The New York State Supreme Court, Appellate Division, affirmed the New York City Tax Appeals Tribunal’s (Tribunal) decision that Aetna’s subsidiary health maintenance organizations (HMOs) were subject to the New York City General Corporation Tax (GCT) for 2005 and 2006. The Appellate Division determined that the Tribunal’s reasoning was not arbitrary and capricious. The Tribunal reasoned that the GCT exemption for companies doing an insurance business in New York State did not apply because the HMOs were regulated almost entirely under New York’s Public Health Law, not the Insurance Law, and therefore were not doing an insurance business in the state. Aetna, Inc. v. N.Y.C. Tax App. Trib., No. 70/16-4533 (N.Y. App. Div., 1st Dep’t Oct. 19, 2017).
The New York State Tax Appeals Tribunal (Tribunal) held that the Department’s assessment of two non-admitted German insurance companies violated the United States-Germany Tax Treaty’s anti-discrimination clause and the US Constitution’s Foreign Commerce Clause.
The alien non-admitted non-life insurance companies had no premiums from sources in the United States. The insurance companies’ activities in New York and the United States were limited to holding interests in limited partnerships that owned real estate in New York and throughout the United States. The insurance companies did not challenge whether they had nexus with New York. An Administrative Law Judge (“ALJ”) previously determined that the insurance companies, as non-admitted non-life insurance corporations, were properly subject to insurance franchise tax, not premium tax. The ALJ also affirmed the Department’s alternative allocation method, which applied an entity theory and imposed tax only on the distributive share from the partnerships using the partnerships’ allocation factors. See previous coverage here.
The Tribunal affirmed the ALJ’s reasoning. However, the Tribunal ultimately reversed the ALJ’s final conclusion based on an argument that the insurance companies had not raised at the ALJ level. The Tribunal concluded that the Department’s assessment discriminated against the insurance companies based on their status as alien insurers, which violated the United States-Germany Tax Treaty and the Foreign Commerce Clause. Although treaties generally do not apply to state and local taxes, the anti-discrimination provision generally does apply.
The Tribunal compared the alien insurance companies’ treatment to the treatment of an otherwise similarly situated domestic, non-New York insurance company. The Tribunal determined that the Department’s assessment imposed a more burdensome tax treatment on the alien insurance companies. A crucial fact in these cases was that the alien insurance companies had zero premiums in the United States, and zero United States effectively connected income from premiums.
The Tribunal also briefly noted that, although it did not have to decide the issue, the Department’s assessment would impede the federal government from “speaking with one voice” in regulating foreign trade, which would violate the Foreign Commerce Clause. In re Bayerische Beamtenkranekenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017); In re Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017).
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).
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).
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.
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).
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).
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.
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.