with computers, the Commissioner contradicts this statement in AP 633, in which she states her position that not owning a computer or understanding how to operate one will not constitute reasonable cause for waiver or abatement of penalties.
It was undisputed that the appellant met the applicable $10,000.00 threshold requirement and therefore, the appellant was required to file sales tax returns and pay sales tax liabilities electronically pursuant to TIR 03-11.  Upon receipt of the notice advising her of the electronic-filing mandate, the appellant contacted the DOR Taxpayer Advocate for assistance with having her penalties waived, as TIR 02-22 suggests, but the Commissioner denied her request.
G.L. c. 62C, § 33(g) provides a penalty for failing to file an electronic return or make an electronic tax payment if the Commissioner has notified the taxpayer of such a requirement:
(g) If after the commissioner has required taxpayers either to prepare or file any required return, document, or information, or to make a required tax payment or estimated payment, by way of a specified automated or electronic means, format, method, or medium, a taxpayer fails to comply with the prescribed method for the filing, data transfer, or payment, the taxpayer shall be considered not to have made the required filing or the required payment. Upon a failure to comply, the commissioner, in addition to other remedies available to him, shall send the taxpayer a notice of improper filing or payment specifying the nonconformity therein, but shall not be required to send the notice for subsequent instances of noncompliance. Thereafter, if the taxpayer, without reasonable cause, fails to conform any filing, data transfer or payment with the method prescribed by the commissioner in tax years beginning on or after January 1, 2005, there shall be added to and become a part of the tax required to be paid a penalty in an amount not greater than $100 for each improper return, document or data transmission, and for each improper payment. 

The § 33(g) penalty may be waived if the taxpayer's failure to comply with the Commissioner's prescribed filing and payment methods are due to "reasonable cause." Section 33(g) provides that the penalty is applicable only if the taxpayer "without reasonable cause" fails to conform any filing or payment method to the Commissioner's requirements and, further, § 33(g) also explicitly states that the penalty imposed is "subject to [§ 33(f)] relative to the waiver of penalties."  Section 33(f) provides as follows: 
(f) If it is shown that any failure to file a return or to pay a tax in a timely manner is due to reasonable cause and not due to willful neglect, any penalty or addition to tax under this section may be waived by the commissioner, or if such penalty or addition to tax has been assessed, it may be abated by the commissioner, in whole or in part.

See also Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 663 (1990) 
	Accordingly, the issue in this case is whether the appellant's failure to file sales tax returns and pay the requisite sales taxes electronically was due to reasonable cause.  Because the appellant bears the burden of proving her right to the abatement, she also bears the burden of establishing reasonable cause.  Blakeley v. Commissioner of Revenue, 28 Mass. App. Ct. 499, 501, rev. denied, 407 Mass. 1103 (1990); Q Holdings Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1996-412, 418.  The Board here found that the appellant satisfied that burden.
The Supreme Judicial Court has defined "reasonable cause" for purposes of § 33(f) as establishing an "objective standard," whereby "[a]t a minimum, the taxpayer must show that he exercised the degree of care that an ordinary taxpayer in his position would have exercised."  Wells Yachts South, 406 Mass. at 665.  The "ultimate question whether there is reasonable cause within the meaning of the statute is one of law."  Id. at 664.  While reasonable cause is an objective standard, it "requires a factual analysis to determine if the taxpayer exercised 'ordinary business care' with respect to filing returns and paying taxes in a timely manner."  Id. at 665.  Reasonable cause is a federal principle which Massachusetts adopted in 1980, and as such, "[i]n determining the existence of reasonable cause, Massachusetts courts and this Board have looked for guidance to federal cases and regulations promulgated under Internal Revenue Code § 6651(a), the federal counterpart to G.L. c. 62C, § 33(f)."  Morris Electrical Supply Co., Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1996-403, 408; see 26 CFR 301.6651-1(c) (defining reasonable cause for late filing of return and late payment of tax under Internal Revenue Code as the exercise of "ordinary business care and prudence."); United States v. Boyle, 469 U.S. 241 (1985); Daly v. United States, 480 F.Supp. 808 (D.N.D. 1979). 
Contrary to the clear line of Massachusetts and federal cases that require a factual analysis to determine whether a taxpayer exercised ordinary business care and prudence, the Commissioner's pronouncement in AP 633 purports to preempt a reasonable cause determination in certain fact situations: "The fact that a taxpayer does not own a computer or is uncomfortable with electronic data or funds transfer will not support a claim for reasonable cause."  However, AP 633 is not dispositive on the issue of reasonable cause.  Administrative Procedures describe the procedures of the DOR and are informational only; they do not "supersede, alter or otherwise affect any provision of the Massachusetts General Laws, Massachusetts regulations, Department rulings, or any other sources of law." 830 CMR 62C.3.1(10)(c)(2).  Further, unlike regulations, which, barring emergency situations, may be promulgated only after notice and a public hearing to "solicit data, views and arguments regarding the proposed adoption, amendment or repeal of a regulation" (831 CMR 62C.3.1(4)(c)(4)), the Commissioner may issue an administrative procedure without soliciting input from affected parties. 
"Well established is the principle that "[t]he duty of statutory interpretation is for the courts.'" Casey v. Massachusetts Electric Co., 392 Mass. 876, 879 (1984) (quoting Cleary v. Cardullo's, Inc., 347 Mass. 337, 344 (1964)).  A blanket pronouncement by the taxing authority, in a publication which does not have the force of law, that a failure to own and understand how to operate a computer will not constitute reasonable cause, is inconsistent with the objective standard, to be determined by the trier of fact, of what constitutes ordinary care and business prudence.  See Wells Yachts South, 406 Mass. at 665.    
The Commissioner's blanket pronouncement in AP 633 also runs contrary to the treatment of electronic filing and payment requirements by the federal government and state taxing jurisdictions, which are instructive on the issue of ordinary business care and prudence.  The United States Code in 26 U.S.C. § 6011(a) provides, "[w]hen required by regulations prescribed by the Secretary [of the Treasury] any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary."  This language is similar to the language used in G.L. c. 62C, § 5 in that both statutes enable the Secretary or Commissioner to prescribe the form and manner in which tax returns must be filed.
However, unlike Massachusetts law, Congress also enacted 26 U.S.C. § 6011(e)(1), which states, "the Secretary may not require returns of any tax imposed by subtitle A on individuals, estates, and trusts to be other than on paper forms supplied by the Secretary."  The only exception to this rule is for tax preparers who file more than 10 tax returns for their clients; these preparers must electronically file their clients' returns, unless the individual client does not wish to have their return filed electronically.  26 U.S.C. § 6011(e)(3).  Thus, federal law provides for an opt-out provision for those taxpayers who use a paid tax return preparer.  Rev. Proc. 2011-25.  Therefore, under federal law, there is no mandate for an individual to file returns or pay taxes by electronic means.
Instead of a mandate, Congress enacted 26 U.S.C. § 6011(f), Promotion of electronic filing, stating:
In general.-- The Secretary is authorized to promote the benefits of and encourage the use of electronic tax administration programs, as they become available, through the use of mass communications and other means.
 
Incentives.-- The Secretary may implement procedures to provide for the payment of appropriate incentives for electronically filed returns.

The incentives that the Internal Revenue Service employs to encourage electronic filing include faster processing time, fewer errors, faster refunds, and the delay of out-of-pocket taxpayer expense by allowing for credit-card payment of taxes.  See, e.g., IRS Publication 3112.  
While many state jurisdictions have enacted electronic-filing mandates for certain types of taxes, most include an opt-out provision for individual taxpayers.  With respect to the mandate for professional tax preparers to file their client's returns electronically, California and New Jersey, for example, permit an opt-out for individual taxpayers who do not wish to have their individual income tax return filed in this manner.  See, e.g., Cal. Rev. & Tax Code § 19170(b) and N.J. Stat. Ann. 54A:8-6.1(c).  These taxing jurisdictions recognize that there may be meritorious reasons for individual taxpayers to decline to use computers to file their returns and pay their taxes.  
With respect to sales tax returns, New York also has an electronic-filing mandate, but, unlike the Commissioner in AP 633, the New York taxing authority does not apply the mandate to taxpayers unless they use computer software to prepare their returns and have broadband internet access, and thus would not require taxpayers like the appellant in this appeal who are unfamiliar with, or distrusting of, computers to purchase and learn to use one and to change their established methods of preparing their tax returns. See NY Tax § 29.  Rhode Island's e-file mandate for sales and use taxes includes a broad "undue hardship" exception, which, unlike AP 633, allows for a case-by-case inquiry.  RI-1345 (Handbook for Electronic Filers of Rhode Island Tax Returns).  In fact, under its e-file mandate for sales and use taxes, Wisconsin specifically recognizes as an undue hardship a taxpayer's lack of access to a computer with internet connection.  Wisc. Tax 1.01(2)(d).  
The consistent thread that runs through these taxing jurisdictions is that there are circumstances where an individual taxpayer may reasonably decline to file returns and pay taxes electronically. Applying an objective standard of the care that an ordinary taxpayer in the appellant's position would have exercised, the Board found and ruled that the appellant exercised ordinary business care and prudence by filing paper returns and remitting taxes by check.  Wells Yachts South, 406 Mass. at 665.  The Board further ruled that penalizing the appellant for not purchasing a computer and learning to operate it goes beyond requiring the taxpayer to exercise ordinary business care and prudence.  Rather, it is an extraordinary requirement particularly where, as here, it is imposed on an individual who is an unincorporated small-business owner and operator, and the taxpayer has had an exemplary 20-year record of tax compliance.











The Board therefore ruled that the appellant met her burden of proving reasonable cause under §§ 33(f) and (g) for her failure to file returns and pay taxes electronically.  Accordingly, the Board issued decisions for the appellant in the instant appeals, and ordered abatements of $100.00 for each of the tax periods at issue, for a total abatement of $1,500.00 in penalties, plus statutory additions. 
					
					  THE APPELLATE TAX BOARD



                       By: ________________________________
		  			  Thomas W. Hammond, Jr., Chairman


A true copy,
	
Attest: __________________________
           Clerk of the Board

 According to a Notice of Assessment dated June 27, 2011, the appellant owed $535.13 in tax liability, plus $7.24 in interest, for the tax period ending March 31, 2011.  However, the Board found that she paid that liability by a check mailed to the Commissioner on April 19, 2011. 
 Although the Commissioner has not fully exercised her authority under § 5 to require that all returns and payment of personal income taxes be electronically filed and paid, she has required, where certain criteria are met, that personal income tax extension requests and accompanying payment, as well as personal income tax returns filed by compensated tax preparers, be filed and paid electronically. See TIR 04-30. 
 St. 1980, c. 27, § 4.

ATB 2013-1089