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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 January 3, 2019 (covering DTA cases issued December 27)

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The DTA worked hard over the holiday season to present us 3 ALJ Determinations and a Tribunal Decision to start off the new year.

ALJ DETERMINATIONS

Matter of Zheng; Judge: Russo; Division’s Rep: Peter Ostwald; Taxpayer’s Rep: pro se; Article 22.  Petitioner and her then-husband (foreshadowing!) filed a joint 2006 NYS return, reporting Schedule C income and expenses from the operation of a restaurant.  The Division audited that return, and determined the Schedule C income was under-reported.  The Division issued a Notice of Deficiency, which the couple did not timely protest.  Eight years later, Petitioner filed a request for innocent spouse relief, separation of liability and equitable relief for the 2006 tax year.  Petitioner argued she did not know English and had no right to access or manage the couple’s money.  The Division requested additional information to support Petitioner’s request, but she did not respond.  The Judge determined Petitioner failed to show that she didn’t know, and had no reason to know, that the return in question contained substantial understatements.  The Judge determined that a spouse’s role as a homemaker, giving complete deference to her spouse’s judgement concerning the couple’s finances, was insufficient standing alone to establish the spouse had “no reason to know” about the underpayment of tax.  The Judge denied Petitioner’s request for innocent spouse relief.  Interestingly, the Determination acknowledges that a Hearing was held, but the Findings of Fact do not refer to any testimony.

Matter of Baoting; Judge: Galliher; Division’s Rep: Hannelore Smith; Taxpayer’s Rep: pro se; Revision of a Determination or for Refund of Cigarette Tax under Article 20.  Petitioner challenged the substantive merits of the assessment in the Notice of Determination issued to him.  A conciliation order was issued to Petitioner denying the challenge.  Petitioner then protested the conciliation order and the subsequently-issued Notice of Proposed Driver’s License Suspension.  The Judge determined that the Division proved proper mailing of the conciliation order and that Petitioner failed to timely file his DTA petition protesting the order. 

The Judge also found that Petitioner timely filed his DTA petition with respect to the Notice of Proposed Driver’s License Suspension.  However, since Petitioner did not raise any of the six specifically-enumerated substantive bases for relief from the Notice or Proposed Driver’s License Suspension, the Judge dismissed the entire petition.

Matter of Milano and Son Jewelry, Inc.; Judge: Connolly; Division’s Rep: M. Greg Jones; Taxpayer’s Rep: Barry Leibowicz and Scott Ahroni; Artciels 28 and 29.  Petitioner was a jeweler operating two booths in the Tri-County Jewelry Exchange.  One booth had a modern point of sale (POS) system, and the other had a punch key register.  The Division audited Petitioner’s sales.  First, Petitioner argued the auditor didn’t make an adequate request for Petitioner’s books and records because the auditor didn’t specifically request Petitioner’s POS records but only Petitioner’s “sales invoices.”  The Judge rejected Petitioner’s argument because the request for “sales invoices” in the audit appointment letter implicitly included those invoices that were part of the POS system records.  Next, Petitioner argued the books and records it did produce on audit were an adequate basis for the audit and that the auditor failed to thoroughly inspect them.  The auditor testified that Petitioner’s records were not maintained in a manner that would permit a complete audit to be performed on them, i.e., the sales booklets were not in sequential order, the individual sales slips didn’t include adequate descriptions of what was sold, were not dated properly, and some didn’t have sales totals properly added. 

The Judge determined that some of those alleged problems with the records didn’t appear to be of sufficient gravity to make it impossible for the auditor to determine whether Petitioner owed additional sales tax.  For instance, the Judge indicated that the lack of description of the items sold on the sales slips was not enough to prevent a determination on whether the invoice was taxable since, as a jewelry seller, Petitioner was not claiming any exemptions other than sales for resale.  However, the Judge also found that Petitioner’s failure to use sales slips in sequential order was sufficient to preclude a determination of whether Petitioner had collected and remitted the proper amount of sales tax because it prevented the auditor from knowing whether she had all of Petitioner’s invoices for the audit period. 

Petitioner also argued that the auditor improperly reviewed only Petitioner’s sales records for a single quarter and not on a quarter-by-quarter basis.  The auditor testified that she reviewed all of the sales records provided by Petitioner, and that she sorted the sales booklets by quarter and then chose the quarter with the most sequential books to review in detail.  So, the Judge rejected Petitioner’s argument.  Lastly, the Judge determined whether the Division’s method to estimate Petitioner’s tax liability was reasonably calculated to reflect the tax due.  Petitioners argued the audit failed to take into account that some of the new gold Petitioner purchased was sold for its “melt value” to refineries, which caused Petitioner a loss, thus the auditor used the wrong percentage markup to a sale that was actually a loss.  The evidence relied on by Petitioner to prove this point was, however, found by the Judge to be unreliable or insufficient.  Accordingly, the Judge determined the Division’s method was reasonable, and sustained penalties.

TRIBUNAL DECISION

Matter of Garrison Protective Services, Inc.; Division’s Rep: Michael Hall; Taxpayer’s Rep: Brooke Anthony; Articles 28 and 29.  First, our write-up of the ALJ Determination:

The issue in this case was whether a private entity was an agent of a New York governmental agency and whether its purchase of security services from the taxpayer was exempt from sales tax.  The Division argued the contractual language stated the private entity was an independent contractor, and thus couldn’t be an agent of the New York City Housing Authority (“NYCHA”), but the Judge held this did not preclude a finding of agency.  The Judge determined there was an agency relationship between the private entity and the  NYCHA because the record clearly established a fiduciary relationship as the NYCHA had a high degree of direction and control over the private entity.  Such as, the NYCHA had to approve almost everything the private entity did to fulfill its management responsibilities, and the Judge found the NYCHA was the true beneficiary of the tax exemption.  Though the Division asserted the security services were only ancillary to the private entity’s management responsibilities, the contracts between the private entity and the NYCHA included a provision providing for a security plan approved by the NYCHA for the health and welfare of the NYCHA’s tenants, employees, and property.  Thus, the security service was an integral part of the contracts.  The security services were also exempt from sales tax because they were purchased for resale from the private entity to the NYCHA.

Petitioner provided security guard services.  When the Division audited Petitioner’s sales, it used a test period to determine tax due.  The test revealed there were 6 customers, including Grenadier Realty Corp. (“Grenadier”), who were not charged sales tax for which no exemption documents were provided.  Petitioner did not produce properly completed exempt purchase certificates (Form ST-122) or exempt purchase certificates for an agent of a NY governmental entity (Form DTF-122).  As such, the Tribunal found Petitioner’s sales to Grenadier remained presumptively taxable and Petitioner bore the burden of showing those sales were nontaxable.  However, for many of the same reasons cited by the ALJ, the Tribunal found the NYCHA had sufficient degree of direction and control over Grenadier such that an agency relationship existed between those entities.  Thus, Grenadier’s purchases of security services from Petitioner, made by Grenadier under the subcontracts, were exempt from sales tax.  The Tribunal affirmed the ALJ’s Determination in Petitioner’s favor and directed the Division to recompute Petitioner’s liability accordingly.

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