Here are the sales tax cases from the TiNY Blog for the week of May 14, 2024.
Matter of Beeline.com, Inc. (May 2, 2024); Div’s Rep. Elizabeth Lyons, Esq.; Pet’s Reps. Peter Larson, Esq. and Raye Elliott, Esq.; Articles 28 and 29/SaaS as a sale of software (Chris Doyle).
This was a close case. The issue involved whether an on-line service provided by Petitioner that matched prospective employers looking for temporary employees with suppliers who provide contingent (temporary) employees was a taxable sale of software or a nontaxable provision of an unenumerated service.
Petitioner provided an integrated service of matching large national and global customers that desired to purchase the services of temporary workers with suppliers of temporary contingent labor. Petitioner provided this service by obtaining large amounts of information from a prospective customer regarding its needs and processes during a customer’s on-boarding process and then used that information to match the customer with a vendor that had an available and appropriate supply of labor. Petitioner spent hundreds or thousands of hours gathering information from prospective customers because Petitioner tailored its services based on each individual customer and therefore needed to understand the scope of the services required by the customer. Customers accessed Petitioner’s services using Petitioner’s proprietary vendor management system (VMS) which utilized pre-written software accessible through the internet with a username and password. According to Petitioner’s website:
“VMS is the software that automates the hiring process of contract workers. It is often a web-based application that helps to manage and procure staffing services from requisition through billing. Most VMS tools are delivered through a software-as-a-service model. VMS tools provide significant improvements in reporting analytics capabilities that far outperform manual system and processes. * * * Suppliers see all relevant job orders, and [customers] can accurately assess labor services spend [sic] and performance, leading to significant cost reduction.”
The VMS was in essence a software application that allowed Petitioner’s customers to access a large universe of potential workers to determine which ones might be suitable for the customers’ needs and then provide analytics to help the customer manage those temporary employees.
At the hearing, Petitioner entered into evidence several contracts for VMS services, and each of them included a license to use Petitioner’s software.
The Tribunal affirmed the ALJ’s determination that Petitioner’s sales of VMS were sales of pre-written computer software and thus sales of tangible personal property subject to New York sales tax. In doing so, the Tribunal disagreed with Petitioner that the “true object” or “primary function” analyses should be applied to determine the taxability of VMS. Under those tests, the taxability of receipts for the provision of a bundle of services is determined by looking at the transaction globally and determining from the purchaser’s perspective what was being purchased. The Tribunal ruled that these tests were not applicable to determine the taxability of a bundled sale in which one part of the bundle was services and the other part of the bundle was the sale of tangible personal property (i.e., the pre-written software).
While the Tribunal agreed that Petitioner provided, in part, services, it found that “VMS software technology was the central element of those contracts and that customers were not just purchasing petitioner’s services, they were purchasing pre-written software that they used to facilitate the sourcing, hiring and management of contract labor.” As such, the Tribunal found that Petitioner’s sales of VMS were subject to sales tax.
Matter of Beaver Street Pizza, LLC (ALJ Behuniak, May 2, 2024); Div’s Rep. Elizabeth Lyons, Esq.; Pet’s Rep. John Weinberg, Esq.; Articles 28 and 29/Bulk sales (Chris Doyle).
Petitioner operated a pizza restaurant on Beaver Street (go figure). A prior vendor, Manhattan’s Best Pizza, Inc. (“MBP”) previously operated at the same location. MBP assigned its lease for the premises to Petitioner. The terms and conditions of that assignment included that Petitioner pay MBP $10 for which Petitioner received both the lease of the premises for the remaining lease term, and an undivided interest in a $65,907.80 security deposit. MBP (and not Petitioner) was required to pay its landlord roughly $165,000 for past-due rent, legal fees related to the assignment, and an “assignment fee.” And Petitioner assumed responsibility for payments under the lease “as if it were the original tenant.”
The Division took the position that Petitioner was a purchaser of “business assets” of MBP outside of the ordinary course of MBP’s business and as such was liable for the sales taxes owed by MBP. If a business purchaser fails to withhold funds from the seller and fails to file a proper and timely notice of bulk sale with the Division, then such purchaser becomes personally liable for the sales and use taxes determined to be due from the seller under Tax Law § 1141(c), up to the fair market value of the assets acquired. A bulk sale includes the transfer of business assets outside of the ordinary course of business.
At the hearing Petitioner argued it didn’t purchase any of MBP’s business assets, but merely assumed the lease under the assignment agreement.
Judge Behuniak found that Petitioner acquired business assets from MBP in a bulk sale transaction. The Judge found that the lease was one of the primary assets of the business since it included not only the premises, but also the pizza ovens, tables, and chairs. As a bulk sale purchaser, the Judge found that Petitioner was liable for MBP’s pre-sale sales tax liabilities limited by the higher of the purchase price or the fair market value of the assets transferred. The Judge found that “the purchase price appear[ed] to be zero.” But since Petitioner did not prove that the fair market value of the assets received was less than the tax liability asserted, the Judge sustained the assessment against Petitioner.
I agree with the Judge that there was a bulk sale. But, with respect, I’m not sure I agree with the Judge that Petitioner did not prove the fair market value of the assets transferred was nil. The purchase price was found by the Judge to have been zero. It appeared to me from the facts found that MBP and Petitioner were unrelated parties acting at “arm’s length.” Given those facts alone the Judge could have determined that the value of assets acquired was what was paid for the assets. But the required standard of proof is “clear and convincing evidence,” and the Judge, who was privy to all of the facts, was clearly not convinced.
Order:
Matter of Volman (ALJ Law, May 2, 2024); Div’s Rep. Aliza Chase, Esq.; Pet’s Rep. Michael Tremonte, Esq.; Articles 28 and 29/Timy (Zoe Peppas).
Per usual, the question of whether the taxpayer filed a timely request for a conciliation conference at BCMS hinges on whether the Division met its burden of demonstrating proper mailing of the notices to Petitioner. Here, notices of estimated determination were dated as sent to Petitioner on April 14, 2022. Petitioner filed a request for BCMS conciliation conference on January 13, 2023. BCMS dismissed the request as untimely.
“To meet its burden, the Division must show proof of a standard mailing procedure and that such procedure was followed in the particular instance in question.” In this matter, the Division offered a CMR that was properly completed, along with two affidavits attempting to show the proper mailing procedure was followed. However, one affidavit “unequivocally reference[d] and relie[d] upon” the other, even though it was dated and signed after the affidavit on which it claimed to rely. This is like one of those Marvel-movie time-travel paradoxes: if a grandson affidavit goes back in time and kills its grandfather affidavit, how could the grandson affidavit ever be born to go back in time to kill the grandfather affidavit? “Given the discrepancy in dates,” the Judge found (without any reference to time-travel paradoxes) the affidavits could be accorded no weight. Since the Division failed to offer sufficient proof establishing the statutory notices were mailed to Petitioner on April 14, 2022, the Division’s motion for summary determination was denied and a hearing was to be scheduled.
