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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 December 10, 2020 (covering DTA cases issued December 3)

By on

‘Tis the season for giving, and the DTA was in the giving mood last week, lavishing us with eight determinations (one for each day of Hanukkah) and two orders (one for each Buffalo Bills win in December—so far). 

In this installment, Joe Endres tries his hand at the art of the obscure pop culture reference.  And we’re taking two new authors, Katie Piazza and Tyler Gately, for test drives.  Enjoy!


Matter of MarketShare Partners, LLC; Division’s Rep.: Stephanie Scalzo; Petitioner’s Reps.: R. Gregory Roberts, and Jeremy Gove; Articles 28 and 29 (by Joseph Endres)

After weeks of being absent from TiNY (in part due to Chris Doyle’s encroachment on my territory), I’m back in a big way.  The Division of Tax Appeals issued a whopper of a sales tax determination – 55 pages!  It addresses one of the most perplexing issues in all of New York sales tax – the proper characterization of a technology product – is it a nontaxable service, taxable information, or taxable software?  Let’s dive in. 

Petitioner was a marketing analytics firm that enabled large companies to measure, predict, and improve their marketing spend impact.  In other words, better marketing means more sales, and Petitioner claimed to help customers optimize their marketing dollars.  Petitioner sold four products: (i) advertiser service, (ii) media company service, (iii) white paper service, and (iv) advertising agency product.  Below is a review of each product, and its corresponding taxability according to the determination.  

  1. Advertiser service: Despite the presence of licenses to use software in Petitioner’s contracts for advertiser services, the Division and Petitioner agreed that the sales under these contracts should be treated as services for sales tax purposes and not as sales of software (e., tangible personal property).  The Division, however, viewed this service as a taxable information service because Petitioner collected data, built models based on that data, and then disseminated information and recommendations derived from those models to the customer.  Petitioner, on the other hand, viewed it as a nontaxable consulting service because the goal of the service was to provide the customer with advice and recommendations about how to apply analytic marketing to resolve the customer’s toughest marketing questions.  Ultimately Petitioner’s view of the product carried the day with the Judge who found that the contracts at issue obligated Petitioner to provide advertiser service customers with guidance on how to adopt analytic marketing as their marketing strategy and advice on how to make particular marketing decisions based on analytic marketing.  In other words, a service that requires judgment and the provision of advice does not qualify as a taxable information service. 

We wholeheartedly agree with this conclusion.  A memo I provide to a client advising whether or not their product is subject to NY sales tax should not become a taxable information service simply because I provide copies of the law, regulations, and interpretive authority on which my advice is based.  

  1. Media company service: This service was similar to the advertiser service detailed above, but it was for a different customer base.  Here, Petitioner sold the same advertiser service to media companies, except that this service also contained an additional element in that the media company customers could also have Petitioner show their clients “how well those media companies perform[ed], and how the different properties that the media company own[ed] performed for the specific advertisers.”  The Judge applied the same analysis as above to conclude that, rather than just providing the information requested by the customer, Petitioner helped its media company customers determine exactly what models should be developed and identified how analytic marketing could be used to improve the customer’s marketing function.  Petitioner then took its conclusions and experience and helped sell the media company to advertisers.  Thus, this was deemed to be a nontaxable service.  

Note that for one contract, classified as a media company service, the engagement was more limited and required only that Petitioner provide a “model rebuild” and access to its software platform.  This transaction was held to be a taxable information service. 

  1. White paper service: The deliverable for this service was a white paper providing information about the effectiveness of different types of advertising media on different industry categories.  According to Petitioner, it generated insights and recommendations by engaging in the same activity it conducted when providing its marketing analytics service, with the only difference being that the insights were provided in white paper form.  Thus, Petitioner argued that if the marketing analytics service is nontaxable, the white paper should be as well.  The Judge, however, concluded that Petitioner did not prove that the white papers followed the same process as the marketing analytics service.  Moreover, the Judge was unable to determine the balance between the general information and data contained in the white papers and the recommendations because no examples were placed in the record and there was no knowledgeable testimony on the subject.  Thus, this offering was deemed to be a taxable information service because Petitioner failed to satisfy its burden to prove otherwise.  

This feels a bit like a missed opportunity.  

  1. Advertising agency product: The parties agreed that the product that Petitioner sold to advertising agencies qualified as prewritten software.  This software allowed advertising agencies to run marketing scenarios for their own clients.  This seems like a pretty straight-forward sale of software, but Petitioner made an interesting argument that had the potential to undermine much of how New York State taxes software.  Petitioner argued that no taxable sale occurred within New York when it made its software platform, located on a server out-of-state, available to a customer who used it over the internet while located in New York.  This involved a pretty technical argument that parsed various statutory and regulatory definitions and case law to show that customers never received exclusive control of the software product, which, according to Petitioner, was a requirement of a taxable transaction.  We’ll likely do a deep dive on this topic in our sales tax blog, indeed, we have previously addressed this issue, but here it is sufficient to say the Judge didn’t buy the argument and found that customers received sufficient control to view the transaction as a taxable software license.  

Matter of Cohen, et al; Division’s Rep.: Tobias Lake; Petitioners’ Rep.: Julia Martin; Article 22 (by Joseph Endres) 

The powers-that-be (and by that I mean Editor-in-Chief Doyle) have allowed me to recap a personal income tax case because it results from a disagreement over the operation of the state’s Brownfield Tax Credit Program (“BTCP”), a specialty of mine.  I know EIC Doyle loves brevity, and a full review of the BTCP to put this case in context would certainly run long.  I also know that EIC Doyle loves “The Princess Bride” and has referenced it extensively in TiNY (see e.g., here, here, and here).  Now, I want to do a good job on this bonus recap, so I’m going to play to the crowd (of one) and use an Inigo Montoya quote to describe my approach here: 

Let me explain . . . No, there is too much. Let me sum up. Buttercup is marrying Humperdinck in a little less than half an hour, so all we have to do is get in, break up the wedding, steal the Princess, and make our escape after I kill Count Rugen. 

So here’s my “Inigo Montoya” recap of the BTCP: You get a set of refundable remediation tax credits for remediating contaminated land.  These credits are based on the amount of your remediation costs.  You also get a set of construction refundable tax credits for developing on the remediated land.  Nearly all hard and soft construction costs that go into your basis for the new building can be used in calculating the second set of tax credits.  Like Inigo, I left out some important details, but you get the picture.  

Here, the dispute was whether a “leasing incentive fee” should be included in the construction costs giving rise to the construction credits.  Despite the fact that soft/indirect costs, including development fees, can generally be included in the calculation of the construction credits, the problem here was that Petitioners failed to substantiate their claim that the leasing incentive fee constituted a development fee, or any other indirect cost that would be properly allocable to the property.  And as we have seen previously, the issue boiled down to a simple proof problem.  According to the Judge, other than a general statement from an interested party in an affidavit (not even live testimony subject to cross-examination), there was no evidence that the $5.7 million fee at issue was tied to the development of the property.  Given the large amounts at issue, it is very unusual to not have an agreement that clearly describes why the fee was paid – in other words, how the fee relates to the development of the site.  This proved to be fatal and nearly half the claimed credit was wiped out.  

Perhaps the most interesting, and potentially concerning, aspect of this case is the fact that State tax auditors and the Judge seemed to have done a deep analysis of the Internal Revenue Code and federal authority to come to the conclusion that the “leasing incentive fee” was not properly included in the building’s capitalized costs.  Let that sink in . . . .  A state auditor analyzed the federal Internal Revenue Code to disallow state tax credits.

“Inconceivable!”, you might respond.  But we’re starting to see more of these federal issues arise in NYS income tax audits, whether they be in the tax credit context, as here, or just simple reviews of “above the line” deductions.  The concern is having auditors delve into issues that might be outside their traditional training and expertise.  In other words, we’re worried that we’ll start having to respond to auditors using another famous phrase from Inigo, “You keep using that word. I do not think it means what you think it means.”  Only time will tell if state auditors are going to start using federal tax concepts and terms incorrectly to increase state tax liabilities.  If so, you’ll eventually read about it here in TiNY.  And knowing our editor, probably through some obscure pop culture reference that no one under the age of 40 will understand.  

Matter of Tayb; Judge Law; Division’s Reps.: Mary Hurteau; Petitioner’s Rep.: pro se; Article 22 (by Katie Piazza) 

The Division issued Petitioner a Notice of Deficiency dated January 24, 2019. Petitioner filed his request for conciliation conference via fax on August 15, 2019. BCMS issued an order dismissing the request as untimely. On September 27, 2019, Petitioner filed a timely petition in protest of the conciliation order, but did not respond to the Division’s motion for summary determination. The Judge found that the Division proved both its standard procedures and that they were followed when it mailed the Notice to Petitioner’s last known address on January 24, 2019. The Judge sustained the dismissal of Petitioner’s request for conciliation conference as untimely and granted the Division’s motion for summary determination. 

Matter of Priester; Judge Law; Division’s Reps.: Michele Milavec; Petitioner’s Rep.: pro se; Article 22 (by Katie Piazza) 

The Division issued Petitioner a Notice of Deficiency dated July 2, 2019. Petitioner filed his request for conciliation conference via fax on January 15, 2020. BCMS issued an order dismissing the request as untimely. On February 14, 2020, a timely petition was filed in protest of the conciliation order.  The petition was signed by Petitioner’s representative, Jason Pinto.  Petitioner attached to the petition a Power of Attorney and Declaration of Representative (IRS Form 2848) authorizing Mr. Pinto, an enrolled agent,  to represent Petitioner for the year at issue. On April 13, 2020, the Division contacted the Division of Tax Appeals to inform it that the IRS confirmed that Mr. Pinto was not an enrolled agent.  Consequently, Petitioner was asked to sign the petition and was informed that Mr. Pinto would be removed as his representative until Mr. Pinto’s qualifications were provided. However, Petitioner never signed the petition nor were Mr. Pinto’s qualifications further established.  In August, the Division moved for summary determination. 

First, the Judge denied the Division’s motion to dismiss for failure to have a correct signature on the petition.  The Judge found that Mr. Pinto was Petitioner’s representative at the time the petition was filed, even though Mr. Pinto was not authorized to appear on Petitioner’s behalf in a proceeding before the Division of Tax Appeals. 

Second, the Judge found that the Division proved both its standard procedures and that they were followed when it mailed the Notice to Petitioner’s last known address on July 2, 2019. The Judge sustained the dismissal of Petitioner’s January 15, 2020 request for conciliation conference as untimely and granted the Division’s motion for summary determination. 

Matter of Al Waqedi; Supervising ALJ Friedman; Division’s Rep.: Christopher O’Brien; Petitioner’s Rep.: pro se; Article 22 (by Joe Tantillo) 

The Division proved both its standard mailing procedures and that they were followed when it mailed, on August 2, 2019, the conciliation order to Petitioner’s last known address. Having established that the conciliation order was properly mailed, it was incumbent on Petitioner to file a petition within 90 days thereafter. Accordingly, the petition, filed by Petitioner on November 26, 2019, was late, so Judge Friedman dismissed the petition. 

Matter of Burdier; Judge Connolly; Division’s Rep.: Christopher O’Brien; Petitioner’s Rep.: pro se; Article 22 (by Joe Tantillo) 

Petitioner filed a petition protesting the Division’s disallowance of her claimed Empire State Child Credit (“ESCC”) and state school tax credit, amongst other claimed credits.  Judge Connolly allowed Petitioner the two named credits, but otherwise denied the petition. 

Petitioner failed to meet her burden proving entitlement to the claimed household credit, New York State, and New York City earned income credits because she could not prove by clear and convincing evidence the amount of her earned income in 2016. 

However, Petitioner proved that one of the two dependents listed on her 2016 tax return met both the age and residency requirement to qualify for the ESCC. The Division disputed that Petitioner satisfied the residency requirement, but its argument was rejected because Petitioner’s testimony that they had lived at her home address all their lives was supported by historical records from New York City Public Schools. 

As for the state school tax credit, Petitioner proved she was a resident and claimed gross income less than the $250,000 income limitation. The Division provided no evidence supporting its argument that she earned gross income in excess of that amount. Thus, the Division’s denial of the state school tax credit claimed was also reversed. 

Matter of Awadh and Yahia; Judge Russo; Division’s Rep.: Michele Milavec; Petitioners’ Rep.: pro se; Article 22 (by Tyler Gately) 

Judge Russo granted the Division’s motion for summary determination on timeliness grounds. The Division proved its standard mailing procedures and that they were followed when it mailed, on January 3, 2019, the Notice to Petitioners’ last known address. Petitioners did not respond to the Division’s motion for summary determination and thus did not overcome the presumption of receipt that follows from proof of proper mailing. Accordingly, Petitioners’ BCMS request, filed on August 5, 2019, was late. 

Matter of King; Judge Friedman; Division’s Rep.: Michael Trajbar; Petitioner’s Rep.: pro se; Article 22 (by Tyler Gately) 

Supervising ALJ Friedman found that the Division proved its standard mailing procedures and that they were followed when it mailed the conciliation order at issue to Petitioner’s last known address on December 1, 2017. Petitioner submitted a response to the notice of intent to dismiss alleging that he did not receive the conciliation order, and he was informed that the order was mailed to an incorrect address. However, the Judge found these allegations to be “completely unsupported.” Petitioner’s petition, filed on December 12, 2019, was therefore untimely. 


Matter of Patrick; Judge Behuniak; Division’s Rep.: Peter Ostwald; Petitioners’ Rep. Andrew Wright; Article 22 (by Emma Savino) 

This is one of ours, so I’m going to Joe-Friday it (one day I’ll actually watch Dragnet so I understand this reference – it’s on Netflix right?). 

The Division submitted an answer to Petitioners’ petition which included the following statements:

Paragraph 6: “AFFIRMATIVELY STATES that the Petitioners have not clearly and convincingly established their claimed change of domicile from New York.”

Paragraph 7: “AFFIRMATIVELY STATES that during the tax years 2015 and 2016 Petitioners were domiciled in New York City.”

Since the basis for the deficiency was whether Petitioners were domiciled in New York State and/or New York City during the years at issue, Petitioners served the Division with a demand for a bill of particulars (“the demand”) requesting that, with respect to Paragraph 6, the Division state whether it was referring to New York State or New York City. The demand also requested that the Division state on which date Petitioners became domiciled in New York City. The Division responded and stated that Paragraph 6 refers to New York City and that Petitioners became domiciled in New York City “during the tax year 2012.” 

Petitioners filed a motion for an order of preclusion based on the claim the Division’s bill of particulars was defective because Petitioners’ demand, with respect to Paragraph 7, requested a date, and the Division provided a year. In its response, the Division asserted that it does not have the burden of proof, and that an individual’s domiciliary status is “determined per annum and is not necessarily date specific.” The response concluded that “Petitioners’ demand for a ‘specific date, i.e., a single day’ is unworkable.” 

Judge Behuniak first noted that the Division initially asserted in its response to the motion that it did not have the burden of proof for the issues demanded. However, since the Division did not object or make a motion to have the demand vacated or modified, it had waived its objection with respect to that argument. 

With respect to the issue regarding the date the Division determined Petitioners became domiciled in New York City, the Judge found that “the Division’s response insinuating that the determination of a specific day, or a more refined period of less than a year, as the date a taxpayer moved is always ‘unworkable’ contradicts the Division’s own past practice on the issue.” So Judge Behuniak ordered the Division to provide either a specific date Petitioners became domiciled in New York City, or a more refined date range, if appropriate. The Judge, therefore, granted the motion for a preclusion order unless the Division serves a further bill of particulars with the required information. 

Matter of DiFucci; Judge DiFiore; Division’s Rep.: Peter Ostwald; Petitioners’ Rep.: Salvatore Iavarone; Article 22 (by Emma Savino) 

The Division issued Petitioners a Notice of Deficiency dated June 1, 2018 (“the June Notice”), and a second Notice on August 31, 2018 (“the August Notice”), with the same assessment number for the same tax years. Both Notices were sent to an address in Garrison, New York. Petitioners filed a BCMS request on August 7, 2019, regarding the June Notice. BCMS issued an order dismissing the request as untimely. Petitioners timely appealed the BCMS order, and each Petitioner used a different address in New York, New York on the petition. 

Judge DiFiore found that the Division failed to produce any evidence that its standard mailing practices were followed with respect to the June Notice or that it was mailed to Petitioners’ last known address. The Division’s representative claimed that a search of the Division’s records did not locate a certified mail record that was proper for evidentiary submission. While the Division’s representative asserted that both the June Notice and the August Notice were issued to Petitioners’ last known address, his affidavit only referenced Petitioners’ six-month extension application. Further, the Division’s representative did not indicate when this application was filed, whether or not it was filed after Petitioners’ last filed return, or whether it contained a different address from the last return, so the last known address was not established. 

Nor could the Division prove actual receipt of the June Notice. The affidavit of a Division legal assistant, USPS form 3811-A, and a USPS response established that a document was sent, delivered to, and accepted by Mr. DiFucci, as well as Petitioners’ representative. However the Division’s papers did not indicate that the June Notice was sent via certified mail using the specific tracking number, so actual receipt could not be proven.

Since Petitioners’ had only appealed the June Notice, the DTA did not have jurisdiction to consider the Division’s arguments with respect to the August Notice. So Judge DiFiore denied the Division’s motion for summary determination and allowed this one to go forward.

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