In Matter of New Cingular Wireless PSC LCC, DTA No. 825318 (N.Y. Div. of Tax App., July 17, 2014), a New York State Administrative Law Judge upheld the denial of a sales tax refund of over $100 million, finding that the vendor had not complied with the statutory requirement that the amount in issue must first be refunded to customers.

Facts. Over a nearly five-year period, New Cingular Wireless, now known as AT&T Mobility (“ATTM”), erroneously billed, collected and remitted over $100 million in New York sales tax on its sales of Internet access services to its customers. As part of a class action settlement agreement involving 44 states, approved by the District Court for the Northern District of Illinois, ATTM agreed to reimburse its New York customers for the overcollected tax by filing a refund claim for the benefit of its customers. The class members specifically consented to ATTM’s filing of a refund claim in New York, payment of the refund by the taxing authority to ATTM or directly to an escrow account, and the distribution of the settlement fund amounts, net of attorneys’ fees, to the customers by an escrow agent under court supervision.

The settlement agreement also contained special provisions for taxing jurisdictions, such as New York, that require a vendor to refund the overcollected tax to its customers prior to the taxing jurisdiction granting a refund to the vendor. In that case, ATTM agreed that it would fund a pre-refund escrow fund for class members and the class members agreed that such payment by ATTM into the pre-refund escrow fund would be considered the payment by ATTM to the class members. However, ATTM did not make any payments to the pre-refund escrow fund with respect to the overcollected New York sales tax.

On review, the Department of Taxation and Finance denied ATTM’s refund claim on the basis that (1) Tax Law § 1139(a) requires that the vendor must show that sales tax has been repaid to the customer in order for the vendor to be eligible for a refund; (2) the documentation submitted did not allow the Department to determine how the refund amounts were calculated; and (3) the refund claim appeared to include claims made on behalf of customers that had opted out of the settlement agreement.

Following the Department’s denial of the refund claim, ATTM and the settlement class entered into a “clarifying agreement” providing that any payments made by ATTM to either the New York escrow account or the pre-refund escrow account would be considered payments made to the settlement class, and that such funds were to be used to make refunds and should be considered refunds to the settlement class at the moment they were deposited in the accounts. However, ATTM still made no payments to the escrow fund with regard to the New York taxes.

ALJ Decision.  Both parties moved for summary judgment, claiming there was no issue of material fact involved, and the ALJ agreed that the matter was ripe for summary judgment. However, he determined that since ATTM had not repaid the tax to its customers, it failed to satisfy the clear requirements of Tax Law § 1139(a) and was not entitled to the refund.

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, under such regulation as it may prescribe, that he has repaid such tax to the customer.” The regulation promulgated pursuant to the statute, 20 NYCRR 534.2, prescribes the form of the refund application, which must include a certification by the applicant and evidence that the applicant had refunded the tax to its customer.

While the ALJ recognized that it would be an advantage to ATTM to have the Division agree to the amount of the refund before making payment to the customer, the ALJ could not reconcile ATTM’s argument that reimbursement of the overcollected tax should not be required with the plain language of the statute. He also noted repeatedly that ATTM had not in fact funded either escrow account with any monies related to the New York amounts, and that ATTM appeared to be reluctant to fund such amounts unless and until the Department had determined the amount of tax due to each customer. Therefore, he found that ATTM’s claim that the amount of the refund has been determined from its computer records “belies its refusal to fund the escrow accounts and its demand that the Division certify the refund amount before it would do so.” He also noted that the Division auditors who reviewed ATTM’s claim had found several shortcomings and areas they could not reconcile. Therefore, the ALJ denied the refund claim, and granted the Department’s motion for summary judgment.

Additional Insights

When confronted with the same issue, the New Jersey Tax Court in New Cingular Wireless PCS, LLC v. Director, Division of Taxation, 28 N.J. Tax 1 (2014) reached an opposite result, and directed the New Jersey Division of Taxation to consider the merits of the refund claim, and determine whether tax had been incorrectly remitted and, if so, by how much (which means the case is still in litigation and not yet ripe for appeal). In that case, the Tax Court found that the vendor could make its application for a refund without first having to repay the tax to its customers, even though the New Jersey refund statute, N.J.S.A. 54:32B-20(a), is similar to Tax Law § 1139(a).

Interpreting New Jersey’s refund statute, the New Jersey Tax Court held that New Cingular could make its application for a refund without first having to repay the tax to its customers. In addition, the Tax Court found the vendor had a statutory right to have its refund application considered by the Director without first having to repay its customers.  Otherwise, the vendor would have to repay the sales tax to its customers without any assurance of success on its refund claim and in the event that its refund claim ultimately was denied, the vendor would be left unable to recoup the taxes it returned to its customers, resulting in a windfall to the customers.

The New Jersey Tax Court also found that, because of the escrow account required by the settlement agreement, it was not possible for New Cingular to “take ownership” of any refunded amounts. Finally, since the transactions contemplated by the settlement agreement would all be subject to court enforcement, the Tax Court found “sufficient safeguards” in place to ensure that the purpose of the statutory repayment requirement would be fulfilled.

The New York ALJ referenced the New Jersey decision, but found a “critical difference” in the statutory language because the New Jersey statute refers to an “actual” refund, thus inferring that there is a “timing difference placed in the New Jersey statute that does not appear in Tax Law § 1139(a).”  Although not entirely clear from the ALJ’s decision, it appears that the “timing difference” referred to by the ALJ might be the difference between filing a refund claim with a taxing authority and the payment of the refund claim by the taxing authority. In any event, since the New Jersey Tax Court found that the purpose of the repayment requirement was satisfied by safeguards in the settlement agreement, any “timing difference” is not really relevant because under the New Jersey decision the vendor should receive the “actual refund” without actually having to pay the class members first. By contrast, in New York, although  the ALJ acknowledged that the vendor was “eligible” to make a refund before repaying its customers, it is quite plain that under the ALJ’s reasoning any such claim will be denied for failing to satisfy the absolute repayment requirement of N.Y. Tax Law § 1139(a).

It is also worth noting that although the ALJ made several references to ATTM’s failure to fund the escrow account, it does not appear that such funding would have been sufficient to satisfy the statute. The ALJ appeared skeptical that, while ATTM claimed its settlement agreement constituted payment to its customers, ATTM had not complied with the terms of that settlement agreement by funding the escrow account.