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.

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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.

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