Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group members Chris Doyle, Peter Calleri, and Zoe Peppas. The weekly reports are intended to go out every Tuesday after the New York State Division of Tax Appeals (DTA) publishes new ALJ Determinations and Tribunal Decisions. In addition to the weekly reports, TiNY may provide analysis of and commentary on other developments in the world of New York tax law.

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TiNY Report for January 12, 2024
NY state flag and the word TAXES made out of money

I’m trying to get back into my normal rotation again, and the DTA accommodated me by posting four ALJ determinations yesterday. Three are ho-hums, but Time Warner is an interesting study of what happens when the digital economy collides with an analog statute. In a more rational world, the Legislature would recognize that antiquated statutes haven’t kept pace and would pass new laws that more clearly apply to modern transactions. But as my colleagues frequently remind me: “We don’t live in Christopia.”  So, we are stuck with the Division and the courts trying to pound round-peg modern transactions into square-hole legacy laws. The result is an inefficient mess.

ALJ Determinations

Matter of Time Warner Cable Information Services (NY), LLC (ALJ Taylor, January 4, 2024); Div’s Rep. Lori Antolick, Esq.; Pet’s Reps. Eric Tresh, Esq., Maria Todorova, Esq., and Chelsea Marmor, Esq.; Articles 28 and 29. This case addressed the narrow issue of whether Petitioner could treat reimbursements of the Federal Universal Service Fund (FUSF) it received from its customers as non-taxable receipts from the sale of interstate telecommunication service.   

Petitioner provided phone service that was “bundled” so that one price paid for interstate telephone service, intrastate telephone service and related telecommunications services. In the old days when your phone was hard-wired to the wall in your kitchen, the phone company would bill you one fee for local service (subject to sales tax) and separately for the calls you made out-of-state (not subject to sales tax). Let’s not wax nostalgic about those times. Yes, they were mostly simpler, but even a Luddite like me can appreciate the increase in information I can get from my smart phone compared to the information I could get from three network TV stations, two daily newspapers and the Encyclopedia Britannica. It’s like Paul Simon sang 37 years ago: “These are the days of miracles and wonder.”

I digress.

In any case, back in the day there was a detailed bill you received so you could discern which part of your service was taxable intrastate phone service and which part was non-taxable interstate phone service.

In the modern world, Petitioner charged a single fee for its phone service, and the Division allowed it to use tracking studies to allocate between the taxable intrastate and non-taxable interstate components. The traffic studies looked at Petitioner’s systemwide usage over a period of time to determine a ratio between intrastate and interstate calls and then applied that ratio to the monthly customer bill to determine the portions that were taxable and the portions that were not. While this approach is practical, it takes away the customer’s ability to control taxability by curating the number of intrastate vs. interstate calls (as if a customer would actually do that).

Anyway, Petitioner’s one-size-fits-all fee included a reimbursement for Petitioner’s contributions to the FUSF. The FUSF is dedicated to funding the interstate telecommunications infrastructure, and no part of it was dedicated to supporting intrastate telecommunications. Since the FUSF supported only non-taxable interstate telecommunications, Petitioner treated the portion of the client bills dedicated to recovery of that fee as non-taxable. The Division disagreed with that treatment.

The Judge found that Petitioner’s customer revenue for telecommunications service was a unitary “receipt,” and that the FUSF was an underlying expense of Petitioner that couldn’t be segregated in customer bills to obtain an exemption.

The Judge’s reasoning seems sound, and using traffic studies to apportion between the taxable and non-taxable aspects of the service being provided is, like I said, a practical approach. But another practical approach would be to treat all of Petitioner’s phone service as non-taxable “interstate” service since I have no idea whether my calls from my office to my house remain in New York even though they start and end there. And the best approach would be for the Legislature to pass laws that neatly apply to modern transactions.

Matter of Napolitano (ALJ Baldwin, January 4, 2024); Div’s Rep. Peter Ostwald, Esq.; Pet’s Rep. Robert Singer, CPA; Article 22. Welcome Judge Baldwin!

The Division moved for summary determination based on an alleged lack of a timely request for conciliation conference. The Judge found that the Division proved both its standard mailing procedures and that they were followed when it mailed the Notice of Deficiency to Petitioners’ last known address (and that of its representative) on June 3, 2021. Petitioner’s BCMS request filed on February 6, 2023, was 17 months or so late. Typical timy; typical result. Case dismissed.

Matter of Paukman (ALJ Russo, January 4, 2024); Div’s Rep. Christopher O’Brien, Esq.; Pet’s Rep. Steven Borochov, CPA; Article 22. Petitioners filed their 2007 return showing a tax due of $70,000, in February 2010. In July 2010, Petitioners filed an amended 2007 return claiming tax due of $27,000. The IRS provided the Division with information strongly suggesting that the original return correctly reported Petitioners’ federal adjusted gross income, so the Division issued a Notice of Deficiency in February 2011 for the tax due based on the FAGI originally reported (and confirmed by the IRS). Petitioners filed a petition challenging the Notice on October 1, 2019, but did not present any testimony or exhibits. The Judge found that Petitioners failed to satisfy their burden of proving that the Notice of Deficiency was erroneous.

Things to wonder about:  Why wasn’t this a timy? Why didn’t Petitioners offer any evidence or documents?

Matter of Berrospi (SALJ Gardiner, January 4, 2024); Div’s Rep. Christopher O’Brien, Esq.; Pet’s Rep. Steven Borochov, CPA; Article ?  Petitioner protested the disallowance of a 2021 STAR credit. But there was nothing attached to the petition to indicate that the Division had disallowed his STAR credit. Indeed, the disallowance notice appears to have been issued by the Office of Real Property Tax Services (ORPTS), and the notice provided instructions for taxpayers who disagreed with the disallowance of their credit. The instructions did not include filing a petition with the DTA.

Judge Gardiner found that the DTA’s jurisdiction did not include challenges to the disallowance of a STAR credit by ORPTS. Case dismissed.

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