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 March 1, 2021 (reporting on DTA cases issued February 18)


Matter of Objet LLC; Supervising ALJ Friedman; Division’s Rep.: Osborne Jack; Petitioner’s Rep.: Joseph Lipari; Articles 28 and 29 (by Chris Doyle)

This submitted case is pretty interesting. For one thing, I can’t remember the last time Supervising ALJ Friedman wrote a determination on something other than a procedural issue.   The facts in this sales tax refund case are interesting too.

Petitioner purchased a half-interest in a Picasso – Femme a la Robe Verte – for $3.6 million. The other half-interest was purchased by “Richard” a week prior to Petitioner’s purchase. “[P]etitioner identified itself in its refund application as a collector of fine art that occasionally enters into leases.” Petitioner was an LLC owned by two trusts. Richard’s two sons were the prime beneficiaries under the two trusts that owned Petitioner. One expects that Richard (or maybe his estates and trusts attorney) may have been the moving force behind all of the transactions at issue, which matters not at all, since, as Joe Endres has stated in these pages at least once or twice, sales tax is a form-over-substance tax.

Anyway, sales tax was paid when Richard and Petitioner bought their respective half-interests in the Picasso. Immediately after acquiring its interest in the Picasso, Petitioner registered as a sales tax vendor and leased its half-interest in the Picasso to Richard (in effect, giving Richard a current possessory interest over the entire Picasso). Petitioner collected sales tax from Richard on the lease payments, and it filed for a refund of the sales tax Petitioner paid on its acquisition of the half-interest on the grounds that it was purchased for resale.

The Judge determined that Petitioner didn’t acquire its half-interest in the painting exclusively for resale and sustained the denial of Petitioner’s refund claim. The Judge found that inasmuch as Petitioner held itself out as a collector, was never even registered for sales tax until the day of the lease, and the lease had a term of only one year, Petitioner couldn’t sustain its burden of proving that the purchase was exclusively for resale. I think the case may have come out differently if the Petitioner was an art lessor that occasionally collected artwork. From the Judge: “This conclusion does not mean that a collector could never purchase an item solely for resale and, thus, be privy to the exemption. Here, however, petitioner has failed to meet its burden under Tax Law § 1132 (c) to prove that it purchased its interest in the Painting exclusively for the purpose of resale.” And: “The mere proof that an intended purpose for the purchase of the Painting was resale is insufficient to obtain the exemption [citation omitted]. It must be the sole purpose for the purchase.”

For the benefit of our readers who weren’t art history minors, “Femme a la Robe Verte” is the name of four noteworthy objets d’art: one by Claude Monet, two by Pablo Picasso, and one by Vincenzo Lego.

Monet’s interpretation (1866):

Picasso’s first interpretation (1946):

Picasso’s second interpretation (1956):

And, finally, Lego’s interpretation (last week at Tim Noonan’s house):

Matter of Zheng; Judge Galliher; Division’s Rep.: Brian Evans; Petitioner’s Rep.: Robert Lerner; Article 20 (by Chris Doyle)

The Division moved for summary determination in this cigarette tax penalty case. The issue was whether the Division properly imposed a penalty on Petitioner for possession of unstamped cigarettes. Critical to the determination of that issue was whether Petitioner was “in possession of” unstamped cigarettes. That should be a question with an easy answer, and it was.

In February 2017, the Division was made aware of an advertisement on the “WeChat” phone app for Asian cigarettes. The app included a phone number and pictures of packs of cigarettes.  Cigarettes are a source of cancer and revenue, so New York ordered surveillance and an undercover agent to investigate. The undercover agent made several purchases of cigarettes from Petitioner by calling the phone number on the app. At least two of the purchases resulted in the delivery of Marlboro cigarettes bearing a Virginia tax stamp to the undercover agent. Marlboro’s are quintessentially American and not Asian, so I expect Petitioner was, at the very least, guilty of false advertising.

Anyway, the team of tax investigators surveilled Petitioner loading cigarettes in and out of an Acura owned by an unidentified co-conspirator. What’s next? According to the Judge: “On June 28, 2017, CID-Cigarette Strike Force agents, together with officers of the New York City Sheriff’s Department and agents from Homeland Security, executed . . . search warrants.” Sheriff’s Deputies? Homeland Security Agents? I wonder if there was something other than the sale of unstamped cigarettes going on.

Anyway, the search warrants executed on the Acura and Petitioner’s apartment under surveillance produced the currency the undercover agent used to buy the last order of cigarettes, 959 cartons of unstamped cigarettes, some other money, some business records, some iPhones, and a computer.

Fast forward: Petitioner pled guilty to possession of cigarettes (a Class A misdemeanor), forfeited the cash found when the search warrants were executed, and paid an extra $5,000 in restitution. In his plea agreement, Petitioner admitted to owning the property seized when the search warrants were executed.

Fast forward again: the Division asserted the maximum $600 per carton penalty against Petitioner for possession of unstamped cigarettes. In his petition challenging the penalty, Petitioner alleged that he did not exercise dominion and control over the cigarettes seized in the apartment he rented and that the penalties are arbitrary and capricious.

Judge Galliher granted the motion for summary determination finding that Petitioner’s admissions in his plea agreement showed that he possessed unstamped cigarettes. The Judge also found Petitioner’s claim of unconstitutionality to be a “facial” constitutional claim beyond the jurisdiction of the DTA. I have little doubt that Petitioner was liable for a penalty. On the other hand, Petitioner must have used inexact language when setting forth his Constitutional claim, since it seems to me that whether a penalty in a particular instance is so arbitrary and capricious as to offend the Due Process Clause is an “as applied” claim. And as I have written before (here), I have concerns about the Division’s imposition and amount imposed of discretionary penalties when there are no regulations or other guidelines governing how that discretion is to be exercised.

Matter of Udoh; Judge Galliher; Division’s Rep.: Christopher O’Brien; Petitioner’s Rep.: pro se; Article 22 (by Chris Doyle)

This 22-page Determination boils down to the following three findings by the Judge:

  1. The DTA does not have jurisdiction to consider refund claims, including refund claims appearing on original returns, more than two years after they are deemed denied. And they are deemed denied six months after the returns are filed or deemed filed.
  2. The DTA does not have the jurisdiction to consider the Division’s applications of tax overpayments to prior years. The application of overpayments claimed as refunds to prior years is a collection matter, and DTA’s jurisdiction does not extend to collection matters.
  3. A petitioner bears the burden of proving a right to a refund. Since Petitioner did not produce any evidence supporting his entitlement to the earned income and dependent child care credits, the Division’s denial of Petitioner’s refund claims based on those credits was sustained.

Matter of 44th Enterprises Corporation et. al.; Judge Russo; Division’s Rep.: Osborne Jack; Petitioners’ Reps.: Amit Shertzer and Kevin A. Fritz; Articles 28 and 29 (by Joe Endres)

The sales taxation of exotic dancing and transactions conducted in adult entertainment establishments has a long history before the Division of Tax Appeals and the New York courts. This case presents the most recent chapter.

The ALJ determined that sales of scrip (an alternate currency used by patrons to tip and/or compensate entertainers at adult entertainment establishments) were subject to sales tax under three provisions of the Tax Law. First, the sales of scrip, which the ALJ found was sold by Petitioners’ employees and was used to purchase exotic dances and to pay for private room charges and entertainment in the private rooms, qualified as taxable admissions charges to a place of amusement. Second, the ALJ found the scrip sales qualified as taxable “charges of a roof garden, cabaret or other similar place.” Finally, the ALJ determined that the scrip sales constituted taxable charges by restaurants, taverns, or other establishments. The ALJ disagreed with Petitioners’ contention that the scrip was only used to pay gratuities to entertainers and that the Fair Labor Standards Act prohibited Petitioners from retaining any revenue from the sale of the scrip.

The ALJ next concluded that certain Petitioners were responsible persons required to collect and remit the sales tax on the scrip transactions, despite the fact that a third-party vendor issued and redeemed the scrip, and net income from the scrip sales was reflected in the other company’s bank deposits. The ALJ focused on Petitioners’ involvement with the scrip transactions, stating, “the record shows that petitioners’ employees were responsible for every step of the scrip transactions: petitioners’ employees sold the scrip to customers, ran the credit card transactions for the purchase of scrip, exchanged the scrip for cash, and recorded the scrip transactions in the daily ledgers.”

Finally, the ALJ found no merit in Petitioners’ estoppel and state and federal constitutional arguments, and sustained the imposition of penalties.

Matter of Shawn McKee Enterprises, Inc.; Judge Gardiner; Division’s Rep.: Adam Roberts; Petitioner’s Rep.: Jennifer Koo; Articles 28 and 29 (by Joe Endres)

This case examines the operation of New York’s resale exemption and the limits of the protection conferred by resale exemption certificates.

The issue in this case was whether Petitioner provided sufficient evidence that its sales of sulfuric acid to cesspool cleaning companies were sales for resale and not subject to tax.

Petitioner did not dispute that all of its sales were to contractors that provide cesspool cleaning services. Thus, the Judge found that Petitioner’s argument that it was selling acid that would be resold was contrary to the facts of the transaction. Cesspool cleaning companies generally do not sell acid to their customers. Rather, they use the acid in the performance of their taxable maintenance/cleaning services. And the tax law explicitly states that a sale of any tangible personal property to a contractor for “maintaining, servicing or repairing real property, property or land . . . is deemed to be a retail sale regardless of whether the tangible personal property is to be resold as such before it is so used or consumed . . . .”  Tax Law § 1101(b)(4)(i). Thus, the ALJ concluded that the sales of acid were not properly viewed as sales for resale.

The Judge then turned to a more interesting question: Even if Petitioner’s sales to a particular customer ultimately failed to qualify as sales for resale, could Petitioner escape taxation because it accepted resale certificates from the particular customer? The  Judge recognized that a vendor may generally escape sales taxation on sales for which the vendor accepts, in good faith, timely and properly completed resale certificates from their customer. Unfortunately for Petitioner, only one of the resale certificates in the record was for a transaction that occurred during the audit period. Petitioner claimed that other resale certificates were stolen from the business during a robbery (ed. if I ever turn to a life of crime, the last thing I am going to steal is sales tax exemption certificates). The Judge was unpersuaded and cited the fact that Petitioner was also missing resale certificates for the sales tax periods following the robbery.

Finally, the Judge concluded that the resale certificates were also not properly completed because they were provided by contractors. The implication is that any resale certificate provided by a “contractor” is per se invalid. But such a rule would appear to be inconsistent with other Tax Department pronouncements. For example, in Carolyn Mazzenga, CPA, TSB-A-01(1)S, a dealer of home improvement supplies, whose customers included homeowners, retailers, and contractors, asked if a resale certificate could be accepted in good faith if the word “contractor” or “contracting” appeared in the customer’s name. The Department concluded that the dealer could accept the certificates in good faith as long as the dealer did not have “actual knowledge” that the customer was a contractor and was purchasing the materials specifically to use in a capital improvement job or repair to real property. According to the opinion, “Where Petitioner's client accepts a resale certificate in good faith, it is under no duty to investigate or police its customers or to debate the taxability of the sales with such customers . . . . There is no provision in the Tax Law or the Sales and Use Tax Regulations that requires Petitioner's client to require further substantiation from its customer.” (internal citations omitted).

Contractors can wear two “hats” – a construction service provider and a retailer of tangible property (think pool cleaning companies that also maintain a retail store front that sells chemicals, floats, and other pool-related materials). When purchasing material that will be used exclusively in the retail side of the business, a contractor can purchase the material for resale. The business is not functioning as a contractor for purposes of this material, and, therefore, the resale certificate restrictions should not apply. We have seen the Division adopt this approach on audit.

Were it simply an issue of the customers being contractors, this case may have come out differently. But the untimeliness of the certificates, as well as a lack of any testimony from Petitioner that it exercised ordinary due care or took any steps, as the vendor, to ascertain the appropriate resale certificates, resulted in the Judge sustaining the Notice.

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