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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 August 1, 2019 (reporting on DTA cases published July 24 and 25)

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We’re in the “Dog Days” of summer now. But you wouldn’t know it from the DTA’s output, which this week includes three Tribunal decisions and four ALJ determinations. There’s a timie or two, but the cases addressed mostly substantive issues, and Matter of Catalyst Repository Systems, Inc. is a noteworthy decision.


Matters of The Executive Club LLC and Gans; Division’s Rep.: Jack Osborne; Petitioners’ Rep.: Alvan Bobrow; Articles 28 and 29.

Petitioner LLC operated an adult entertainment club in New York City. An admission charge was levied on patrons entering the club. An additional charge was levied on patrons who wished to go into private rooms to watch private dances. The Petitioners conceded that the aforementioned admission charges were subject to tax.

Entertainers in the club would perform personal dances for $600 an hour (umm . . . that’s in the same neighborhood of what I charge per hour for legal services, which makes me wonder about a lot of things). Payments to the entertainers could be made in cash or scrip. The scrip was sold by Petitioner LLC, which charged a 20% surcharge on each purchase. Petitioner LLC charged a 13% redemption fee when the entertainers presented the scrip for redemption. The scrip carried a legend which stated that the scrip could not be used for gratuities. But testimony demonstrated that the scrip was, in fact, also used to pay gratuities.

Petitioner LLC did not collect sales tax on the sale of the scrip since it viewed scrip sales receipts as non-taxable. On audit, the Division asserted that sales tax was due on the full amount received by the club for sales of scrip. The ALJ sustained the Division’s position, and this exception to the Tribunal ensued.

Cutting to the chase: the Tribunal sustained the Notices and the ALJ’s determination.

The Petitioners argued that the scrip was not taxable at the time it was sold to the patrons. Instead, the Petitioners argued that the scrip was like gift cards and that the tax should be determined based on what was received when the scrip was presented to a subsequent vendor (i.e. the entertainer). The Tribunal disagreed, ruling for the first time that even though the scrip is neither tangible personal property nor a service, Petitioner LLC’s “‘receipts from the sale of scrip are taxable as admission charges to a place of amusement’ and such admission charges include charges for the private dances.” (citations omitted) Therefore, the Tribunal reasoned, tax was due when the scrip was sold.

This part of the Tribunal’s decision is pretty interesting since it could be viewed as imposing tax liability on loyalty program benefits on the original vendor. For instance, if I go into my grocery store and buy $105 worth of potato chips and beer (eg.: I’m on my “summer diet”), and my grocery store says that for every $100 of groceries I purchase, I can get one gallon of free gas for every ten gallons of gas that I purchase from participating gas stations, doesn’t the Tribunal’s rationale lead to the conclusion that the grocery store just sold me gas and should have charged me sales tax?

In a different vein, the Tribunal’s analysis suggests that any purchase of currency could be taxed as an admission charge. Scrip is currency. The only other currency that could be used at the club was US dollars. So if Hans and Gunther from Hamburg get the club to convert their Euros to US dollars, would that conversion also attract sales tax under a logical extension of the Tribunal’s analysis?

Back to the decision. The Tribunal was unmoved by the Petitioners’ argument that the scrip could be used both for entertainment (taxable) and also gratuities (not taxable). The Tribunal sustained the ALJ’s finding that the Petitioners had not proven that any portion of the scrip was used for gratuities.

It seems to me that another argument that the Petitioner may have made was that the 20% surcharge on the purchase of the scrip was not taxable since the 20% was due regardless of how the scrip was used. However, given the antipathy shown to adult entertainment facilities by New York’s adjudicating institutions, I have my doubts regarding whether this argument would find a sympathetic ear.

Matter of the Estate of Phyllis Millstein; Division’s Rep.: Jennifer Hink-Brennan; Petitioner’s Reps.: Jason Blasburg and Jeffery Galant; Article 31.  

A charitable trust’s sale of real property was found by the Tribunal to not be exempt from the real estate transfer tax. The charitable trust was found to be an entity exempt from income and sales taxes by the IRS and the Division. However, the exemptions under the Article 31 real estate transfer tax (“RETT”) are much more constrained. As relevant to this case, conveyances by the United States, the State of New York, or any of their agencies or instrumentalities are exempt from the RETT. The Petitioner argued that it should be viewed as an instrumentality of the federal or state governments since its goals were the same as those of the government, its activities reduced the burdens of government, and the governments exercised extraordinary control and oversight over the Petitioner. Alternatively, the Petitioner argued that it was an agent of those governments. The Tribunal wasn’t buying what the Petitioner was selling. Absent clear entitlement to an exemption, taxpayers aren’t going to get an exemption. ALJ determination affirmed.

Matter of Catalyst Repository Systems, Inc.; Division’s Rep.: Clifford Peterson; Petitioner’s Reps.: Stephen Solomon and Kenneth Moore; Article 9-A.

Petitioner was a Colorado-based litigation support business that provided electronic document storage and management services. It took the position that its receipts were not from New York sources. Under the Division’s interpretation of the pre-2015 franchise tax statute, receipts from services were sourced using a “where performed” analysis—in this case, Colorado. But if the receipts generated were “other business receipts,” the Division historically construed the statutory “where earned” language as requiring a customer-based sourcing approach. In this regard, the Division had issued numerous advisory opinions supporting customer-based sourcing for “other business receipts.”

Anyway, the Petitioner took the position that its receipts were for the performance of a service (and not from unclassified non-service business activities) and applied the “where performed” receipts sourcing approach. On audit, the Division took the position that Petitioner engaged in an unclassified non-service activity that generated “other business receipts” that should be sourced in and out of New York based on the location of the Petitioner’s clients (i.e. the “where earned” approach).

The ALJ disagreed with the Division’s view that only personal services could give rise to service receipts. The judge found that the litigation support services performed by the Petitioner were, well, services, the receipts from which were to be sourced using the “where performed” approach. The Division filed an exception.

The Tribunal affirmed the ALJ’s decision, but the Tribunal’s analysis is something new. Contrary to the ALJ’s determination, the Tribunal found that the Petitioner did not sell services. Instead, the Tribunal found that the Petitioner provided a license to use intangible property (i.e. Petitioner’s litigation support software platform). The Tribunal found support for its conclusion in the form of agreement that the Petitioner used. The agreement did not mention services but, instead, required clients to pay the Petitioner for the right (i.e. a license) to access and use the Petitioner’s litigation support system. The Tribunal found that, inasmuch as the agreement was consistent with the substance of the arrangement between the Petitioner and its clients, it would be respected as not being an agreement for the provision of a service.  

The Tribunal’s finding that the Petitioner’s receipts were “other business receipts” should not have boded well for the Petitioner. However, instead of holding the receipts subject to customer-based sourcing, the Tribunal ruled that the location where an “other business receipt” is earned is where the work was done to generate the receipt. This is, in essence, the same as the “where performed” standard applied to service receipts. So, to the Tribunal, it wasn’t particularly relevant whether the receipt was from a service or an “other business receipt,” since in either case it was going to be sourced to Colorado.

In so ruling, the Tribunal disregarded a long line of Division Advisory Opinions to the effect that other business receipts needed to be sourced to the location of the taxpayer’s customers, stressing that “the cited advisory opinions are not persuasive because they offer no statutory or regulatory justification for the conclusion that receipts for digital transactions as described in the opinions are properly sourced to the customer’s location; they simply assert it . . . .”

But for the fact that the law was changed effective 2015 to make the distinction between unclassified service receipts and other business receipts largely academic, this would have been a major development. As it is, this case still may have implications for federal S corporations paying New York City’s GCT because the GCT still follows the pre-2015 sourcing rules.


Matters of Amona Deli Corp. and Mohamed; Judge: Law; Division’s Reps.: Adam Roberts in Amona Deli Corp. and Stephanie Scalzo in Mohamed; Petitioners’ Rep.: Pro Se; Articles 28 and 29.

In separate determinations, Judge Law found that the petitions filed by a business and its alleged responsible person were time-barred. Even though the petitions were not received by the DTA until September 7, 2018, the Petitioners were able to prove that they mailed their petitions on May 25, 2018. Unusual and Great! (Note to self: Don’t use UPS to send anything to the Division of Tax Appeals).

But, as it turns out, May 25, 2018 was long after the 90-day time limit had expired. The Division successfully proved both its standard mailing practices and that they were followed when: (1) on February 25, 2016, it mailed a Notice of Determination to the corporate Petitioner at its last known address; and (2) on both June 6, 2014 and February 29, 2016, it mailed Notices of Determination to the individual Petitioner at his last known address. Likewise, the Division was able to show that the Conciliation Default Orders had been properly mailed to the Petitioners at their last known addresses on October 14, 2016.

Petitioners’ petitions were filed long after the 90-day time limits expired for challenging the Notices and the Conciliation Orders. Cases dismissed.

Matter of Anika USA, Inc.; Judge: Galliher; Division’s Rep.: Michael Hall; Petitioner’s Reps.: Arthur Morrison and Irina Herman; Articles 28 and 29.

Petitioner argued that the Division was not entitled to resort to an indirect audit method because: (1) the Division did not clearly request records from the Petitioner; and (2) the Petitioner provided satisfactory records from which non-taxable sales may have been proven.

Petitioner operated a watch/jewelry store in Manhattan. For the periods at issue, it reported roughly $550,000 of total sales, but taxable sale of less than $30,000. The Division notified the Petitioner that it was being audited and sent with the audit notification letter an Information and Document Request #1 (“IDR #1”) listing the records the Division wanted to see. It was the typical list. The Petitioner’s representative asked for additional time to respond, but then reneged on the extended deadline. The Division made “several” more requests for records both by telephone and in writing, but the records were not forthcoming. In light of the lack of records, the auditor calculated the tax due by treating all of the Petitioner’s sales as being taxable. Eventually, a Notice of Determination was issued asserting the additional tax due as calculated by the auditor.

At the hearing challenging the Notice, the Petitioner produced: (1) a work paper from a prior sales tax audit showing that some sales were deemed nontaxable in said prior audit, (2) a spreadsheet purporting to show for the prior audit period that certain nontaxable invoices were accepted, and (3) 31 Resale Certificates, 28 of which were undated. Petitioner did not provide any evidence that the Resale Certificates related to sales made during audit period at issue. Petitioner also offered evidence that certain of its financial records had been seized by the District Attorney’s office in connection with a criminal investigation. The records were, however, for periods which had ended prior to the audit period at issue in the hearing. How these records could have possibly been helpful to the Petitioner’s case is a mystery and disclosure in a DTA hearing that Petitioner had been the target of a criminal search warrant seems ill-advised at best.

The judge had little difficulty finding that “the Division made numerous clear and unequivocal written and oral requests for petitioner’s books and records, including records in substantiation and verification of petitioner’s claimed nontaxable sales. In response, petitioner failed to provide any records pertaining to the period at issue.” The judge also found that the records relating to the prior audit had little or no relevance or probative value with respect to the audit periods at issue in the hearing. Ultimately, the judge found that the Petitioner failed to prove that any of its sales were exempt and thus sustained the Notice. Unsurprisingly, penalties were also sustained.

Matter of Black; Judge: Connolly; Division’s Rep.: Stephanie Lane; Petitioner’s Rep.: David Cherubin; Article 22.

This one left a bad taste.

Petitioner was the president and 51% owner of the issued shares of NECC, Inc. (“NECC”), which was a drywall contractor. The Petitioner’s investment in the business was no more than $200,000. The Petitioner was a minority and his business sought and received certification as a minority business enterprise (“MBE”). A significant ownership interest (44%) in NECC was owned during the periods at issue, by A. Nastasi, who also controlled a larger drywall company called NAA. Mr. Nastasi’s father helped fund NECC in its early years and the Petitioner testified that the father and another NAA employee handled financial matters for NECC during those early years. Later, after the father passed away, A. Nastasi handled the financial affairs for NECC at NAA’s Hauppauge offices.

NAA directed certain subcontracts to NECC, presumably to help NECC out, but also presumably to satisfy NAA’s minority participation requirements in certain projects.

While A. Nastasi did the financial and office work, the Petitioner did the field work, including managing the projects and making sure that they were completed and billed. While it is unclear how it happened, NECC developed a huge debt (more than $4 million) to NAA and A. Nastasi. As a result of that debt, the Petitioner was compelled by A. Nastasi to enter into an agreement under which A. Nastasi could force the Petitioner to sell all of his interest in NECC to A. Nastasi—on demand by A. Nastasi—for $26. Ultimately, A. Nastasi made such a demand, and the Petitioner was forced out of NECC.

After a thorough analysis of the applicable case law, Judge Connolly held that the Petitioner was a responsible officer who willfully failed to assure that NECC satisfied its employment tax withholding obligations for the periods prior to the Petitioner’s ouster. This determination was made in spite of the following: (1) a finding by the IRS that the Petitioner should not be held liable as a responsible person for NECC for the tax quarters immediately preceding the ones at issue here; (2) sworn testimony (by affidavit) by A. Nastasi that “[n]either [petitioner] (President/CEO for [NECC]) nor any other employee of [NECC] exercised control over the corporate disbursements (e.g., payments for vendors, creditors, union benefits and obligations, all payroll taxes, employer compensation and benefits, etc.),” and that “[a]s Director/Secretary-Treasurer of [NECC], [A. Nastasi,] had ultimate authority and absolute control over the financial disbursements of the company;” (3) testimony by A. Nastasi’s attorney that A. Nastasi “was in complete financial control of NECC;” (4) testimony by NECC’s controller that A. Nastasi determined which of NECC’s liabilities would be paid; and (5) less than a year before the periods at issue the Port Authority of New York and New Jersey decertified NECC as an MBE because of the “substantial amount of control over the operations of [NECC]” exerted by A. Nastasi.

I understand that the case law is pretty one-sided. But I think that the judge gave too little weight to two facts and their implications. Yes, on paper, the Petitioner was the controlling shareholder. But the Petitioner’s nominal control was negated by the agreement that allowed A. Nastasi to force the sale of the Petitioner’s shares for next-to-nothing. And the extraordinary level of debt owed to NAA by NECC (more than $4 million owed compared to only $200,000 invested by Petitioner) suggests that NAA/ A. Nastasi had practical control over NECC.

While I cannot quibble with the judge’s statement of the applicable precedent, based on the facts found, I simply cannot accept that this Petitioner had the level of control sufficient to be a responsible officer. The Petitioner should file an exception.

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