Sales Tax Cases from the TiNY Blog for the Week of February 13, 2020

Here are the sales tax cases from the TiNY Blog for the week of February 13, 2020. 

Matter of 608 Franklin, LLC, Judge: Maloney; Division’s Rep: Howard Beyer; Taxpayer’s Rep: Herschel Friedman, CPA; Articles 28 and 29 (by Joe Endres).

This case appears to be a sister case to a determination issued about a month ago.  The taxpayer is different, but the ALJ, the Division’s counsel, and taxpayer’s counsel are all the same.  And the case was decided based on submitted documents without a hearing.  You can read our review of the prior case (Matter of Evergreen Gardens, LLC) here.  Finally, the determination here reads like a carbon copy of the prior case. 

The issue in the case was whether security services provided at a real property construction project that constituted a capital improvement are taxable.  And as in the prior determination, the ALJ relied on a 1996 Appellate Division case that concluded that such protective services are, indeed, taxable.  The ALJ relied on the following analysis from that case: “that Tax Law § 1105(c)(8), which specifically imposes a sales tax upon security services of every nature, takes precedence over the more general language of Tax Law § 1105(c)(5)” (the provision that exempts services to real property in capital improvement projects).  Thus, the ALJ, following the Appellate Division’s lead, concluded that since Tax Law § 1105(c)(8), unlike Tax Law § 1105 (c)(5), does not contain a capital improvement provision, the “end result test” does not apply.

But is this really correct?  As the Petitioner pointed out in the case, the Division has applied the capital improvement analysis and tax treatment to 1105(c)(7) (interior decorating services) despite the fact that this section contains no capital improvement language.  See TSB-A-08(30)S and TB-ST-400; but see TSB-A-91(76)S.  The weakness in the argument might be that to be nontaxable, the taxpayer that provides the interior decorating services also has to implement those design service (i.e., do the installation).  When that happens, in the Division’s view, the taxpayer ceases to be an interior designer and becomes a contractor, causing 1105(c)(3) and 1105(c)(5) (i.e., the sections of the law that contain the capital improvement language) to come into play.  According to the decision, the Petitioner also cited the L & L Painting case and the Division’s analysis of “temporary facilities,” but Tax Law § 1105(c)(8) never factors into this authority. 

So while we think Petitioner makes an interesting point, it might be a bit of a longshot. 

Matter of Summer Pavilion Corp., Judge: Behuniak; Division’s Rep: Elizabeth Lyons, Esq.; Taxpayer’s Rep: Gary Kanaley, Esq.; Articles 28 and 29 (by Joe Endres).

In this order, the ALJ considered Petitioner’s motion for summary determination.  To win a motion for summary determination, the requesting party must “make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case.”  So the initial question here is whether Petitioner offered sufficient evidence to support its motion.  Unfortunately for Petitioner, the ALJ didn’t think so.

During the audit of Petitioner, Petitioner executed a “Test Period Audit Method Election” form.  This form allows the Division to review a taxpayer’s records for a limited portion of the audit period, and then extrapolate any results (liability and credits) to the rest of the audit period.  In our experience, most audits proceed in this manner and a test period typically benefits the taxpayer by limiting the amount of records it must produce, which, in turn, usually limits the length of the audit.  

In the present case, the Division determined that Petitioner’s records were inadequate and, “based on available information,” determined that Petitioner owed additional sales tax for the audit period.  So the question in this case is whether the Division properly determined that Petitioner’s records were inadequate.  Petitioner’s representative and an associated CPA submitted affidavits asserting that Petitioner maintained adequate records, but they did not submit those records as part of the motion for summary determination.  Because the ALJ could not determine whether Petitioner had, in fact, maintained adequate records for the test period, he concluded that Petitioner did not meet its burden of establishing a prima facie case in support of summary determination. 

Though the ALJ could have stopped there, he concluded that even if Petitioner had made a prima facie case for summary determination, its motion would still have to be denied because the Division’s response to the motion raised a material question of fact regarding the test period.  Because the executed test period election form did not specify a particular period of time as the test period, the ALJ concluded that the Division appropriately established that a material issue of fact exists regarding the length of the test period. 

We here at TiNY love a good sales tax audit methodology case, and hope we get to read a full determination on the merits at a later date….

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