Affirming the decision of the New York State Tax Appeals Tribunal, the Appellate Division, Third Department, held that vending equipment stored and stocked at a facility within an Empire Zone did not qualify for a sales tax exemption because it was not used primarily within the Empire Zone. American Food & Vending Corp. v. New York State Tax Appeals Tribunal, No. 522043 (App. Div. 3d Dep't, Nov. 3, 2016).

Facts. American Food & Vending Corporation ("AFVC") is a New York corporation that provides food and refreshment services to educational institutions, sports arenas, hospitals and other businesses. Its principal place of business was in Onondaga County within an established Empire Zone. In 2003, the corporation was certified as a qualified Empire Zone enterprise ("QEZE") and received a QEZE sales tax certification entitling it to sales and use tax exemptions on purchases of certain property to be used or consumed within Empire Zones.

AFVC ordered vending machines from out-of-state suppliers, and had them delivered to its facility located in the Empire Zone. Generally, new machines were held in inventory for 30 to 45 days. When machines were needed for delivery to customer locations, they were unpacked, inspected, tested and programmed, loaded with food products, and placed on trucks for delivery to and installation at customer locations by AFVC employees. The preparation process took about two and a half hours. The products sold in the vending machines were warehoused at AFVC's facility and were delivered to the customer locations by AFVC drivers, who collected the cash from the machines and returned it to the accounting department at the facility. Once installed at customer locations, machines usually remained there for the remainder of their useful life, about 10 to 15 years.

Issues and Decisions Below. After an audit for the years 2007 through 2009, the Department sent AFVC a Notice of Determination, imposing sales tax on the vending machines that had been purchased by AFVC without payment of the tax. The applicable statute, former Tax Law 1115(z)(1), provided for an exemption from tax for "tangible personal property . . . directly and predominantly . . . used or consumed . . . in an area designated as an empire zone . . . ." The Department claimed that the equipment did not qualify for the exemption because its predominant use was not in AFVC's facility, but instead was at the customer locations outside the Empire Zone. AFVC argued that the predominant use of the vending equipment occurred within its facility and that, in addition, its use of the equipment through its employees at customer locations in restocking and retrieving cash should be deemed a use within the Empire Zone, since the use was inextricably tied to its facility and, other than the restocking and cash retrieval, it was not using the machines at its customers' locations, but the customers themselves were using them.

An Administrative Law Judge sustained the sales tax assessment, and the Tax Appeals Tribunal agreed, defining the term "use" broadly and finding that AFVC's predominant use of the vending equipment occurred while it was deployed at customer locations outside the Empire Zone, and rejecting AFVC's assertion that the use of the equipment at customer locations was a use by its customers and not by AFVC. Noting that the Department has defined "predominantly" for purposes of the QEZE sales tax exemption as "50% or more," see TSB-M-02(5)S (N.Y.S. Dep't of Taxation & Fin., July 24, 2002), and that the definition was in accord with the common meaning of the term, the Tribunal found that AFVC's predominant use of the vending equipment occurred while such equipment was deployed at the customer locations and not while the equipment was being prepared in AFVC's facility.

Appellate Division Decision. The Appellate Division, Third Department, affirmed the decision of the Tribunal. Given the limited standard of review, which requires a Tribunal decision to be affirmed if it is "`rationally based upon and supported by substantial evidence . . . even if a different conclusion is reasonable,'" the Third Department found that the Tribunal properly concluded that AFVC had failed to meet its burden of demonstrating that it was entitled to an exemption. The court agreed with the Tribunal's broad definition of the word "use," and found that the Tribunal had properly concluded that AFVC's predominant use occurred outside the QEZE facility.

The Third Department also went on to consider AFVC's argument that the sale of foods at customer locations from vending machines that had been stocked with items once stored at the facility should be regarded as being a "direct" use at the facility as if AFVC had sold the food items directly to a customer from the facility. The Third Department rejected this argument, finding that the activities conducted by AFVC at its facility, while necessary for the machines to function, added little or no value and that the majority of the machines' usefulness to AFVC occurs outside the facility when used by customers. The court found AFVC's argument to be "too attenuated and wholly inconsistent with the entire purpose of the empire zone initiative."

Because AFVC was arguing for entitlement to an exemption, the Third Department concluded that AFVC had to prove not only that its construction of the statute was plausible, but that its interpretation was "the only reasonable construction," and that it had failed to do so. Since the court found that the Tribunal's determination was rational and supported by substantial evidence, the determination was upheld and the exemption was denied.

Additional Insights.

The standard applied to review of a Tax Appeals Tribunal decision by the Appellate Division requires the taxpayer to demonstrate that the Tribunal decision was either not supported by substantial evidence or that it was irrational and a clearly erroneous interpretation of the law or the facts. In addition, and as the Third Department noted, here AFVC was also arguing for application of an exemption from sales tax, and New York cases have repeatedly held that a taxpayer bears the burden of proving entitlement to an exemption. These are difficult standards to meet, and it appears that the Third Department accepted the Tribunal's rejection of AFVC's arguments trying to bring vending machine sales at remote locations around the state within the statutory definition of activities conducted "directly" and "primarily" at the facility where the machines were stored and the food items were loaded.