Ultrasound. 09 REV 1582 upheld the DOR’s assessment of sales tax from a company that did ultrasound imaging of in utero infants. The sales would have been exempt if truly done for medical diagnosis, but the ALJ and the DOR found that it was not done for medical diagnostic purposes, although it was not clear what other purpose might have been involved. Aside from the issue or medical or not, there were two other curious aspects of the Final Decision:
- Expert testimony. Evidently the taxpayer put its accountant on the stand and the DOR got the accountant to admit that if the taxpayer was selling ultrasound pictures it would be subject to sales tax. Moreover, the ALJ qualified the accountant as an expert on North Carolina tax law and evidently relied on his expert testimony. This means that taxpayers should be careful in offering their own representatives to testify; but also taxpayers should consider offering testimony from tax experts who will support their interpretation of the law.
- Arbitrary and capricious. The holding in the Decision was that the taxpayer failed to show by the preponderance of the evidence that the DOR was arbitrary, capricious or erroneous in imposing the sales tax. This is a surprising standard because it does not appear in the statute. Rather the ALJ is supposed to sit as the agency and decide the case the same way the agency would, not review the agency decision under an arbitrary and capricious standard. The reason the Decision reads this way is that those words appear on the OAH Form Petition, where the Petitioner checks the applicable boxes for erroneous agency action, or failed to act as required by law, or arbitrary and capricious agency action. Form H-06. Perhaps there is no harm in checking all the boxes, but it could be dangerous to the taxpayer’s claim if the ALJ were to focus on whether an assessment was arbitrary and capricious as opposed to just being wrong.
Customer’s rights. 08 REV 2880 held that a retailer was liable for use tax on certain purchases and could not offset erroneously collected sales taxes. That conclusion is reasonable enough, but unlike the first Decision, this one reveals substantial rewriting by the DOR in the Final Decision. Moreover, it contains the following statement:
N.C. Gen. Stat. § 105-164.11 therefore requires Petitioner’s erroneous collections of sales tax to be credited or refunded to its customers, who actually paid the tax, prior to Petitioner seeking any such refund from Respondent. (emphasis added)
That gloss on the statute is incorrect. If it were correct it would mean that retailers must refund improperly collected sales tax to customers before finding out whether the DOR would have to refund the taxes to the retailer. The practice of the DOR has always been to tentatively agree to refunds and pay them on the condition the retailer could prove the customers had been made whole.
Whether this statement is just an accident or an intentional effort by the DOR to expand the law is unclear. The statement did not appear in the ALJ decision but rather was added by the DOR.
Use tax. 09 REV 4433 involved a disabled person who purchased two “sports vehicles” for approximately $9000 apiece from a South Carolina vendor who did not collect North Carolina sales tax. The DOR assessed use tax and the ALJ and Final Decision affirmed the assessment, although the DOR made various modification to the Decision.
Service charges. 08 REV 2563 upheld an assessment of sales tax on the service charge separately stated by a catering service that “drops off” the food at the customer’s location. It relied on the statutory rule that the sale of foods involves the service.
Performance contracts. 09 REV 0020 upheld an assessment of sales tax on the sale of stone products at fixed prices. The retailer evidently argued it was engaged in a non taxable performance contract (services) but failed to prove that.
Refunds to local governments. 08 REV 2915 upheld a denial of refund to a local school administrative unit of sales tax paid by the county on construction materials for building new schools owned by the unit. The ground of the denial of the refund that would otherwise have been made was that the county not the school unit was the taxpayer because it paid the bills.
This may be literally correct, but reflects a surprisingly stingy approach by which the state holds onto sales tax that is clearly refundable simply because the local government made a footfault in its paperwork.
