United States: New York Tax Insights - Volume 7, Issue 3, March 2016

TRIAL COURT HOLDS THAT FEES RELATED TO THE NEW YORK HIGHWAY USE TAX ARE UNCONSTITUTIONAL

By Michael J. Hilkin

In a class action lawsuit, an Albany County trial court held that flat highway use registration and decal fees charged to heavy motor vehicles operating on New York public highways discriminate against non-New York based businesses in violation of the Commerce Clause of the U.S. Constitution. Owner Operator Indep. Drivers Ass'n et al. v. N.Y.S. Dep't of Taxation and Fin., No. 5551-13 (N.Y. Sup. Ct., Albany Cnty. Jan. 22, 2016). The trial court declared the registration and decal fees unconstitutional even though they amount to only $15.00 and $4.00, respectively, and are charged once every three years.

New York Highway Use Tax and Fee Scheme. New York imposes a highway use tax "for the privilege of operating" certain heavy vehicles (such as semi-trailers) on New York highways. Tax Law § 503(1). The highway use tax is based on the gross weight of a vehicle and the number of miles such vehicle is operated on New York highways. The highway use tax was not at issue in the Owner Operator case.

Carriers with vehicles subject to the highway use tax must apply for a certificate of registration and pay a $15.00 fee (Tax Law § 502(1)(a)). The New York State Department of Taxation and Finance (the "Department") is also authorized to "require the use of decals as evidence that a carrier has a valid certificate of registration," and charge $4.00 for each decal (Tax Law § 502(6)(a)). While the Department is authorized to issue replacement certificates of registration or decals once every year (Tax Law § 509(8)), it instead issues certificates of registration and decals in series, each of which has always been valid for at least a three-year period. According to the Department, the purpose of the registration and decal fees is to enforce and ensure compliance with the highway use tax.

Case Background and Decision. The plaintiffs filed a complaint in New York Supreme Court (a trial court) seeking injunctive and declaratory relief and a refund of registration and decal fees. The complaint alleged, among other things, that the registration and decal fees constituted an undue burden on interstate commerce in violation of the Commerce Clause because they imposed a higher per mile tax rate on out-of-state trucks.

In an earlier decision, the trial court certified the case as a class action lawsuit, including in the class interstate motor carriers residing outside of New York State that paid the registration and decal fee and are now, or may in the future be, liable for such fees. Now, the trial court has held that the registration and decal fees violate the Commerce Clause and has enjoined the Department from implementing or enforcing such fees against the plaintiffs.

The trial court's analysis primarily relied on the U.S. Supreme Court's decision in American Trucking Associations, Inc. v. Scheiner, 483 U.S. 266 (1987). In American Trucking, the Court ruled that two flat taxes imposed by Pennsylvania on commercial users of its highways violated the Commerce Clause. Pennsylvania imposed an annual $25.00 fee for an identification loan marker exclusively on out-of-state vehicles, and also imposed an annual $36.00 per vehicle axle fee on in-state and out-of-state vehicles. The Court in American Trucking stated that the marker fee had the practical effect of imposing flat taxes at a cost five times as high per mile for out-of-state vehicles than for local vehicles, and the axle fee similarly exerted "inexorable hydraulic pressure on interstate businesses" to do business within the state enacting such a fee rather than among several states. While the Court in American Trucking agreed that the Commerce Clause does not require states to avoid flat taxes "when they are the only practicable means of collecting revenues from users and the use of a more finely gradated user-fee schedule would pose genuine administrative burdens," the Court concluded that such justification was not applicable to the Pennsylvania taxes under consideration.

The trial court in Owner Operator treated the registration and decal fees as state taxes subject to Commerce Clause scrutiny. The trial court found, based on interrogatory responses, deposition testimony, and an expert affidavit that, in fiscal years 2013 and 2014, the cost per mile for New York's registration and decal fees was about 4 to 5 times greater for non-New York based businesses than it was for New York based businesses. This evidence demonstrated that the registration and decal fees have a discriminatory impact on interstate commerce.

The Department did not submit any evidence disputing the discriminatory effect of the registration and decal fees and instead argued that the fees were below the level that any court had ever considered worthy of Commerce Clause scrutiny. The trial court, however, stated that a fee's constitutionality cannot turn on the "amount of the flat fees charged" and pointed out that "the U.S. Supreme Court has rejected the notion of a 'de minimus' defense to an allegation that a tax is discriminatory under the Commerce Clause."

The Department also argued that the registration and decal fees could not practically be apportioned, because the miles traveled on New York highways by any covered vehicle is not known until the relevant highway use tax return is filed. The court, however, stated that it could "envision several ways that registration and decal fees can be apportioned," including by providing credits on highway use tax returns based on annual mileage traveled in New York by a vehicle subject to the fees.

Additional Insights

The court in Owner Operator highlighted that its decision is consistent with other state court decisions issued after American Trucking by Alabama, Maine, and Maryland courts, each of which struck down unapportioned flat fees similar to those at issue in Owner Operator. Those other state cases involved challenges to fees ranging from $12.00 to $25.00 a year. Collectively, such decisions show that even seemingly nominal fees are subject to scrutiny under Commerce Clause principles. It is not yet known whether the Department will appeal the decision in Owner Operator.

Separately, the procedural posture of the Owner Operator case is notable. While the vast majority of New York State tax cases originate in the New York State Division of Tax Appeals (New York's administrative tax appeals system), the plaintiffs in Owner Operator brought their case directly to the New York Supreme Court. While not discussed in the summary judgment decision, the plaintiffs' action was likely allowed to proceed because it involves a constitutional challenge to the basic applicability of a New York tax statute and seeks declaratory and injunctive relief, circumstances in which taxpayers may not be required to exhaust administrative appeals before going to court. Further, Owner Operator is a rare example of a class action lawsuit successfully brought against the Department. As a result of the unique procedural posture, if the decision is not reversed on appeal, further proceedings may be necessary to address damages, class administration, and attorneys' fees.

REFUND CLAIMS TIME-BARRED DESPITE UNCONSTITUTIONAL STATUTE

By Hollis L. Hyans

A New York State Administrative Law Judge has held in eight separate decisions that several owners of limited partnership interests could not claim refunds for credits under the State's Qualified Empire Zone Enterprise ("QEZE") program for real property taxes, even though the Department's retroactive application of amendments to the statute denying the credits had been found unconstitutional due to the claims were not being timely asserted. Matter of Dorothy Krause F/B/O Angela Krause et al., DTA Nos. 826752-826759 (N.Y.S. Div. of Tax App., Feb. 4, 2016).

Facts. Each of the petitioners in the eight related matters (referred to as the "Owners") owned an interest in 450 South Salina Street Partnership ("450 South Salina") as a beneficiary of the Alfred F. Krause Family Benefit Trust (the "Trust"). 450 South Salina owns and operates real property in Syracuse, New York, and invested more than $4.2 million to acquire and renovate the property. 450 South Salina filed a New York State Partnership Return for 2008, claiming a QEZE credit for real property taxes of approximately $142,000. The return included a New York Partner's Schedule K-1 for the Trust, allocating to the Trust a portion of the QEZE credit for real property taxes.

In April 2009, the New York Legislature enacted modifications to the law governing QEZE-certified businesses, requiring all such businesses to verify that they qualified for continued certification under new criteria, in order to receive benefits for years beginning on or after January 1, 2008. The Department issued technical advice requiring individuals claiming credits through a pass-through entity, such as a partnership, to file an EZ Retention Certificate with their tax returns claiming a QEZE Credit for tax years beginning after January 1, 2008. Legislative Changes to the Empire Zone Program, TSB-M-09(4)I, TSB-M-09(5)C (Dep't of Taxation & Fin., Apr. 15, 2009). In April 2009, the Department also modified its Form IT-606, Claim for QEZE Credit for Real Property Taxes, for the 2008 year, to include a new instruction requiring the attachment of a retention certificate.

In June 2009, the Department of Economic Development revoked the certification of 450 South Salina, claiming it did not provide economic returns greater in value than the tax benefits it received. 450 South Salina appealed the Notice of Decertification, and a copy of that appeal was provided to the Assistant Deputy Commissioner of the Department of Taxation and Finance. In its appeal, 450 South Salina argued that the amendment to the Tax Law was unconstitutional and that continued certification was warranted. The appeal was denied by the Empire Zone Designation Board in the fall of 2009.

Each Owner filed New York State personal income tax returns for 2008, at a time after TSB-M-09(4)I was issued, and after 450 South Salina received notice of revocation. Each Owner believed he or she was legally barred from claiming the QEZE credit.

In 2013, as discussed in the July 2013 issue of New York Tax Insights, the Court of Appeals held in James Square Associates L.P. v. Mullen, 21 N.Y.3d 233 (2013), that the Department's retroactive application of the 2009 amendments was unconstitutional, and that revocations of certifications made retroactive to January 1, 2008, were void.

In 2013, the Owners all filed amended New York State personal income tax returns for 2008, claiming the QEZE credits for real property taxes. All the claims were disallowed, on the grounds that the amended returns were untimely.

ALJ Decision. The ALJ upheld the Department's denial of the refunds, finding that the amended tax returns were all filed after the expiration of the three-year statute for claiming refunds. While recognizing that informal claims for refunds might be sufficient, here the ALJ rejected the arguments of the Owners that they had provided informal refund claims, either by filing a partnership return with a Schedule K-1 showing distributions to them, or by providing a copy of the appeal of 450 South Salina's Notice of Decertification to an official of the Department. The ALJ held that neither submission amounted to an informal refund claim, relying on a federal case, Rothman v. United States, 75-2 U.S.T. C. (CCH) ¶ 9720 (D. N.J. 1975), which found that a protest by a partnership is not considered an informal claim for a refund by a partner.

The Owners argued that they had been prevented from filing returns claiming the QEZE credit by TSB-M-09(4)I and the enactment of the new statute, and that any such claims for credits would have involved filing a false or fraudulent return. The ALJ found that argument "without merit," since a taxpayer may file a protective claim to protect an interest as long as the claim fully discloses the facts, nature and basis for the protective claim. The ALJ also rejected the argument that the denial of the refunds violated the constitutional requirement for "meaningful, backward-looking relief" for constitutional violations, as set forth by the U.S. Supreme Court in McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990), finding that New York's system of allowing timely claims for refund satisfies the Due Process Clause.

Additional Insights

These cases highlight the importance of filing timely claims for refund on a protective basis whenever a taxpayer believes a statute is being improperly applied. Litigation challenging the Department's position can take many years to resolve, particularly when a constitutional issue is involved, and, even when a statute is ultimately declared unconstitutional, New York law includes no provision for a blanket extension of the ordinary statute of limitations while issues are being litigated or when a statute is found to be unconstitutional. Taxpayers who decide to wait while litigation in a "lead case" proceeds should be sure to protect their interests with timely refund claims.

To continue reading this article, please click here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.