United States

New York: Taxpayer Must Repay Customers before Receiving a Refund of Erroneously Collected Sales Tax

Mar 07, 2016
From KPMG TaxWatch

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The New York Tax Appeals Tribunal recently held that a binding promise to refund erroneously collected sales tax to customers would not satisfy the statutory requirement that a taxpayer “repay” its customers before receiving a sales tax refund from the state. The taxpayer at issue had erroneously collected sales tax on charges for Internet access. After being sued by customers, the taxpayer entered into a nationwide settlement that required it to seek a refund of the taxes erroneously collected and remitted to the states. The settlement provided a method for obtaining refunds from jurisdictions (such as New York) that require the taxpayer to refund erroneously collected tax to customers before the jurisdiction will grant or pay a refund to the taxpayer. Per the settlement, the taxpayer established a “pre-refund” escrow account, which under the agreement was considered a “payment” by the taxpayer to its customers. Once the taxpayer was received a refund from New York, the refund was to be placed in another escrow account to be disbursed to the customers. Once the refunds were disbursed, the funds deposited in the “pre-refund” escrow account would be returned to the taxpayer. Without funding the pre-refund escrow account, the taxpayer submitted a claim for refund with the New York taxing authorities. The Division denied the refund, in part because the taxpayer never repaid the erroneously collected taxes to its customers. The taxpayer contested the denial before an ALJ, who upheld the refund denial. The taxpayer then petitioned the ALJ to reopen the case and allow it to introduce evidence that it had funded an escrow account in accordance with the settlement agreement. The ALJ refused to consider the evidence.

On appeal, the Tribunal upheld the ALJ’s refusal to allow the taxpayer to submit additional evidence that it had actually funded the escrow account because that action was taken only after the original proceeding, and thus did not meet the requirement for being able to reopen a proceeding. As such, the Tribunal did not address the taxpayer’s argument that, by funding the escrow account as required under the settlement agreement, it had in essence satisfied the repayment requirement. The Tribunal did consider whether the promise to pay outlined in the settlement agreement satisfied the repayment requirement and determined that the statute unambiguously required the taxpayer to repay customers before a taxpayer’s refund could be granted.  Promises to pay, in the Tribunal’s view, were insufficient. For more information on In re New Cingular Wireless PCS LLC, please contact Judy Cheng at 212-872-3530.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.