Hodgson Russ Tax Win Creates New York Sales and Use Tax Refund Opportunity for Site Safety Service Providers and New York City Construction Firms

Hodgson Russ State & Local Tax Partner Craig Reilly recently secured a favorable declaratory judgment ruling on behalf of a group of licensed site safety service providers operating in accordance with the New York City Building Code. The declaratory judgment ruling by the Albany Supreme Court confirmed that section 1105 of the New York State Tax Law is wholly inapplicable to these licensed site safety services, which involve coordinators or managers who monitor construction sites in New York City and advise contractors on whether they are complying with the New York City Building Code.

Although tax disputes in New York are usually decided first by the Division of Tax Appeals, the New York Supreme Court, Appellate Division Third Judicial Department previously ruled in this case that the site safety service providers did not need to exhaust administrative remedies before asking the courts to decide whether their licensed services are taxable under the New York State Tax Law. The site safety service providers brought their declaratory judgment action following a 2020 advisory opinion (TSB-A-20(14)S) issued by the New York State Tax Department, which indicated that New York State’s sales and use tax on “protective and detective” services should apply to charges for services performed by licensed site safety service providers. Following the 2020 advisory opinion, the Tax Department’s Audit Division began auditing various site safety service providers and the contractors who hired them. These audits resulted in proposed assessments totaling tens of millions of dollars in additional New York State sales and use tax.

Instead of pursuing a lengthy administrative appeal to challenge these proposed assessments, Hodgson Russ filed a declaratory judgment action in New York State court on behalf of several site safety service providers. The declaratory judgment action requested a judicial ruling that section 1105 of New York State’s Tax Law is wholly inapplicable to licensed site safety services. After the Third Department remanded the case to the lower trial court for a substantive ruling, the Albany Supreme Court overruled the Tax Department’s interpretation of the Tax Law as announced in the 2020 advisory opinion and concluded that licensed site safety services are not taxable under the Tax Law.

The trial court found it was not required to give any deference to the Tax Department’s prior interpretation of the Tax Law, and that, because the dispute involved a statute seeking to impose tax, any ambiguities in the statute were to be construed in favor of the taxpayer and against the Tax Department. With this backdrop, the court held that the mandated duties of licensed site safety service providers are distinguishable from those of taxable security guards, watchpersons, or patrolmen. Specifically, although licensed site safety service providers may have a duty to notify other individuals of a New York City Building Code violation, the court held that this duty does not rise to the level of a taxable “protective and detective” service as the reported violations do not necessarily signal the presence of a malfunction or damage to a building site. Licensed site safety services, according to the court, do not directly prevent harm to the public or property, and there is no affirmative duty upon the service provider to signal the presence of an existing danger. Accordingly, the court held that licensed site safety services do not qualify as taxable “protective and detective” services.

This determination may create a significant New York State sales and use tax refund opportunity for both site safety service providers and construction contractors who have purchased site safety services and incorrectly paid New York State sales and use tax on charges for these services. New York State’s general sales and use tax refund guidelines require that valid refund requests must be submitted within three years from the date the tax was due to the Tax Department, or two years from the date the tax was paid, whichever is later. A proper claim for refund must also include a completed and signed application form (Form AU-11) that details various information, such as an explanation for the basis of the refund claim, a detailed list of all transactions related to the refund claim, and proof of payment of the requested tax refunds.

For further information or for assistance in evaluating any possible refund claims, please contact the Hodgson Russ State & Local Tax team.

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