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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 June 7, 2019 (reporting on DTA cases issued May 29 and 30)

We have a pretty full deck this week with two Determinations and three Tribunal Decisions, one of which was litigated by our shop. It’s a fun-filled week with Walt Disney, South Korea addresses, haunted houses, Fourth Amendment and Eighth Amendment issues, and Native American tax free (or not) cigarettes – and only one of the decisions is on timeliness. So sit back and enjoy the show – don’t worry, unlike Frightworld (see below), we don’t have actors pushing you forward, compelling you to read faster.


Matter of The Walt Disney Company and Consolidated Subsidiaries; Judge: Law: Division’s Rep.: Jennifer Baldwin; Petitioner’s Reps.: Marc Simonetti, Andrew Appleby, and Dmitrii Gabrielov; Article 9-A. 

Petitioner received royalty income from its non-US subsidiaries. On its sixth (!?) amended NYS franchise tax return, it deducted those royalties in computing its entire net income based on its interpretation of former N.Y. Tax Law § 208.9(o)(3). At the time, N.Y. Tax Law § 208.9(o)(3) provided that: “[A] taxpayer shall be allowed to deduct royalty payments directly or indirectly received from a related member during the taxable year to the extent included in the taxpayer’s federal income unless such royalty payments would not be required to be added back under subparagraph two of this paragraph. . . .” And, at the time, N.Y. Tax Law § 208.9(o)(2) provided that a taxpayer paying a royalty to a related person was not required to add-back to entire net income any deduction for such payment if  “(i) the related members were part of a combined report (combined reporting exception); or (ii) the related member paid the royalty during the same tax year to a non-related member for a valid business purpose in an arm’s-length deal (the conduit exception); or (iii) the royalty payments were paid to a related member organized under the laws of a foreign country subject to a comprehensive tax treaty with the United States and the payments were taxed in that country at a rate equal to or greater than the rate in New York (treaty exception).” (Conclusion of Law C).

Petitioner argued that it was entitled to exclude the royalties that it received from its foreign affiliates because those foreign affiliates would have been required to add-back the royalty payment deductions if they had been New York taxpayers. The Division argued that Petitioner did not prove that the royalties were, in fact, royalties. And the Division argued that even if the royalties were royalties, Petitioner could only deduct the royalties if the payer of the royalties was a New York taxpayer and the payer’s deduction for the royalty payments was required to be added-back to income.

After finding that Petitioner had proven that the payments were royalties, Judge Law went on to analyze the statute based on its language and legislative history. And here we stop to commend Judge Law for not applying the “only reasonable construction standard” (ORC) in considering the proper interpretation of the statute. Some of our authors have written often and recently that the ORC standard has no place in the DTA’s arsenal of interpretive tools. We were pleased to see that the Judge did not resort to it even though the case involved a special exclusion. We hope other judges and the Tribunal follow suit.

Judge Law determined that the statute is properly read to require that the payer of the royalty be a New York taxpayer for the recipient to be able to deduct the payment. We think this is a close question, and (with respect) we would have fallen on the other side. But we admit that there is support for both interpretations. To us, the use of the phrase “would not be” instead of “are not” in former N.Y. Tax Law § 208.9(o)(3) indicates that the Legislature contemplated that non-taxpayer royalty payers would not preclude a royalty recipient from claiming the special exclusion. We agree with the Judge that the royalty payment add-back and exclusion was intended to combat the use of intercompany royalties to shift earnings out of high-tax states and into low or no-tax jurisdictions.  But fairness dictates symmetry in tax provisions like this. So for every deduction denial, there ought to be a corresponding exclusion. Certainly the Division would not have permitted a New York royalty payer to avoid the deduction add-back requirement if the royalty recipient were not a New York taxpayer since this is exactly the situation the law was intended to address. But there is no symmetry unless the law is properly construed to permit an exclusion for a New York royalty recipient when the payer is a non-taxpayer. Otherwise, New York has a “heads I win, tails you lose” situation.

The Judge also determined that the Division’s interpretation of the statute did not violate the Commerce Clause. The only information we have on Petitioner’s Commerce Clause argument is what the Judge shared in his determination. Based on that we are having a hard time seeing how out-of-state economic interests are being disadvantaged, as Petitioner argued, when it is New York taxpayers that will bear the brunt of the position. Still, given the pedigree of Petitioners lawyers, it's likely that Petitioner’s constitutional argument had merit. So we expect there is more to the story.

Stay tuned.  We imagine we haven’t heard the last of this case.

Matter of Blue Rock Contracting, Inc.; Judge: Maloney: Division’s Rep: Melanie Spaulding; Petitioner’s Rep: Herschel Friedman; Articles 28 and 29. 

Petitioner filed a refund claim for sales tax that it paid on trash removal for its construction projects. The Division granted 90% of the claimed refund, denying the remainder of the claim based on the fact that 10% of the invoices did not have separately-stated sales tax figures.  Petitioner filed a motion for summary determination on the grounds that it was obvious from the invoices that sales tax was being charged - there was a charge for the trash removal service and then a total charge for the invoice that was 108.875% of the amount shown as due for the trash removal, and 8.875% was the sales tax rate in effect in the jurisdiction and was listed as the effective sales tax rate on the invoice. The Division then sent a Notice of Discontinuance to Petitioner granting the rest of the refund but denying Petitioner the right to recover fees.  Petitioner refused to sign the Notice. So Judge Maloney issued her determination.

While acknowledging that the invoices did not have the separate-statement of sales tax, Judge Maloney found that the invoices and other evidence submitted by Petitioner proved that it had paid the sales tax at issue. Since the only issue in denying the claimed refund was the absence of acceptable proof that Petitioner paid the tax, the Judge directed the Division to pay the remainder of the claimed refund.

We wish Petitioner the best of luck with its application for fees.


Matter of Kallianpur; Division’s Rep.: Peter Ostwald; Petitioner’s Rep.: Scott Shimic;  Article 22.

At issue was whether the Division properly mailed Notices of Deficiency for the tax years 2013 and 2014. Petitioner first received a letter from the Division on January 4, 2016, which indicated that his 2012 tax return had been selected for review, and this letter was mailed to his Schenectady address. The Division then sent a proposed audit change and a Notice of Deficiency to the Schenectady address on March 9, 2016, and May 25, 2016, respectively. And on July 1 and 5, 2016, the Division mailed statements of proposed audit changes for tax years 2014 and 2013, again using the Schenectady address.

Petitioner timely filed a BCMS request for the 2012 Notice of Deficiency on July 14, 2016, using a South Korea address. Included in this request was a request to address the notices of proposed audit changes for 2013 and 2014. BCMS sent a letter to Petitioner at his South Korea address on July 22, 2016, informing him that his protest for 2013 and 2014 was premature inasmuch as the Notice of Deficiency had not been issued. On July 25, 2016, BCMS sent a letter to Petitioner at his South Korea address informing him that a conciliation conference regarding the 2012 tax year would be scheduled.

Thereafter, on August 17 and 22, 2016, the Division mailed Notices of Deficiency for 2014 and 2013, respectively, to Petitioner at his Schenectady address. Petitioner’s attorney sent a letter to the Division inquiring about the 2013 and 2014 assessments (which, we assume, had not been received by Petitioner or his attorney) on December 28, 2016, which the Division responded to on March 28, 2017, noting that the Notices of Deficiency had been issued in August 2016.  Petitioner alleged that he only became aware of the Notices of Deficiency after his attorney’s December 28 letter. On April 20, 2017, Petitioner’s attorney received copies of the Notices and then filed a BCMS request on April 24, 2017, listing Petitioner’s South Korea address. BCMS issued a conciliation order, which it sent to Petitioner’s South Korea address dismissing the request as untimely, and then Petitioner filed a petition protesting this order on July 17, 2017.

The Tribunal agreed with the ALJ that the CMRs and affidavits presented by the Division were sufficient to establish that it had followed its standard mailing procedure and that the Notices were mailed to the Schenectady address on August 17, 2016 and August 22, 2016, as the Division alleged. The issue then became whether the Schenectady address was Petitioner’s “last known address.”

Tax Law § 691 (b) provides that “a taxpayer’s last known address shall be the address given in the last return filed by him, unless subsequently to the filing of such return the taxpayer shall have notified the [Division] of a change of address.” However, the Tribunal noted that the Tax Law does not specify what qualifies as an appropriate notice of change of address. It then looked to federal case law and statutes, and concluded that, for federal purposes, the address shown on the taxpayer’s most recently filed return is his last known address unless the taxpayer has provided the IRS with “clear and concise notification” of a change of address.

Petitioner asserted that he had lived in South Korea full time since October 2012. However, the Tribunal found that he continued to use his Schenectady address on his New York State nonresident and part-year resident income tax returns for 2012, 2014 and 2015, which were filed after the Notices, and the corresponding applications for automatic six-month extensions.  Petitioner argued that the address listed on his July 14, 2016, BCMS request constituted a notice of a change of address, but the Tribunal did not agree. A BCMS request is not a return, rather, the Tribunal found that a clear and concise notification is required to establish a change of address.

The Tribunal considered the totality of the circumstances. While the Division was auditing Petitioner’s residency status, it had sent letters to his South Korea address. But this was outweighed by the fact that Petitioner used the Schenectady address on his tax returns, had not provided a notice of change of address, and had received the Notices sent to his Schenectady address a few months prior. Thus, it denied Petitioner’s petition and sustained the conciliation order.

This is probably the right decision. We think the real nail in Petitioner’s coffin was his 2015 return that also used his Schenectady address and was filed after the mailing of the Notices, even though the Tribunal doesn’t seem to hammer that point.

But riddle us this: Was the BCMS Order properly issued when it was sent to the South Korea address (which was, according to the ALJ and Tribunal, not Petitioner’s last known address)?  Probably not. But in the absence of an allegation of non-receipt of that Order, this ought to be irrelevant.

Matter of Doherty, d/b/a Eerie Productions; Division’s Rep.: David Gannon; Petitioner’s Reps.: Andrew Wright and Timothy Noonan; Articles 28 and 29.

Petitioner operated a haunted house called “Frightworld” in Buffalo, New York (no, your authors have never been – we don’t particularly like to be frightened). Frightworld operated from late-September through the first week of November each year. The location changed each year.  Petitioner typically signed a three-month lease for an abandoned big-box store in which it operated Frightworld. In order to ready the haunted house each year at a different location, the attractions were erected off-site and then joined together with temporary walls on-site, and props were delivered and set up within the attractions.

Patrons could enter into the common area of Frightworld free of charge, but they were required to pay a fee to enter the haunted house, which, during the years at issue, was $23, and on which Petitioner did not collect or remit tax. To ensure that patrons did not linger in the attractions, trained actors and special effects moved them forward, essentially, by scaring them, and the manner in which this was done depended on the theme of the particular attraction (and this apparently caused patrons to get injured – we guess it’s a good thing we never went).

The Division had previously audited and assessed sales tax on Petitioner’s admission charges for the period of March 1, 2005 to November 30, 2008. An appeal to the DTA of that prior assessment resulted in a stipulation for discontinuance of proceeding reflecting a settlement in the amount of $8,360.00, which equaled the amount of tax due on expense purchases. The stipulation did not indicate whether the admission charges were subject to tax. During this prior audit, Petitioner received an Advisory Opinion which concluded that the admission fees were subject to sales tax.

In the audit at issue, despite apparently dropping the sales issue in the prior appeal, the Division again asserted tax on the admission charges. During this audit, Petitioner again requested an Advisory Opinion because the facts included in the first were inaccurate (it was prepared by a prior representative). The second Advisory Opinion also concluded that the admission charges were taxable.

The ALJ determined that the attractions found within Frightworld were places of amusement and not amusement devices. Rather, it found that the attractions were more like the coin-operated booths that allow patrons to view live female entertainment, and not like a Ferris wheel, merry-go-round or coin-operated game. The ALJ also concluded that there was no reasonable cause for abatement of penalties since the Petitioner had obtained an Advisory Opinion which stated that the admission fees were subject to tax.

The Tribunal began by noting that it is clear that Frightworld is a place of amusement, but that the issue is whether the admission fee charged to enter the attractions found within Frightworld is subject to tax. In other words, the issue was whether the admission charge was “an admission charge to enter the location where amusement facilities are found” (taxable) or a charge to use an amusement device (not taxable). The Tribunal rejected Petitioner’s argument that the issue involved the interpretation of an ambiguous statute, and instead found that Fairland Amusements v. State Tax Commn. resolved any perceived ambiguity in the taxing statute, and that the Tribunal was only required to perform a weighing of the facts.

Petitioner argued that Frightworld was more similar to a merry-go-round or Ferris wheel than to a coin operated peep-show, and the Division argued the opposite. Petitioner relied on the fact that Frightworld is temporary in nature, as it is constructed each year at a new site with free standing attractions and then all of the attractions are removed in November. Petitioner argued that this impermanence was an indication that it was akin to an amusement device, like a Ferris wheel, rather than a place of amusement. However, the Tribunal found that the attractions were fairly substantial and not easily moved, which indicated that they were places of amusement.

Petitioner also argued that the actors were not there to entertain but only to move people through the attraction. The Tribunal again disagreed finding that the actors were instructed “to put on a show to scare and entertain the patrons” and that this made the attractions more like a coin-operated peep show booth where patrons entered a physical location where they watched a show for amusement. Nor did the Tribunal find that the issuance of permits to operate and an amusement device to be persuasive.

The Tribunal also agreed, without any analysis, with the ALJ’s decision to sustain the penalties.  And on this, we must (with respect) note our disagreement. 

The chronological course of events indicate that Petitioner acted reasonably (in our opinion).  In short, there was a dispute as to whether the charges at issue were taxable. Petitioner brought the dispute before the DTA through an ALJ petition for a prior audit and by requesting Advisory Opinions. The first Advisory Opinion ruled that Petitioner’s charges were taxable, but it was based on inaccurate facts. So Petitioner requested another Advisory Opinion based on accurate facts. All the while Petitioner was challenging the Division’s position by pursuing a DTA petition for the first audit. It is worth noting that the amount the Division agreed that Petitioner would pay to resolve that case did not include sales tax on Petitioner’s admission charges. The second Advisory Opinion request and the first ALJ Petition were not resolved until after the relevant sales tax periods had ended. It seems to us that this is consistent with what a prudent business would do if the business had a good faith belief that its transactions were not taxable, and we understand the regulations to support that pending non-frivolous petitions constitute reasonable cause for abatement of penalties.

Matter of ERW Enterprises, Inc. & Eric White d/b/a ERW Wholesale.; Division’s Rep.: Brian Evans; Petitioners’ Reps.: Jeffrey Reina and Paul Cambria, Jr.; Article 20.

ERW Enterprises (“Enterprises”) is wholly-owned by Eric White, who is a member of the Seneca Nation of Indians, which is recognized by the United States Bureau of Indian Affairs. Enterprises is a construction company that does heavy site work, so it mainly employed heavy equipment operators, carpenters, and electricians. As such, it has never engaged in the business of tobacco trading or wholesale. Its only connection to this matter is that the vehicle which was used to transport the allegedly unstamped cigarettes at issue was registered to Enterprises. ERW Wholesale (“Wholesale”) operated a tobacco wholesale business, and it is also wholly-owned by Eric White. Mr. White’s business license to operate as a tobacco wholesaler was issued by the Seneca Nation, and Wholesale’s warehouse, equipment and facilities are located on a Seneca Nation Reservation. Wholesale is solely regulated by the Seneca Nation of Indians. All of Wholesale’s customers are Native Americans, and it deals solely in Native American manufactured tobacco products, but Wholesale is not a New York licensed wholesaler or stamping agent.

In late November 2012, Wholesale received an order for 150 cases of King Mountain cigarettes from Oien’Kwa Trading, a Native American business located in New York. After its order, Oien’Kwa resold the order to Saihwahenteh, a Native American business located in Gainenkeh, New York, and Wholesale agreed to do a drop shipment where it would transport to cigarettes for Oien’Kwa. The cigarettes sold to Oien’Kwa were manufactured by a Native American owned business, and they were delivered to Wholesale by common carrier in sealed cases. Because the cases were sealed, it was impossible to tell if they contained New York tax stamps unless they were opened and inspected.

On December 1, 2012, the 150 cases of King Mountain cigarettes were loaded on a box truck that was registered to Enterprises as a commercial vehicle. Once loaded, the roll door on the truck was padlocked shut and sealed. This truck was used by Wholesale from time-to-time and, at this time, the registration was in the process of being changed to Wholesale. Shawn Snyder, an employee of Wholesale, was tasked with delivering the shipment. He was provided with invoices for the shipment and bills of lading, but neither contained any information that would suggest that Wholesale was transporting King Mountain cigarettes or that they contained New York tax stamps. The invoice noted that the cigarettes were “Exempt.”

Snyder was also given a document packet which contained: 1. a Seneca Nation of Indians Stamping Agent License issued to John Waterman d/b/a Iroquois Wholesale; 2. other documents indicating that John Waterman was a cigarette wholesaler; 3. a Seneca Nation of Indians business license permitting Eric White to operate as a tobacco wholesaler through Wholesale; and 4. a forwarded email from the then-Deputy Commissioner for the Office of Tax Enforcement which said  “Native Americans transporting untaxed native [sic] American cigarettes from one reservation in NYS to another reservation in NYS. - Don’t Seize.”

Mr. Snyder left to deliver the cigarettes on December 2, 2012, and he had some bumps along the way, including a flat tire. Once the tire was repaired, My Snyder continued on his trip, but along his route, the State Police were conducting a checkpoint where they were inspecting commercial trucks. There was a sign indicating that all trucks had to stop and be inspected, but Mr. Snyder failed to do so. He was seen passing the stop by a state trooper who then stopped Mr. Snyder and made him return to the checkpoint. Once at the checkpoint, Mr. Snyder, while wearing shorts and a tee shirt (and it was December in Upstate New York) was told to turn off his vehicle and they took his keys. Mr. Snyder had given the trooper who stopped him his driver’s license, the truck’s registration, the bill of lading, and the two invoices, and he told him that he was transporting cigarettes. This information was then given to the investigator at the checkpoint.  Mr. Snyder never informed the trooper of the brand of cigarettes in the truck. The investigator called his supervisor and reported that he thought the cigarettes that were in the tuck were unstamped (I don’t know about you, but this seems like a bit of racial profiling to us). The supervisor told the investigator to detain Mr. Snyder, which he did. He did not put Mr. Snyder under arrest, but Mr. Snyder wasn’t free to leave, and no one read Mr. Snyder his Miranda rights (We guess someone hasn’t been watching enough "Law and Order").

One of the troopers searched the cabin of the truck, and during this, Mr. Snyder gave the investigator the white packet and the name and number of his attorney. The trooper then asked Mr. Snyder to open the back of the truck, but Mr. Snyder was unable to find the key to the padlock. Without asking for permission, the troopers told Mr. Snyder they were going to cut to padlock. No warrant was obtained, and no one contacted Mr. Snyder’s attorney. No one asked Mr. Snyder if the cigarettes had tax stamps. Instead, the troopers broke into the back of the truck (later arguing it was for a “safety check”), opened a sealed case, pulled out a pack of cigarettes, and discovered that there were no New York State tax stamps. Ultimately, the troopers seized all of the cigarettes and allowed Mr. Snyder to leave. The State Police reported that only 140 cases were seized despite the fact that 150 were purchased and loaded onto the truck, and there was no evidence to explain this discrepancy.

The Division issued Notices of Determination to each Petitioner in the amount of $1,259,250.00 for the tax period ended December 3, 2012. At the time of the incident, a fine of up to $150 per carton could be assessed against anyone in possession of unstamped cigarettes in New York.  The penalty here was calculated as follows: 140 cases of cigarettes containing 60 cartons per case for a total of 8,400 cartons seized minus five cartons because the law allows for a $150.00 fine per carton in excess of five cartons, multiplied by $150.00, which equals a penalty of $1,259,250.00.

The entire load of cigarettes had been sold for $164,250. So the proposed penalty was more than seven times the value of the cigarettes.

New York imposes an excise tax of $4.35 on every pack of cigarettes possessed in state for sale. The tax is paid in advance by licensed cigarette agents who purchase and affix stamps to demonstrate that the tax is paid, and then the tax is included in the price as the cigarettes move down the distribution chain. The Tribunal noted that none of the parties involved were New York-licensed cigarette agents, and that cigarettes possessed in New York by one other than a licensed cigarette agent must have a stamp. However, cigarettes sold to qualified Native Americans for their own use and consumption on a reservation are exempt from the tax. This exemption does not extend to a purchases by Native Americans who are purchasing cigarettes for their own use off of their reservations or on another nation or tribe’s reservation. Exempt sales are effectuated through a coupon system or prior approval. Failure to comply with this results in a penalty of $150 per carton in excess of 5 cartons. 

The Tribunal found that the Notice of Determination issued to Enterprises should be cancelled based on Enterprises’ lack of possession or control of the cigarettes. The Tribunal agreed that the Notice should be cancelled because Enterprises was not in the tobacco business, in direct control of the truck, or holding the title to the truck. Further, the truck was only occasionally used by Enterprises, and the registration was being transferred to Wholesale. Also, it was determined that Mr. Snyder was employed by Wholesale and not by Enterprises.

Next, the Tribunal addressed Wholesale’s liability. Wholesale alleged that it was acting as a contract carrier, and thus entitled to the contract carrier exception. This exception provides that the penalty does not apply to common or contract carriers when lawfully transporting unstamped cigarettes. The Tribunal agreed with the ALJ that Wholesale was, in fact, a contract carrier.  However, it found that the transportation was not lawful. Rather, the Tribunal noted that Wholesale was not a stamping agent, which is the required New York entry point for cigarettes, and thus its possession of unstamped cigarettes was not in compliance with Article 20. The Tribunal rejected Wholesale's argument, based on Native American sovereignty, that the transaction did not occur in New York, but simply passed through en route from one Indian Nation to another Indian Nation, and that the cigarettes are beyond the State’s authority to tax.  The Tribunal found that Wholesale was liable for the penalty since it was in possession of unstamped cigarettes and no exemption applied.

Then, the Tribunal addressed Wholesale’s allegation that the search of the truck was in violation of its Fourth Amendment Right. The Tribunal did not rule on whether the search was a Fourth Amendment violation, but instead punted and said that if this evidence were excluded from evidence, it would have no impact. The Tribunal found that there was sufficient evidence to conclude that the cigarettes were unstamped without the cigarettes themselves. And the Tribunal stated that Petitioners never denied the cigarettes were unstamped.

The Tribunal seems to have gotten this part of the ruling right. But your authors know only enough Fourth Amendment law to recognize when to get our criminal litigators involved in a case (which, we should add, Wholesale actually did). And we expect that the members of the Tribunal are likewise less-versed in Fourth Amendment matters than in tax law matters. But we do watch a lot of “Law and Order,” and there is something that feels a bit hinky about the search. We wish the Tribunal had ruled more clearly and directly on the admissibility of the fact of the discovery that the truck contained unstamped cigarettes and all of the facts that followed therefrom (the “fruit of the poisonous tree”).

Wholesale next argued that the Notice of Determination should be cancelled because it did not hold title to the cigarettes when they were seized. The Tribunal noted that to be subject to the penalty, ownership is not required, and that Wholesale was clearly in possession of the cigarettes. Nor did the Tribunal find the argument that the “Don’t seize” directive in the above-noted Division email provided a basis to cancel the penalty.

Finally, the Tribunal also rejected Wholesale’s argument that the penalties are excessive fines contrary to the Eighth Amendment. Instead, the Tribunal noted as supporting the reasonableness of the penalty that: 1. the fine of $150 per carton is about 3.5 times the per-carton cigarette tax; 2. there were no criminal charges brought; and 3. the fine was, shortly thereafter, raised by the Legislature to $600 per carton.

Ultimately, the Tribunal sustained the Notice of Determination issued to Wholesale and cancelled the Notice of Determination issued to Enterprises.

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