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State and Local Tax Blog

About This Blog

Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group. The weekly reports are intended to go out within 24 hours of the Division of Tax Appeals’ (DTA) publication of 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.  

TiNY Report for April 2, 2020 (reporting on DTA case issued March 26)

By on

I don’t know about you, but days of the week have ceased to have meaning to me. I don’t drive to and from the office Monday to Friday and then spend my weekends on the couch catching up on work that I didn’t get to during the work week. Now each day just kind of blurs into the next – and now I know that I’m not alone in this feeling, the DTA is right there with me. DTA isn’t following its routine of posting cases only on Thursday, so this can only mean one thing, the days of the week don’t matter to the DTA either. Needless to say, we’ll just keep updating the TiNY Report every time something gets posted, like today – just don’t ask me what day of the week it is.

Matter of ERW Enterprises, Inc.; Judge: Galliher; Division’s Rep.: Brian Evans; Petitioner’s Reps.: Jeffrey Reina; Application for costs under Tax Law § 3030 (by Emma Savino)

We wrote about the Decision here back in June, and now Petitioner is back with an application for costs. This was a fairly fact intensive Decision, so I’ll try to whittle down the facts a bit.

ERW Enterprises (“Petitioner”) was wholly-owned by Eric White, who was a member of the Seneca Nation of Indians. Petitioner was a construction company that does heavy site work, so it mainly employed heavy equipment operators, carpenters, and electricians, and it didn’t engage in the business of tobacco trading or wholesale. Petitioner’s only connection to this matter is that the vehicle which was used to transport unstamped cigarettes at issue was registered to it. ERW Wholesale (“Wholesale”) operated a tobacco wholesale business, and it was also wholly-owned by Mr. White. Mr. White’s business license to operate as a tobacco wholesaler was issued by the Seneca Nation, and Wholesale’s warehouse, equipment and facilities were located on a Seneca Nation Reservation. Wholesale was solely regulated by the Seneca Nation of Indians. All of Wholesale’s customers were Native Americans, and it dealt solely in Native American manufactured tobacco products, but Wholesale was not a New York licensed wholesaler or stamping agent.

Long story short, Wholesale received an order for cigarettes and it agreed to a do a drop-shipment. The cigarettes came in sealed cases and were manufactured by a Native American owned business. The cigarettes were put on a box truck that was registered to Petitioner, and the registration was in the process of being changed to Wholesale. The guy driving the truck was an employee of Wholesale and he was given invoices for the shipment and bills of lading, but neither contained any information that would suggest that Wholesale was transporting any particular kind of cigarettes or that they contained New York tax stamps, but the invoice noted that the cigarettes were “Exempt.”

On his way to drop off the cigarettes, the driver of the truck blew through a police checkpoint where they were inspecting commercial trucks, and he was then stopped by a state trooper who made him return to the checkpoint. At the checkpoint, the truck, eventually (there were some twists and turns here), got searched and the troopers opened a sealed case, pulled out a pack of cigarettes, and discovered that there were no New York State tax stamps. Ultimately, the troopers seized all of the cigarettes and allowed the driver to leave.

The Division issued Notices of Determination to Petitioner in the amount of $1,259,250.00 for the tax period ended December 3, 2012 for being in possession and/or control of unstamped cigarettes. At the time of the incident, a fine of up to $150 per carton could be assessed against anyone in possession of unstamped cigarettes in New York.

The Tribunal found that the Notice of Determination issued to Petitioner should be cancelled based on Petitioner’s lack of possession or control of the cigarettes. The Tribunal cancelled the Notice because Petitioner was not in the tobacco business, in direct control of the truck, or holding the title to the truck. Further, the truck was only occasionally used by Petitioner, and the registration was being transferred to Wholesale. Also, it was determined that driver was employed by Wholesale and not by Petitioner.

On June 27, 2019, Petitioner timely filed an application for costs under Tax Law § 3030 in the amount $62,412.75 which consisted of over 200 hours of legal fees for 5 different attorneys as well as services from law clerks and paralegals. The attorneys’ hourly rates were between $275 and $325. Along with the application, Petitioner submitted affidavits from each of the attorneys which included their experience level, what their fees consisted of, and that their hourly rate was reasonable within the Buffalo, New York area, and is similar to the rates in Buffalo for attorneys with the same level of experience (ed. being in Buffalo, I can confirm this).

Petitioner’s application also included an affidavit from Mr. White which stated that (1) Petitioner was the prevailing party and thus entitled to costs; (2) Petitioner’s net worth did not exceed $7 million and it did not have more than 500 employees when the petition was filed.

The Judge determined that Petitioner was the prevailing party because it prevailed with respect to the amount in controversy since the Notice was cancelled. However, the Judge found that the Division’s position was substantially justified, and thus Petitioner was ineligible for an award of costs. The Division was substantially justified, according to the Judge, because the Notice was based on the Division’s assertion that Petitioner was in possession/control of unstamped cigarettes, and when the Notice was issued (1) who the driver was employed by was uncertain; (2)  the truck was used by both Petitioner and Wholesale; (3) the truck was still registered to Petitioner at the time of stop and it had Petitioner’s name and DOT number on the sides of the truck; (4) the truck was titled to and owned by Mr. White; and (5) there was no evidence that Petitioner presented all relevant information under its control before the Notice was issued. Rather, the Tribunal’s ruling was based on facts developed at the proceedings after the Notice was issued.

The Judge noted that because the Division was substantially justified, whether Petitioner established that: (1) its net worth was less than $7 million, (2) it had less than 500 employees, and (3) it was entitled to costs in excess of the statutory $75 per hour, were moot issues. But, he ruled on these issues anyway in the interest of completeness. Thus, the Judge determined that, since the statute says that Petitioner must “show” that its net worth doesn’t exceed $7 million and did not have more than 500 employees, the submitted affidavit was insufficient. Finally, the Judge found that Petitioner was entitled to the number of hours claimed, but not to a rate above the statutory $75.

I do not dispute the result. But there are certain aspects that are of concern. First, the Judge relies heavily on the Division’s lack of certainty as to the employer of the driver of the truck. If this was such a key issue, shouldn’t the Division have confirmed that fact before it issued the notice? After all, employers are required to submit to the Division Forms IT-2104 for new employees within 60 days of the start of their employment. Did the Division check these? Did the Division ask Mr. White which entity employed the driver, or did the Division simply rely on equivocal statements of a 22-year old driver as recorded (maybe inaccurately) by a third-party investigator who didn’t even work for the Division and whose credibility as a witness has never been tested? Who should bear the burden of the Division’s failure to even try to obtain accurate information from a reliable source (like the Division’s own records)?

And I disagree with one detail of the Judge’s analysis supporting his decision that something more than $75 per hour was inappropriate. Even in the absence of a “special factor,” the Legislature explicitly provides for using a higher hourly rate if there has been “an increase in the cost of living.” The statute was enacted in 1997. I’m pretty sure the cost of living has increased since then. Admittedly, it may be that Petitioner didn’t offer any proof on the cost-of-living issue.

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