A New York State Administrative Law Judge has held that a limited liability company's purchases of elevators, along with service and maintenance sales related to the elevators, are subject to sales and use tax. Matter of Titan Elevator & Lift LLC, et al., DTA Nos. 825845, 825858, & 825859 (N.Y.S. Div. of Tax App., Sept. 1, 2016). In reaching his conclusion, the ALJ rejected the company's contention that the purchases and sales qualified for a statutory exemption applicable to medical equipment.

Facts. Petitioner ("Titan") is a New York entity in the business of installing and servicing small elevators for use in homes and small business locations. Titan did not register as a sales tax vendor in New York. The Department audited Titan for the period December 1, 2003, through November 30, 2009, and initially requested books and records for the entire period. According to the Department, Titan's records were not adequate to conduct a detailed audit of the entire period, and it treated the year 2007 as a "test period" because it was the only year for which Titan had purchase and sales invoice records.

The Department examined Titan's 2007 retail sales to calculate sales tax due from the service and maintenance of elevators for the entire audit period. The Department examined Titan's 2007 expense purchases to calculate tax due on Titan's purchases of materials used in the installation of elevators. Titan did not pay sales tax on any of its purchases of such materials. The Department ultimately issued Titan a sales and use tax assessment, which included penalties, and also issued assessments to two married individuals as "responsible officers or responsible persons" of Titan.

During the audit, the Department rejected Titan's claims that its services sales, along with its purchases of materials for installing elevators, constituted sales related to medical equipment exempt from sales and use tax. The Department claimed that Titan did not adequately document that the elevators related to the materials purchased were for use by individuals with disabilities. Notably, while reviewing documents in the office of Titan's accountant, the Department found letters, purportedly from Titan's customers, stating that such customers purchased and had installed the elevators "for medical purposes in order to create accessibility in the home." The Department disregarded these letters as unreliable, however, because its investigator determined that in one instance a letter was changed after the individual had signed it, and in two other instances, the individuals whose names appeared on a letter said that they had never seen the letter.

Tax Law. Sales of tangible personal property, and certain sales of tangible personal property installation and maintenance services, are generally subject to sales and use tax unless a statutory exemption applies. Tax Law 1105(a) & (c)(3), 1110(a), 1115.

Titan apparently did not dispute that the material purchases and service sales at issue were subject to sales and use tax but instead argued that its purchases and sales were exempt from sales and use tax either as "medical equipment" and "supplies" used "to correct or alleviate physical capacity" or as "prosthetic aids." Tax Law 1115(a)(3) & (4). Department regulations require that, in order to qualify for the medical equipment exemption, the equipment in question "must be primarily and customarily used for medical purposes and not be generally useful in the absence of illness, injury or physical incapacity." 20 NYCRR 528.4(e)(2).

The Decision. The ALJ concluded that the Department properly assessed sales and use tax on Titan's purchases of materials to install elevators and on its sales of installation and maintenance services related to such elevators. The ALJ explained that persons claiming an exemption from sales and use tax "have the burden of proving their entitlement to" such exemption, and Titan failed to meet its burden.

Titan attempted to satisfy its burden by presenting letters from the suppliers of the equipment that it installed. One supplier's letter stated that from 2003 to 2008, it only manufactured residential disabled accessible elevators for Titan, and another supplier's letter stated that all of the equipment that it supplied to Titan was for residential accessibility installations and that such equipment met the requirements of the American Society of Mechanical Engineers' Code for disabled accessible elevators. The ALJ, however, concluded that "Titan did not have any documentation, such as contracts or memorandums to show that the cost of the materials used to install the elevators were sales not subject to tax."

Separately, the ALJ upheld the penalties imposed on Titan, reasoning that penalties were appropriate because Titan failed to maintain and provide proper records and indeed did underreport its sales and use tax liability. Finally, the ALJ rejected the request that "innocent spouse treatment" be applied to one of the individuals who was issued an assessment as a responsible person because the sales and use tax statutes do not contain any innocent spouse relief provision and, even if they did, no evidence was offered to support innocent spouse relief.

Additional Insights

This case highlights the difficulties that businesses may encounter in claiming a sales and use tax exemption without maintaining detailed documentation contemporaneous with any applicable purchases and sales. Among other things, the ALJ cited sales and use tax statutes explaining that the records a company is required to maintain must "include a true copy of each sales slip, invoice, receipt, statement or memorandum." Tax Law 1135(a)(1).

Separately, this case is unusual in that an individual who was assessed for a business's sales and use tax liability as a "responsible person" attempted to obtain innocent spouse relief from such assessment. Innocent spouse relief is provided for by the personal income tax statutes, and may be available when, taking all facts and circumstances into account, it would be "inequitable" to hold a spouse liable for a joint return's understatement. Tax Law 654; IRC 6015(b). As innocent spouse relief is not provided by any sales and use tax statute, the ALJ concluded that he lacked the power in general equity to consider applying innocent spouse relief in the case.