The New York State Appellate Division, in a strongly worded opinion, reversed the decision of the Tax Appeals Tribunal denying sales tax refunds of over $100 million to New York customers, finding that the Tribunal had abused its discretion in refusing to reopen the record to allow evidence of the funding of a pre-refund escrow account set up to facilitate repayment to customers of improperly collected tax. Matter of New Cingular Wireless PCS, LLC v. Tax Appeals Trib., 2017 NY Slip Op. 06010 (3d Dep't, Aug. 3, 2017).

Background. In order to resolve litigation claiming that New Cingular Wireless, now known as AT&T Mobility ("ATTM"), improperly collected and remitted sales tax on charges for Internet access, ATTM entered into a nationwide class action settlement agreeing to reimburse its customers, including New York customers, for the overcollected tax by filing refund claims for their benefit. The agreement involved the creation of escrow accounts to receive sales tax refunded by the states, with those funds to be distributed to the customers by an escrow agent under court supervision. In states like New York that require a vendor to refund the overcollected tax to its customers prior to receiving a refund from the state, ATTM agreed to fund a pre-refund escrow fund. However, ATTM had not made any payments to the pre-refund escrow fund with respect to the overcollected New York sales tax before claiming the refund for New York customers.

Decisions Below. In July 2014, an Administrative Law Judge ("ALJ") determined that, since ATTM had not repaid the tax to its customers, it could not obtain a refund, because Tax Law 1139(a) provides that "[n]o refund or credit shall be made to any person of tax which he collected from a customer until he shall first establish to the satisfaction of the tax commission . . . that he has repaid such tax to the customer."

A month after the ALJ decision, in August 2014, ATTM filed a motion to reopen the record for reargument, claiming that it had not previously funded the New York escrow account because the Department had informed it that the refund claim would nonetheless be denied on other grounds; that it subsequently did fund the New York escrow account; and that it could submit evidence establishing that the account had indeed been funded. The ALJ denied the motion, holding that the Tribunal's Rules of Practice and Procedure, which are patterned after the New York Civil Practice Law and Rules applicable in New York State courts, only allow the record to be reopened for newly discovered evidence, and that this evidence was not newly discovered but had not been in existence at the time of the original hearing.

The Tribunal then affirmed the ALJ on both grounds. First, it agreed that the record cannot be reopened for the admission of evidence that was not in existence at the time of the original hearing and was only created afterwards, and concluded that reopening the record would be contrary to the Tribunal's mission of providing a fair, efficient, and final hearing system. On the merits of the refund claim, the Tribunal found that the language of Tax Law 1139(a) requires actual repayment or reimbursement to customers before a vendor may receive a refund, and that the various agreements among the parties did not constitute a legally binding promise to pay. Because it refused to reopen the record to allow evidence of the escrow account funding, the Tribunal did not address the question of whether that funding would be sufficient to satisfy the repayment requirement.

Appellate Division Decision. The Appellate Division held that, on "the particular facts of this case," it was an abuse of discretion for the Tribunal to deny ATTM's motion to reopen the record. The court noted that there was no viable alternative to reopening the record of the original proceeding to allow the evidence of the funding to be submitted. Although the Department had argued that ATTM could simply file a new refund claim relying on the funding of the account, the court recognized that there might be a statute of limitations defense to a new refund claim, which would result in what the court described as a "$106 million windfall" to the Department, a conclusion the court found the Legislature "surely did not envision." The court granted the motion to reopen the record, and remitted the case to the Tribunal for further proceedings in light of the evidence that the escrow account had indeed been funded.

While not expressly deciding the question of whether funding of the escrow account amounted to a valid refund to the customers for purposes of Tax Law 1139(a), the court gave a very definitive indication of what it expected to happen next. It found that, pursuant to the terms of the global settlement agreement, ATTM had "unquestionably" assigned all rights in the refund amounts to the settlement class customers; the customers had already acknowledged that refunding the escrow account constitutes repayment of the taxes; and the federal court that had approved the settlement had both sanctioned the payments and retained supervision of the distribution of the refund to ATTM's customers. The court concluded its decision by finding that "all that remains is the physical act" of payment to ATTM's customers of "the moneys to which they are due," and that "the parties would be well-served to proceed in a fashion that accomplishes those tasks in as expeditious a manner as possible."

Additional Insights

The Appellate Division could not have made its view on this case more clear: sales tax had been improperly collected from New York State customers by ATTM, ATTM had acknowledged the overcollection and set up a mechanism to refund the tax under the supervision of a federal district court, and the customers -- not the Department of Taxation and Finance -- are entitled to receive those refunds forthwith. While both the ALJ and the Tax Appeals Tribunal had considered the position of the two litigating parties before it, the court's primary concern appears to have been the position of the New York State customers, who had incorrectly paid more than a hundred million dollars in tax that the Department was now trying to keep.