Sales tax suit tossed

State sought levy from N.C. firm selling furniture in Md.

Ruling upsets local sellers

Court says Maryland should have taken administrative steps

May 10, 2001|By Andrea F. Siegel | Andrea F. Siegel,SUN STAFF

Maryland's highest court yesterday dismissed a lawsuit filed by the state comptroller's office demanding state sales tax from a North Carolina furniture dealer who does business here.

But the court sidestepped the issue of whether collection of that sales tax is constitutional.

The Court of Appeals said the comptroller's office should have taken administrative steps before filing its lawsuit - an issue that was not raised by the state agency, or by defendants Furnitureland South, of Jamestown, N.C., and Royal Transport Inc., a High Point, N.C., trucking company that makes deliveries in Maryland.

The ruling disappointed Maryland furniture sellers, who have long complained about competition from the mammoth North Carolina furniture market, whose sellers boast low prices.

Henry Shofer, president of Shofer's Furniture in Baltimore, says he can sell items to his customers "for the same price," but they still buy from his North Carolina rivals to save on sales tax.

"It is the 5 percent difference," he said. "I think it is a pretty severe issue. It really makes it so that these factories always have this 5 percent tax on us - it penalizes the merchants in Maryland."

Would-be buyers roam local furniture stores as showrooms, write down label information and then order from businesses in North Carolina - often at the same price; customers pay a shipping fee but avoid the sales tax they would have to pay in local stores. On big-ticket items such as furniture, sales tax sums can dwarf freight charges.

The issue of sales tax on out-of-state purchases is growing pricklier with the increase in Internet, phone and mail-order sales. By law, Marylanders owe the 5 percent sales tax if the seller does not collect it, but many consumers neither realize that nor pay the tax.

This year, for the first time, the back of the state income tax booklet featured a form for payment, said agency spokesman Michael Golden.

Whether yesterday's ruling ends the dispute between in-state and out-of-state furniture sellers remains to be seen. Furnitureland's attorney said he hopes he has shown that the comptroller cannot make a winning argument. Agency officials are studying the ruling.

"The U.S. Supreme Court has ruled that companies like Furnitureland are not required to collect the tax, unless and until the United States Congress passes legislation that requires them to collect it," said H. Bryan Ives III, Furnitureland's attorney.

Such bills have been defeated since the 1992 high court ruling.

"If the Maryland comptroller wants Furnitureland to collect this tax, it should be talking to [Sen.] Barbara Mikulski and the Maryland representatives in the Congress," Ives said.

Maryland furniture retailers complained to legislators five years ago about their plight, and legislators pressured the comptroller's office to take corrective action.

In early 1997, legislators withheld about $1 million from the comptroller's budget until it was shown what the compliance division was doing to collect taxes from out-of-state furniture sellers, according to trial testimony from an official in the comptroller's office.

The lawsuit was filed in May. It contended that, by assembly and service through Royal Transport, Furnitureland and the delivery company were operating in Maryland and should be collecting the sales tax.

Kathleen A. Morse, assistant attorney general, said the comptroller's office is reviewing the ruling and its options. It can ask the court to reconsider its unanimous ruling or it can go through the administrative actions spelled out by the court.

The agency could have tried to subpoena sales records and brought an enforcement action based on that, the judges said.

Another state law allows the comptroller's office to "demand the filing of a sales and use tax return" or make a tax assessment, the court said. Appeals go to the state's Tax Court, an administrative body; further appeals go to Circuit Court.

The Court of Appeals judges said the comptroller was wrong to argue that the agency could not go through Tax Court. Contrary to its contention, the Tax Court can hear constitutional issues.

"The presence of constitutional issues does not authorize a party to circumvent the statutorily prescribed administrative remedies," Judge John C. Eldridge wrote.

Another option, tucked in a footnote in the 14-page ruling, is for the comptroller to go directly to consumers for the tax. "If the vendor fails to collect and pay the sales or use tax due, the comptroller may proceed against the buyer," the Court of Appeals said.

In 1999, Anne Arundel County Circuit Judge Ronald A. Silkworth ruled in favor of the comptroller's office in the lawsuit. But the North Carolina vendors appealed.

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