On November 18, 2010, the New York Division of Tax Appeals held that Dann Ocean Towing (Dann), a Florida corporation with no employees or property in New York State, was liable for New York’s petroleum business tax. In re Dann Ocean Towing, Inc., Determination DTA No. 822683 (Nov. 18, 2010).
Dann owned 12 tugboats, seven of which were used to perform towing, icebreaking and other operations in New York State on behalf of third-party charter companies. The agreements between Dann and the charter companies were drafted as “service” agreements. However, the tugs were owned by Dann, and Dann’s employees operated the tugs and performed services on behalf of the charter companies.
The New York Division of Tax Appeals held that the tugboats’ operations in New York waters, which included towing and discharging cement and performing ice-breaking operations, constituted substantial nexus with the state. By operating its vessels in New York waters, Dann engaged in business in the state and was liable for the petroleum business tax.
Dann also argued that the charter companies had control over the tugboats, and therefore, they should be responsible for the tax. Dann pointed to the charter agreement provisions requiring the charterers to reimburse Dann for fuel purchased for the tugboat. The Division of Tax Appeals con-cluded that Dann exercised significant control over the tugboats and, therefore, was liable for the tax.