TiNY Report for March 19, 2021 (reporting on DTA cases issued since February 28)

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In this edition, we recall the Bard’s Julius Caesar because, you know, the whole “ides of March” thing. And so: “Friends! New Yorkers! Twelve (or so) loyal readers! Lend me your eyes.”

In Shakespeare’s play, the Soothsayer warns Caesar: “Beware the ides of March.” TiNY would have instead cautioned petitioners: “Beware the first of March” –  because in the four Tribunal Decisions issued on March 1, no petitioner was victorious. But, consistent with Marc Antony’s sarcastic eulogy of Caesar: Joe Endres, Emma Savino, and I write to report the decisions, not to praise them. And yet TiNY is an honorable institution (or so we’d like to think).

Et tu, IBM?  Yup. On March 5, the Tribunal issued another Decision and another taxpayer defeat. An ALJ Order rounds out our presentation.

DECISIONS

Matter of M & Y Developers, Inc.; Division’s Rep.: Anita Luckina; Petitioner’s Reps.: Joshua Lawrence and Timothy Noonan; Articles 28 and 29 (by Joe Endres)

Because this was handled by Hodgson Russ, we’ll forego editorializing and provide just the facts.

You can read the TiNY recap of the ALJ determination here. By way of summary: Petitioner paid sales tax on purchases of concrete used in foundation work for building projects. Petitioner then sought a refund for the sales tax it paid, claiming that the concrete purchases qualified as nontaxable installations of capital improvements. The ALJ determined that the transactions constituted taxable purchases of tangible personal property because it was Petitioner, and not the concrete vendor, who was responsible for the installation of the concrete.

The Tribunal again characterized the issue as whether Petitioner purchased taxable tangible property or a nontaxable capital improvement installation service. The Tribunal rejected Petitioner’s argument that it purchased capital improvement services because:

  1. Petitioner itself provided more than de minimus involvement in the installation of the concrete; and
  2. The invoices for the transactions at issue did not refer to, or charge for, the installation of the concrete.

Finally, the Tribunal distinguished the primary case relied upon by Petitioner by concluding that Petitioner had not shown that the process of distributing and applying asphalt emulsion (found to be the installation of a capital improvement to real property) is sufficiently similar to the process of pumping and pouring concrete. The Tribunal viewed the pouring of concrete into a form or designated area to be akin to the delivery of building materials, and, therefore, a taxable sale of tangible property.

Matters of 608 Franklin, LLC and Evergreen Gardens, LLC; Division’s Rep.: Melanie Spaulding; Petitioners’ Rep.: Herschel Friedman; Articles 28 and 29 (by Joe Endres)

We lumped these two cases together because they present pretty much identical facts, legal issues, and outcomes. Indeed, the opinion sections of each decision contain virtually identical structure and language. You can read our full recaps of both ALJ Determinations here and here. The issue in these cases was whether security services provided at real property construction projects were taxable. This should be an easy question, right? Wrong. It actually requires a rather nuanced analysis of two statutory provisions that seem diametrically opposed. Tax Law § 1105(c)(8) imposes sales tax upon security services of every nature. However, Tax Law § 1105(c)(5) exempts services to real property in capital improvement projects. So what happens when otherwise taxable security services are performed at a capital improvement job site? Which provision wins? Well, the ALJ determined that the tax imposition statute for security services takes precedent over the “more general” tax exception relating to services performed at capital improvement projects.

Though we had some questions about this approach in our reviews of the ALJ Determinations, the Tribunal affirmed the ALJ’s determination.

The Tribunal first notes that these cases are not concerned with a tax imposition statute. Tax Law § 1105(c)(8) imposes sales tax on the sale of protective services. This section of the law contains no exclusions or exemptions for capital improvements. Therefore, according to the Tribunal, “the question here is not whether the subject services are subject to taxation, but whether taxation is negated by a statutory exclusion or exemption.” This is important because were the Tribunal to view these cases as construing a tax imposition statute, it would be compelled to construe the law most strongly against the Division and in favor of Petitioners.

The Tribunal then effectively states that these matters are controlled by Matter of Robert Bruce McLane Assocs., Inc. v Urbach, a Third Department case that analyzes this exact issue. See 232 A.D.2d 826 (3rd Dept. 1996). Petitioners responded to this case by asking the Tribunal to “revisit” the McLane decision (I’m not sure exactly what that means – as if the Tribunal could somehow disregard binding authority) because the Division “has inconsistently applied the McLane ruling and has inconsistently followed its own regulations.”

The Tribunal disagreed with this assertion, first citing the fact that Tax Law § 1105(c)(8) was enacted 25 years after the sections of the law that excluded services to capital improvements, and, therefore could have included a similar exclusion for the security services. According to the Tribunal, “[t]he failure of the Legislature to include a capital improvement provision in Tax Law § 1105(c)(8), therefore, can be taken as an indication that its exclusion was intended.”

As support for its contention that the Division has inconsistently applied the provisions at issue, Petitioners cited the Tribunal decision Matter of L&L Painting Co., Inc., a case handled by our law firm. In L&L Painting, the Tribunal “determined that the installation of a platform as part of a protective containment system was a necessary prerequisite to a capital improvement project at a bridge” and was therefore not taxable. Petitioners argued that both the nontaxable “protective containment system” in L&L Painting, and the nontaxable “temporary protective pedestrian walkways” listed in the sales tax regulations (see 20 NYCRR 541.8(a)), contradict the conclusion that security services should be taxable in these cases. However, the Tribunal largely dodged the larger substantive points Petitioners were making by noting that: (1) Tax Law § 1105(c)(8) was not at issue in L&L Painting, and (2) Petitioners failed to meet their burdens to show that the regulation is irrational and inconsistent with the Tax Law.

I’m struck by the fact that just because an argument wasn’t raised in a case doesn’t mean that it couldn’t have been. And just because an issue is missed in a case, doesn’t mean there isn’t still a potentially open issue that should be addressed to help inform taxpayers regarding the proper application of the Tax Law. But I can appreciate that perhaps the Tribunal would not have the facts necessary to analyze the nature of the transaction from a “protective services” perspective. It remains unclear to me, however, exactly why Petitioners failed to meet their burdens to show that the regulation is irrational and inconsistent considering that the Tribunal cited no specific deficiencies. I could see some valid arguments - temporary protective pedestrian walkways are not similar to the type of “protective services” taxable under Tax Law § 1105(c)(8) – but without any analysis, one is left to wonder.

Finally, Petitioners cited to the authority that concludes that interior decorating services cease to be taxable when the interior decorator also installs the design (thereby becoming a contractor and bringing the capital improvement service exclusion into play). Unfortunately for Petitioners, the Tribunal adopted the analysis we were concerned with in our initial blogpost on 608 Franklin (are the members of the Tribunal among TiNY’s twelve or so readers?), and distinguished this authority factually – i.e., unlike the interior decorator, the vendors selling Petitioners security services did not thereafter install a capital improvement.

It will be interesting to see if Petitioners decide to take these cases to the Third Department to see if it is troubled by the fact that the Division “has inconsistently applied the McLane ruling and has inconsistently followed its own regulations.” Because the Third Department is really the correct forum for overturning McLane, these cases may just be the perfunctory undercard of the main event.

Matter of Bortnikova; Division’s Rep.: Anita Luckina; Petitioner’s Rep.: Aleksei Koutin; Articles 28 and 29 (by Emma Savino)

The Tribunal affirmed the ALJ’s finding that the Division proved its standard procedures and that they were followed when it mailed four Notices to Petitioner at her last known address on May 15, 2018. Accordingly, the BCMS requests filed by Petitioner on August 14, 2018 were one day late. Because the Tribunal found that the BCMS requests were untimely, it did not reach Petitioner’s argument that she was not a responsible person under Tax Law § 1131(1).

Matter of International Business Machines Corp.; Division’s Rep.: Jennifer Baldwin; Petitioner’s Reps.: Scott Brandman and David Pope; Articles 28 and 29 (by Chris Doyle)

The Tribunal affirmed the ALJ’s determination that the royalties Petitioner received from foreign affiliates were not excludable from its income under former Tax Law § 208.9(o)(3), since the exclusion from income is permitted only if  “such royalty payments would not be required to be added back [to the income of the royalty payer].” Our write-up of the ALJ Determination may be found among the other Determinations making up the famous (to us) “Christmas Eve Massacre of 2019,” here. The Tribunal decided that one of the situations in which the royalty payer would not be required to add back the royalty payments to income is if the royalty payer is not a New York taxpayer. The die was cast for Petitioner when the Tribunal decided a case on this exact issue against Disney last August (my summary of that Decision is here).

I have previously opined that the statutory analysis is a close call. I would have gone the other way, but close calls always go against the taxpayer whenever the ill-begotten “only reasonable construction” standard is applied by the Tribunal, as it was in this case.

I still think there is an internal consistency problem with the statute because if every jurisdiction applied New York’s law, double taxation would be inevitable whenever the royalty payer was not taxable in the same jurisdiction as the royalty recipient. But a facial constitutional challenge like this is beyond the DTA’s jurisdiction, so I hope Disney and/or IBM take the fight to the next level.

ALJ ORDER

Matter of 240 Little Plains Realty, LLC; Judge Gardiner; Division’s Rep.: Jennifer Hink-Brennan; Petitioner’s Rep.: John P. Fazzio; Article 31 (by Emma Savino)

New York imposes a real property transfer tax on all non-exempt transfers of an interest in New York real property. An additional tax is imposed if the real property is residential real property and the consideration is $1 million or more. This additional tax is colloquially referred to as the “Mansion Tax,” because back when it first became effective, $1 million bought you a pretty nice house.

Petitioner purchased real estate in Southampton for $4.1 million. The seller filed a Form TP-584, Combined Real Estate Transfer Tax Return, but left the Mansion Tax section blank. Petitioner produced another Form TP-584 at the hearing which showed a $4.1 million sale of real estate and an additional transfer tax (i.e. the Mansion Tax) due in the amount of $41,000.00. Why Petitioner produced the form that indicated it owed the additional tax, when it claimed it was not owed, we don’t know.

The Division issued a Notice of Determination for the transfer tax due. Petitioner claimed that the conveyance was not subject to real estate transfer tax because the purchase was of vacant land and the transfer tax only applies to the conveyance of real property. Petitioner filed a timely BCMS request, and BCMS sustained the Notice. Petitioner then filed a timely petition and moved for summary determination. Since the TP-584 forms submitted by Petitioner and the Division were inconsistent, the Judge found that there existed a material issue of fact as to whether the property included a residence. So the Judge denied Petitioner’s motion for summary determination and scheduled this case for a hearing.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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