Sales Tax Cases from the TiNY Blog for January 11, 2024

Here are the sales tax cases from the TiNY Blog for the week of January 11, 2024.

ALJ Orders

Matter of Pollo D. Maria, Corp. (ALJ Russo 12/21/2023); Div’s Rep. Elizabeth Lyons, Esq.; Pet’s Rep. pro se; Articles 28 and 29.  The Division moved for Summary Determination on the basis that Petitioner did not file a timely request for conciliation conference following the issuance of a Notice of Determination” dated April 8, 2021.  Petitioner filed its BCMS request on September 16, 2022. Judge Russo denied the motion finding that the Division failed to show that the standard procedures were followed when the notice was issued to Petitioner. There was clearly a mix-up about the notice numbers being challenged, and the Judge found that the confusion required a hearing to clear up the resulting uncertainty.

ALJ Determinations

Matter of Mitchell (ALJ Law, 12/07/2023); Div’s Rep. Laura Krzeminski, Esq.; Pet’s Rep. Nicholas Nesi, CPA; Articles 28 and 29. Judge Law found that the Division proved both its standard mailing practices and that they were followed when the Division mailed a Notice of Determination to Petitioner at his last known address on June 18, 2020. Therefore, Petitioner’s petition dated May 3, 2022, was more than a year too late. As a consequence, the Judge dismissed the petition. 

Tribunal Decisions

Matter of Gelco Corporation (Tax Appeals Tribunal, 12/21/2023); Div’s Rep. Anita Luckina, Esq.; Pet’s Rep. Peter Larsen, Esq. and David Rosen, Esq.; Articles 28 and 29.

Petitioner entered into vehicle leases in which the lease amount paid was subject to adjustment at the end of leases. For instance, cars returned at the end of a lease in better shape with lower miles would be entitled a “terminal rental adjustment clause” (“TRAC”) payment by Petitioner to the lessee to reflect the higher residual value of the returned vehicle. This would often result in a refund to the lessee of some of the tentative periodic rental payments made by the lessee. If, on the other hand, the lessee was required to pay more (i.e., because the car was in worse condition than projected), then Petitioner would collect an additional payment from the lessee with sales tax and remit the sales tax to the Division. If it was found that the lessee overpaid (i.e., because the residual value of the vehicle was higher than estimated), Petitioner repaid the overpayment, including the sales tax it had collected on the overpayment. Thereafter, Petitioner took a credit on its sales tax return for the sales tax it repaid to the lessee.

The Tribunal agreed with the ALJ that Petitioner was not entitled to refunds of the sales tax it refunded to its Lessees. The Tribunal noted that the Legislature had adopted particular rules for leases of commercial vehicles where the leases included options to extend the lease. The Tribunal cited Tax Law § 1111(i)(B) as support for the proposition that it was proper for the Division to insist on the payment of sales tax on the anticipated lease payments to be received over the first 32 months of the leases, and that vehicle leases are treated as unique transactions subject to sales tax at the time the lease is entered into. The Tribunal found that the payment of sales tax on the required lease payments was proper, and that repayment of certain lease payments upon the termination of certain leases should not influence the sales tax result. So, the Tribunal sustained the Division’s denial of a refund for the sales tax remitted to Petitioner’s customers upon recalculation of the lease payments.

I appreciate where the Division and Tribunal are coming from given the language of the statute under which “all receipts due or consideration given or contracted to be given under such lease for the first 32 months, or the period of the initial term if greater, of such lease shall be deemed to have been paid or given and shall be subject to tax [at the inception of the lease].” But I wonder if this language also means that additional payments made by lessees upon termination of the leases should NOT be subject to sales tax. If the residual value of a vehicle is lower than estimated, then the lessees were required to pay more upon termination of the lease. But that additional amount results from a recalculation of the previous lease payments, all of which are, by statute, “deemed to have been paid.”  If all of the payments are deemed to have been paid at the time the lease was entered into, then, arguably, no additional sales tax should be due on the lease termination “true-up payments” made by the lessees.

The Tribunal also noted that the Legislature amended the statute to explicitly permit sales tax refunds related to TRAC payments made on and after June 1, 2022.

Comment