COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
VERIZON NEW ENGLAND, INC. v. COMMISSIONER OF REVENUE
Docket Nos. C293850-C293856 Promulgated:
June 7, 2011
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, ? 7 and G.L. c. 62C, ? 39 from the refusal of the Commissioner of Revenue (“Commissioner” or
“appellee”), to abate sales taxes assessed against Verizon New England, Inc. (“Verizon” or “appellant”) for the monthly tax periods beginning January 1, 1999 and ending December 31, 2001, and the monthly tax periods beginning October 1, 2003 and ending September 30, 2006 (collectively, the “tax periods at issue”).
Commissioner Scharaffa heard these appeals and was joined by Chairman Hammond and Commissioners Egan, Rose, and Mulhern in decisions for the appellant.
These findings of fact and report are made pursuant to requests by the appellant and the appellee under G.L. c. 58A, ? 13 and 831 CMR 1.32.
William A. Hazel, Esq., James F. Ring, Esq., and
Brad G. Hickey, Esq. for the appellant.
Timothy R. Stille, Esq. and Frances M. Donovan, Esq.
for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts, the testimony, and the exhibits offered into evidence at the
of these appeals, the Appellate Tax Board (“Board”) hearing
made the following findings of fact. The appellant was incorporated under the laws of New York in 1883. It has been qualified to do business in the Commonwealth since 1884. The appellant was originally incorporated as New England Telephone & Telegraph Company but changed its name to “Verizon” in 2001. Verizon provides telecommunications services to customers in Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
For each of the tax periods at issue, the appellant timely filed monthly sales tax returns with the Commissioner. In 2001, the Commissioner commenced an audit of the appellant’s monthly sales tax returns filed for periods beginning January 1, 1999 and ending December 31, 2001 (the “first audit cycle”). During the course of the audit, the appellant and the Commissioner entered into
agreements extending the time for the assessment of taxes, and on October 7, 2006, the Commissioner issued to the appellant a Notice of Intention to Assess (“NIA”) proposing the assessment of additional sales taxes in the amount of $876,132 for the first audit cycle. Also, in October of 2006, the Commissioner began auditing the appellant’s monthly sales tax returns for the periods beginning October 1, 2003 and ending September 30, 2006 (the “second audit
cycle”). Again, the Commissioner and the appellant entered into agreements extending the time for the assessment of taxes, and on December 22, 2006, the Commissioner issued to the appellant an NIA proposing the assessment of additional sales taxes in the amount of $622,297 for the second audit cycle.
The appellant requested and received a hearing with the Department of Revenue’s Office of Appeals to discuss
the Commissioner’s proposed additional assessments. On June 4, 2007, the Office of Appeals issued a Letter of Determination upholding the Commissioner’s proposed additional assessments in full. On July 3, 2007, the Commissioner issued to the appellant a Notice of Assessment indicating that the additional sales taxes proposed on the October 7, 2006 NIA and on the December 22, 2006 NIA had been assessed on July 1, 2007.
On July 31, 2007, the appellant filed an Application for Abatement with the Commissioner requesting abatements of the additional sales taxes assessed for each of the periods at issue. By Notices of Abatement Determination dated October 1, 2007, the Commissioner denied the appellant’s request for abatements for each of the tax periods at issue. The appellant timely filed its petitions with the Board on November 29, 2007. On the basis of the foregoing, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
During the periods relevant to these appeals,
G.L. c. 64H, ? 2 (“64H, ? 2”) imposed a tax, at the rate of 5 percent, upon sales at retail in the Commonwealth, by any vendor, of tangible personal property or of
telecommunications services performed in the Commonwealth. There was no dispute between the parties that Verizon was a vendor making retail sales of telecommunications services. The primary issue presented in these appeals was whether the Commissioner properly disallowed the exemption found in G.L. c. 64H, ? 6(i)(4) (“? 6(i)(4)”) on certain sales of
telephone services made by the appellant. Section 6(i)(4) provides an exemption from the sales tax imposed by 64H, ? 2 for up to $30.00 of “residential main telephone
services” billed on a monthly recurring basis
(“$30.00 exemption”). On audit, the Commissioner
disallowed the claimed $30.00 exemption in instances in which there were more than one account with the same customer name and billing address and in instances in which it appeared that an account was being used for business, rather than residential purposes, leading to the deficiency assessments at issue.
The Commissioner made no additional assessments with respect to the second issue, which was whether charges made by the appellant for voice mail services were subject to the sales tax imposed by 64H, ? 2. The appellant had reported sales taxes on its returns, and it therefore had self-assessed all such taxes for the tax periods at issue, which it collected and remitted to the Commissioner. The appellant contended in its Applications for Abatement and in its petitions with the Board that voice mail was not subject to the sales tax imposed by 64H, ? 2 because it was not a “telecommunications service” as defined by G.L. c. 64H, ? 1 (“64H, ? 1”), and therefore it should not have been included in its tax returns.
The appellant called two witnesses to testify at the hearing of these appeals. Those witnesses were Mr. Vinod Motwani, who was the manager of Verizon’s transaction tax audit group, and Mr. Michael Anglin, who, as of the time of
the hearing, had been employed in various positions at Verizon and its predecessors for 38 years. The Commissioner offered the testimony of one witness, Mr. Dale Morrow of the Massachusetts Department of Revenue. Mr. Morrow was the regional director in charge of the audits which generated the deficiency assessments at issue. II. Audit Methodology
The Commissioner conducted her audit of the
appellant’s sales tax returns using what is known as a sampling methodology. For the first audit cycle, the Commissioner selected a sample of 579 customer bills, all of which were issued during October of 1999. The Commissioner determined that nine of the 579 bills contained erroneous applications of the $30.00 exemption, resulting in $204.78 of telecommunications services that were, in the Commissioner’s opinion, erroneously exempted from tax. The Commissioner then calculated an error rate by taking the $41,198.05 of total sales shown in the sample bill pool and dividing it by the $204.78 of sales that should have been subject to tax in the Commissioner’s opinion. The error rate was then applied to the net taxable amount reported for October of 1999, less coin revenue, and then multiplied by the number of months in the audit period to arrive at a total additional tax due of
1 The $836,430 relating to the $30.00 exemption issue.Commissioner applied the same methodology and error rate for the second audit cycle, arriving at a total additional
2tax due of $582,595 relating to the $30.00 exemption issue.
The appellant did not dispute the Commissioner’s use
of the sampling methodology in general, but did dispute certain calculations and adjustments made by the Commissioner in the course of the audit. Prior to the hearing of these appeals, the parties reached an agreement with respect to the audit methodology issues, and that agreement, as reflected in the Statement of Agreed Facts, was that regardless of the Board’s determinations on the issues presented in these appeals, the appellant is entitled to abatements totaling $176,139 for the first audit cycle and abatements totaling $89,581 for the second audit cycle. The amount remaining at issue with respect to the $30.00 exemption issue for the first audit cycle was $660,291, and the amount remaining at issue with respect to the $30.00 exemption issue for the second audit cycle was $493,014.
1 The NIA proposed an assessment of $876,132, of which $39,702 related to sales taxes assessed by the Commissioner because of insufficient exemption certificates. The appellant did not dispute that issue and paid the $39,702 in full. 2 The NIA proposed an assessment of $622,297, of which $39,702 related to sales taxes assessed by the Commissioner because of insufficient exemption certificates. The appellant did not dispute that issue and paid the $39,702 in full.
III. The $30.00 Exemption
Section 6(i)(4) provides an exemption from sales tax for up to $30.00 of “residential main telephone services billed on a monthly recurring basis or billed as message units.”
During the course of the audit, the Commissioner identified nine customer bills (“nine bills”) from the total sample which, in her opinion, were improperly treated by Verizon as eligible for the $30.00 exemption. The Commissioner therefore disallowed the $30.00 exemption on those nine bills.
The Commissioner denied four of the nine bills after concluding that the accounts were being used for business, not residential, purposes. Prior to the hearing of these appeals, the parties were able to reach agreements with respect to three out of those four bills, leaving only one bill, the Todd Richman bill (“Todd Richman bill”), in
dispute. The remaining five bills (“five bills”) each
reflected an account billed to a billing address at which an additional account was also billed to the same individual. The Commissioner denied the $30.00 exemption for each of the five bills because they did not reflect, in the Commissioner’s opinion, sales of “residential main
Substantial evidence was entered into the record regarding the meaning of the phrase “residential main
telephone services.” Mr. Anglin testified that the phrase “residential main telephone services” is a
telecommunications industry term. He explained that the phrase is used in the telecommunications industry to describe basic, local residential telephone services, which include the provision of a dial tone and the ability to make and receive local telephone calls. He stated that additional services, such as long distance service and toll calls, are not “residential main telephone services.” Mr. Anglin testified that Verizon offers several varieties of “residential main telephone service” packages and that
each of the bills at issue reflected charges for Verizon’s
“residential main telephone service” packages.
Mr. Anglin’s testimony was supported by documentary
evidence entered into the record. Mr. Anglin explained that Verizon is an incumbent local exchange carrier (“ILEC”), and that each of Verizon’s customers purchases
services within a specific calling area, known in the telecommunications industry as a local access and transport area (“LATA”). As an ILEC, Verizon is required to file a local exchange tariff (“tariff”) with the Massachusetts Department of Telecommunications and Energy, and a copy of
that tariff was entered into the record. The tariff states that “[m]ain telephone exchange service consists of basic exchange services.”
The Commissioner, on the other hand, interpreted the phrase “residential main telephone services” as used in ? 6(i)(4) to mean the primary telephone account at a residence. It was for this reason that the Commissioner disallowed the claimed exemption in the five bills, each of which reflected an account billed to a billing address at which an additional account was also billed to the same customer.
On the basis of all of the evidence, the Board found that, for purposes of ? 6(i)(4), the phrase “residential
main telephone services” meant basic local residential
telephone services. The testimony and documentary evidence entered into the record reflected that the phrase “residential main telephone services” was commonly
understood and used within the telecommunications industry to mean basic local residential telephone services. The Board found it apparent from the statutory language that the Legislature intended to adopt the phrase’s established
industry meaning, as the Legislature used additional