A New York State Administrative Law Judge partially denied a tobacco wholesaler and distributor's tobacco products tax refund claim on the grounds that the statute of limitations had expired for part of the tax period for which the refunds were requested. The ALJ also held that the wholesaler and distributor was not entitled to relief under the portion of the Taxpayer Bill of Rights that requires the disclosure of overpayments made by the taxpayer. Matter of Globe Wholesale Distributors, Inc., DTA No. 826617 (N.Y.S. Div. of Tax App., Nov. 2, 2017).

Facts. Globe Wholesale Distributors, Inc. ("Globe") is a licensed New York State wholesaler and distributor of tobacco products. The New York State Department of Taxation and Finance audited Globe for the tobacco products tax for the audit period May 2009 through April 2012. During the course of the audit, the Department determined that Globe had made several errors in its calculation of the tax. As a result, on July 5, 2013, the Department issued a Notice of Determination assessing additional tax due of $55,965, plus interest, for the tax period August 1, 2011, through April 30, 2012, but did not assert any additional tax due for any other portion of the audit period. Globe timely filed a petition with the Division of Tax Appeals.

On December 5, 2013, after it issued the Notice of Determination to Globe, the Department issued a Technical Memorandum providing new guidance for determining a distributor's wholesale price of cigars when an established price or manufacturer's invoice price is not available. Technical Memorandum, TSB M 13(12)M (N.Y.S. Dep't of Taxation & Fin., Dec. 5, 2013) (the "TSB-M"). The TSB-M stated that it was "[e]ffective for cigars imported into New York on or after December 1, 2013." Having concluded that under the TSB-M it would be entitled to refunds, on December 19, 2013, Globe filed a protective refund claim for the entire audit period. On July 2, 2015, Globe filed a second refund claim for the audit period.

In September 2015, the Department issued a notice allowing Globe a partial refund. The notice granted Globe's refund claims for November 2011 through April 2012, but denied Globe's refund claims for August 2011 and September 2011 on the grounds that the two-year statute of limitations had already expired for those periods. (No refund was claimed by Globe for October 2011.) As a result, the only periods at issue at the hearing before the ALJ were August 2011 and September 2011. There was no dispute regarding the periods November 2011 through April 2012, as refunds had already been issued to Globe for those periods, and the Department did not assert that additional tax was due.

Law. Tax Law 476 provides that, where the tobacco products tax is paid in error, a taxpayer is entitled to a refund of the amount of tax paid, provided the refund claim is filed within two years after the tax was paid. Separately, the Taxpayer Bill of Rights provides that the Department must disclose to a taxpayer "all instances of overpayment of tax by such taxpayer discovered by the [D]epartment during the course of an audit, assessment, collection or enforcement proceeding." Tax Law 3004-a(a).

ALJ Decision. The ALJ determined that the Department properly denied Globe's refund claims for August 2011 and September 2011. The ALJ held that, since Globe had filed its protective refund claim on December 19, 2013, it was only entitled to a refund for taxes paid within two years of that date -- that is, on or after December 19, 2011. The ALJ noted that, although the Department granted Globe's refund claims for the audit period November 2011 through April 2012, by its terms the TSB-M was only applicable prospectively beginning in December 2013, after the tax periods in issue.

The ALJ also concluded that Globe was not entitled to relief under the Taxpayer Bill of Rights provision that requires the Department to disclose to the taxpayer overpayments discovered during the course of an audit. The ALJ noted that, since the TSB-M was not issued until after the audit was completed, and only applied to cigars imported into New York after December 2013, Globe failed to show that the Department discovered any overpayment during the course of the audit that it was required to disclose.

Additional Insights

This decision deals with--but finds inapplicable--a rarely invoked provision in the Taxpayer Bill of Rights that imposes an affirmative duty on the Department to disclose to the taxpayer any overpayment of tax discovered during the course of an audit, assessment, collection, or enforcement procedure. The taxpayer then has 120 days from the date of the disclosure to file a refund claim, but the 120 days does not reduce the time during which a taxpayer may otherwise file a refund claim. Tax Law 3004-a(b). The disclosure requirement does not require or permit the payment of a refund with respect to a period that, at the time the overpayment is discovered by the Department, is closed by virtue of the expiration of the statute of limitations. Tax Law 3004-a(c). In this case, the ALJ found that the disclosure requirement did not apply, both because the TSB-M on which the refunds were based was not issued until after the audit concluded and because the TSB-M was not retroactive in nature. However, even if the TSB-M had been made retroactive, the result would have likely been the same, since, at the time it was issued in December 2013, the statute of limitations for refunds had already expired for August 2011 and September 2011.