New York State and Local Tax Update—Second Quarter 2023 (1)

While it was a quiet second quarter for New York City, there were a few interesting decisions in New York State.

In Petition of Verizon New York Inc., the New York State Division of Tax Appeals determined that the franchise tax imposed on corporations principally engaged in the conduct of a local telephone business, in NY Tax Law Section 184, was federally preempted from applying to gross receipts derived from the sale of fiber-optic broadband and other internet access services. Eversheds Sutherland represented the taxpayer before the DTA.

The Division of Tax Appeals held that the federal Internet Tax Freedom Act is intended to be read broadly, and the New York State Department of Taxation and Finance’s interpretation was too limited. Since the taxpayer’s services were internet access services within the meaning of ITFA, the gross receipts from the sale of such services are federally preempted from taxation by Section 184.

In another determination issued on May 4, the Division of Tax Appeals rejected the taxpayer’s refund requests in Matter of Sunoco Inc. (R&M) Combined Affiliates, concluding that the amounts Sunoco received from its sales in buy-sell agreements weren’t receipts includable in its New York business allocation percentage for tax years 2007 through 2010.

Sunoco, principally engaged in petroleum refining and marketing, entered into buy-sell transactions wherein it both bought and sold petroleum products with other petroleum refiners and producers to “reduce transportation costs, or to acquire a grade of Oil that more closely matched a customer’s needs.”

According to the determination, Sunoco recorded each side of the respective transaction as either a purchase or sale. And at month’s end, Sunoco debited its sales accounts and credited its cost of goods sold to adjust the sales to $0, with any pricing difference reflected as an inventory adjustment, not as gross receipts or sales.

The Division of Tax Appeals agreed with the state tax department, determining that the oil in question was inventory that was exchanged, which Sunoco properly included in its costs of goods sold on its originally filed returns. The DTA therefore rejected Sunoco’s refund position and concluded that the sale-side of the buy-sell transactions wasn’t the sale of tangible personal property and shouldn’t have been included in Sunoco’s business receipts to determine the business allocation percentage.

Finally, the FY 2024 New York budget included one noteworthy change for taxpayers litigating in New York, as the tax department now has the opportunity to appeal certain adverse Tax Appeals Tribunal decisions to the New York Supreme Court, Appellate Division.

Previously, only taxpayers were able to appeal adverse tribunal decisions, but by amending NY Tax Law Section 2016(3), the tax department now has the ability to appeal tribunal decisions that are “premised on interpretation of the state or federal constitution, international law, federal law, the law of other states, or other legal matters that are beyond the purview of the state legislature.”

Given the breadth of the statutory language, disputes regarding the scope of the tax department’s right to appeal may become a new frontier in taxpayers’ litigation with the department.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Liz Cha is a partner at Eversheds Sutherland. She counsels clients on state and local taxation matters, including tax structuring and planning.

Jeremy Gove is an associate at Eversheds Sutherland. He counsels clients on all aspects of the state and local tax consequences of their various business transactions.

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