New York Law Review

Tag: Use Tax

  • 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).”

  • Matter of Arundel Corp. v. Joseph, 11 N.Y.2d 44 (1962): Application of Use Tax on Property Used Outside City

    Matter of Arundel Corp. v. Joseph, 11 N.Y.2d 44 (1962)

    A municipality can impose a use tax on tangible personal property brought into the city, even if the property was initially purchased and used outside the city for a substantial period, with the tax based on the property’s current value, not the original purchase price.

    Summary

    Arundel Corporation, a West Virginia corporation with its principal place of business in New York City, challenged a New York City Comptroller’s determination imposing a use tax on a dredge and pipeline equipment it owned. Arundel had purchased the dredge in Maryland in 1948, used it for eight years in other states, and brought it to New York City in 1956 for short-term dredging contracts. The Comptroller assessed a tax deficiency because Arundel omitted the dredge and pipeline equipment from its tax returns, arguing the use tax didn’t apply to property purchased and used elsewhere long before being brought into the city. The New York Court of Appeals upheld the Comptroller’s determination, finding that the use tax could be applied to property used within the city regardless of when it was purchased and initially used, with the tax based on the property’s value at the time of use.

    Facts

    Arundel Corporation purchased a dredge in Maryland in 1948 and registered it in New York, N.Y. The dredge was used for dredging operations in South Carolina, Florida, and Virginia for approximately eight years. In July 1956, Arundel brought the dredge to New York City for about six weeks to complete dredging contracts. Following the New York City work, the dredge was moved to Connecticut in September 1956. Arundel also used pipe and pontoon line equipment to transport dredged material. Arundel did not include the dredge and related equipment in its New York City tax returns, believing them exempt from the use tax.

    Procedural History

    The New York City Comptroller determined that Arundel had a tax deficiency. After a hearing, the Comptroller assessed a use tax deficiency of approximately $33,000, including penalties and interest. The Appellate Division unanimously confirmed the Comptroller’s determination. Arundel appealed to the New York Court of Appeals based on constitutional grounds.

    Issue(s)

    1. Whether New York City’s use tax can be imposed on tangible personal property purchased and initially used outside the city several years before being brought into the city.

    2. Whether basing the use tax on the current value of the property, rather than the original purchase price, is a permissible method of taxation.

    3. Whether the use tax, as applied in this case, constitutes an unconstitutional burden on interstate commerce.

    Holding

    1. Yes, because the statute contemplates that a use tax may be imposed on property that has been purchased and used elsewhere before being brought into the city.

    2. Yes, because the Comptroller is empowered to determine the value of the property, and the tax can be based on that value rather than solely on the purchase price.

    3. No, because the possibility of multiple state taxation does not automatically render a use tax unconstitutional, especially when there is no evidence of actual multiple taxation.

    Court’s Reasoning

    The court reasoned that the New York City Administrative Code (§ M46-16.0) imposes a tax on the use of tangible personal property within the city. The court emphasized the Comptroller’s power to determine the “value” of the property, which indicates that the tax is not solely based on the original purchase price. The court cited City Sales and Use Tax Regulation, art. 2(F), stating that the tax is computed on the property’s value when the property has been used outside the city before being used within the city. The court distinguished cases with tax laws applicable to personal property “purchased for use” in the state. Regarding the constitutionality of the use tax, the court noted that the possibility of multiple state taxation does not automatically make a use tax an unconstitutional burden on interstate commerce, citing Southern Pacific Co. v. Gallagher, 306 U. S. 167. The court emphasized that Arundel did not present any evidence of sales or use tax imposed in any other jurisdiction. The court highlighted that the purpose of a use tax is not only to prevent tax avoidance but also to enable city retail sellers to compete with retail dealers in other states or cities exempt from sales tax.

    The Court quoted Henneford v. Silas Mason Co., 300 U. S. 577, 581 stating, “the purpose of a use tax is not only to prevent tax avoidance but to enable city retail sellers ‘to compete upon terms of equality with retail dealers in other states [or cities] who are exempt from a sales tax or any corresponding burden.’”

  • Atlantic Gulf & Pacific Co. v. Gerosa, 16 N.Y.2d 1 (1965): Applicability of Use Tax to Property Purchased and Used Outside the City

    16 N.Y.2d 1 (1965)

    A municipality can impose a use tax on tangible personal property brought into the city, even if the property was initially purchased and used elsewhere, with the tax assessed on the property’s value at the time of use within the city.

    Summary

    Atlantic Gulf & Pacific Co. challenged New York City’s imposition of a compensating use tax on a dredge and pipeline equipment the company owned. The company argued the tax was intended only to address sales tax avoidance for items brought into the city shortly after purchase. The Court of Appeals upheld the tax, finding that the city’s administrative code allowed for valuation of the property at the time of use, not just at the time of purchase. The court also dismissed constitutional challenges, finding no violation of interstate commerce or equal protection clauses. The decision clarifies the scope of use taxes on property used within a jurisdiction, regardless of its initial purchase location or time of use.

    Facts

    Atlantic Gulf & Pacific Co., a West Virginia corporation based in New York City, purchased a dredge in Maryland in 1948 and registered it with New York City as its home port. The dredge was used for dredging operations in South Carolina, Florida, and Virginia for approximately eight years. In 1956, the dredge was used for about six weeks in New York City harbor waters before being moved to Connecticut. The company also used pipeline equipment purchased outside New York City to transport dredged material within the city.

    Procedural History

    The New York City Comptroller determined that Atlantic Gulf & Pacific Co. had a tax deficiency for failing to pay use tax on the dredge and pipeline equipment. The company challenged the Comptroller’s determination in an Article 78 proceeding. The Appellate Division confirmed the Comptroller’s determination. The company appealed to the Court of Appeals based on constitutional grounds.

    Issue(s)

    1. Whether New York City’s use tax applies to tangible personal property like a dredge and pipeline equipment, that was purchased and initially used outside the city before being brought into the city for temporary use?
    2. Whether the imposition of the New York City use tax in this case violates the interstate commerce or equal protection clauses of the U.S. Constitution?

    Holding

    1. Yes, because the city’s administrative code allows for a use tax based on the value of the property at the time of use within the city, not solely on the original purchase price or recent purchases.
    2. No, because the tax does not discriminate against interstate commerce, and the possibility of multiple taxation does not automatically render a use tax unconstitutional, especially when no other sales or use tax has been imposed by another jurisdiction.

    Court’s Reasoning

    The court reasoned that the use tax was not solely based on the original purchase price but on the "value" of the property at the time of use in the city, as evidenced by the Comptroller’s power to determine value. The court cited provisions of the Administrative Code that allowed for the collection of taxes based on the "value" of the property and the Comptroller’s regulation explicitly stating that property used outside the city and subsequently used inside the city is taxed based on its value at the time of use. The court stated, "It seems manifest that the Legislature contemplated that, in appropriate circumstances, a use tax might be imposed not measured by the original price and without relation to the time of sale."

    Addressing the constitutional challenges, the court relied on Southern Pacific Co. v. Gallagher and Henneford v. Silas Mason Co. to reject the argument that the use tax was an unconstitutional burden on interstate commerce. The court emphasized that there was no evidence of multiple taxation in this case, as the petitioner acknowledged that no other sales or use tax had been imposed on the dredge or pipeline equipment. The court quoted Henneford, stating, “It will be time enough to mark [the limits of a state’s taxing powers] when a taxpayer paying in the state of origin is compelled to pay again in the state of destination”.

    The court further reasoned that the purpose of a use tax is not only to prevent tax avoidance but also to enable local retailers to compete fairly with out-of-city retailers. Allowing property to be purchased and used outside the city for a period long enough to avoid the use tax would create a competitive disadvantage for New York City retailers.

    Judge Van Voorhis dissented, arguing that the use tax was intended to prevent sales tax evasion on property purchased outside the city for permanent use therein and should not apply to equipment brought into the city temporarily for a specific contract.