By Andrew Appleby and Dmitrii Gabrielov

The New York State Tax Appeals Tribunal released its precedential decision in Stewart’s Shops, affirming an Administrative Law Judge’s determination that payments by a corporation to its captive insurance company did not qualify as deductible insurance premiums because the arrangement did not constitute insurance for federal income tax purposes. (see prior coverage here).

The taxpayer owned and operated convenience stores and gas stations. It insured risk related to these operations with its captive insurance company, which it did not treat as an insurance company for federal tax purposes. The Tax Appeals Tribunal determined that because the transactions did not constitute “insurance” for federal income tax purposes—because they lacked risk shifting and risk distribution—the premiums were not deductible for New York State corporate franchise tax purposes. The Tax Appeals Tribunal also found that neither the 2009 nor 2014 amendments to New York’s captive insurance combination regime authorized the taxpayer to deduct its premiums in the tax years at issue (2006 through 2009). The outcome may have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it, as the arrangement may have qualified as insurance under federal tax law. In re Stewart’s Shops Corp., DTA No. 825745 (N.Y. Tax App. Trib. July 27, 2017).

By Alla Raykin and Jonathan Feldman

In an Advisory Opinion, the New York Department of Taxation and Finance concluded that fees paid to a social club by non-members for certain activities (tennis lessons, children’s camp, basketball court use, etc.) are not subject to tax, although membership fees that provide access to the same activities are subject to tax. Membership fees are taxable under New York Tax Law § 1105(f) because members purchase ownership of the club, not directly for activities. However, the Opinion determined that the fees paid by non-members directly for specific activities would be taxable only if the nature of the activity or service was taxable. The Opinion then separately analyzed the activities in question and determined whether they themselves were taxable. TSB-A-17(5)S (NY Dep’t of Taxation & Finance Mar. 3, 2017).

The U.S. Supreme Court recently ruled in Expressions Hair Design v. Schneiderman that a New York statute that prohibits identifying a surcharge to customers for credit card payments regulates speech and is therefore subject to heightened scrutiny. 

The court remanded the case to the U.S. Court of Appeals for the Second Circuit to determine whether New York’s statute violates the First Amendment. While the court’s decision has many important implications, its impact on how businesses collect or seek reimbursement for the costs of state and local taxes from their customers could be significant.

In their article for Law360, Eversheds Sutherland (US) attorneys Eric Tresh and Alla Raykin break down the case and analyze its implications. 

View the full article

A recent US Supreme Court decision on surcharges strengthened taxpayers’ First Amendment rights when deciding how they present pass-through fees and taxes to their customers.

  • The Supreme Court held that a New York statute prohibiting a seller from imposing a credit surcharge was a speech regulation, subject to heightened scrutiny, because it regulates how retailers communicate their prices.
  • The decision’s reasoning regarding the communication of prices as speech clarifies that the heightened scrutiny standard also applies to state and local tax statutes regulating a taxpayer’s ability to separately identify taxes and fees on customer invoices.

Prior to this decision, courts and states have taken differing positions on whether a seller may be prohibited from separately identifying tax on a customer invoice when the seller is not required to pass through the tax.

View the full Legal Alert.

By Nicole Boutros and Scott Wright

A New York State Division of Tax Appeals administrative law judge (ALJ) determined that a telecommunications provider’s electricity purchases were not exempt from sales tax as sales for resale. In so doing, the ALJ rejected the taxpayer’s assertion that it resold electricity by incorporating it into its telecommunications services, explaining that the regulation on which the taxpayer relied applies to tangible personal property purchases, which electricity is not. The ALJ further held that the taxpayer was not exempt under a separate provision for resales of electricity, finding that the taxpayer was not reselling electricity upon sale of its telecommunications services and that the electronic signals powering its network were only incidental to the services for which its customers contracted. Matter of XO Communications Services, LLC, DTA Nos. 826686 & 827014 (N.Y. Div. Tax App. Mar. 9, 2017).

By Evan Hamme and Tim Gustafson

The New York State Department of Taxation and Finance issued an advisory opinion exempting from New York state sales tax a charge the petitioner paid to a cable company to cover the cable company’s costs to expand its cable network to bring broadband Internet to the petitioner’s rural location. The Department disagreed with the petitioner’s contention that the charge was exempt from sales tax as a charge for a capital improvement on real property. However, the Department found the charge to provide broadband Internet service to the petitioner was nonetheless exempt from sales tax as a charge for the “provision of internet access service.”  N.Y. Advis. Op., TSB-A-16(32)S (Dec. 2, 2016).

By Samantha Trencs and Eric Tresh

The New York State Department of Taxation and Finance issued an advisory opinion concluding that a detailed report of customer behavior that includes both client-specific and industry-related information is a service subject to sales and use tax. Tax Law § 1105(c)(1) imposes sales and use tax on information services; however, the tax is not imposed on information that is personal or individual in nature which cannot be substantially incorporated in reports furnished to other persons. The Department determined that the personal or individual information exclusion did not apply in this case because a portion of the information in the client reports came from public sources that could be utilized in other reports for similarly situated clients and thus was not personal or individual in nature. The Department further determined that the non-personal information included in the client reports was not de minimis. Without the use of the non-personal information about a client’s particular industry, a comparison of the client’s performance relative to its competitors would not be possible. TSB-A-16(33)S. The advisory opinion is consistent with the Department’s expansive interpretation of sales tax on information services. 

By Mike Kerman and Charlie Kearns

The New York Department of Taxation and Finance issued an advisory opinion concluding that a taxpayer that collects and furnishes healthcare information on behalf of healthcare providers, such as medical practices and hospitals, to persons requesting copies of medical records is not performing a service subject to New York sales and use tax. The Department also determined that the taxpayer’s coding service, by which the taxpayer transforms narrative descriptions of diseases, injuries and similar information into numeric or alphanumeric codes is not taxable if performed for healthcare provider customers or persons authorized to request medical records. These services are non-taxable information services that are personal or individual in nature. However, the Department determined that if the taxpayer provided coded information to third parties, such as persons seeking information for research or education purposes, the records would no longer be personal or individual to the person requesting such information, and would therefore be taxable. TSB-A-16(31)S.

On December 29, 2016, a New York City administrative law judge (ALJ) determined that Sprint’s long distance telecommunications service fees were exempt from the City’s Utility Tax. In the Matter of the Petitions of U.S. Sprint Communications Co., LP, TAT (H) 14-12 (UT) et al. Sutherland represented Sprint in the matter.

  • The ALJ concluded that the Utility Tax enabling statute—which limits the scope of the Utility Tax to transactions occurring within City limits—applies to “transactions” and not “services.” As such, once an exempt transaction has been identified, the exemption applies to the transaction itself plus all revenue associated with the transaction.
  • Applied to telecommunications services, the ALJ determined that exempt long distance telecommunications transactions include not only the charge for the long distance telephone call itself but also charges related to the long distance transaction, regardless of the billing method.
  • Additionally, charges for Internet access are exempt from the Utility Tax pursuant to the Internet Tax Freedom Act, as the City historically did not tax such charges prior to the moratorium on Internet taxes imposed by the Internet Tax Freedom Act.

View the full Legal Alert.

On January 5, 2017, a New York State Division of Tax Appeals administrative law judge (ALJ) determined that a taxpayer’s electronic bill payment and presentation receipts constitute “service” receipts and not “other business receipts,” and are properly sourced where the service is performed. In the Matter of the Petitions of Checkfree Services Corp. 

  • New York taxpayers received additional guidance on the important issue of whether online services constitute “service” receipts, and how those receipts should be sourced, for New York corporate franchise tax purposes. 
  • An ALJ found for a taxpayer on this same issue previously. In Expedia, another ALJ confirmed the taxpayer’s position that travel reservation facilitation receipts, and online advertising receipts, constitute “service” receipts that are sourced to the location of performance. In the Matter of the Petition of Expedia, Inc.
  • The ALJ’s analysis in Checkfree largely mirrors the sound analysis in Expedia. Both determinations concluded that the taxpayer performed a “service” under the term’s plain meaning; that a “service” does not require human involvement; that the taxpayer did have some human involvement even though the service had an automated component; and that “service” receipts are properly sourced where performed, which is the taxpayer’s location, not the customer’s location.

View the full Legal Alert.