TiNY Report for October 4, 2018 (covering DTA cases issued September 27)

This week we have two ALJ Determinations and two Tribunal Orders. Only one (yay!) covers a timeliness issue. 

ALJ DETERMINATIONS

Matter of Forstadt; Judge: Russo; Division’s Rep: Anita Luckina; Taxpayer’s Rep: Robert S. Lisch; Article 22.  The Division proved it mailed the Notices of Deficiency to Petitioner’s last known address.  Petitioner mailed her BCMS request protesting the Notices about eight years later (give or take a month or two).  As Maxwell Smart might say:  “Missed the deadline by this much (hold thumb and forefinger of right hand one inch apart).” The Judge granted summary determination for the Division.  

Matter of Greenfield; Judge: Russo; Division’s Rep: Jessica DiFiore; Taxpayer’s Rep: Richard Rubin; Articles 28 and 29.  Not a lot of money in this one, but it raises an issue on which I think the Division is entirely wrong. 

Petitioner leased a car in 2014. Upon inception of the lease he paid all of the sales tax that would otherwise be due under the entire term of the lease.  A year later he assigned the lease to a third party and sought a refund of the sales tax he paid for the remaining term of the lease.  The Division denied his refund claim, and the Judge summarily sustained the refund denial. 

So what’s my gripe?  The Judge quoted the Division’s policy statement in matters such as these:

“When an individual leases a motor vehicle for a period of one year or more, the amount due under the agreement and for the entire period covered by the lease will immediately be subject to sales tax. This lease is considered a sale, and as such, it would be taxable in a like manner as any other tangible personal property. That is, tax is due when title or possession transfers from the seller to the purchaser for a consideration.  There is no provision in the sales tax law that allows for a refund of the sales tax paid be [sic] the lessee even though the agreement may be terminated prematurely.

When the original lease is subsequently assumed by an assignee, this is a separate taxable transaction.  As stated above, title or possession of tangible personal property has been transferred for a consideration.  In this instance, the consideration is the assumption of the lease payments and tax is due on the remaining payments on this lease as indicated above.” 

I totally agree with the first paragraph of the policy and the Judge’s ruling is in accord with it.  I totally disagree with the second paragraph of the Division’s policy (the propriety of which was not before Judge Russo).  I question whether the assignment of a lease for tangible personal property is a retail sale in the absence of additional compensation for the assignment.  The lessee’s/assignee’s obligation to pay the remaining lease payments is not consideration.  If it was, then sales tax would be due upon every creation of a lease of non-exempt tangible personal property.  Instead, the Division has consistently treated the creation of a lease as not being a taxable event.

In the case of an assignment of a lease, sales tax would generally be owed on the new lessee’s/assignee’s remaining payments under the lease as such payments are being made.  However, with certain motor vehicle leases (like the one at issue in this determination), Regulation § 527.15(c)(1)(i) provides:  “With respect to the lease of a motor vehicle, vessel or noncommercial aircraft for a period of one year or more, all receipts due or consideration given or contracted to be given for such property under, and for the entire period of, the lease…are deemed to have been paid or given and are subject to tax, and any tax shall be collected, at the inception of the lease.”   This regulatory language parrots the statute (Tax Law § 1111(i)(A)).  Thus, an assignee of such a lease shouldn’t owe any tax since all of the consideration on the lease is statutorily deemed to have been paid by the original lessee at the inception of the lease. 

Stated another way: even if the assignment of a lease is treated as a new transaction, the lease is still the same lease; and since the original lessee is deemed, by statute, to have paid all of the consideration due at the inception of the lease, there is no consideration left for the new lessee/assignee on which tax may be computed. 

TRIBUNAL ORDERS

Matter of Bayerische Beamtenkrankenkasse and Matter of Landschaftliche Brandkasse Hannover; Division’s Rep: Clifford Peterson; Taxpayer’s Reps: Arthur Rosen and Alysse McLoughlin; Article 33.  These are the last-gasp sequels to the very interesting (well, for state tax nerds) insurance franchise tax cases on which we reported a year ago.  To recap:  Last September the Tribunal ruled that: (1) the Division had correctly followed the law when it denied Petitioners the ability to pay the Article 33 franchise tax based on premiums; (2) Petitioners were required to compute their tax based on income; (3) since they were a non-US insurer, their income base for tax purposes was effectively connected income (“ECI”) apportioned to New York using US-centric factors; and (4) under the law Petitioners owed a bunch of additional tax.  But then the Tribunal ruled that subjecting a German insurer to an income tax based on ECI and US-centric apportionment factors violated the US-German Tax Treaty’s nondiscrimination clause since similarly-situated US insurers would base their tax on world-wide income and world-wide apportionment factors.  Accordingly, the Tribunal canceled the Notices of Deficiency issued to Petitioners.

In the orders issued last week, the Tribunal denied the Division’s motions for reargument.  Noting first that it had only limited authority to grant reargument, the Tribunal went on to describe why it felt that its authority should not be exercised in these cases.  The Tribunal noted its preference for finality, but accepted that reargument may be appropriate if it had been shown that the Tribunal’s original decision evidenced either misapprehended facts or a misapplied controlling principle of law.  The Tribunal held that it did not misapprehend any facts in its original decision since the question of whether the nondiscrimination provision of the US-German Tax Treaty prohibited the Division’s audit treatment was a question of law only.  And as to whether it misapplied any controlling principle of law, the Tribunal found that the legal issues raised by the Division in its motion may have been persuasive if raised during the exception, but they did not rise to the level of a “controlling principle of law.”  Accordingly, the Tribunal denied the Division’s motion for reargument.    

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