A New York City Administrative Law Judge has ruled that a cruise ship operator’s payments to dock its boats at Chelsea Piers in Manhattan are subject to New York City commercial rent tax. Matter of Spirit Cruises, Inc., TAT(H) 09-18(CR) (N.Y.C. Tax App. Trib., Admin. Law Judge Div., June 2, 2011). The ALJ also rejected the taxpayer’s attempt to rely on the results of a prior audit to collaterally estop New York City from assessing the tax.

Spirit Cruises operated dining, entertainment, and sightseeing cruises on the Hudson River. It subleased dock space, as well as office space and storage facilities, from Chelsea Piers LLC, which leased the space from New York State. The principal dispute concerned whether the separate dock rent charges under the sublease were taxable payments for commercial premises in Manhattan, or instead nontaxable payments for water areas in the Hudson River.

The commercial rent tax (“CRT”) applies to a lessee’s base rent for taxable premises, which include “[a]ny real property or part thereof, and any structure thereon or space therein” within portions of New York City. N.Y.C. Admin. Code § 11-701.4. On audit, the Department of Finance (“City”) determined that the dock rents were for land, improvements, and an appurtenant right of access, making the rents payments for taxable premises. Spirit Cruises claimed that the payments, which were separate from its payments for office and storage space, were payments for “water areas.”

Taxable premises. The ALJ held that the dock rents were taxable payments for the right to dock boats alongside a physical structure affixed to land, and to give customers access to the boats. In the ALJ’s view, what was being rented was the appurtenant physical structure, which was essential to the taxpayer’s cruise boat business. In support of its position, Spirit Cruises had submitted an affidavit of its chief financial officer stating her belief as to what was being rented. Over the City’s objection, the ALJ admitted it into the record, but gave it no weight, noting that the affidavit merely reflected the CFO’s “understanding” of what others told her the payments were for, and that she was not subject to cross-examination. Although the City also took the more far-reaching position that CRT would be due even if the payments were for water areas, the ALJ did not address that issue because the record did not support the taxpayer’s factual premise. Collateral estoppel. Spirit Cruises also claimed that the City should be collaterally estopped from imposing the tax because, in a prior audit several years earlier, the City did not impose commercial rent tax on the dock rents. Moreover, the City did not audit the taxpayer’s CRT returns in the five years immediately preceding the periods years in issue, during which dock rents were also not reported in its returns. In reliance on that prior audit, and the absence of a follow-up audit, Spirit Cruises stopped filing CRT returns, since the balance of the rent paid for taxable premises – the storage and office space – did not meet the minimum dollar threshold for taxability.

The ALJ held that collateral estoppel could not be invoked against the City. The ALJ noted that the purpose for collateral estoppel is to bar parties from re-litigating issues where there was a full and fair litigation of the issue in a prior action. Since there was no prior litigation here, merely a desk audit, there was no final court judgment that could bind the City for future periods. The ALJ did abate penalties, however, finding that the taxpayer had reasonable cause for not paying tax on the dock rents by having relied on the prior audit results.

Additional Insights. The ALJ’s decision that the dock rents were being paid for the use of taxable premises, under the particular facts, and in the absence of evidence to the contrary other than the CFO’s affidavit, is not surprising. Although not in issue in Spirit Cruises, rents paid for use of “piers” in interstate or foreign commerce are exempt from the CRT. In Matter of Circle Line Statue of Liberty Ferry, Inc., TAT(H)08-82(CR) (N.Y.C. Tax App. Trib., Admin. Law Judge Div., Apr. 27, 2010), the same ALJ held that rent paid to the New York City Parks Department by an operator of a ferry service between Battery Park, Liberty Island, and Ellis Island for access to landing slips did not qualify for that exemption, because the slips were not “piers” under common parlance, or under state, federal and maritime law.

The ALJ’s discussion of the taxpayer’s collateral estoppel argument is of more widespread interest. The ALJ correctly noted that collateral estoppel applies only when there has previously been a full and fair opportunity to litigate an issue. She also stated, seemingly in dicta, that collateral estoppel cannot be asserted against the government, particularly in tax matters. Although collateral estoppel may not have been the appropriate legal remedy in this case, the taxpayer raised a valid concern regarding the inequities resulting from an unannounced change in a government tax policy. The ALJ acknowledged that “the Department published no notice advising an industry of what is, in practice, a change in its position” regarding dock rentals. The City’s apparent retroactive change of policy does raise questions of fundamental fairness and, ultimately, of whether the taxpayer’s due process rights were violated.