Mississippi Taxpayers should keep a very close eye on the Toolpushers Supply sales tax case just granted certiorari by the Mississippi Supreme Court. This case addresses important sales tax issues related to wholesale sales and the extent to which a seller must audit its purchaser’s downstream use of the goods on purported resale transactions. More importantly, perhaps, the case seriously jeopardizes key tax appellate reforms that the Legislature overwhelmingly enacted in 2014 in direct response to the thoroughly criticized 2013Equifax alternative apportionment case.

The substantive sales tax issue in this case is the extent to which a seller can rely on a purchaser’s valid resale permit when deciding whether to treat a sale as a wholesale or retail transaction. Mississippi’s wholesale sales statute contains a “good faith” requirement that the seller must determine whether the customer was a retailer regularly selling or renting that property. The case involved sales to an oilfield service provider holding a valid retail sales tax permit, but the Department assessed the seller based on the position that the purchaser later consumed those products instead of reselling them. The negligible “record” in the case suggested that the seller accepted the permit at face value without any further inquiry (a disputed assertion in the case). If upheld, the holding suggests that every seller must perform a much more laborious – but undefined – examination of its customer’s planned use of the goods in determining whether the transaction is eligible for wholesale treatment. While there appear to be substantial factual questions in this case going to that “good faith” requirement, it could require substantial alternation of internal policies and procedures for wholesale sellers going forward.

The more important question in the case, however, may be procedural. In direct response to widespread criticism and concern about the Equifax decision in 2013, the Mississippi Legislature overwhelmingly approved fundamental changes to the tax appeals statutes to expressly provide for true de novo appeals of tax cases before the chancery court. In fact, the amended Section 27-77-7 explicitly prohibited application of the more deferential “arbitrary and capricious” standard of review relied upon to such consternation in the Equifax decision. This express prohibition and statement of intent was necessary after the Supreme Court concluded in Equifax that when the Legislature originally used the term “de novo” under the older version of the appeals statute, it really meant arbitrary and capricious. 

To preclude such a misconstruction of intent in future cases, the Legislature added a new provision mandating that “[t]he chancery court is expressly prohibited from trying any action filed pursuant to this section using the more limited standard of review specified for appeals in Section 27-77-13 of this chapter.” That cross-referenced code section, governing appeals of permit denials, etc., requires the application of the historic “arbitrary and capricious” standard of review which is more appropriate in those circumstances because an actual evidentiary record is created below to enable a review on that basis. In the typical sales, use, income and franchise tax context, however, no evidentiary record is created at the Board of Tax Appeals or Review Board, so application of a true de novo standard with a full evidentiary trial is necessary at the chancery court level.

The Court of Appeals in Toolpushers cited the Supreme Court’s analysis in Equifax to again discount the statutory de novo reference and impose the old arbitrary and capricious standard, perhaps unaware of the relationship of that very case to the new statutory standard. The Court of Appeals never acknowledged, cited, or analyzed the new sentence in Section 27-77-7 expressly prohibiting it from applying the lesser standard of review.

If the Supreme Court upholds the Court of Appeals’ analysis on the standard of review, it could be near impossible for taxpayers to prevail on a judicial appeal under the weaker Equifax standard in the absence of any evidentiary record to review. This case will be extraordinarily important for both pending and future tax appeals.