The New York State Tax Appeals Tribunal has affirmed the decision of an Administrative Law Judge denying sales tax refunds of over $100 million because the vendor had not complied with the statutory requirement that the amount in issue must first be refunded to customers. Matter of New Cingular Wireless PCS LLC, DTA No. 825318 (N.Y.S. Tax App. Trib., Feb. 16, 2016). The Tribunal also affirmed the ALJ’s separate decision denying the company’s motion to reopen the record.

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 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 an escrow account 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 prerefund escrow fund. However, before claiming the refund, ATTM did not make any payments to the prerefund escrow fund with respect to the overcollected New York sales tax.

The ALJ had determined that since ATTM had not repaid the tax to its customers, it could not obtain a refund because it failed to satisfy Tax Law § 1139(a), which 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, under such regulations as it may prescribe, 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 or 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, noting that the Tribunal’s Rules of Practice and Procedure 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. 

Tribunal Decision. The Tribunal 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 only was created afterwards. It rejected ATTM’s assertion that the Tribunal had “inherent authority” to reopen the record when there has been a change in circumstances, finding there was simply no basis in the governing statute and rules to reopen the record, and that reopening would be contrary to the Tribunal’s “mission to provide a fair and efficient hearing system which…must be both defined and final.” 

On the merits of ATTM’s refund claim, the Tribunal found that the language of Tax Law § 1139 unambiguously requires actual repayment or reimbursement to customers before a vendor may receive a refund, and that the various agreements among the parties, while they might constitute a legally binding promise to pay, did not satisfy the statutory language. The Tribunal explicitly noted that it was not addressing the question of whether funding of the escrow account would be sufficient to satisfy the repayment requirement since, given its denial of the motion to reopen, “there is no evidence in the record of any such escrow account funding.” The Tribunal also agreed with the ALJ that the contrary decision by the New Jersey Tax Court in New Cingular Wireless PCS, LLC v. Director, Division of Taxation, 28 N.J. Tax 1 (2014) is distinguishable, due to differences between the New Jersey and New York statutes and the lack of any New Jersey regulations on point, where New York’s regulations strongly support the payment requirement.

Additional Insights

There is no doubt that the New York sales and use tax statute, like those in many states, contains a clear requirement that customers must be repaid before a vendor can obtain a refund. This can result in a significant hardship to vendors when a potential refund is large and there is no guarantee that the state will agree a refund is due, and the $100 million at issue in New Cingular Wireless would be particularly daunting. Other state Departments of Revenue, in states with similar statutes, have, on occasion, been willing to work with vendors to create mechanisms to ensure no unjust enrichment to the vendor, but no enormous out-ofpocket expenses either, such as “unconditional promise to pay” agreements entered into between vendors and customers requiring the customers to be paid during the time period between the Department agreeing the refund claim is valid and actually issuing the payment to the vendor. Neither the ALJ nor the Tribunal was satisfied with any of the documents executed by ATTM and its customers and, due to the failure to fund the escrow account before the initial hearing (which ATTM claimed was based on informal advice from the Department that it wouldn’t have mattered) and the Tribunal’s sustaining the ALJ’s determination not to reopen the record, it is impossible to know what impact funding the escrow account might have had.

At press time it is not yet known whether ATTM will appeal to the Appellate Division.