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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 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 January 28, 2021 (reporting on DTA cases issued January 21)

I am trying to get TiNY back into the groove of publishing within days (instead of weeks) of the issuance of cases by the DTA. There were three Determinations and one ALJ Order posted to the DTA’s site last Thursday. PLUS, we have seen at least two Tribunal Decisions that, at least as of this writing, haven’t been posted yet, but should be soon. So we summarize those decisions too.


Matter of Acquavella Fine Arts, LLC, et. ux.; Judge Gardiner; Division’s Rep.: Osborne Jack; Petitioners’ Reps.: Arthur Rosen and Kathleen Quinn; Articles 28 and 29 (by Chris Doyle)

Petitioners’ counsel served a subpoena on the Division seeking five sets of documents, all of which seem to me to be relevant to the sales tax petition Petitioners filed. Petitioners are an art gallery and its owner, and the documents sought by the attorney subpoena included the records of the audit, the records of an investigation of the gallery by the Attorney General, and information related to the Department’s removal of TB-ST-155 from the Department’s website.

The Division made a motion to withdraw or modify the subpoena.

Judge Gardiner denied the motion finding that the DTA was the wrong forum to hear the motion. The Judge cited to CPLR 2304, which requires parties to make such a motion in the court in which the subpoena is returnable. According to the Judge, if the subpoena is not returnable in a court, CPLR 2304 provides the party on whom the subpoena is served must request that the person who issued the subpoena withdraw or modify it. And if that doesn’t work, the party seeking modification or withdrawal can move for the same in supreme court.

So, I guess the Division can either march to supreme court and move to quash or modify the subpoena, or the Division can make its arguments when, and if, Petitioners go to supreme court to compel the Division to produce documents.

Regarding the mysteriously-withdrawn TB-ST-155: It addressed delivery rules for New York’s sales tax. If you are interested, a copy of the Bulletin is available on our website here.  Coincidentally, my partners Joe Endres and Josh Lawrence wrote an article about the application of TB-ST-155 to the art world, a copy of which you may find here. Even with a tinfoil hat fitted squarely atop my head, when I saw Petitioners’ allegation that an authoritative document had been removed from the Department’s website, the voices in my head started chanting the mantra “cover-up” . . . “conspiracy” . . . “cornflakes.” For background: the voices in my head like consonance and lists of three, so I think we can disregard “cornflakes” as a filler. But the other two merit some consideration. So I’m interested to see what Petitioners’ counsel uncovers.


Matter of Strata Skin Sciences, Inc.; Judge Connolly; Division’s Rep.: Anita Luckina; Petitioner’s Rep.: Margaret Wilson; Articles 28 and 29 (by Joseph Endres)

The issue in this case is whether the sale of laser technology used to treat dermatological ailments and related services constituted a taxable lease of tangible property or the provision of a nontaxable service. Petitioner provided to its dermatologist customers an ultraviolet light excimer laser system that generated and delivered targeted ultraviolet light to treat various skin conditions. Petitioner did not characterize the transactions as leases, nor did the customers receive the lasers for a set amount of time. Rather, Petitioner “consigned” the lasers to its customers and charged for “treatment codes,” which allowed the lasers to be used and treatments to be administered.

In connection with the provision of the laser, Petitioner also provided a host of services intended to facilitate the use of the technology, including the flow of patients. These services gave participating physicians access to the laser technology in a way that increased the doctors’ likelihood of achieving an adequate return on investment in relation to the practices’ expenses of providing the laser therapy. These services included most of the non-medical aspects of using the lasers to provide treatment, including helping to ensure proper patient flow through Petitioner’s advertising and patient screening programs, assisting with the insurance reimbursement process, maintaining the laser devices, and training the doctors’ staff in the use of them. And by retaining ownership of the devices, the financial risk to the dermatologist/customers was mitigated.

The Judge initially concluded that the transactions did not constitute leases for sales tax purposes. The Judge based this conclusion on: (1) the fact that the contracts were not denominated as “leases,” had no lease language in them, and were not structured as leases; (2) the contracts did not specify the model of laser the customer was to receive, and Petitioner had the right to remove the device at any time without the participating physician’s prior consent; and (3) Petitioner’s charges under its contracts were for “treatment codes” and were not explicitly for the rental of the laser.

Although Judge Connolly could have concluded the determination here, he decided to further support his reasoning by applying a “primary function” analysis and determining that it supported the conclusion that the nontaxable aspects of Petitioner’s activity predominated. According to the Judge, “a fair description of petitioner's primary function under the usage agreement is the nontaxable one of managing the nonmedical aspects of the business of providing . . . laser treatments.” The economics of the overall transaction also carried weight with the Judge: “The predominance of the value of the services provided under the usage agreement compared to the value of the  . . . laser itself is also consistent with the fact that participating physicians have been willing to pay petitioner between $30,000.00 and $40,000.00 per year under the usage agreement when they could have purchased outright a device, with its 5-year useful life, for $80,000.00.

This is a bit of a unique determination because the “primary function” analysis is usually reserved for determining the taxability of pure service transactions. But here it is applied to a mixed tangible property/service transaction. I will be surprised if the Division decides not to appeal the determination both because of the use of the “primary function” analysis and because this case further opens the door to nontaxable transfers of tangible property when services are involved.

Matter of Khouater and Khouira; Supervising ALJ Friedman; Division’s Rep.: Michael Trajbar; Petitioners’ Rep.: pro se; Article 22 (by Emma Savino)

Petitioners were issued a Conciliation Order sustaining the Notice for the 2017 tax year. Petitioners filed a petition challenging the Order on January 14, 2020. The Judge found that the Division proved both its standard procedures and that they were followed when it mailed the Conciliation Order to Petitioners and their representative (who was not qualified to represent them at the DTA) at their last known addresses on July 26, 2019. Therefore, Petitioners’ petition was late, so the Judge dismissed the case following the issuance of a Notice of Intent to Dismiss by the Division of Tax Appeals.

Matter of Mair; Supervising ALJ Friedman; Division’s Rep.: Karry Culihan; Petitioner’s Rep.: pro se; Articles 28 and 29 (by Emma Savino)

The Judge found that the Division proved both its standard mailing practices and that they were followed when it mailed the Notice at issue to Petitioner’s last known address on February 14, 2018 (because nothing says “I love you” on Valentine’s Day like a notice from the Division). Petitioner’s petition filed on November 27, 2019 was therefore late. The petition also challenged the Notice and Demand issued against Petitioner, but the Judge held that Notices and Demands do not give rise to DTA hearing rights. Accordingly, the Judge dismissed the case following the issuance by the DTA of a Notice of Intent to Dismiss.


Matter of Tilton; Division’s Rep.: Anita Luckina; Petitioner’s Rep.: Craig Reilly; Articles 28 and 29 (by Chris Doyle)

This is one of ours, so you know . . . nothing but the facts.

The Tribunal reversed and remanded the Judge’s determination that Petitioner filed her request for conciliation conference too late. Our write-up of the Determination is here. Preliminarily, the Tribunal found that the Judge correctly determined that, in its Motion for Dismissal, the Division adequately proved its standard mailing practices and that they were followed when the Division mailed the Notices to Petitioner at her last known address. As a consequence, the Tribunal held that the Judge properly found that the Notices were presumed to have been received by Petitioner.

However, since this is a sales tax case, the presumption of receipt may be rebutted. And even though the Tribunal acknowledged that a mere denial of receipt is not enough to rebut the presumption, it ultimately held that Petitioner had raised enough doubt regarding delivery that the timeliness issue should be remanded for a hearing. In support of Petitioner’s allegation of non-receipt was: (1) Petitioner’s affidavit that she knew nothing about the Notices until eight months after they had been mailed by the Division; (2) materials from the USPS Domestic Mail Manual addressing how delivery information might be obtained for items posted by certified mail; (3) an affirmation from Petitioner’s lawyer on the methods used to obtain USPS delivery information; and (4) information obtained from the USPS website relating to delivery of mail with the certified control numbers matching those of the Notices.

The Tribunal found that in the case of a motion to dismiss, the evidence must be viewed in a light most favorable to the non-moving party (i.e. Petitioner). Viewing the above information in accordance with the appropriate standard, the Tribunal concluded that Petitioner raised a material question regarding whether the Notices were received, and remanded the matter back to the Judge for an evidentiary hearing on that issue.

Matter of Obus and Coulson; Division’s Rep.: Linda Farrington; Petitioner’s Rep.: Glenn Newman; Article 22 (by Chris Doyle)

Not one of ours, but we filed an amicus brief.

Petitioners lived in New Jersey but were treated on audit as residents of New York State because Petitioner husband worked in New York City, was there more than 183 days, and Petitioners had an abode in New York. But here’s the hitch: Petitioner’s New York abode was 200 miles from the husband’s work, and the abode was used infrequently and only for vacations.

For nondomiciliaries to be residents of New York for a tax year, they must be in New York for at least 183 days during the tax year and maintain a permanent place of abode in New York for substantially all of the tax year.

Petitioners made two arguments. First, Petitioners argued that the Court of Appeals decision in Matter of Gaied v. Tax Appeals Tribunal stands for the proposition that an abode does not become a permanent place of abode for a nondomiciliary unless the nondomiciliary has a “residential interest” in the abode; and further, that Petitioners’ infrequent use of the abode for vacation purposes did not evince the necessary residential connection. In response, the Tribunal found that a “residential interest” in an abode exists if the abode is suitable for year-round occupancy and the nondomiciliary has the legal right to enjoy that occupancy. For the Tribunal, it seems that a petitioner’s subjective feelings about an abode and its use are irrelevant to the determination of whether it is a permanent place of abode under the law.

Petitioners also argued that New York’s 183-day “statutory resident” law violated the internal consistency test for compliance with the Interstate Commerce Clause articulated in the Supreme Court’s 2015 decision, Maryland v. Wynne. The Tribunal determined this to be a “facial” constitutional challenge to the law, and therefore beyond the Tribunal’s jurisdiction.

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