The New York State Tax Appeals Tribunal has upheld the decision of an Administrative Law Judge that a Manhattan hotel may not claim a sales tax credit for its costs to purchase continental breakfasts made available to hotel guests as part of their room charges. Matters of Washington Square Hotel LLC and Daniel Paul, DTA Nos. 825405, 825505, & 825821 (N.Y.S. Tax App. Trib., July 19, 2016).

Facts and Issues. During December 1, 2007, through May 31, 2010, the years in issue, the Washington Square Hotel LLC (the “Hotel”) owned and operated a continued on hotel on Waverly Place in New York City. Its brochures indicated that the room rates include a continental breakfast and that a restaurant is also on the premises. As part of its contracts with travel companies, which also advertised that the room rates included a continental breakfast, the hotel provided rates for meals described as American breakfast for $15, lunch for $25, and dinner for $40. No rates for continental breakfasts were given. No separate charge for the continental breakfasts appeared on guests’ bills, and guests did not have the option to decline the breakfast and obtain a lower rate. The Hotel purchased the continental breakfasts from a restaurant operated by a related entity. It paid sales tax on the purchases and then claimed a sales tax credit for the tax it paid on the purchases.

Prior to 2002, the Hotel had not paid sales tax when purchasing the breakfasts, but had provided the seller with a resale certificate. During an audit of the restaurant in 2002, the Department’s auditor indicated that the restaurant should charge sales tax, although it was unclear from the record whether the auditor also expressly advised the Hotel to claim a credit for the sales tax. The Hotel was later audited for the period September 1, 2003, through May 31, 2006, periods during which it had also claimed the sales tax credit, and no issues appeared to have been raised with this treatment during the audit. On audit of the years in issue, the Department denied the credit, resulting in additional tax of approximately $300,000. The hotel also filed an application for a refund of approximately $22,000 on the same resale theory for the period December 1, 2011, to February 29, 2012; this refund was similarly denied by the Department.

ALJ DecisionThe ALJ upheld the Department’s denial of the credit and refund. She found that although Tax Law § 1101(b)(4)(i), commonly known as the “sale for resale” exclusion, allows an exclusion from tax for amounts paid to purchase tangible property for resale, the exclusion only applies when the property is resold “as such” or as a component part of other tangible personal property, or is used in performing certain specified services. Since the service of providing hotel rooms for occupancy is not included within the specified qualifying services, the sale of continental breakfasts as part of the service of providing hotel rooms does not fall within the sale for resale exclusion in Tax Law § 1101(b)(4)(i)(B). She also found that the record contained no evidence that a continental breakfast was actually sold to guests or that the price for each breakfast was separately stated. The ALJ relied primarily on Matter of Helmsley Enterprises., Inc., (N.Y.S. Tax App. Trib., June 20, 1991), aff’d, 187 A.D.2d 64 (3d Dep’t 1993), lv denied, 81 N.Y.2d 710 (1993), in which the Tax Appeals Tribunal found that a hotel’s purchase of furniture, guest room supplies, and in-room amenities were not considered purchases for resale because the items were furnished to guests not as resales of tangible personal property, but as a component part of an “overall package of services." The ALJ also rejected the hotel’s argument that the Department should be estopped from changing its position from that taken in earlier audits. 

Tribunal Decision. The Tribunal affirmed the ALJ, relying on the Department’s regulation, 20 NYCRR § 527.9(h)(1)(iii), which provides that “the entire charge” for a hotel room “is subject to tax as rent for the occupancy,” and also on the decision in Helmsley, 187 A.D.2d at 69, for the proposition that “property used in providing a hotel service is not resold as such to guests, but is inseparably connected to the provision of the service." The Tribunal rejected the Hotel’s argument argued that the breakfasts, which were not provided in guest rooms, were substantively different from the items in Helmsley, finding that the breakfasts were an “amenity incidental to” the provision of services to the guests.

The Tribunal also rejected the Hotel’s argument that the Department should be estopped from denying the credit since it accepted the same credit in an earlier audit. It found that “a taxpayer attempting to invoke the doctrine of estoppel against the State has a steep hill to climb,” and that the Hotel had failed to establish the kind of “exceptional facts” that would require estoppel to avoid “a manifest injustice." While the records did show that the Department acquiesced to the Hotel’s credit claims during the audit of earlier years, there was no evidence that the Department had affirmatively advised the Hotel to claim the credit.  "

Additional Insights

After the decision in Helmsley, it would seem exceedingly difficult for a hotel to establish that tangible property provided to guests as part of overnight accommodations qualify for the resale exemption when they are initially purchased by the hotel. The Appellate Division in Helmsley upheld the Tribunal’s conclusion that purchase of items such as guest room furniture, furnishings, and guest consumables “were not sales of tangible personal property for purposes of resale as such and were subject to sales tax.” 187 A.D.2d at 68 (emphasis in original). The Appellate Division found a distinction between the property provided in Helmsley and the holding in “container cases” such as Matter of Burger King v. State Tax Commission, 51 N.Y.2d 614 (1980), where purchases of food wrappers were held to be “resold as such” since the wrappers retained their separate identity when used as containers for food and drinks sold at Burger King restaurants.

With regard to estoppel, as the Tribunal acknowledged, this is a difficult argument for a taxpayer to sustain. The elements of estoppel are generally that a representation was made, that a taxpayer was entitled to rely on that representation, that the taxpayer did in fact so rely, and that such reliance was reasonable under the facts and circumstances. Matter of Harry’s Exxon Serv. Station, DTA No. 801193 (N.Y.S. Tax App. Trib., Dec. 6, 1988). In that case, a taxpayer received a letter from the Department stating that an audit was complete and no tax was owed, and in reliance on that letter, the taxpayer’s accountant destroyed the relevant records, leaving the taxpayer unable to defend against an assessment. In the absence of such extraordinary circumstances, including clear proof of written advice, and conduct taken in reliance on that advice to a taxpayer’s detriment, estoppel will not likely be imposed against a taxing authority.