The Appellate Division, Third Department, has confirmed the New York State Tax Appeals Tribunal's decision that a Manhattan hotel may not treat as purchases for resale continental breakfasts purchased from a restaurant on its premises and made available to hotel guests as part of their room charges. Washington Square Hotel LLC v. Tax Appeals Tribunal, 155 A.D. 3d 1477 (3d Dep't, 2017).

Factual History and Decisions Below. From December 1, 2007 through February 29, 2012, the years in issue, the Washington Square Hotel LLC (the "Hotel") owned and operated a hotel on Waverly Place in New York City. It provided its guests with a continental breakfast that it purchased from Caf C-III, a restaurant located on its premises. The cost of the breakfasts was included in the hotel rental room fees paid by guests. The Hotel paid Caf C-III regardless of whether guests consumed the breakfasts, and hotel guests were not separately billed for the breakfasts.

The Hotel had paid sales tax to Caf C-III on the purchases and then requested credits for the amount paid, claiming it had purchased the breakfasts for resale. Prior to 2002, the Hotel had not paid sales tax when purchasing the breakfasts, but had provided the seller with a resale certificate. During an audit of the restaurant in 2002, the Department's auditor had indicated that the restaurant should charge sales tax, although it was unclear from the hearing record whether the auditor also expressly advised the Hotel to claim a credit for the sales tax paid to Caf C-III. The Hotel was later audited for the period September 1, 2003 through May 31, 2006, periods during which it had also claimed the sales tax credit, and no issues were raised with this treatment during the audit.

The Administrative Law Judge denied the Hotel's entitlement to any credit, and her decision was upheld by the Tax Appeals Tribunal. The ALJ found that although Tax Law 1101(b)(4)(i), commonly known as the "sale for resale" exclusion, allows an exclusion from tax for amounts paid to purchase tangible property for resale, the exclusion only applies when the property is resold "as such" or as a component part of other tangible personal property, or is used in performing certain specified services. Since the service of providing hotel rooms for occupancy is not included within the specified qualifying services, the sale of continental breakfasts as part of the service of providing hotel rooms does not fall within the sale for resale exclusion in Tax Law 1101(b)(4)(i)(B). She also found that the record contained no evidence that a continental breakfast was actually sold to guests or that the price for each breakfast was separately stated, relying primarily on Matter of Helmsley Enterprises, Inc. (N.Y.S. Tax App. Trib., June 20, 1991), aff'd, 187 A.D.2d 64 (3d Dep't, 1993), appeal denied, 81 N.Y.2d 710 (1993), in which a hotel's purchase of furniture, guest room supplies, and in-room amenities were not considered purchases for resale because the items were furnished to guests not as a resale of tangible personal property, but "as a component part of an overall package of services."

[T]he court found that the breakfasts were provided to guests as part of the hotel rental rate and not resold to them, and that the Tribunal's determination that the Hotel could not claim the benefit of the resale exemption had a rational basis and was supported by substantial evidence.

The Tribunal agreed, relying on the Department's regulation, 20 NYCRR 527.9(h)(1)(iii), which provides that "the entire charge" for a hotel room "is subject to tax as rent for the occupancy," and on the decision in Helmsley, 187 A.D.2d at 69, for the proposition that "property used in providing a hotel service is not resold as such to guests, but is inseparably connected to the provision of the service." The Tribunal rejected the Hotel's argument that the breakfasts were substantively different from the items in Helmsley, finding that the breakfasts were an "amenity incidental to" the provision of services to the guests.

Both the ALJ and the Tribunal rejected the Hotel's argument that the Department should be estopped from denying the credit since it accepted the same credit in an earlier audit.

Appellate Division Decision. The Appellate Division has now confirmed the Tribunal's decision in all respects, finding that the Hotel had not met its burden of showing that the breakfasts were purchased for the "one and only one purpose" of resale. The court noted that the Hotel paid Caf C-III whether or not a guest consumed the breakfast, and that, "[m]ore critically," hotel guests were not separately billed for the breakfasts. Therefore, the court found that the breakfasts were provided to guests as part of the hotel rental rate and not resold to them, and that the Tribunal's determination that the Hotel could not claim the benefit of the resale exemption had a rational basis and was supported by substantial evidence.

The Appellate Division also rejected the Hotel's equitable estoppel argument, finding that the doctrine of equitable estoppel does not apply in tax cases absent "unusual circumstances" that would support a finding of "manifest injustice," which were not present here. The court concluded that the fact that the Hotel in a prior audit had not been assessed additional tax even though it claimed the same tax credit did not rise to the level of "manifest injustice," particularly when each audit stands on its own and does not bind a subsequent audit cycle.


In Helmsley, the Tax Appeals Tribunal found, and the Appellate Division agreed, that purchase of items such as guest room furniture, furnishings, and guest consumables "were not sales of tangible personal property for purposes of resale as such and were subject to sales tax." 187 A.D.2d at 68. The Appellate Division found a distinction between the property provided in Helmsley and the holding in "container cases" such as Matter of Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614 (1980), where purchases of food wrappers were held to be "resold as such" since the wrappers retained their separate identity when used as containers for food and drinks sold at Burger King restaurants. In light of that precedent, the Hotel in this case bore a heavy burden to demonstrate it was buying the breakfasts for resale, and both the Tribunal and the Appellate Division were swayed by the fact that the price of the breakfast was not separately stated and that the room rate was the same whether or not guests ate the breakfasts.

With regard to equitable estoppel, this is a difficult argument for a taxpayer to sustain, and demonstrating the existence of a "manifest injustice" is a challenging burden, unlikely to be satisfied in the absence of written contrary advice from the taxing authority on which a taxpayer reasonably relied to its detriment. In the absence of such extraordinary circumstances, equitable estoppel is not likely to be imposed against a taxing authority.