Sales Tax Slice: Not Owning, Knowing How to Use a Computer Is Reasonable Cause Not to File Returns and Pay Electronically

The Massachusetts Commissioner of Revenue would not budge when it came to giving an unincorporated small-business owner and operator, with a 20-year exemplary tax record, a break on not complying with its electronic-filing mandate, but was forced to back down following a ruling by the Massachusetts Appellate Tax Board. Cocco v. Massachusetts Comr. Of Rev., Mass. App. Tax Bd., Nos. C310367, C311626, C314426, 10/30/13.

Specifically, the Massachusetts e-filing mandate requires a vendor to file sales and use tax returns and pay taxes electronically if the vendor's aggregate tax liability reaches $10,000 in any taxable year. Failure to comply with the e-filing mandate is considered a failure to file and pay, unless the vendor is able to demonstrate reasonable cause for noncompliance.

Marian Lisa Cocco, the owner of a small retail store selling handcrafted decorative items, found the mandate to be unfair to her business, as she did not own a computer, did not know how to use a computer, and did not trust the reliability or security of filing by electronic means. Cocco also believed the mandate would create additional costs for her small business if she had to hire a tax professional to file the returns for her.  For the 20 years that she had been in business, Cocco used paper records and returns and continued to do so after the mandate was passed.

Although Cocco timely filed paper returns and paid by check during the monthly tax periods at issue, the Commissioner continued to issue her notices of improper filing and payment, including $100 penalties for each non-electronic return. Believing that her reasons for not complying with the mandate were reasonable, Cocco filed abatement applications for the penalties. These were denied by the Commissioner.

Appealing to the Board, Cocco, pro se, argued that she had attempted to explain her position to the Massachusetts Department of Revenue on receipt of notice advising her of the e-filing mandate. At that time, she had contacted the department requesting that she be grandfathered into an exemption from the mandate, but the Commissioner denied her request. The Commissioner argued that the fact that Cocco did not own a computer, or was uncomfortable with filing or paying electronically, did not support a claim for reasonable cause to waive the requirements of the mandate.

Ultimately, the Board sided with Cocco, ruling that when applying an objective standard of care of that an ordinary taxpayer in Cocco's position would have exercised, and that Cocco exercised ordinary business care and prudence by filing paper returns and remitting by check the taxes owed. Further, the Board ruled that penalizing Cocco for not purchasing a computer and learning how to operate it goes beyond requiring a taxpayer to exercise ordinary business care and prudence. The Board ordered the Commissioner to issue to Cocco $100 for each of the tax periods at issue, for a total abatement of $1,500 in penalties.

By Ean Hamilton

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