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Compusa Stores, L.P. v. State

Supreme Court of Hawaii

May 18, 2018

COMPUSA STORES, L.P., Appellant-Appellant,
v.
STATE OF HAWAI'I, DEPARTMENT OF TAXATION, Appellee-Appellee.

          APPEAL FROM THE TAX APPEAL COURT OF THE STATE OF HAWAI'I (CAAP-15-0000861; TAX APPEAL CASE NO. 1TX12-1-0264)

          Christopher J. Muzzi for appellant

          Kimberly Tsumoto Guidry for appellee

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

          OPINION

          RECKTENWALD, C.J.

         I. Introduction

         This case requires us to determine if Hawaii's use tax violates the Commerce Clause or the Equal Protection Clause of the United States Constitution.

         CompUSA Stores, L.P. (CompUSA) is a Texas-based limited partnership which operated two retail stores in Hawai'i selling personal computers and other consumer electronics until 2008. CompUSA imported all goods that it sold from third party vendors outside the state. Pursuant to the use tax statute, Hawai'i Revised Statutes (HRS) § 238-2, [1] in the years 2006, 2007, and 2008, CompUSA made use tax payments in the amount of $385, 855.68, $323, 628.50 and $42, 045.78, respectively.

         In 2010, CompUSA filed claims for refund of its 2006, 2007, and 2008 use tax payments. The Department of Taxation (Department) denied CompUSA's request for refund. CompUSA appealed, and its appeal was ultimately transferred to the Tax Appeal Court.[2] CompUSA and the Department's Director of Taxation (Director) submitted cross-motions for summary judgment to the Tax Appeal Court. The Tax Appeal Court denied CompUSA's Motion for Summary Judgment, and granted the Department's Motion for Summary Judgment, concluding that the use tax does not violate the Commerce Clause or the Equal Protection Clause. CompUSA timely filed its notice of appeal in the Intermediate Court of Appeals (ICA) and subsequently filed its application for transfer, which was granted.

         In 2004, the legislature amended the use tax statute, HRS § 238-2. CompUSA argues that the 2004 amendment to the statute rendered the statute unconstitutional because the amendment eliminated the application of the tax to in-state unlicensed sellers, thereby limiting the tax to out-of-state sellers. Thus, CompUSA argues that the use tax violates the Commerce Clause and the Equal Protection Clause because the tax discriminates against out-of-state commerce, and cannot be justified by a legitimate local purpose.

         We conclude that the current version of the statute serves a legitimate local purpose of leveling the playing field between in-state and out-of-state sellers, because in-state sellers are subject to the general excise tax (GET), and out-of-state sellers are subject to the use tax. Further, HRS § 237-22(a) (Supp. 2002) and HRS § 238-3(i) (Supp. 2000) are designed to ensure that out-of-state sellers are not over-taxed. Thus, HRS § 238-2 does not violate the Commerce Clause of the United States Constitution.

         In evaluating whether the current version of the use tax statute violates the Equal Protection Clause, we agree with CompUSA that the statute establishes a classification between instate and out-of-state sellers. However, the statute satisfies rational basis review because the classification of out-of-state sellers bears a rational relationship to the legitimate state interest of "leveling the economic playing field" for local businesses subject to the GET. Thus, HRS § 238-2 does not violate the Equal Protection Clause of the United States Constitution.

         Accordingly, we affirm the Tax Appeal Court's October 6, 2015 judgment granting the Department's motion for summary judgment and denying CompUSA's motion for summary judgment.

         II. Background

         A. The Use Tax in Hawai'i

         This court has summarized the use tax, HRS § 238-2, as follows:

The use tax is closely connected with Hawaii's general excise tax (GET). The GET places a 0.5% tax on the business of manufacturing and wholesaling in Hawai'i, resulting in a price differential between the products made and sold wholesale locally and the same products made and sold wholesale on the mainland. In the absence of a use tax that complements a GET, sellers of goods acquired out-of-state theoretically enjoy a competitive advantage over sellers of goods acquired in-state: . . . out-of-state products would be less expensive than in-state products, the prices of which would presumably reflect some pass-on of the GET.

CompUSA Stores LP v. Dep't of Taxation (CompUSA I), 128 Hawai'i 116, 122, 284 P.3d 209');">284 P.3d 209, 215 (2011) (internal citations and quotations omitted) (citing HRS § 238-2 (1993)).

         In 2004, the legislature amended HRS Chapter 238 for the following purpose:

The purpose of this Act is to clarify current use tax laws in light of Baker & Taylor, Inc. v. Kawafuchi, SC 23376 (Jan. 14, 2004) and administrative rule 18-237-13-02.01 by:
(1) Clarifying when a seller is subject to the 0.5 per cent use tax;
(2) Restoring the imposition of taxes on goods purchased both within and outside the State; and
(3) Clarifying that the use tax applies to sellers who acquire goods from outside the State and import the product for sale or resale in the State.

2004 Haw. Sess. Laws Act 114, § 1 at 431.

         In Baker & Taylor, this court held that the use tax did not apply to a mainland seller, Baker, who sold and shipped, FOB ("free on board") origin, books to the Hawai'i State Library. In re Tax Appeal of Baker & Taylor, Inc. v. Kawafuchi, 103 Hawai'i 359, 361-62, 372, 82 P.3d 804, 806-07, 817 (2004). Title passed to the library while the books were on the mainland, and thus Baker did not own the goods when they arrived in Hawai'i, or use them in Hawai'i. Id. Because the sale of books was directly from Baker to the library, Baker therefore did not import the books from an unlicensed seller, and Baker did not purchase the books and resell them to the library. Id. Thus, this court concluded that Baker was not subject to the use tax under the plain language of the statute.[3] Id.

         The 2 0 04 amendment, inter alia, both added and removed[4]language in HRS § 238-2:

There is hereby levied an excise tax on the use in this State of tangible personal property which is imported [7-or-] by a taxpayer in this State whether owned, purchased from an unlicensed seller, or however acquired for use in this State. The tax imposed by this chapter shall accrue when the property is acquired by the importer or purchaser and becomes subject to the taxing jurisdiction of the State.
For purposes of this section, tangible personal property is property that is imported by the taxpayer for use in this State, notwithstanding the fact that title to the property, or the risk of loss to the property, passes to the purchaser of the property at a location outside this State.

2004 Haw. Sess. Laws Act 114, § 3 at 433, 435.

         Further, the definitions for "import" and "purchaser" were amended as follows to clarify that the use tax applies to the purchase of tangible property from an unlicensed seller, whether the title passed in-state or out-of-state:

         "Import" .... includes:

(1) The importation into the State of tangible property, services, or contracting owned, purchased from an unlicensed seller, or however acquired, from any other part of the United States or its possessions or from any foreign country, whether in interstate or foreign commerce, or both[-]; and
(2) The sale and delivery of tangible personal property owned, purchased from an unlicensed seller, or however acquired, by a seller who is or should be licensed under the general excise tax law from an out-of-state location to an in-state purchaser, regardless of the free on board point or the place where title to the property transfers to the purchaser.
"Purchaser" means any person purchasing property, services, or contracting and "importer" means any person importing property, services, or contracting[t], regardless if at the time of importation, the property, services, or contracting is owned by the importer, purchased from an unlicensed seller, or however acquired; ....

2004 Haw. Sess. Laws Act 114, § 2 at 431-32.

         The definition of "use" was also changed with the addition of the following language:

and shall include control over tangible or intangible property by a seller who is licensed or who should be licensed under chapter 237, who directs the importation of the property into the state for sale and delivery to a purchaser in the State, liability and free on board (FOB) to the contrary notwithstanding, regardless of where title passes . .

2004 Haw. Sess. Laws Act 114, § 2 at 432.

         B. Tax Appeal Court Proceedings

         The following facts appear undisputed from the record. From January 1, 2006 through February 29, 2008, CompUSA conducted its retail business through two stores on Oahu. CompUSA did not manufacture any of the products sold at its retail stores and purchased all products from vendors and manufacturers located outside of Hawai'i. CompUSA also purchased and imported products for its own use in Hawai'i. CompUSA was thus assessed use tax in the following amounts: (1) $385, 855.68 in 2006; (2) $323, 628.46 in 2007; and (3) $42, 045.78 in 2008. On April 20, 2010, CompUSA filed General Excise/Use Tax Annual Return & Reconciliation forms for all three years, requesting a refund for the use tax paid in each year. The Department denied the request for a refund on the 2006 tax year and issued tax assessments for the 2007 and 2008 tax years.

         CompUSA subsequently filed its Notice of Appeal to the Tax Appeal Court. CompUSA argued that HRS § 238-2 impermissibly imposed a use tax directly on CompUSA in violation of the Commerce Clause and Equal Protection Clause of the United States Constitution, creating disparate treatment in the taxability of CompUSA's out-of-state purchases and similar purchases that could have been made in the State of Hawai'i.

         CompUSA moved for summary judgment, and the Director filed a cross-motion for summary judgment. The Tax Appeal Court held four hearings on the motions before granting the Department's motion for summary ...


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