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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.  

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TiNY Report for January 2, 2020 (covering DTA cases issued December 17 and 24)

Happy New Year TiNY readers! Not only has the year changed, but there are a few changes going on here at TiNY as well. You may have noticed a byline on the posts for the last few weeks and wondered what that was all about. Well, TiNY has added a new author to the mix, our own Joe Endres, to report on sales tax cases, and today is his debut!

This week we have 3 decisions, and no timies(!!). I have to say, I was a bit surprised that the Tribunal issued 2 decisions on Christmas Eve – I guess the judges don’t have as much holiday spirit as your TiNY reporters.


Matter of Apple Inc.; Division’s Rep: David Gannon; Taxpayer’s Rep: Peter Faber and Mark Yopp; Articles 28 and 29 (by Joe Endres). 

Before delving into the substantive issues in this case, I would like to thank the powers-that-be at TiNY for allowing me to report on sales tax cases.  I will endeavor to uphold TiNY’s strong analytical tradition while also maintaining its somewhat irreverent, yet respectful, tone. 

By way of introduction, let me begin by saying that sales tax is, by far, my favorite tax.  This is because it is the meanest and most persnickety of all New York taxes.  And the lone sales tax case this week illustrates these points perfectly. 

In Matter of Apple Inc., the Tax Appeals Tribunal reviewed Judge Law’s determination that Petitioner under-collected tax on its 2011 and 2012 “Back to School” (BTS) promotion sales made in its retail stores.  TiNY previously reviewed the Judge’s determination here.  This decision highlights numerous interesting issues, including: structuring issues, burden of proof issues, audit methodology issues and compliance concerns in New York’s broader tax enforcement climate. 

Structuring Issues

Pursuant to Petitioner’s BTS promotions, customers who purchased certain qualifying computers or iPads received gift cards for either $100 or $50 depending on the product purchased.  Let’s say I paid $1,000 for an iPad.  Under the BTS promotion, I received the iPad and a $100 gift card.  The question in this case was whether I paid for a discounted iPad (i.e., a $900 iPad and a $100 gift card) or a full-price iPad and a free gift card (i.e., $1,000 iPad and no charge for the gift card).  As the Judge and the Tribunal noted, these distinct scenarios have very different tax consequences.  In the former, sales tax is due on only the $900 iPad, while in the latter, sales tax is due on the full $1,000. 

The Tribunal ultimately concluded that, based on the facts of the transactions at issue (more on this later), tax was due on the full $1,000 and upheld the ALJ determination.  But Petitioner could have easily accomplished its goal of selling discounted hardware and full-priced gift cards if it just made the facts surrounding the transaction clearer, i.e. by changing how the receipt given to customers was structured.  And that’s why sales tax is a particularly persnickety tax.  Absent unusual circumstances, taxpayers live or die by the form of the transactions they create and the tax consequences that flow from them.  Properly structured transactions may reduce the tax vendors are required to collect and remit.  Poorly structured transactions may result in a hefty and unexpected tax bill. 

Burden of Proof

But did Petitioner really structure poorly here?  That statement seems a bit harsh.  Certainly the company could have made the underlying facts clearer so as to leave the Division with no basis for an assessment.  But there were facts that supported Petitioner’s treatment and the Tribunal acknowledged this.  For example, Petitioner categorized the revenue from the gift cards for accounting purposes as “deferred revenue.”  Moreover, when hardware was returned by a customer, Petitioner also required the contemporaneous return of the unused gift card, otherwise only the discounted price of the hardware would be refunded.  Petitioner also never used the word “free” when referring to the gift card and its POS system was not capable of discounting the price of the gift card.  These facts supported Petitioner’s treatment of the BTS transactions. 

But there were also unhelpful facts for Petitioner.  For example, its online sales during the BTS promotions correctly (in the Division’s view) computed and collected tax on the full $1,000.  Moreover, if a customer declined the gift card as part of the BTS promotion, the full price of the qualifying device with applicable tax would have been charged. 

What’s important to recognize here is that the applicable burden of proof puts taxpayers at a severe disadvantage when confronted with competing factual scenarios.  Unfortunately for Petitioner, it had the burden of proving, by clear and convincing evidence, that its position was correct.  It had numerous helpful facts.  In my opinion, a preponderance of the facts supported Petitioner’s position.  But a “preponderance of evidence” is not necessarily “clear and convincing evidence.”  Taxpayers should recognize that the rules of the game are tilted heavily in favor of the government, as borne out annually in the published DTA statistics.

Audit Methodology

Just a quick note on sales and use tax audit methodology (for an overview of the steps in a NY sales and use tax audit, click here).  Many taxpayers forget that sales and use tax audits examine three distinct areas:

  1. Did the taxpayer collect the proper amount of sales tax on its sales;
  2. Did the taxpayer pay the proper amount of tax on its purchases (capital and expense); and 
  3. Do the taxpayer’s numbers reconcile?

The last inquiry, which usually occurs first in an audit, was central in this case.  Had the Division not thoroughly reviewed Petitioner’s sales and tax figures, it’s likely that this issue would not have been spotted on audit.  As part of all audits, auditors are instructed to review the taxpayer’s taxable sales figures and confirm that they reconcile with the amount of tax paid to the state.  Similarly, auditors are instructed to review the amount of tax collected by the taxpayer from customers to confirm that it reconciles to the amount of tax actually paid to the state. 

In this case, the liability resulted from a one-day test period wherein customer invoices from Petitioner’s retail stores were reviewed, with the subtotal on the invoice being multiplied by the applicable tax rate. This review led to a discrepancy between the amount of tax the auditors determined should have been collected and the amount actually collected by Petitioner for sales subject to the BTS promotion.  Again, this issue could have easily been missed by less-diligent auditors.  And it’s a warning to taxpayers to conduct internal reconciliations prior to meeting with auditors.  Surprises are great for birthday parties and Christmas gifts, not so much for sales tax audits. 

Compliance Environment

We at TiNY have a bias in favor of taxpayers.  But even if we didn’t, it would be tough not to feel sympathy for the Petitioner.  As noted above, it could have structured its BTS transactions to avoid paying tax on the value of the gift cards.  But what’s particularly startling is the amount of effort Petitioner exerted to properly account for BTS sales.  The Tribunal details how Petitioner’s point-of-sale, tax, accounting and legal teams all worked on the promotions.  And if a behemoth like Apple can’t get it right, with all its resources and expertise, what hope does a little mom-and-pop retailer have of correctly navigating New York’s confusing and counterintuitive sales tax law? 

At one point in the decision, the Tribunal notes that one of Petitioner’s employees voiced concern over over-collecting tax, which, she posited, could happen if Petitioner gave the gift card away “for free” (leading to the collection of full tax on the $1,000 charge that included both the value of the taxable hardware and the value of the non-taxable gift card) and then charging tax again when the gift card was redeemed for taxable products.  The Tribunal noted that Petitioner had been subject to “over-collection” suits in the past.  One can imagine the competing considerations that Petitioner faced. 


Ok, so I geeked out a bit on sales tax, and this summary got a bit long.  What can I say? I was excited to join the TiNY blog, I love sales tax and this case raised a bunch of juicy issues.  I realize that we probably lost half of our readership due to that last sentence, but somehow we’ll manage to carry on with the remaining six readers.  I look forward to contributing every time the DTA issues a sales tax order, determination or decision.  Until then….

Matter of Biggar; Division’s Rep.: Peter Ostwald; Taxpayer’s Reps.: Kenneth Zemsky and Mitchell Newmark; Article 22 (by Emma Savino). 

There’s a lot going on here, and because it’s not every day we get a decision on domicile, I’m going to spend a bit more time on it. If you want to read more about what the ALJ decided, we wrote about that here.

Petitioner was born and raised in New Zealand, and he became a chartered accountant (which is the equivalent of a CPA for those of you who didn’t go to school in the Commonwealth).  While he was in school and for several years after, he lived at his mother’s home. Petitioner eventually moved abroad for work because he was focused on “wealth creation” (I guess that’s one way of saying “it’s all about the Benjamins”). Petitioner eventually moved to the UK, where he became a citizen and lived for a number of years, still keeping his New Zealand citizenship. Petitioner went to work for Creditex in 2000 first in Australia, before being transferred to the London office. In 2008, Creditex was bought by Intercontinental Exchange, Inc. (ICE). In 2010, ICE asked Petitioner to become the president of Creditex and take over the New York City office, which Petitioner did. On July 8, 2010, Petitioner signed a one-year employment agreement, with renewals. Petitioner testified that he did not see this position as permanent.

ICE got an L-1 visa for Petitioner and applied for a green card for Petitioner, at his request. The green card said that Petitioner had been a resident of the US since June 1, 2012. Despite always renting while living abroad, in December 2009, Petitioner purchased a $2.9 million apartment in Manhattan, which he spent $700K renovating. The renovation was even featured in New Zealand Home magazine and it was referred to as a “home with warmth and character” – this would come back to bite him.

Petitioner left Creditex on December 1, 2012, and the separation agreement listed Petitioner as residing in New York. After the separation, Petitioner remained in New York. He purchased two apartments as investments and put a down payment on a third. In 2014, Petitioner became a founding member of the Tribeca Angels, which is an investment club for high-net-worth individuals, but Petitioner had no obligations or duties as a member. In addition, Petitioner invested in a New Zealand non-bank lender as well as a British financial technology company of which he served as an advisor.

In January 2014, Petitioner found out that his mother had cancer, so he returned to New Zealand to spend time with her until she died just over three months later. At the time of her death, Petitioner’s mother still lived in the New Zealand home where Petitioner continued to receive mail. Petitioner testified that he considered this home to be his permanent home and domicile. Up until her death, Petitioner contributed to the maintenance and renovation of his mother’s home. His mother also left all of her paintings to Petitioner which he currently keeps, along with other family heirlooms, in his home in Auckland that he purchased in March 2014 for $2.25 million in New Zealand currency. Petitioner also testified that while he wanted his New York City apartment to feel like a hotel, he wanted his New Zealand home to feel like home.

As for his New York filings, in 2010, Petitioner filed an IT- 203 (nonresident and part-year resident return) and reported all of his federal income as New York State income. He indicated that he moved into New York State on June 14, 2010, and did not check “yes” or “no” to maintaining living quarters in New York. Petitioner also filed an IT-360.1 and checked the box that indicated a New York City change of residence. Petitioner filed a resident return for 2011-2013 and 2015 on the advice of his accountant on the basis that he was a statutory resident of the state.  For the 2014 tax year, Petitioner filed an IT-203 and he checked the “No” box.

During the audit, the auditor calculated that Petitioner exceeded 183 days in New York during 2010-2013, and 2015, but that Petitioner only spent 102 days in New York during 2014 and 130 days in New Zealand that year. The auditor also noted that Petitioner frequently travelled, but that he would return to New York between trips. The auditor concluded that Petitioner changed his domicile to New York in June 2010 and remained a domiciliary in 2014. The auditor didn’t testify at the hearing, but instead submitted an affidavit stating that Petitioner’s use of the IT-203 and IT-360.1 in 2010 indicated that Petitioner became a domiciliary after the move.

Change of domicile to New York

The ALJ found that Petitioner was domiciled in New Zealand until 2010, but that the Division had met its burden of showing a change of domicile to New York in 2010 because Petitioner (1) filed an IT-203 and IT-360.1, rather than an IT-201 (which he should have used as a statutory resident of the state); (2) purchased and renovated a NYC apartment; (3) remained in NYC after his employment ended; and (4) applied for and received a green card. 

The Tribunal began by noting that since the ALJ determined Petitioner was domiciled in New Zealand before 2010, it is the Division’s burden to prove that he became a New York domiciliary, and if a shift in domicile to New York was proven, then the burden shifts to Petitioner to show that he was not domiciled in the state during 2014. The Tribunal also stated that there is a greater presumption against a change of domicile from one country to another.

The Tribunal ultimately determined that the Division met its burden to show that Petitioner acquired a New York City domicile on or before 2014, but for different reasons than the ALJ. The Tribunal then began its factor analysis with the time factor, and noted that from 2010-2013, Petitioner spent 1,118 days in New York and only 38 days in New Zealand which led it to conclude that “[s]uch minimal use over this period indicates an abandonment of the [New Zealand] residence as his domicile.” As for the business factor, the Tribunal found that Petitioner’s employment and business activity were centered in New York. The Tribunal relied on the fact that Petitioner moved to New York to become the president of Creditex and held this position until late 2012. Further, Petitioner’s only New Zealand business activity was pre-investment due diligence work that he did in 2013. The crux of this factor seems to be best summarized in this statement: “His continuing presence in New York following his separation from Creditex was thus no longer a function of his employer’s needs, but was, rather, indicative of an intent to be domiciled in New York” (internal quotations omitted). And while domicile does not depend on citizenship, the Tribunal did note that Petitioner’s receipt of a green card also supported his New York domicile.

In comparing his New York City apartment to the New Zealand home, the Tribunal noted that Petitioner actually owned his New York City place, but not the New Zealand home. Contributing to the upkeep and maintenance of the New Zealand home wasn’t enough.  However, both the near and dear and family factors were found to support a New Zealand domicile as his mother and brother lived in New Zealand and it was also the location of his mother’s paintings and family photos.

However, contrary to the ALJ, the Tribunal found that the change of domicile was not effective June 14, 2010. Rather, it found that Petitioner’s use of the IT-203 and IT-360.1 were insufficient to establish a change of domicile. These forms use the term resident, and not domiciliary, and while the instructions to IT-360.1 use the term domicile, there was no evidence of Petitioner’s or his tax preparer’s understanding of the form.

In sum, the Tribunal found that Petitioner became a New York domiciliary in 2013, as he chose to stay after his employment ended, could do so because of his green card status, and began his new career as a private investor.

Just a note here before I go on to Petitioner’s argument that he changed his domicile back to New Zealand in 2014. The Tribunal began its analysis with the statement that “case law has held that the presumption against a change of domicile from one nation to another, as is the case here, is generally greater than the presumption against a change of domicile from one state to another.” But it never makes clear why the facts here were sufficient. In this case, there are clearly factors that go both ways. And if we look at the change between 2012 and 2013, there really isn’t a change other than Petitioner just stayed in New York after his job ended. The only factors that really support a New York domicile are Petitioner’s time factor and arguably the home factor. By 2013, Petitioner is no longer working, but has invested in a few apartments and is hanging around New York trying to “cement” relationships. So does this really support the business factor?  That’s debatable.   If the burden is higher, and there was a question as to when the Petitioner changed his domicile, how can it be said that the Division met its burden here?

Change of domicile to New Zealand in 2014

The ALJ found that Petitioner did not meet his burden of showing that he changed his domicile to New Zealand in 2014 because Petitioner (1) continued to have business connections in both places; (2) spent more days in New York than in New Zealand in 2014 after March 2014, and roughly the same number of days in both places during the entire year; (3) spent little time in the New Zealand home, and didn’t refer to it as his permanent residence during the audit; and (4) since he closed on his New Zealand apartment in April, he could have only spent 50 days there.

The Tribunal agreed with the ALJ that Petitioner had not changed his domicile to New Zealand in 2014. It acknowledged that the death of Petitioner’s mother was a life-changing event, and that he spent additional time in New Zealand because of it. In addition, Petitioner purchased a home in Auckland and kept all of his family heirlooms and near and dear items there. And while the Tribunal acknowledged that this purchase suggested stronger ties to New Zealand than his mother’s house, it also rejected Petitioner’s argument that this home felt more like home and his New York City place felt more like a hotel because of the description in the New Zealand Home magazine (see I told you that’d come back). So because the two homes were comparable as was his time during the year, neither clearly supported a change of domicile to New Zealand. Nor did Petitioner’s 2015 day count help as he spent twice as much time in New York as in New Zealand. As for the business connections, Petitioner invested in New York based start-ups and had 3 investment properties in New York by 2015. He did invest in a New Zealand company but it was unclear when that investment was made, and Petitioner’s only New Zealand-centered business activity was the due diligence work Petitioner did related to that investment. Petitioner also invested in California real estate and became an advisor for a British-based company with a New York office. All in all, the Tribunal did not find enough of a shift towards New Zealand in 2014.

The Tribunal did agree to abate penalties, however, as it determined that Petitioner was not negligent in filing a nonresident return in 2014, and that it was done in good faith.  So even though it found that Petitioner had a historic domicile in New Zealand and his life underwent enough changes in 2014 to abate penalties, this was not enough to find that he changed his domicile or that he had remained a New Zealand domiciliary. Hmmm, I’ll have to remember this one on my next penalty abatement request. 

Matter of NRG Energy, Inc.; Division’s Rep: David Markey; Taxpayer’s Rep: Daniel Hurteau and Jena Rotheim; Article 9-A (by Emma Savino).

This case came back up after a remand, and we wrote about the remand here. The remand required the ALJ to consider the constitutionality of the retroactive application to Petitioner of certain 2009 amendments to the Empire Zones program. This was similarly at issue here, as well as whether the selective enforcements of the amendments were in violation of the Equal Protection Clause. On remand, the ALJ found that no violation occurred and that there was no selective enforcement.

The Tribunal began with the three-pronged test laid out in Matter of Replan Dev. v. Department of Hous. Preserv. & Dev. of City of New York, which is used to determine whether the retroactive application of a statute violates the Due Process Clause. The test consists of the following three prongs: (1) the taxpayer’s forewarning of a change in the law and the reasonable reliance on the old law; (2) length of retroactive period; and (3) the public purpose.

As for the first prong, the ALJ determined that under Hale and Montante, this factor should be given no weight. The Tribunal did not agree.  Unlike those cases, it found that Petitioner could have avoided revocation of its eligibility in 2009 if it had altered its budget in December 2008, but it would have had to know about the changes. Thus, the Tribunal decided this factor should be given weight, and weighed in favor of finding the retroactive application of the amendment violated due process rights because, even though Petitioner did not change its conduct after the passage of the legislation, it would have had to have done so in 2008 when Petitioner adopted its budget. 

With regard to the second prong, the Tribunal previously found that the period was 97 days. Petitioner argued that the period should run to the date of the revocation of its certification, but provided no legal authority for this. Since the period was “relatively short,” the Tribunal found that it weighted in favor of constitutionality.

Finally, with regard to the third prong, the Tribunal determined the public purpose was controlled by James Sq. Assoc. which found that the amendments were to “stem abuses in the Empire Zones Program . . . and to increase tax receipts.” And since it previously held that the public purpose weighed in favor of a finding that the retroactive application of the 2009 Amendments violated Petitioner’s due process rights, it similarly found here.

In weighing the factors, the Tribunal found that the retroactive application violated Petitioner’s due process rights. The Tribunal conceded that the application here was not substantially different than in James Sq. Assoc., nor were there any distinguishing facts that would result in different conclusions.

In addition, the Tribunal also found, while not necessary, that Petitioner did not meet its burden of proof regarding the discriminatory enforcement issue as it failed to prove selectivity of enforcement and that the selectivity arose from “an intentional invidious plan of discrimination on the part of the Division.”  This Decision was issued December 17.  On Thursday of the following week (December 26), The Tribunal’s Hale decision was reversed by the Third Department in Matter of Mackenzie Hughes LLP v. Tax Appeals Tribunal.  So it looked like NRG was going to eventually win, anyway.  Of course, there is at least one more appeal the Tax Department may pursue, so maybe there are still a few more chapters left in this story.

Still, it’s always nice ending with a taxpayer victory.

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