United States

New York: Taxpayer Did Not Establish that It Paid Sales Tax On Behalf of Customers

Oct 23, 2017
From KPMG TaxWatch

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Recently, an Administrative Law Judge (ALJ) denied a taxpayer’s requested sales tax refunds because, in the ALJ’s view, the taxpayer did not establish that the taxpayer paid the tax on behalf of its customers. Instead, the ALJ concluded that the customers had paid the tax, and because the taxpayer had not refunded the tax to its customers, it could not receive a refund. The taxpayer was in the business of providing securities rating services. Because it was unclear whether its services were subject to sales and use tax in New York, the taxpayer requested an advisory opinion from the Division of Taxation. In the interim, the taxpayer included the statement “includes any applicable sales taxes” on its invoices and remitted tax to the state on what it believed was the taxable portion of the invoice. Tax was not added to the invoice amount or separately stated. Over eighteen months after submitting its advisory opinion request, the Division ruled that the taxpayer’s services were not taxable under New York State law, but that its services were subject to New York City tax if delivered in the City. The taxpayer subsequently requested a refund of the sales taxes remitted.

Under New York law, no refund of sales tax collected from a customer will be issued unless the vendor establishes that it has repaid the taxes to its customer. The taxpayer argued that because it paid the sales tax on behalf of customers, it was not required to pay the tax back to customers before obtaining a refund. As support for this position, the taxpayer pointed to the fact that the rates charged on its engagement letters were the same as the rates charged on the invoices. This presumably established that customers were not paying sales taxes. However, the ALJ disagreed that this fact established that the taxpayer did not collect tax from its customers. Rather, the ALJ determined that the manner in which the taxpayer structured its invoices, and the manner upon which it computed the tax remitted to the Division, indicated that the customers were paying the entire amount on the invoice, which included the sales tax remitted to the Division. After rejecting the taxpayer’s assertion that it did not collect the sales tax from customers, the ALJ rejected the taxpayer’s argument that allowing the Division to keep the tax amounted to unjust enrichment. For more information on Kroll Bond Rating Agency, Inc., 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.