Summaries fo Significant Decisions Issued by the Courts and
Administrative Tribunals of New York
The New York Supreme Court, Appellate Division, held that the New York Department of Taxation and Finance’s “Internet Activities Rule” was not preempted by Public Law 86-272. P.L. 86-272 prohibits a state from imposing a net income tax on an out-of-state seller of tangible personal property whose in-state activities do not exceed solicitation. The Department issued regulations that, for purposes of P.L. 86-272, treat internet-based activities as in-state activities—the “Internet Activities Rule.” For example, if a seller provides a customer located in New York with post-sale assistance via the internet from a location outside New York, the Internet Activities Rule treats the seller as having performed that activity, which exceeds solicitation, in New York State. The American Catalog Mailers Association challenged the Internet Activities Rule, asserting that it conflicted with P.L. 86-272 on its face. The Court disagreed, concluding that the Internet Activities Rule, as written, did not necessarily conflict with P.L. 86-272, and that the Internet Activities Rule did not obstruct Congress’s objective in enacting the federal statute. The court did, however, appear to leave the door open for as-applied challenges.
An administrative law judge for the New York State Division of Tax Appeals determined that corporate franchise taxpayers could not meet the definition of a “qualified emerging technology company” (“QETC”) unless every member of their combined group independently met the definition of a “QETC.” For tax years 2015 through 2017, New York taxed QETCs at a reduced tax rate. The taxpayers in Fidelity were members of a combined group that collectively sold financial and banking services to customers located throughout the world, including New York. It was undisputed that the taxpayers’ combined group, when viewed in the aggregate, met the QETC requirements: it was “located in New York” and derived over 50% of its total receipts from emerging technologies. But the ALJ, relying on Charter Communications, an appellate court decision (summarized below), determined that because not every member of the combined group independently met the requirements of a QETC, no taxpayer in the combined group was a QETC entitled to compute its tax at a reduced rate. Although the years at issue in Fidelity were subsequent to the years at issue in Charter Communications, the ALJ concluded that no subsequent legislation, specifically New York’s 2015 corporate tax reform, warranted a departure from Charter Communications.
The New York Supreme Court, Appellate Division, held that a vehicle-lessor was entitled to sales-tax credits for amounts refunded to vehicle-lessees upon lease termination. The taxpayer leased commercial vehicles. The leases contained terminal-rental-adjustment clauses (TRACs), under which the lessee paid monthly rent based on the projected book value of the vehicle at the end of the lease. If at the end of the lease the book value was higher than projected, the taxpayer would refund the lessee a portion of its monthly rent payments plus the sales tax previously collected thereon; and if at the end of the lease the book value was lower than projected, the taxpayer would retroactively charge the lessee additional monthly rent and collect sales tax thereon. When the taxpayer refunded the lessee previously collected sales tax, it claimed a credit against future sales tax owed. On audit, the state denied the taxpayer these claimed credits. Under New York Tax Law § 1111(i)(B)(1), a lessor is required to collect sales tax at the inception of a long-term lease of a vehicle, based on the “consideration . . . contracted to be given” for at least the first 32 months of the lease. The taxpayer followed this law; however, the anticipated monthly rent upon which tax was collected and paid was sometimes overstated due to subsequent downward-TRAC adjustments. While the state acknowledged this, it argued that it had no statutory authority to refund or credit a lessor for tax paid at a lease’s inception—according to the state, this amount was “irrevocably fixed.” The court disagreed, concluding that the taxpayer’s position was supported by the plain meaning of the statute’s text (“consideration . . . contracted to be given”) and the Legislature’s decision to expressly grant credits for tax-overpayments attributable to TRACs for periods subsequent to those at issue in the case, which was described in legislative materials as “clarifying” legislation.
The New York Supreme Court, Appellate Division, held that corporate franchise taxpayers could not meet the definition of a “qualified emerging technology company” (“QETC”) unless every member of their combined group independently met the definition of a “QETC.” From 2012 to 2014, New York taxed QETCs at a reduced tax rate. A QETC includes a company located in New York whose primary products or services are classified as emerging technologies. A company is “located in New York” if it owns or rents real property in New York that is used for emerging technologies; a company’s emerging technologies are “primary” if they account for more than 50% of the company’s receipts.
The taxpayers in Charter were members of a combined group that collectively provided customers throughout the United States, including New York, with video, high-speed data, and digital-voice services. It was undisputed that the taxpayers’ combined group, when viewed in the aggregate, was “located in New York” and derived well over 50% of its total receipts from emerging technologies. Nevertheless, the court held that no taxpayer-member of the combined group could be a QETC unless every member of the combined group independently met the QETC requirements. Because certain members of the taxpayers’ combined group had no real property in New York, not every member of the combined group was a QETC, and therefore no taxpayer-member of the combined group was entitled to compute its tax at the reduced rate afforded to QETCs.
An administrative law judge for the New York City Tax Appeals Tribunal determined that a taxpayer-partnership, for purposes of computing its unincorporated business tax (UBT), could not: (1) include in its taxable income its distributive shares of income from subsidiary partnerships that did not conduct business in the City; and (2) include in its allocation formula any property, payroll, and gross income attributable to subsidiary partnerships that did not conduct business in the City. The taxpayer was a partnership that owned interests in several subsidiary partnerships; the taxpayer and the subsidiary partnerships collectively operated a financial-services business. Certain of the subsidiary partnerships conducted no business in the City (the “Non-City Partnerships”). The taxpayer computed its UBT using the “aggregate method”: it included in its allocable income and allocation formula the income and allocation factors of the Non-City Partnerships. The ALJ determined that this computation method was prohibited by the City’s Administrative Code and its Rules and Regulations, agreeing with the City’s Department of Finance that partnerships must compute their UBT according to the “entity method.”
An administrative law judge for the New York State Division of Tax Appeals determined that a wireless telecommunications service provider was required to collect and remit New York sales tax on fees charged to its customers in connection with the Federal Universal Service Fund (“FUSF”). The taxpayer sold New York customers calling, texting, and internet- access services for a single charge. In addition, the taxpayer separately charged the customers a “FUSF fee,” which covered a portion of the taxpayer’s federally mandated contributions to the FUSF. The FUSF was created to ensure affordable telecommunication services to rural and low- income areas of the United States. The amount of the taxpayer’s contribution to the FUSF was based on its revenue from interstate and international calling services.
The taxpayer collected no sales tax from its customers on the FUSF fees. The ALJ ruled that this was improper because: (1) under Tax Law § 1105(b)(2), the taxpayer could not unbundle the FUSF fees from its taxable charges for mobile telecommunication services; and (2) the FUSF fees were merely a component of the taxable mobile telecommunication services. Thus the FUSF fees were taxable. (Note: the ALJ distinguished the taxpayer’s case from Matter of Time Warner (discussed below) because the taxpayer’s services were subject to tax under Section 1105(b)(2), which subjects all calling services to sales tax, whereas the services in Time Warner were subject to tax under Section 1105(b)(1), which subjects only intrastate calling services to tax.)
In a two-to-one decision, the New York State Tax Appeals Tribunal held that a provider of voice-over-internet protocol (VoIP) services need not collect New York sales tax on fees charged to its customers in connection with the Federal Universal Service Fund (“FUSF”). The taxpayer provided intrastate, interstate, and international VoIP services to customers in New York for a single charge. The taxpayer separately charged the customers a “FUSF fee,” which covered a portion of the taxpayer’s federally mandated contributions to the FUSF. The FUSF was created to ensure affordable telecommunication services to rural and low-income areas of the United States. The amount of the taxpayer’s contribution to the FUSF was based on its revenue from interstate and international VoIP services—not intrastate VoIP services.
The taxpayer did not collect and remit sales tax on the FUSF fee charged to its customers. The state argued that this was improper, but the Tribunal’s majority disagreed. Per Tax Law § 1105(b)(1), only that portion of the taxpayer’s charge for intrastate VoIP services was subject to sales tax. The portion of the charge for interstate and international VoIP services was expressly excluded from sales tax under Section 1105(b)(1)—on this point there was no dispute. The majority characterized the taxpayer’s FUSF contributions as a federal “regulatory surcharge . . . on revenue related to its interstate and international services,” and reasoned that if charges for interstate and international services were exempt from sales tax, the federal surcharge on such services passed through to the customer must also be exempt. The Tribunal thus sided with the taxpayer.