The Supreme Court of the State of New York for New York County dismissed a lawsuit brought by the state attorney general (“AG”) under the New York State False Claims Act alleging that a company made “reverse false claims” by failing to declare certain promotional payments that it received as receipts subject to sales tax on its sales tax returns. People v. B&H Foto & Electronics Corp., 2021 NYLJ LEXIS 988* (N.Y. Sup. Ct. Sept. 21, 2021). The decision confirms that what is relevant in determining receipts subject to sales tax in New York is the consideration that the end-user customer pays in a retail transaction, without regard to separate payments made pursuant to agreements between the retailer and the manufacturer.
Facts: The company, a photography and video equipment retailer, purchased inventory from manufacturers and participated in “instant savings” programs through which manufacturers provided an incentive to the company to sell that manufacturer’s goods. During the promotional period, the company would receive a promotional payment (typically a credit applied to future orders) for every item of the manufacturer’s goods that the company sold. The company was permitted, but not required, to pass the promotional payment on to its end-user customers in the form of discounts. The AG argued that the promotional payments operated as de facto manufacturer’s coupons which are taxable in New York and the payments should have been reported on the company’s sales tax returns as receipts subject to sales tax. The company’s position was that the promotional payments function as wholesale discounts calculated into its cost of goods sold.
Decision: The Court disagreed with the AG, finding that the promotional payments under the “instant savings” programs were distinguishable from manufacturer’s coupons inasmuch as when an end-user customer makes a taxable purchase using a manufacturer’s coupon for an amount that the manufacturer has agreed to reimburse the retailer, then the amount of the coupon is part of the consideration that the end-user paid and is taxable. However, the Court reasoned that here, if the company provided a discount to the end-user customer because it knew it would receive a promotional payment from the manufacturer for the sale, that amount is not part of the consideration that the end-user customer paid “[s]ince there is no privity between the manufacturer and the customer.” Id. at *9.
Finally, the AG alleged that “disagreements among [the company’s] executives as to the proper tax treatment” of the promotional payments was evidence that the company knew that it was required to remit sales tax on the payments. Id. at *3. While acknowledging that internal company discussions can support the existence of fraud in conjunction with a statutory violation, the Court explained that here “the absence of a statutory violation” inasmuch as the promotional payments were not subject to sales tax “means that persistent fraud or illegality was not committed even if [the company] believed that it was acting unlawfully.” Id. at *13.