In Matter of Old Forge Kampgrounds, LLC, DTA No. 823254 (N.Y.S. Div. of Tax App., June 2, 2011), a New York State Administrative Law Judge has held that camp cottage rentals, no matter their duration, qualify as nontaxable occupancy for sales tax purposes, despite the Department’s regulation limiting the exemption to rentals of at least one week.
Old Forge Kampgrounds provided tent sites, RV sites, log cabins, and two-room cottages, with beds, light, electricity and heat, kitchenettes, dining table and chairs, and an attached bathroom. The facilities contained no telephones or televisions, and guests had to supply their own cooking items, linens or sleeping bags, soap, and towels. A grocery store on the premises sold food, beverages, clothing, fuel, and other supplies, and also rented linen packages for an additional charge. The Department conducted a sales and use tax audit for 2005 through 2008 and, while agreeing that no sales tax was due on the charges for tent sites, RV sites, and log cabins, as well as rentals of cottages for seven or more days, asserted that tax was due on cottage rentals of less than seven days.
New York imposes sales tax on the rental of hotel rooms, Tax Law § 1101 (c)(1), and the Department’s regulations add “[b]ungalows or similar living units” as examples of “hotels.” 20 N.Y.C.R.R. 527.9(e). As in effect for the years in issue, the regulation provided that rents for the occupancy of bungalows limited to single family occupancy are not for the taxable rental of hotel rooms, as long as no maid, food, or other common hotel services are provided, and the rental is for more than one week.
Both parties agreed that the cottages at issue were bungalows within the meaning of the regulation, and therefore the sole issue concerned the validity of the regulation’s one-week rental requirement. The ALJ reviewed the Department’s regulation, which he found created a special definition of a “hotel” for bungalows that met certain conditions. The first condition, the presence of common hotel services, was found to be implicit in the statutory definition of hotel in Tax Law § 1101(c) (1) and therefore supportable. However, the one-week stay requirement had no support in the statute or the common law, and the ALJ found the Department had offered no argument as to why the length of stay should be “uniquely relevant or rational in determining whether a bungalow — and no other type of accommodation — should be considered a hotel for sales tax purposes.” The regulatory distinction meant that the cottages would be taxable hotels for a six-day stay, but the same spaces would not be considered hotels and would not be taxable beginning on the seventh day. The ALJ found that “[t]his juxtaposition of similar circumstances and contrary results shows the illogic and irrationality of the regulation.” He found that the one-week requirement did not exist in the statute, and therefore the regulation exceeded the Department’s authority and was invalid.
Additional Insights. As the ALJ noted in the decision, tax regulations are generally entitled to deference, and are upheld unless they are shown to be irrational or inconsistent with the statute. When, as here, a regulation adds a requirement not set forth in the statute, and no rationale for the distinction could be found, the regulation was not sustained. However, an ALJ decision has no precedential value, so the regulation is not automatically invalidated for all taxpayers, unless an appeal is taken by the Department and the decision is affirmed.
In addition, the regulation also contained the requirement that the bungalows be “furnished living units limited to single family occupancy.” It is not clear that the cottages at issue were limited in that way, since they contained two separate rooms, and could conceivably be used by a group of people other than a single family. No mention of this requirement was made by the ALJ in the decision, however, and it does not seem to have been an issue raised by either party.