A New York State Administrative Law Judge has held that a car dealership could not obtain a refund of sales tax paid on sales of cars and extended warranties because it had failed to first refund the amounts to its customers. Matter of Stamford Subaru, LLC, DTA  No. 826071 (N.Y.S. Div. of Tax App., Dec. 10, 2015). The ALJ did not agree with the dealership’s claims that it, rather than its customers, had borne the incidence of the tax.

Facts. Stamford Subaru, the dealership, operated in Stamford, Connecticut, approximately three miles from the New York border, and frequently sold automobiles and extended warranties to New York State residents.   It collected sales tax on those sales and remitted the tax to New York State. After an audit by the Connecticut Department of Revenue, the dealership was advised  that sales tax was due to Connecticut on sales of all extended warranties sold in Connecticut. Stamford Subaru paid the amount due to Connecticut, at the  same rate, and then sought a refund from New York State for the amounts it had collected from its New York customers on the sales of extended  warranties. Stamford Subaru argued that it had “in essence” refunded the collected sales tax and then recharged the tax, at the same rate applicable in both states, which  was remitted to Connecticut.

ALJ Decision. The ALJ found that Stamford Subaru had failed to fulfill the requirements of Tax Law § 1139(a), which mandates that, in order to be eligible for a refund of taxes erroneously collected from customers, vendors must demonstrate that the tax was first repaid to the customers. Here, Stamford Subaru was arguing that it had paid the sales tax directly to New York and therefore had no obligation to refund anything to its customers, asserting that 75% of the sales tax it paid to New York “came from its own pocket,” because that portion was actually owed to Connecticut and paid to that state at a later date. The ALJ rejected this argument, finding that all the sales  tax was originally collected from the customers on   both purchase of vehicles and purchase of extended warranties. Therefore, the ALJ found that Stamford Subaru had to repay its customers before it was entitled to a refund.

Additional Insights.

It is not clear exactly what Stamford Subaru could have done to qualify for a refund under the ALJ’s   analysis. There is no doubt that, under New York law and the law of many other states, sales tax collected from customers must be refunded to those customers before a refund  can be claimed from the taxing authority and also no doubt that, initially at least, Stamford Subaru collected the tax from customers and remitted it to New York State. After learning that the tax should have been remitted instead to Connecticut, Stamford  Subaru then paid tax to Connecticut, in the same amount,   since the rates were the same, but not collected from anyone. There would have been no reason and no logic in refunding the New York sales tax originally collected from customers, and then simultaneously asking the same customers to immediately remit the same exact amount back to Stamford Subaru as  Connecticut sales tax so that it could send the money instead to Connecticut. Since the tax was collected just once from customers but paid twice to different jurisdictions, and given the general rule that money is fungible, another way of looking at the facts would have been to say that the tax collected from the customers was actually paid  to Connecticut, allowing a refund to Stamford Subaru and avoiding a windfall to New York State in the form  of tax to which it was never entitled.