United States

New York: State Taken To Task over Refund Delays

Aug 14, 2017
From KPMG TaxWatch

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A New York trial court recently paved way for a number of customers to get refunds of sales and use taxes erroneously collected several years ago on charges for Internet access. After being sued by customers for improperly charging sales tax, 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 a 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 received a refund from New York State, the refund was to be placed in another escrow account to be disbursed to customers. Once the refund was disbursed to customers, 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 $106 million claim for refund with the New York taxing authority. The Department of Taxation and Finance 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 later 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. An ALJ has discretion to reopen a case if there is newly discovered evidence. Here, the funding of the escrow account occurred after the original proceeding and therefore the ALJ—and the N.Y. Tax Tribunal on appeal—ruled that this was not “newly discovered evidence.”  The Tribunal did not address the taxpayer’s argument that, by funding the escrow account as required under the settlement agreement, the taxpayer had in essence satisfied the repayment requirement.

The trial court noted at the outset that the parties, in their zeal to advance their competing interpretations of New York’s tax law, had overlooked the key fact that the taxpayer’s customers were owed in excess of $106 million. Moneys that, in the court’s view, neither party was entitled to and which were available and awaiting distribution to the taxpayer’s customers if only the parties “could get out of each other’s way long enough to make that happen.” Although the ALJ properly denied the taxpayer’s refund claim before it had funded the pre-refund escrow account, the trial court ruled that the Tribunal abused its discretion when it refused to reopen the case after the account had been funded. The court noted that if the taxpayer filed a new refund claim, it would likely be outside the statute of limitations and therefore the court’s only viable alternative was to rule that the Tribunal abused its discretion. Although the Tribunal had not addressed whether, by funding the escrow account as required under the settlement agreement, it had satisfied the repayment requirement, the court strongly suggested that the Tribunal (upon remand) hold so and not further delay in getting the refunds paid.  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.