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State and Local Tax Blog

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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 August 23, 2018 (covering DTA cases from August 16)

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The stream of cases rolling out of the DTA has slowed to a trickle as the summer wanes.  There’s only one ALJ determination today.

Matter of Jefferson Hotel Associates LLC; Judge: Galliher; Division’s Rep: Robert Maslyn; Petitioner’s Rep: Robert Halpin; Articles 28 and 29.  Some say the three most important things in real estate are location, location, and location.  But sometimes, timing is important too. 

In August 2012, an IDA granted sales tax exempt status to Petitioner in connection with a hotel it was building.  At the time, the law did not place any limit on the amount of the sales tax benefits an IDA-induced project developer like Petitioner could receive.  However, in compliance with the then-existing statutory requirements, Petitioner estimated that the sales tax savings would be around $223,200.  The project went beyond the term of the original exemption, and the IDA extended the term twice; once in December 2012 and once in February 2014.  The Hotel was completed in 2014.  And when the dust settled, due to cost overruns, the actual sales tax benefit claimed by Petitioner was $253,359.96.

No problem, right?  The law at the time the IDA induced the project required only an estimate of the sales tax benefit, right?  And for a contractor to get within 15% with its first estimate is pretty good, right?  (I mean pretty good for a contractor; I have a kitchen remodel story that I cannot tell without expletives galore and is thus unsuitable for the TiNY Report).

Wrong.

The Legislature added new requirements for IDA deals in 2013.  One of those new requirements was that project operators could not receive benefits in excess of those that had been authorized by the IDA.  The new requirements applied to projects induced on and after March 28, 2013, and to any additional benefits resulting from any amendment with respect to an IDA project induced prior to March 28, 2013.  Petitioner argued that its February 2014 extension of its agreement with the IDA was not an “amendment.”  Judge Galliher disagreed, holding that the extensions permitted Petitioner to access additional economic benefits and was, therefore, an amendment.  Petitioner also argued there were no additional benefits received since at the outset of the IDA agreement the estimated sales tax benefit of $223,200 was not a hard cap.  But Judge Galliher didn’t buy that argument either since the forms filed by the IDA with the Department expressly stated that the costs of the project were limited to those detailed on the form (which reflected the original estimates).  So the Judge permitted the Division to claw back the approximately $30,000 sales tax benefits claimed by Petitioner that was in excess of its estimate.

Total Monday-morning quarterbacking here, but maybe a better approach would have been for Petitioner to argue that the IDA authorized an unlimited sales tax benefit at the time of the original agreement.

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