New York Law Review

Tag: sales tax

  • People v. Valenza, 60 N.Y.2d 363 (1983): Criminal Liability for Failure to Remit Sales Tax

    People v. Valenza, 60 N.Y.2d 363 (1983)

    A vendor who collects sales taxes but fails to remit them to the state is not subject to criminal prosecution for larceny by embezzlement unless specifically provided for by statute; civil penalties are generally the exclusive remedy.

    Summary

    The New York Court of Appeals held that a restaurant and its owner could not be criminally prosecuted for grand larceny for withholding sales taxes collected from customers. While vendors act as trustees for the state in collecting sales taxes, the Tax Law provides a comprehensive scheme of civil and criminal penalties. The legislature’s choice to impose only civil penalties for the failure to remit sales taxes, except in specific circumstances, indicated a legislative intent to exclude such conduct from general larceny statutes. This decision emphasizes the principle that when the legislature provides a specific and integrated statutory scheme, it can preempt the application of more general criminal laws.

    Facts

    Proof of the Pudding, Inc., a restaurant, and its owner, Frank Valenza, were indicted for grand larceny and failure to file sales tax returns. The larceny charges stemmed from the alleged withholding of sales tax revenues collected between 1976 and 1979. The charges for failure to file returns concerned the period from June 1978 through July 1979. The indictment alleged the defendants withheld sales taxes collected in connection with the redemption of gift certificates.

    Procedural History

    The Supreme Court denied the defendants’ motion to dismiss the larceny counts. After a trial, both defendants were convicted of grand larceny in the second degree. A mistrial was declared on the remaining larceny counts. Proof of the Pudding was convicted of failure to file sales tax returns, while Valenza was acquitted on those counts. The Appellate Division affirmed the convictions. The New York Court of Appeals reversed the grand larceny convictions and dismissed those counts of the indictment.

    Issue(s)

    1. Whether a vendor who collects sales taxes but fails to remit them to the state under circumstances indicating an intent to permanently deprive the state of those taxes can be prosecuted for larceny by embezzlement.
    2. Whether the evidence was sufficient to convict Proof of the Pudding, Inc. for failure to file sales tax returns with the intent to evade payment of taxes.

    Holding

    1. No, because the Legislature intended that the civil penalties in the Tax Law be the exclusive means of prosecuting the failure to remit sales taxes, except under specific circumstances outlined in the statute.
    2. Yes, because viewing the record in the light most favorable to the prosecution, a rational trier of fact could have found beyond a reasonable doubt that the defendant failed to file a sales tax return within the meaning of the law and did so with intent to evade payment of the taxes.

    Court’s Reasoning

    The Court of Appeals reasoned that while a vendor collecting sales tax acts as a trustee for the state, the Tax Law provides a comprehensive scheme of penalties for violations. The court emphasized that the legislature specifically outlined violations that would result in criminal penalties in Tax Law § 1145(b) but conspicuously omitted the general failure to remit sales taxes collected, only including it in the limited instance of failing to comply with a notice to deposit collected taxes in a separate account. The court drew a comparison to Article 22 of the Tax Law concerning income taxes, where the legislature explicitly made the failure to pay over withholding taxes a misdemeanor. The absence of similar language in Article 28 indicated a deliberate choice not to criminalize the failure to remit sales taxes under most circumstances.

    The court distinguished cases where a prosecutor could choose between general and specific statutes within the Penal Law. Here, the State sought to prosecute under the Penal Law for conduct regulated by a comprehensive and specific Tax Law. The court stated, “The Legislature’s structuring of section 1145 to provide substantial civil penalties for failing to pay over sales tax and to exclude this conduct from the criminal penalties section must be deemed to manifest an intent to exclude such conduct from criminal prosecution under either the Tax Law or the Penal Law.”

    Regarding Proof of the Pudding’s conviction for failure to file sales tax returns, the Court found sufficient evidence to support the conviction. The State presented evidence that no returns were filed until after the restaurant was under investigation and that only nominal payments were made nearly two years after the returns were filed. This was sufficient for a rational trier of fact to conclude that the failure to file was intentional and aimed at evading tax payments.

  • Servomation Corp. v. State Tax Commission, 51 N.Y.2d 608 (1980): Resale Exclusion for Disposable Food Service Items

    Servomation Corp. v. State Tax Commission, 51 N.Y.2d 608 (1980)

    Disposable items like cups and containers, purchased by food service vendors and transferred to customers, are exempt from sales tax under the resale exclusion of New York Tax Law § 1101(b)(4)(i)(A).

    Summary

    Servomation, a company operating vending machines and food service facilities, challenged a New York State Tax Commission regulation that subjected disposable paper and plastic products (cups, plates, containers) to sales tax. The Court of Appeals held that these items, when transferred to customers, qualify for the resale exclusion under Tax Law § 1101(b)(4)(i)(A), thus are not subject to sales tax. The court reasoned that the regulation was inconsistent with the statute, as interpreted in the companion case, Matter of Burger King v. State Tax Commission, and therefore unenforceable.

    Facts

    Servomation Corp. operates vending machines, cafeterias, and restaurants. In its food service business, it buys disposable paper and plastic products (cups, plates, containers). New York Tax Law § 1115(a)(19) exempts containers used in packaging tangible personal property for sale. The State Tax Commission issued a regulation (20 NYCRR 528.20(c)(5)) stating that containers used by restaurants are taxable, regardless of whether a separate charge is imposed.

    Procedural History

    Servomation sued for a declaratory judgment that the regulation was invalid. The Supreme Court initially sided with the Tax Commission. The Appellate Division reversed, citing its decision in Matter of Burger King v. State Tax Comm., which was later modified by the Court of Appeals. The Court of Appeals then reviewed the Appellate Division’s decision regarding Servomation.

    Issue(s)

    Whether the State Tax Commission regulation (20 NYCRR 528.20(c)(5)), which subjects disposable containers used by restaurants to sales tax, is valid in light of Tax Law § 1101(b)(4)(i)(A) and § 1115(a)(19).

    Holding

    No, because the disposable items fall within the resale exclusion provided by Tax Law § 1101(b)(4)(i)(A), making the regulation unenforceable as it is inconsistent with the statute.

    Court’s Reasoning

    The Tax Commission argued that section 1115(a)(19) only exempts containers used to package tangible personal property, and that restaurant food is not tangible personal property. However, the court relied on its holding in Matter of Burger King v. State Tax Comm., which determined that similar paper products purchased by fast-food chains for sale to customers fall within the resale exclusion of Tax Law § 1101(b)(4)(i)(A). The court stated that an administrative agency cannot override a statute enacted by the Legislature with its own regulations, quoting Matter of Jones v. Berman, 37 NY2d 42, 53. The Court emphasized that when a regulation is disharmonious with the statute it intends to implement, it must be deemed void. The court distinguished this case from situations where deference to agency interpretation is appropriate, stating, “Where, however, the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency and its interpretive regulations are therefore to be accorded much less weight” (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459).

  • Matter of Diamond International Corp. v. New York State Tax Commission, 51 N.Y.2d 734 (1980): Use Tax on Equipment Fabrication

    51 N.Y.2d 734 (1980)

    Use taxes apply to the full purchase price of equipment assembled in New York from out-of-state components, even if the equipment undergoes testing in New York before being shipped out of state, if that testing also serves the purpose of fulfilling service contracts.

    Summary

    Diamond International assembled industrial cleaning machines in New York using components purchased out-of-state. These machines were then used for field-testing at customer sites within New York, fulfilling service contracts, before being shipped out of state. Diamond sought a refund or credit for use taxes paid on the components, arguing the testing was part of fabrication. The New York Court of Appeals held that because the testing simultaneously fulfilled contractual obligations, it was not solely for fabrication, thus the use tax applied based on the full purchase price, not fair rental value, and the cleaning services did not qualify for janitorial service tax exclusions.

    Facts

    Diamond International Corp. designs, assembles, and fabricates industrial cleaning machines in Cheektowaga, New York, using parts purchased from outside the state. After assembly, the machines are used at customer sites in New York for field testing under real operating conditions. This testing period varied from 8.5 to 132 hours. Following satisfactory testing, the machines are shipped to locations outside New York for use in providing customer services. The field testing within New York occurred while Diamond International was fulfilling contractual obligations with its customers.

    Procedural History

    The Sales Tax Bureau issued a notice of determination demanding $97,589.07 in sales and use taxes for the period of September 1, 1969, to August 31, 1972. Diamond International requested a hearing, claiming it was not liable for the sales taxes and was entitled to a refund or credit for the use taxes. The State Tax Commission upheld the notice. Diamond International then commenced a proceeding to review the commission’s determination. The Appellate Division confirmed the imposition of sales taxes and denied the refund/credit for use taxes but modified it to allow Diamond to compute use taxes on fair rental value instead of purchase price. The Court of Appeals then granted leave for cross-appeals.

    Issue(s)

    1. Whether the use of cleaning machines for field testing in New York State, which also fulfills customer service contracts, qualifies as “fabricating” the machines, thereby entitling the taxpayer to a refund or credit for use taxes under Section 1119(a)(4) of the Tax Law.

    2. Whether the industrial cleaning services provided by the taxpayer qualify for exclusion from sales tax under Section 1105(c)(5) of the Tax Law as “interior cleaning and maintenance services performed on a regular contractual basis.”

    3. Whether the taxpayer can elect to compute use taxes on the fair rental value of the component parts instead of the purchase price under Section 1111(b)(2) of the Tax Law.

    Holding

    1. No, because the use of the machines served the dual purpose of field testing and fulfilling customer service contracts, which goes beyond mere fabrication.

    2. No, because the cleaning services are of a specialized and technical nature, not ordinary janitorial services.

    3. No, because Section 1111(b)(2) applies only to property previously used out-of-state, and the component parts were shipped directly to New York.

    Court’s Reasoning

    The court reasoned that while testing could potentially be considered an integral part of fabrication in some situations, the taxpayer’s use of the machines went beyond simple fabrication. Because the machines were used to fulfill existing customer service contracts, the use served a dual purpose. This additional purpose meant the taxpayer’s use did not fall within the scope of Tax Law Section 1119(a)(4), which provides refunds or credits for property used solely for fabrication before being shipped out of state. The court deferred to the Tax Commission’s interpretation. The court also held that the taxpayer’s cleaning services were not ordinary janitorial services. The services were of a specialized, technical nature, requiring custom-fabricated equipment and skilled laborers and, therefore, did not qualify for the exclusion under Tax Law Section 1105(c)(5). Finally, the Court clarified that the fair rental value election under Tax Law Section 1111(b)(2) is only available for property previously used out-of-state before being brought into New York. Since the component parts were shipped directly to New York, the taxpayer could not avail itself of this provision. As the court stated, “In the present case, so far as appears from the record the component parts of the cleaning machines were shipped directly to New York without any prior out-of-State use. In this circumstance it was error to afford the taxpayer the right to avail itself of the optional valuation under paragraph (2).”

  • Automotive Electric of New York, Inc. v. State Tax Commission, 48 N.Y.2d 345 (1979): Upholding Accelerated Sales Tax Payments

    Automotive Electric of New York, Inc. v. State Tax Commission, 48 N.Y.2d 345 (1979)

    The Legislature may validly require vendors to accelerate sales tax payments by estimating sales and taxes for the remainder of a month, even though the taxes have not yet been collected, as long as the measure is not utterly unreasonable or arbitrary.

    Summary

    Automotive Electric of New York challenged the constitutionality of Section 1137-A of the Tax Law, which required vendors to pay their estimated sales tax liability for the entire month of March by March 20. The plaintiffs, large automobile dealers, argued this was an unconstitutional imposition of taxes on sales before they were consummated. The Court of Appeals upheld the statute, finding that the Legislature has broad authority in designing tax measures and that advance taxation is permissible, provided it is not arbitrary or confiscatory. Adjustments are made in April, negating any final injustice.

    Facts

    • The New York State Legislature enacted Chapter 894 of the Laws of 1975, later codified as Section 1137-A of the Tax Law, requiring vendors to pay their estimated sales tax liability for the entire month of March by March 20.
    • This law was enacted to balance the state budget at the close of the fiscal year on March 31.
    • Automotive Electric of New York, Inc., and other automobile dealers, challenged the law, arguing that it unconstitutionally imposed a tax on sales before they occurred.

    Procedural History

    • The petitioners initiated an Article 78 proceeding in the Supreme Court, Albany County, seeking a declaration that Section 1137-A of the Tax Law was unconstitutional.
    • The Supreme Court converted the proceeding into an action for a declaratory judgment and ruled in favor of the State, declaring the statute valid and constitutional.
    • The Appellate Division affirmed the Supreme Court’s decision.
    • The petitioners appealed to the Court of Appeals as of right.

    Issue(s)

    Whether Section 1137-A of the Tax Law, requiring vendors to pay estimated sales tax liability for the entire month of March by March 20, is an unconstitutional exercise of the State’s taxing power.

    Holding

    No, because the Legislature has nearly unconstrained authority in designing tax measures unless they are utterly unreasonable or arbitrary, and advance taxation has been consistently sustained in other areas.

    Court’s Reasoning

    • The Court stated that taxing measures violate due process only if they are so arbitrary as to constitute a forbidden power, such as confiscation of property, citing Magnano Co. v. Hamilton, 292 U.S. 40, 44 and Shapiro v. City of New York, 32 N.Y.2d 96, 102.
    • The court noted that advance taxation has been sustained in other areas, such as corporate franchise taxes (People ex rel. Bass, Ratcliff & Gretton v. State Tax Comm., 232 N.Y. 42) and estimated income tax payments (U.S. Code, tit. 26, § 6153; Tax Law, § 656).
    • The court rejected the argument that vendors are merely collecting trustees and cannot be held liable for taxes before sales are made, referencing Matter of Atlas Tel. Co., 273 N.Y. 51, 57, which established that vendors have an obligation to pay the tax regardless of whether they actually collect it from purchasers. The court stated: “There is no doubt that the sales tax law imposes upon the vendor the obligation of a taxpayer in addition to that of a collecting trustee.”
    • The court distinguished this case from other cases by pointing out the trustee relationship between the vendor and the state, but ultimately held the vendor to be a taxpayer, citing Matter of Grant Co. v. Joseph, 2 N.Y.2d 196, 203.
    • The court emphasized the practical necessity of such measures for balancing the state budget and ensuring fiscal stability.

  • Abraham & Straus, Inc. v. Tully, 47 N.Y.2d 207 (1979): Proper Allocation of Partial Payments to Sales Tax on Uncollectible Debts

    Abraham & Straus, Inc. v. Tully, 47 N.Y.2d 207 (1979)

    When a vendor makes credit sales and a portion of the debt becomes uncollectible, it is unreasonable for the State Tax Commission to require that partial payments be allocated first to cover the entire sales tax due on the full purchase price before any portion is allocated to the actual purchase price of the goods.

    Summary

    Abraham & Straus (A&S) challenged a determination by the State Tax Commission regarding the calculation of sales tax liability on uncollectible credit sales. A&S operated several retail department stores and offered various credit accounts to customers. When balances became uncollectible, A&S deducted these bad debts from taxable sales, effectively paying sales tax only on the amount actually received. The Sales Tax Bureau, however, allocated any payments first to cover the entire sales tax on the item, disallowing bad debt deductions unless no payment was received at all. The Court of Appeals held that the Tax Commission’s method was irrational and unreasonable, as it deviated from the statutory intent of taxing only actual receipts and created a disproportionate tax burden on partially collected debts.

    Facts

    During 1965-1968, A&S made millions of credit sales through regular charge, permanent budget, and convenient payment accounts.
    No monthly statements showed the price of goods and sales tax separately.
    Unpaid balances were written off as uncollectible and sent to attorneys for collection.
    A&S calculated bad debt losses quarterly and deducted them from taxable sales, effectively paying sales tax pro rata on amounts actually received.

    Procedural History

    The Sales Tax Bureau audited A&S’s sales tax returns and issued a notice of deficiency.
    A&S sought revision, leading to a settlement agreement on most issues, except for the bad debt deduction.
    The State Tax Commission confirmed the deficiency based on the Bureau’s allocation method.
    Supreme Court transferred the case to the Appellate Division.
    The Appellate Division annulled the commission’s determination as irrational.
    The Court of Appeals reviewed the Appellate Division’s decision.

    Issue(s)

    Whether the State Tax Commission’s method of allocating partial payments on credit sales first to the sales tax due on the full purchase price, before allocating any payment to the purchase price, is a reasonable interpretation of Tax Law § 1132 and regulation 525.5(a), which allows for exclusion of uncollectible receipts from taxable sales.

    Holding

    No, because the Tax Commission’s interpretation of the statute and regulation is unreasonable and contradicts the intent to relieve vendors of sales tax liability to the extent that receipts prove uncollectible, thus ensuring that taxes remitted reflect taxes due on moneys actually received. This interpretation leads to a sales tax liability that deviates from the statutory sales tax rate on actual payments.

    Court’s Reasoning

    The court reasoned that the Tax Law and regulation 525.5(a) intend to relieve vendors of sales tax liability when receipts prove uncollectible. The Commission’s method, which assumes that the first cash received covers the entire sales tax, contradicts this intent.

    The court illustrated the unreasonableness with an example: “Thus, in the hypothetical instance previously referred to, if $5 of the single payment of $20 on the $100 sale be attributed first to the 5% tax applicable to the $100, the effective tax rate on the portion of the purchase price actually received will be 331/3%.”

    The pro rata method used by A&S (and later adopted by the Tax Commission) aligns better with the regulation’s intent by ensuring taxes reflect payments actually received.

    The court noted the prior uniform practice of New York City, which allowed pro rata tax payments under a similar regulation, supporting a similar interpretation at the state level. “Enactment of the statutory provision and adoption of the Tax Commission’s regulation in face of that current practical application of the language there employed lends support to their interpretation in similar fashion.”

    The court acknowledged the Tax Commission’s discretion in providing credit or refunds for uncollectible transactions. However, once the Commission elected to do so via regulation, it could not apply an unreasonable interpretation.

  • American Locker Co. v. New York State Tax Commission, 30 N.Y.2d 820 (1972): Sales Tax on Coin-Operated Locker Rentals

    American Locker Co. v. New York State Tax Commission, 30 N.Y.2d 820 (1972)

    Renting coin-operated lockers constitutes “storing tangible personal property” under New York tax law, making the locker company a vendor responsible for collecting sales tax.

    Summary

    American Locker Company, which owned and contracted out coin-operated lockers, was assessed sales tax by the New York State Tax Commission for storing tangible personal property. The court affirmed the assessment, holding that the rental of these lockers constituted “storage” despite the short-term nature of the rentals. The court reasoned that the essence of the service was providing a place for safekeeping goods, aligning with the common understanding of storage. Furthermore, American Locker Company was deemed the vendor because it owned, maintained, and branded the lockers, directly influencing the customer relationship.

    Facts

    American Locker Company owned patented coin-operated lockers. The lockers were placed under contract with operators at various locations. Patrons deposited coins to lock their property in a locker for up to 24 hours. American Locker installed and maintained the lockers, retaining ownership. The lockers displayed American Locker’s name, contract terms, and operating instructions. Operators collected receipts, cleaned lockers, and handled customer issues. American Locker typically indemnified operators against claims for loss or damage to checked articles and processed these claims.

    Procedural History

    The New York State Tax Commission determined that American Locker was a vendor engaged in the business of storing tangible personal property and was liable for sales tax. The Appellate Division confirmed the Tax Commission’s determination. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the rental of coin-operated lockers constitutes “storing tangible personal property” within the meaning of the New York Tax Law.
    2. Whether American Locker Company is the “vendor” of the storage services and thus responsible for collecting sales tax.

    Holding

    1. Yes, because the essence of the service is the provision of a place for the safekeeping of goods, which accords with the ordinary meaning of storage.
    2. Yes, because the nature of the contractual relationship between American Locker and its operators indicates that American Locker is the vendor within the meaning of the statute.

    Court’s Reasoning

    The court reasoned that the term “storage” encompasses the service provided by coin-operated lockers, despite the short-term nature of the rentals. It emphasized that the tax law was intended to have a broad base, including charges for services. The court referenced its prior decision in American Locker Co. v. City of New York, noting that the court had previously recognized that patrons of the lockers bargain for a safe place to “store” their baggage. Semantical distinctions between “storage” and “checking” were deemed inappropriate in the context of the statute. The court stated, “Certainly, the essence of this service is the provision of a place for the safekeeping of goods, which generally accords with the ordinary and common meaning of storage.” The court distinguished the case from zoning cases where distinctions based on the duration of an activity were relevant. As to who was the vendor, the court noted that American Locker installed and maintained the lockers, retained ownership, and displayed its name on the lockers. The court stated, “For all intents and purposes, when a patron makes use of a locker he is dealing with the American Locker Company.” The company also typically indemnified operators against claims for lost or damaged articles and processed these claims. The court analogized the situation to a case where a person engaged in the business of maintaining jukeboxes was held liable for the tax provided by statute for this privilege. The court affirmed the order of the Appellate Division, holding American Locker liable for the sales tax.