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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 February 6, 2020 (covering DTA cases issued January 27 and 30)

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This week we have two decisions and a determination. One of the decisions and the determination are basically timies (yawn), but the other decision deserves closer consideration.

DECISIONS

Matters of Yonkers Wholesale Beer Distributors, Inc. and McDine; Division’s Rep: Stephanie M. Scalzo; Taxpayer’s Rep: Michael Buxbaum; Articles 28 and 29 (by Joe Endres).

Two weeks in a row the Tribunal issues a sales tax methodology decision and two weeks in a row the taxpayer loses primarily due to a lack of evidence. Let’s dive in . . . .

This case addresses three issues: (1) were penalties appropriately imposed on the business for failing to file informational returns, (2) was the tax assessment improper or erroneous, and (3) was the proposed cancellation of the business’s certificate of authority improper. The Petitioners lose on all issues. Here’s why:

1.) Informational Return Penalties

The Tax Law obligates certain businesses to make informational returns to the Tax Department.  One such business is an alcoholic beverage wholesaler. These wholesalers are required to file an annual transaction information return that details all sales of alcoholic beverages where no sales tax was collected. See Tax Law § 1136(i). The Division uses the information in these returns “to review the sale of alcoholic beverages by wholesalers . . . and to determine the accuracy of income and sales tax returns filed, in turn, by vendors to whom such sales are made.”

This is a good reminder to accountants and other tax practitioners: You may not represent any large alcoholic beverage wholesalers, but if you represent restaurants, bars and /or liquor stores that buy from these wholesalers, it’s good to keep in mind that big brother is watching the amount of product your clients purchase. If one of those clients receives an audit notification letter from the Division, it’s likely that the Division already has a significant amount of information in its audit file regarding the business’s purchases. Further, the wholesalers are obligated to provide their customers with a copy of the information in the informational return (Tax Law § 1136(i)(4)). So, a best practice might be to ask your liquor buying business clients for a copy of this information to make sure inventory purchases makes sense in relation to the amount of sales reported by those clients. If not, you should have a serious conversation with that client because an audit probably isn’t too far off.

Anyway, back to the case—here, the liquor wholesaler filed the first two informational returns required by the law but then failed to file any further returns, even after repeated reminders and requests by the Division during the audit. There was a halfhearted explanation that the business owner was “an unsophisticated user of electronic records” and that the “Division failed to provide technical support for filing the informational returns.” But because the business seemed to have the requisite sophistication to file the first two returns due under the law, the Tribunal found the business’s “unsubstantiated” claims unconvincing. Again, a lack of evidence will get you every time.

2.) Audit Methodology

During the audit, the business provided almost no records to support the amount of claimed nontaxable sales made during the audit period despite repeated requests by the Division for the business to produce such records. Rather, the business simply advised the auditors that 20% of its total sales were taxable retail sales and the remaining 80% were nontaxable wholesale sales. I wish this was how audits worked—taxpayers could simply tell auditors the amount of taxable sales made during the audit period. Then again, if this was how audits worked, I’d probably be out of a job . . . never mind!

Having received no records following its multiple requests, the Division’s auditor had to come up with a way to audit the business’s sales. In calculating tax due on audit, the Division accepted Petitioner’s gross sales, as reported, but was unwilling to accept the business’s estimated taxable ratio (20/80) without some substantiation. Consequently, the Division took the business’s gross sales and subtracted the nontaxable wholesales that the business reported during the two quarters during the audit period for which it actually filed informational returns. The Division then simply taxed the remaining sales because there was no proof that such sales constituted nontaxable wholesales. This resulted in additional taxable sales of almost $93 million!

It seems a bit harsh that for periods where the business made no informational returns (or provided any other proof) regarding its nontaxable wholesale sales, the Division assumed that the business made absolutely no nontaxable sales. Perhaps a fairer way to proceed would have been to apply the same taxable/nontaxable percentage found during the periods for which the business made information returns to the periods for which it did not. Indeed, other audit results have been thrown out when auditors failed to make a reasonable allowance for nontaxable sales. See Matter of Bernstein-on-Essex St., Inc., et al., DTA Nos. 807165, 807166, 807167; Matter of Majestic Deli Grocery Inc., et al., DTA Nos. 827533, 827534. But alas, when taxpayers come before the Division of Tax Appeals with little or no evidentiary support, especially in the face of repeated requests for such support, good things tend not to happen.

3.) Revocation of Certificate

The Division also sought to revoke the business’s certificate of authority due to its repeated failures to file informational returns regarding its wholesale transactions. The Tribunal sums it up best: “[c]onsidering [Petitioner’s] undisputed failures to file the information returns required by Tax Law § 1136, even after being prompted to do so by the Division, taken together with [Petitioner’s] demonstrated ability to file such returns on two occasions, we agree with the Administrative Law Judge that [Petitioner’s] continued failure to file the required information returns was knowing, deliberate and voluntary and therefore constitutes a willful failure to file a required return.” Given this willful failure, the Tribunal sustained the Division’s revocation of the business’s Certificate of Authority. This effectively means that the business cannot legally make taxable sales in New York State.  One would think it’s going to miss those sales, even if they only constituted 20% of total sales.

Matter of Lord of Kings Inc.; Division’s Rep: Michael Hall; Taxpayer’s Reps: Ehsanul Habib and Ahmed Faisal; Articles 28 and 29 (by Emma Savino).

The Tribunal agreed with the ALJ (we wrote about the determination here) that the Division proved both its standard mailing practices, and that these practices were followed to mail a Notice of Determination to Petitioner at its last known addresses on June 24, 2015. The Tribunal went through the timeliness analysis even though Petitioner did not dispute that the petition was late filed on July 6, 2018.

Instead, before the Tribunal, Petitioner argued that a bulk sale release was issued and that this matter was previously resolved during the conciliation process. However, the Tribunal determined that the Petitioner did not prove a bulk sale release notification was issued to Petitioner because the release was not part of the record in the ALJ hearing, and thus could not be considered. As for what occurred during the conciliation process, the Tribunal found that the fact that the notice issued to Petitioner’s president was modified had no relevance to the notice issued to Petitioner. Thus, the Tribunal affirmed the ALJ’s determination and dismissed the petition.

DETERMINATION

Matter of Prathiban; Judge: Behuniak; Division’s Rep: M. Greg Jones; Taxpayer’s Rep: Isaac Sternheim, CPA; Articles 28 and 29 (by Emma Savino).

The Division issued Petitioner a Notice of Determination dated June 19, 2018. Petitioner filed his request for conciliation conference on January 3, 2019. BCMS issued an order dismissing the request as untimely. Petitioner then filed a timely petition. Despite the slight differences in addresses, 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 June 19, 2018. So, the Judge sustained the dismissal of Petitioner’s request for conciliation conference as untimely.

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