Title: State Dep’t of Taxation v. Masco Builder Cabinet Group

State: nevada

Issuer: Nevada Supreme Court

Document:

nee

 

127 Nev, Advance Opinion G7
IN THE SUPREME COURT OF THE STATE OF NEVADA

‘THE STATE OF NEVADA | No. 55183
DEPARTMENT OF TAXATION, i
Appellant, Ez

te FILED
MASCO BUILDER CABINET GROUP
D/B/A QUALITY CABINETS OF
NEVADA,
Respondent.

 

Appeal from a district court order granting a petition for
judicial review in a tax matter. Kighth Judicial District Court, Clark
County; Susan Johnson, Judge.

Affirmed,
Catherine Cortez Masto, Attorney General, and Blake A. Doerr, Deputy
Attorney General, Carson City,
for Appellant.

Justice Law Center and Bret 0. Whipple, Las Vegas,
for Respondent.

BEFORE SAITTA, C.J., DOUGLAS and HARDESTY, JJ.
OPINION

PER CURIAM:

In this appeal, we consider two issues regarding a taxpayer's
request for a refund from the Nevada Department of Taxation. First, we
consider whether the Nevada Tax Commission improperly substituted its

own judgment for that of an administrative law judge in reversing the

W- 32396

 
judge's determination that the taxpayer was entitled to a refund. Second,
we consider whether the statute of limitations governing the time within
which a taxpayer must file a formal refund claim should be tolled when the
Department of Taxation has led the taxpayer to believe that a formal filing
was unnecessary. Because we conclude that the Tax Commission

improperly substituted its own judgment for that of the administrative law

 

judge, we affirm the district court's decision to grant the taxpayer's petition
for judicial review. Additionally, we conclude that, under the facts of this
case, equitable considerations warrant a tolling of the statute of
limitations, and we affirm the district court's decision to grant the
taxpayer its entire refund request.

FACTS:

Respondent Masco Builder Cabinet Group is a nationwide
cabinet-manufacturing company that both sells its cabinets in retail
showrooms and installs them in houses as part of construction contracts.!
Pursuant to Nevada's tax code, Masco must remit sales tax to appellant,
the Nevada Department of Taxation, for each retail sale it makes, and it
‘must remit use tax for each construction contract it enters into, NRS
372.105; NRS 372.185; NAC 372.200(1). Both sales tax and use tax are
based upon the same tax rate, but sales tax is calculated as a percentage of
the retail sales price of Masco's cabinets, whereas use tax is calculated as a
pereentage of Masco's cost to acquire the cabinet components. NRS

 

1As opposed to a retail sale, which involves the sale of tangible
personal property, see NRS 372.105, a construction contract is a “contract
for. affixing a structure or other improvement on or to real property.”
NAC 372.1902).

 

 
372.105; NRS 372.185; NAC 372.200(1). Thus, from a tax perspective, it is
more beneficial for Masco to enter into a construction contract than to
make a retail sale.

In November 2003, Masco acquired Root Industries, a Reno-
based company that engaged largely in retail sales of cabinets? Masco
management retained Root's personnel to handle Masco's northern
Nevada-based business. In so doing, Root kept its same computer system

1ed for a retail sal

 

and accounting programs, which were desi

 

company.

When Root's accounting program generated invoices to send to
its retail sales customers, the program automatically added the applicable
tax on a line labeled “sales tax.” For example, prior to its acquisition by
Masco, if Root sold a customer a cabinet for $1,000, Root's personnel would
‘enter the $1,000 retail price into its computer system, and the system
would automatically calculate the sales tax, Thus, assuming an applicable
tax rate of 7.5%, an invoice for $1,075 would be generated, which Root
would send to the customer.

Masco's construction contracts with its customers, however,
were structured differently. Under its contracts, Masco’s customers agreed
to pay Masco a lump-sum amount in exchange for Masco providing and

installing cabinets, and Masco agreed to be responsible for paying any

"The record indicates that Root was acquired in November 2003 by
‘Texwood Industries, a Las Vegas-based cabinet company. As such,
‘Texwood was the company that the Tax Department initially audited and
that requested the refund at issue in this appeal. While the audit was
‘ongoing, Masco acquired ‘Texwood, at which point Masco became the
affected taxpayer. For the sake of clarity, this opinion refers solely to
‘Masco as the affected taxpayer.

 

 
applicable taxes. Thus, when Root’s personnel began generating invoices
for Masco's lump-sum contracts, they had to “back into” the contract price
so that when the computer system added on the “sales tax,” the total
invoice still equaled the lump-sum amount that the customer had
contractually agreed to pay. For example, if a customer agreed to pay
Masco a lump sum of $1,000 for installing a cabinet, and Masco agreed to
be responsible for any resulting taxes, Roots personnel would enter the
tem, which, after

automatically calculating 7.5% “sales tax,” would generate a $1,000 invoice

contract price of $930.24 into the computer 5;

 

for the customer. Root would then remit the calculated $69.76 “sales tax"
to the Tax Department on behalf of Masco?

In summer 2006, the Tax Department began an audit of
Masco, which was to cover the periods of May 2003 through April 2006.
While conducting the audit, the Tax Department's auditor and Masco’s
management discovered Root’s accounting procedures. Both the auditor
and Masco agreed that, by backing into the contract prices in this manner,
Root had arguably been remitting sales tax to the Tax Department when it
should have been remitting use tax. Aggregated over thousands of invoices
and several years, the difference between remitting sales tax and use tax
on Masco's contracts was substantial. The auditor and Masco agreed

preliminarily that Masco might be entitled to a refund for the amount it

Sf, in this example, Masco’s cost of acquiring the cabinet components
was $500, Masco should have actually been remitting $37.50 in use tax.
Root's method of backing into the tax figure, however, caused it to remit
tax on behalf of Masco for amounts comprising the difference between $500
and $930.24—amounts such as labor, overhead, and profit, which are not
subject to use tax. NRS 372.186

 

 

 
arguably overpaid and that the auditor would consider the issue of Masco's
potential refund within the overall context of his audit.

By statute, a taxpayer seeking a refund must file a formal
refund claim with the Tax Department within three years of when the

taxpayer's purported overpayment occurred. NRS_372.685(1); NRS

 

372.650. Similarly, if an audit reveals a tax deficiency on the part of an
audited taxpayer, the Tax Department may assess a deficiency on the
taxpayer only for underpayments that occurred within three years prior to
when the actual deficiency assessment is made, NRS 360.355(1). Because
both the auditor and Masco anticipated that the audit would be lengthy,
the Tax Department requested that Masco sign a waiver of the statute of
limitations, in essence asking Masco to agree that the Tax Department
could assess a deficiency for any underpayments that the audit might
uncover going back to May 2003. Having agreed with the auditor that its
refund request would be dealt with in the context of the audit, Masco
signed the Tax Department's waiver in June 2006 with the understanding
that the waiver would also maintain the timeliness of its own refund
request for any overpayments of sales tax during that same period. Based
upon this understanding, Masco did not file a formal refund claim.
Pursuant to Tax Department policy, its waiver forms only
extend the statute of limitations for three months at a time. As such,
‘Masco signed several subsequent waivers between mid-2006 and mid-2007.
By August 2007, the audit had been completed, but during this same time,
the auditor left his job at the Tax Department without telling Masco and
without having notified Masco that the audit had been completed.
Realizing that the most recent waiver was about to expire, Masco

attempted to contact the Tax Department, but its calls were not returned.

 

 
In October 2007, after the most recent waiver had already expired, Masco
was able to speak with the new auditor, who informed Masco that the Tax
Department was denying its refund request.

‘Two months later, Masco received the Tax Department's
deficiency assessment, which made no mention of Masco's refund request.
or why it was being denied. Masco then filed a formal refund claim in
January 2008 as part of a petition for redetermination. At a hearing before
an administrative law judge (ALJ), the Tax Department maintained that
‘Masco was not entitled to a refund because it had been acting as a retail
seller under the contracts in question, not as a construction contractor. It
argued additionally that, even if Masco were entitled to a refund, any
overpayments it may have made more than three years prior to January
2008 were now time-barred.

‘The ALJ disagreed with the Tax Department and determined
that Masco’s contracts with its customers were construction contracts, not
retail contracts, which thereby entitled it to a refund on the mistakenly
overpaid sales tax. The ALJ also determined that Masco was entitled to a
refund for the entire audit period in spite of its late filing of a formal
refund claim because it had reasonably relied on the auditor's
representation that he would consider Masco’s refund request within the
overall context of the audit.

‘The Tax Department then appealed the ALJ's determinations
to the Tax Commission. After a short hearing, the Tax Commission
reversed the ALJ's determination that Masco was entitled to a refund.
Without addressing Masco's reliance on its agreement with the auditor, the

Tax Commission also concluded that Masco's failure to timely file a formal

 

 
refund claim would have rendered a portion of its refund request time-
barred,

Masco then filed a petition for judicial review. The district
court granted Masco’s petition on the basis that the Tax Commission had
improperly substituted its own judgment for that of the ALJ. In so doing,
the district court reinstated the ALJ's determination that Masco wi

 

entitled to a refund and that the time period for the refund should cover
the entire audit period. This appeal followed.
DISCUSSION

On appeal, the Tax Department makes two arguments. First,
it argues that the Tax Commission did not improperly substitute its own
judgment for that of the ALJ in considering whether Masco should be
entitled to a refund. It contends that, instead, the ALJ's determination
was clearly erroneous and that the Tax Commission therefore acted
properly in denying Masco's refund request. Second, the Tax Department
argues that, even if Masco is entitled to a refund, it is barred from
obtaining a refund for any overpayments made more than three years prior
to January 2008—the date when it filed its formal refund claim.

For the reasons given below, we reject both of the Tax
Department's arguments. The ALJ's determination that Masco was
entitled to a refund was supported by substantial evidence in the record
and was therefore not clearly erroneous. Additionally, we reject the Tax
Department's contention that Masco’s late filing of a formal refund claim

has rendered a portion of its refund request time-barred. Under the
doctrine of equitable tolling, the applicable statute of limitations was tolled
from the time Masco signed the Tax Department's first waiver in June
2006 with the understanding that its refund request would be considered
within the overall context of the audit. We therefore affirm the district

 

 
court's order in which it granted Masco's petition for judicial review and
reinstated the ALd's determinations,
Standard of review

When reviewing an administrative agency's decision, our

   

fandard of review is the same as that of the district court. Garcia v,
Scolari's Food & Drug, 125 Nev. 48, 56, 200 P.8d 514, 519-20 (2009). We

review questions of law de novo, and with regard to factual is

 

limited to determining whether the agency's decision is supported by
substantial evidence. Id, at 56, 200 P.3d at 520. Substantial evidence is
evidence that a reasonable mind might accept as adequate to support a
conclusion. Id, If the agency's decision is supported by substantial
evidence, we are prohibited from substituting our own judgment for that of
the agency. NRS 293B.195(3); Garcia, 125 Nev. at 56, 200 P.3d at 520.
Only under limited circumstances, such as when an agency's decision is
“[ellearly erroneous,” may we reverse the agency's factual determinations.
NRS 233B.135(3)(0).

Because the Tax Commission’s decision in this case was based
on its review of the ALJ's findings, it was governed by the same standard
of review as this court’s analysis. NRS 360.390(2). That is, if the ALJ's
findings were supported by substantial evidence, the Tax Commission was
prohibited from substituting its own judgment for that of the ALJ. NRS
233B,.135(8). ‘Thus, our inquiry on appeal is whether the Tax Commission
improperly substituted its own judgment for that of the ALJ or if. instead,

it properly overturned a clearly erroneous decision by the AL.

‘The Tax Commission improperly substituted its own judgment for that of
the ALJ

Both Masco and the Tax Department agree that Masco’s tax
status is dictated by its contractual undertaking. See State, Dep't

 

 
‘Taxation v. Kelly-Ryan, Inc, 110 Nev. 276, 283-84, 871 P.2d 331, 336-
87 (1994) (concluding that a taxpayer was obligated to remit use tax based
upon the contractual responsibilities that the taxpayer undertook);
Maecon, Inc, v. State, Dep't of Taxation, 104 Nev. 487, 489-90, 761 P.2d
411, 412 (1988) (game). In other words, if Masco contractually agreed to
sell its customers tangible personal property in the form of cabinets, it was
acting as a retail seller and therefore properly remitted sales tax,
Conversely, if Masco contractually agreed to install cabinets into its

customers’ hous

 

ind to provide the cabinets necessary for doing so, it was
acting as a construction contractor and therefore should have been
remitting use tax.

In spite of this general agreement, the parties disagree as to
what relevance the Root-generated invoices have in determining Masco's
status. Masco contends that these invoices, which contained a line-item for
“sales tax,” were the result of a computer-generated accounting oversight
that had no bearing on its contractual undertaking. The Tax Department,
‘on the other hand, contends that these same invoices evince a conscious
decision on Masco's part to act as a retail seller.

At the ALJ hearing, Masco produced several contracts that it
had entered into with various customers and identified contract language
indicative of construction (rather than retail) contracts. It also walked the
ALJ through several Root-generated invoices in which Root personnel had
taken one of Masco's lump-sum contract prices, entered it into their
computer system, and backed into the sales tax figure that was ultimately
remitted to the Tax Department.

Based upon Masco's explanation, the ALJ issued a detailed
decision in which he determined that Masco had indeed acted as a

 

 
construction contractor. Specifically, the ALJ based this determination on
his belief that each contract in question was, in essence, an agreement
between Masco and its customer wherein Masco promised to install
cabinets in the customer's house in exchange for a lump-sum price.
Because the Root-generated invoices equaled the lump-sum amounts that

‘Masco’s customers had contractually agreed to pay, the ALJ discounted the

 

fact that the invoices contained a specific line for sales tax, downplaying

 

the Tax Department's contention that this line-item evinced a conscious
decision on Masco’s part to act as a retail seller.

In overturning the ALJ's decision, the Tax Commission failed
to address the ALY's detailed findings and the evidence upon which these
findings were based. Specifically, its decision made no mention whatsoever
of Masco’s contracts, much less why it found them unpersuasive or why it
found the ALJ to have been clearly erroneous in relying on them, Nor did
its decision articulate why it believed that the Root-generated invoices
reflected Masco's choice to act as a retail seller.

Accordingly, we conclude that the Tax Commission improperly
substituted its own judgment for that of the ALJ. The ALJ's decision was
supported by substantial evidence, as the contracts in question clearly
demonstrate agreements between Masco and its customers to provide and
install cabinets in the customers’ houses in exchange for a lump-sum price.
‘These contracts, combined with Masco’s explanation of how the invoices
were generated, were more than adequate to support the ALJ's conclusion.
Garcia, 125 Nev. at 56, 200 P.3d at 520 (‘Substantial evidence is evidence

that a reasonable mind might accept as adequate to support [a]

 

 
conclusion.”). We therefore affirm the district court's order to reinstate the
ALJ's determination that Masco is entitled to a refund.

‘The three-vear limitations period was tolled when Masco signed the Tax
Department's waiver

Having determined that Masco is entitled to a refund, we next
consider whether it is entitled to a refund for the entire audit period or if,
instead, its late filing of a formal refund claim renders a portion of its
request time-barred.

A taxpayer is statutorily required to file a written claim for a
refund within three years of the purported overpayment. NRS 372.635(1);

“The Tax Department also contends that Masco is not entitled to a
refund because it did not bear the financial burden of the taxes that it
over-remitted. See State, Nev. Tax Comm/n v. Obexer & Son, 99 Nev. 233,
238, 660 P.2d 981, 984 (1983) C[NRS 372,630] permit[s} recovery only
where the taxpayer himself has borne the financial burden of the tax. If
the taxpayer making the claim has collected the tax from his customers, he
has suffered no loss or injury, and is not entitled to a eredit or refund even
if the tax was paid erroneously.”

While we agree with the Tax Department's premise, we disagree
with its conclusion. Masco's contracts provided that its customers would
pay a lump-sum price and that Masco would be responsible for any
resulting taxes. In so doing, Masco may have been able to build into its
contract prices an amount that equaled the applicable use tax rate, thereby
transferring this burden to its customers. Nevertheless, the fact that it
was over-remitting sales tax indicates that Masco was still bearing the
financial burden of the difference between what it actually remitted and
what it should have been remitting. It is this difference that forms the
basis for Masco’s refund request.

    

 

   

"Because neither party has addressed whether Masco should be
entitled to a credit, rather than a refund, we refer generically to Masco's
“refund.” See NRS 360.235 ("[A]ny amount determined to be refundable by
the Department after an audit must be refunded or credited to any amount.
due from the taxpayer.”).

 

 
0 08 <a

 

NRS 372.645; NRS 372,650, Because Masco did not formally file its own
written claim until January 2008, the Tax Department contends that
Masco is now prohibited from receiving a refund for any overpayments
made prior to 2005—in essence, barring it from obtaining a refund for a
substantial portion of the initially agreed-upon audit period. Masco, on the
other hand, contends that the agreement it made with the Tax
Department's auditor and the multiple waivers it signed should have tolled
the running of the three-year limitations period. As explained below, we
agree that the limitations period should have been tolled, and we conclude
that Masco is entitled to a refund for overpayments encompassing the
entire audit period.

Equitable tolling operates to suspend the running of a statute
of limitations when the only bar to a timely filed claim is a procedural
technicality. Copeland v. Desert Inn Hotel, 99 Nev. 823, 826, 673 P.2d 490,
492. (1983) (We therefore adopt the doctrine of equitable tolling. ..;
procedural technicalities that would bar claims... will be looked upon
with disfavor.”); Lantzy_v. Centex Homes, 73 P.3d 517, 523 (Cal. 2003)
(This court has applied equitable tolling in carefully considered situations
2). Even

when the claim’s untimeliness is due to a procedural technicality,

to prevent the unjust technical forfeiture of causes of action ..

 

application of the doctrine is appropriate only when “the danger of
prejudice to the defendant is absent” and “the interests of justice so
require.” Seino v. Employers Ins. Co. of Nevada, 121 Nev. 146, 152, 111
P.3d 1107, 1112 (2005) (quoting Azer v. Connell, 306 F.3d 930, 936 (9th
Cir. 2002).

With this basic framework in mind, we explain why the statute
of limitations governing Masco's refund request was tolled. ‘The record

12

 
demonstrates that the only basis for the Tax Department's argument is a

 

procedural technicality. Specifically, Masco told the Tax Department's
auditor that it was requesting a refund, stated its basis for the refund, and
the auditor communicated this stance in writing to his supervisors at the

‘Tax Department, Thus, the only shortcoming in Masco’s refund request.

 

‘was its failure to send the Tax Department its own letter to the same
effect. Cf, Hansen-Neiderhauser v, Nev. Tax Comm'n, 81 Nev. 307, 311,
402 P.24 480, 482 (1965) (“The purpose of the statute requiring the filing of
a claim ... is to enable the agency to investigate the claim and the
claimant while the occurrence is recent and the evidence available . ...”)

For similar reasons, the danger of prejudice to the Tax
Department is absent. The Tax Department was fully apprised of Masco's
basis for its refund request from the inception of the audit, and because it
has already denied the request, we assume that it has already fully
investigated the matter. As such, tolling the limitations period during the
pendency of the audit would have no prejudicial impact on the Tax
Department's ability to contest or investigate the matter. Hansen-
Neiderhauser, 81 Nev. at 311, 402 P.2d at 482.

Finally, the interests of justice require a tolling of the statute of
limitations in this case. In applying the doctrine of equitable tolling in the
past, this court has looked at several nonexclusive factors to determine
whether it would be just or fair to toll the statute of limitations: the
claimant's diligence, the claimant's knowledge of the relevant facts, the
claimant's reliance on authoritative statements made by the

administrative agency, and whether these statements misled the claimant.
Copeland, 99 Nev. at 826, 673 P.2d at 492 (articulating the doctrine of
equitable tolling in the context of an employment-discrimination claim).

 

 
4

When considering these factors within the context of this case,
it becomes clear that justice requires the statute of limitations to be tolled.
‘To be sure, Masco is a large company with the apparent resources and
wherewithal to investigate whether it might need to formalize its refund
request. Nevertheless, given the auditor's assurances that its refund
request would be considered within the context of the audit, the Tax
Department's conduct effectively lulled Masco into a false sense of security.
Moreover, having understood that the viability of its refund request was
contingent on the continuing validity of the waivers, Masco diligently
attempted to contact someone at the Tax Department to ensure that a new

waiver would be signed in time. The fact that a new waiver was not timely

 

signed was solely the result of the Tax Department's failure to return

‘Masco's phone calls and its own disorganization with regard to who was in

 

charge of the audit after the original auditor left the Tax Department,
Even after Masco was eventually able to contact someone in the Tax
Department, it had to wait another two months to receive an actual
deficiency assessment, during which time Masco was essentially left in
limbo as to the status of its refund request.

Given that the Tax Department actively participated in and
contributed to Masco’s delay in filing its formal refund claim, the interests
of justice require the statute of limitations to be tolled. The Tax
Department's role in this delay began at the time the auditor agreed to
consider Masco’s refund request within the context of the audit, which was
at the time when Masco signed the June 2006 waiver. Its role in
perpetuating this delay continued until Masco received the actual
deficiency assessment in December 2007, and as such, the three-year
Timitations period was equitably tolled during this period. Because Masco

ul

 

 
filed its formal refund request within a month of receiving the deficiency
assessment, its request was timely with regard to any overpayments that
occurred 2 years and 11 months prior to June 2006.
CONCLUSION

Substantial evidence supported the ALJ's conclusion that
Masco acted as a construction contractor and not as a retail seller.
Accordingly, the Tax Commission improperly substituted its own judgment
for that of the ALJ in reversing the ALJ's determination that Masco was
entitled to a tax refund. Furthermore, because the Tax Department played
an active role in causing Masco's formal refund claim to be untimely, the
statute of limitations was equitably tolled during the time in which the Tax
Department hindered Masco from filing its formal written claim.
Accordingly, we affirm the judgment of the district court.

Lepht J.
Douglas

(Norte,

Hardesty

"Although the audit period began in May 2003, Masco did not acquire
Root until November 2003. Because the overpayments at issue occurred in
and after November 2003, Masco's formal written claim filed in January
2008 is timely with regard to all of the contested overpayments.