Opinion
NO. 2010-CV-708
05-31-2012
Capital One Auto Finance, Inc. v. Kevin A. Clougherty, Commissioner N.H. Department of Revenue and the N.H. Department of Revenue
ORDER
Plaintiff, Capital One Auto Finance Inc. ("Capital One"), appeals a decision of the Commissioner of the Department of Revenue Administration ("DRA") upholding the assessment of additional tax, interest, and penalties under the Business Profits Tax ("BPT") against it for the tax years 2003, 2004, 2005, and 2006. Capital One seeks discovery of certain information in possession of the DRA that the State claims is absolutely privileged. For the reasons stated in this Order, the Court GRANTS the Motion to Compel and orders the parties to meet and confer regarding the manner in which specific interrogatory and production requests will be answered and how information in those documents will be redacted in accordance with the terms of this Order. Capital One also moves to compel answers to 11 interrogatories that the DRA claims are untimely. Capital One's Second Motion to Compel is also GRANTED.
Because the State represents both Commissioner Clougherty and the DRA, the Court will collectively refer to these parties as "the DRA."
I
The ultimate issue in this case is whether the DRA properly assessed a BPT for Capital One by including two banks related to Capital One in the calculation between tax years 2002 and 2006. Resolution of this issue turns on a determination of whether the two banks-Capital One Bank and Capital One F.S.B.-conducted "business activities" within the State of New Hampshire. Neither party disputes that "business activity" is ambiguous and requires interpretation by the DRA. Before 2007, "business activity" was defined in RSA 77-A:1, XII as:
[A] group of actions performed by a business organization for the purpose of earning income or profit from such actions and includes every operation which forms a part of, or a step in, the process of earning income or profit from such group of actions. The actions ordinarily include, but are not limited to, the receipt of money, property, or other items of value and the incurring or payment of expenses.(2003).
The 2003 version of RSA 77-A:1, XXI is the same as the prior version. This is the language to which the Court will refer because the 2007 amendment is irrelevant to the disputed taxes in this case.
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Capital One asserts that the two related banks did not conduct "business activities," and consideration of their income in computing Capital One's BPT was inappropriate. Capital One asserts that the DRA has taken an expansive and inappropriate interpretation of whether an entity has engaged in business activity. Specifically, Capital One argues that the DRA interpreted the statute contrary to the law as enacted in 1986.
According to the Capital One, at the time the statute was enacted in 1986, all states that imposed a business tax recognized that the taxpayer it must first have a physical presence within the state. However in the early 1990s, the law regarding jurisdiction began to develop. In 1992 the United States Supreme Court decided Quill v. North Dakota, 504 U.S. 298 (1992). In Quill, the Court addressed the validity of a North Dakota sales and use tax. It held that a vendor with no physical presence in North Dakota did have a "nexus" for due process purposes because it purposely availed itself of the North Dakota marketplace. Id. at 306-08. Following Quill, a number of states began to hold that Quill's physical-presence test was limited to sales and use taxes and that the relevant nexus requirement for income tax was whether the party to be taxed "purposely availed itself of the marketplace;" an "economic nexus" test. See Geoffrey, Inc. v. S.C. Tax Com'n, 437 S.E.2d 13, 18 (S.C. 1993), cert. denied, 510 U.S. 992 (1993) (limiting Quill's physical-presence test to sales and use taxes); Tax Comm'r v. MBNA Am. Bank, N.A., 640 S.E.2d 226, 235-36 (W. Va. 2006), cert. denied, 551 U.S. 1141 (2007) (upholding imposition of business franchise and corporate net income tax on out-of-state credit card company based on purposeful availment). According to Capital One, in 2007, the New Hampshire legislature amended the BPT law to adopt the language used by the West Virginia Supreme Court in Tax Comm'r v. MBNA, 640 S.E.2d at 235-36.
The DRA hearing officer expressly upheld the tax in this matter, which related to the pre-2007 statute. The officer utilized the statute, in part, by applying an economic nexus test. The officer held that the banks "targeted New Hampshire's economic market . . . and [its] actions in New Hampshire were continuous and systematic and produced significant gross receipts attributable to New Hampshire customers." Pl.'s Mem. of Law in Support of Mot. to Compel Ex. G, at 9. Capital One argued that economic nexus was not a viable basis on which to impose a tax prior to the 2007 amendment. The hearing officer cited legislative history for the 2007 amendment, offered by the DRA for the proposition that the 2007 amendment does not change how or what the DRA taxes. Id. at 14.
Capital One asserts that the pre-2007 statute should be interpreted differently from the post-2007 statute. It claims that the statute is ambiguous and that the Court should consider administrative gloss—how the statute was interpreted by those charged with enforcing the law. DHB v. Town of Pembroke, 152 N.H. 314, 321 (2005).
An "administrative gloss" is placed upon an ambiguous clause when those responsible for its implementation interpret the clause in a consistent manner and apply it to similarly situated applicants over a period of years without legislative interference. If an "administrative gloss" is found to have been placed upon a clause, the municipality may not change its de facto policy, in the absence of legislative action, because to do so would, presumably, violate legislative intent.Id. at 321. Capital One further argues that the 2007 amendment would have been unnecessary if the DRA's interpretation of "business activity" has not changed.
Capital One served interrogatory and document requests seeking information re-garding the DRA's application of the pre-2007 statute. It sought information regarding whether the DRA generally sought to impose BPT on any entity that did not have a physical presence in the state and whether it applied the economic nexus test prior to 2007. The disputed discovery requests fall to two classes:
(1) Information regarding the Department's treatment of similarly situated taxpayers. With respect to this first category, Capital One takes issue with the Department's response to Interrogatories 19, 20, 21, 22 and 23 and its response to Document Request number 21.Pl.'s Mem. of Law in Support of Mot. to Compel 9. The DRA does not dispute the relevance of the documents sought but asserts that it is barred from producing the information sought by RSA 21-J:14.
(2) Department communications regarding the doctrine of "Economic nexus." Capital One takes issue with the Department's responses to Interrogatory 28 and Document Requests 7, 8, 9, 10, 11, 12 and 13.
II
RSA 21-J:14, generally speaking, provides that the records and files of the DRA are confidential and privileged. Several exceptions, however, provide for disclosure of DRA records. One such exception allows disclosure when records, files, returns, or other information sought relates to a "judicial or administrative proceeding pertaining to state tax administration . . . ." RSA 21-J:14, V(c). This exception applies when the information sought "is directly related to a tax issue in the proceeding, or the taxpayer whom the information concerns is a party to such proceeding, or the information concerns a transactional relationship between a person who is a party to the proceeding and the taxpayer." Id. (emphasis added).
Capital One argues that this exception to the confidentiality requirement allows the Court to order production of the documents it seeks. Capital One has requested communications between the DRA and taxpayers that set forth the position of the DRA regarding the economic nexus test, or communications between DRA employees regarding application of the economic nexus test. It does not seek the names, returns, or financial information regarding any taxpayer, and Capital One is willing to allow the DRA to redact all documents to ensure that no such information is disclosed. Capital One asserts, and the State does not dispute, that the information it seeks could be easily redacted to eliminate any reference to any particular individual.
While the DRA does not dispute the relevance of the documents Capital One seeks, it argues that relevance is not enough. It relies primarily on In re United States, 669 F.3d 1333, 1337-38 (Fed. Cir. 2012) and Vons Cos., v. United States, 51 Fed. Cl. 1, 17-19 (Ct. Cl. 2001). In these cases, federal courts interpreted the "directly related" language of Internal Revenue Code section 6103 (h)(4)(C), stating:
A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only . . . if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding . . . .(2010) (emphasis added). In both cases, the courts refused to order production of otherwise protected tax returns because the evidence the taxpayer sought was not "directly related" to the claim in question. In re United States, the court noted that the "directly related" requirement is far narrower and different than evaluating whether evidence is relevant. 669 F.3d at 1340. The State reasons that the provisions of RSA 21-J must also be narrowly interpreted. The Court disagrees.
The federal statutory scheme is distinct from New Hampshire's. In fact, the material that Capital One seeks here would be available under federal law because "the text of any written determination and any background file document relating to such written determination shall be open to public inspection." 26 U.S.C. § 6110(a)(2007). "Written determination" is defined as a "ruling, determination letter, technical advice memorandum, or Chief Counsel advice." § 6110(b)(1)(A). However, "the names, addresses, and other identifying details of the person to whom the written determination pertains and of any other person . . ." must be deleted prior to inspection. § 6110 (c)(1). Thus, it may be true that federal courts narrowly construe the "directly related" language in the Internal Revenue Code, but they do so in the context of a statutory scheme that allows for the production of all relevant information that does not violate statutory policy.
Inherently, the two sets of rules are unrelated and nonbinding on one another. The DRA argues that RSA 21-J:14 does not contain a provision similar to federal law, authorizing information disclosures, and the absence of such a provision indicates legislative intent to prohibit such disclosure. However, this argument misses the mark. The federal system begins with an assumption of disclosure and then carves out exceptions for certain protected information. The New Hampshire scheme begins with an assumption of confidentiality and carves out exceptions, allowing disclosure. The two systems approach the issue of taxpayer confidentiality from different viewpoints. Any comparison between the two cannot be made based on a broad scale. Further, absence in New Hampshire's code from language that is present in the federal context cannot be interpreted as affirmative legislative decision making.
In any event, even if the federal scheme did apply in New Hampshire, the claim made by the DRA here—that it has applied the economic nexus test both before and after the 2007 amendment—is "directly related" to a tax issue in this proceeding. Whether the DRA utilized the economic nexus test prior to 2007 is part of the hearing officer's reasoning for a decision from which Capital One now appeals. By the very terms of either statute, the information sought is not prohibited. It may be produced with appropriate redactions to eliminate any identifying characteristics for any taxpayers.
III
Alternatively, even if the statute were interpreted to prohibit production of the information sought, under settled principles of New Hampshire jurisprudence, in the circumstances of this case, the privilege could not be maintained. Generally speaking, New Hampshire evidentiary privilege may be pierced if there is no alternative source of evidence to prove the elements of a given claim other than the privileged information. See Jeremy D. Eggleton, Evidentiary Privileges, in I PRACTICAL GUIDE TO DISCOVERY & DEPOSITIONS IN NEW HAMPSHIRE § 11.24 (Gary E. Hicks & Daniel E. Will eds., 2011). "[T]here are some circumstances in which even the most sacred of privileges fail." Harper v. Healthsource N.H., Inc., 140 N.H. 770, 776-77 (1996). New Hampshire courts will pierce a privilege if maintaining the privilege would deprive a party of a fair trial or perpetrate injustice. Desclos v. S. N.H. Med. Ctr., 153 N.H. 607, 618 (2006). Here if the privilege is not pierced, the DRA would be able to assert that it has always interpreted the statue in the same fashion without giving Capital One the opportunity to test that claim. Such a result is unjust.
IV
Capital One has also filed a Second Motion to Compel its second set of interrogatories. The DRA has refused to respond to these interrogatories and document requests. Supp. to Pl.'s Second Mot. to Compel ¶ 3. The parties' dispute regarding these interrogatories involves timing. By agreement of the parties, the deadline for serving interrogatories was September 30, 2011. Id. ¶ 3. Capital One served its initial interrogatories and request for production of documents on June 27, 2011. DRA did not respond until August 31, 2011. As might be expected in litigation of this nature, the parties engaged in a number of meetings in order to resolve discovery disputes. Some of the disputes were resolved, and Capital One followed up after the September 30, 2011 interrogatory deadline with further requests. Id. ¶¶ 3-8.
Interrogatory deadlines are not intended to preclude reasonable follow-up to responses to initial discovery requests. As Capital One argues, this is particularly true where the DRA needed to supplement its initial production after good faith negotiations. At oral argument, the DRA conceded that the information sought in the second set of interrogatories could be sought during deposition. Nonetheless, producing the requested information by interrogatory is the cheaper method. The interrogatory responses will likely decrease the need for lengthy depositions, thereby saving all parties time and money. Capital One only seeks answers to 11 interrogatories. The burden on the DRA in producing the information sought is not great, and the potential benefit to both sides is significant. Accordingly, the Second Motion to Compel is GRANTED. SO ORDERED.
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Richard B. McNamara,
Presiding Justice