EXCISE TAX* ASSESSMENT?
TAXPAYERS, KNOW YOUR RIGHTS

By Milette Shanon

As the result of differences in the statutory language governing New York State and New York City income taxes (i.e., the State's Corporate Franchise Tax imposed under Article 9-A, the City's General Corporation Tax or "GCT," the Unincorporated Business Tax or "UBT," and the personal income tax administered by the State under Article 22) and the State's and City's excise taxes (e.g., the Commercial Rent Tax, Real Property Transfer Tax, Liquor License Tax, Annual Vault Charge, Utility Tax), excise taxpayers may be unaware of several pitfalls which they face.

Excise taxpayers should be aware of the following discrepancies:

1. Most of the excise taxes have a statute of limitations for requesting refunds which is at least one year shorter than that applicable to income
tax claims.

2. No interest accrues on New York City excise tax refunds, and

3. If an excise tax taxpayer does not make a formal protest of an excise tax deficiency within 90 days of receiving a Notice of Determination, in virtually all cases, the taxpayer loses any further right to appeal.

It is this third issue (Prong 3) that is discussed here. In an era when so many jurisdictions have promulgated taxpayer rights laws, prong three is unduly harsh. Nevertheless, the only body that can offer relief from the predicaments caused by this rule is the New York State Legislature.

As the recipient of a Notice of Determination (NOD) for an Article 9-A, Article 22, GCT, or UBT assessment, a taxpayer has the right to file a Petition for Hearing or a Request for Conciliation Conference within 90 days of receipt of the NOD. Should the taxpayer fail to take advantage of this opportunity, it may still rectify the mistake by paying the tax and filing a claim for refund. Since the city's Refund Unit is not equipped to evaluate audit issues, a Notice of Disallowance of Refund will generally be issued to the taxpayer. At this point, the taxpayer once again has 90 days to file a Petition for Hearing or a Request for Conciliation. Thus, a GCT or UBT taxpayer can ultimately recoup any erroneously paid tax even when the taxpayer has ignored its initial right to Petition.

However, a taxpayer who receives a Notice of Determination reflecting certain excise tax assessments and who fails to file a petition within ninety days of the NOD, does not have the same recourse as does an Article 9-A, Article 22, UBT, or GCT taxpayer. A regulatory example, 20 NYCRR 575.16(c), states:

A person shall not be entitled to a refund of tax, interest, or penalty determined to be due pursuant to section 1411 of the tax law (i.e., the Real Estate Transfer Tax provision) where the person has had a hearing or an opportunity for a hearing or has failed to take advantage of the remedies provided.

Likewise, New York City Administrative Code Sec. 11-709(c) which addresses Commercial Rent Tax Refunds states as follows:

A person shall not be entitled to a refund or credit under this section of a tax, interest, or penalty, which had been determined to be due pursuant to the provisions of section 11-708 of this chapter (i.e., the Notice of Determination provision) where such person has had a hearing or an opportunity for a hearing, as provided in said section, or has failed to avail himself or herself of the remedies therein provided. No refund or credit shall be made of a tax, interest, or penalty paid after a determination by the Commissioner of Finance made pursuant to section 11-708 of this chapter unless it be found that such determination was erroneous, illegal, or unconstitutional, or otherwise improper, by the tax appeals tribunal after a hearing, or if such tax appeals tribunal affirms in whole or in part the determination of the Commissioner of Finance, in a proceeding under article seventy-eight of the civil practice law and rules, pursuant to the provisions of said section, in which event refund or credit without interest shall be made of the tax, interest, or penalty found to have been overpaid (emphasis added).

Why this difference in the refund provisions of the income and excise taxes exists is a matter for speculation. Whatever the reason, the difference appears illogical and is blatantly unfair.

What Kind of Arguments Can Excise Taxpayers Make?

To contest a NOD, the excise taxpayer has to file a petition alleging that it "did not have an opportunity for a hearing" in addition to its substantive arguments on the issues. This allegation can be based on improper notice, i.e., the taxpayer did not receive the Notice of Determination. The taxpayer can also make several collateral arguments concerning 1) the denial of equal protection under the law 2) the denial of due process, and 3) the doctrine of equitable recoupment. Other than the doctrine of equitable recoupment, these are constitutional arguments, that the City's Tax Tribunal may not entertain. The problem with the doctrine of equitable recoupment is that its function is to allow the taxpayer to reduce the amount of the deficiency recoverable by the government by the amount of an otherwise barred overpayment by the taxpayer. Thus, the doctrine does not benefit the taxpayer by providing a refund.

An excise taxpayer may also request a courtesy conference with the collection or audit divisions. In this case, the taxpayer has the burden of proving that the tax paid was "clearly erroneous."

Mobil Oil

Aside from the three specific provisions in the law cited earlier, which indicate that there is generally more leniency afforded income taxpayers, income taxpayers may also benefit from the commissioner's discretion. This is apparent in the Court's holding in Mobil Oil v. Comm'r (lst Dept. 1984). In Mobil, a general corporation taxpayer, was under audit for the 1979 tax year and discovered that it had overpaid its 1974 GCT. Although the Statute of Limitations barred the claim, the Commissioner of Finance, under its special powers to grant refunds without regard to time limitations, granted a full refund of the taxpayer's overpayment. Citing the commissioner's general powers in administering the city tax laws, the court made specific reference to subdivision 4 of Reg 46-77.0, which states that "Where no questions of fact or law are involved and it appears...that any moneys have been erroneously or illegally collected from any taxpayer, or paid by such taxpayer under a mistake of facts, the Director of Finance has the power, without regard to any period of limitations, to cause such moneys to be refunded." Essentially, the Mobil court concluded that despite a taxpayer's untimeliness, it would be a clear abuse of the commissioner's discretion not to grant a refund. The court also alluded to the obvious inequity that befalls a taxpayer who pays the erroneous amount of taxand is then denied a refund because
its refund request was untimely.

Certainly, the same inequity befalls excise taxpayers. But an excise taxpayer who has made the mistake of not filing its petition is "in a pickle." Unless the determination is deemed to be erroneous, illegal, or unconstitutional, or otherwise improper in an Article 78 proceeding, the excise taxpayer who has made that mistake has no way to obtain a refund. There is no provision for the Commissioner's discretion to grant refunds in the excise tax provisions; therefore, excise taxpayers can't get to court to air their grievance as the GCT taxpayer did in Mobil Oil because the excise tax provisions preclude them from doing so. Thus, there is no excise tax case analogous to Mobil Oil.

New York State Sales Tax

Recently, the state has amended Tax Law section 1139 to give sales tax taxpayers a second chance for a hearing on the merits after payment, as may be done under the personal income and corporate tax procedures. As with other excise taxes, under the old law, a taxpayer who failed to petition within 90 days of receipt of a NOD lost the opportunity to obtain a refund after payment since the assessment became "fixed and irrevocable." Now, a taxpayer who has defaulted in contesting a NOD may pay the tax and subsequently request a refund. As per the new legislation, for tax years beginning on and after January 1, 1997, if the refund claim is denied, the taxpayer is entitled to petition for and receive a hearing on the merits of the refund claim. Thus, the new sales tax refund provisions conform to the income tax provisions.

Certainly, the new sales tax legislation illustrates the State's awareness of the need to put sales tax taxpayers on equal footing with income tax taxpayers. But, as with the sales tax, the legislature must effectuate a change in the other excise tax provisions. This may only happen as a result of taxpayer efforts. In any event, taxpayers should be aware of these differences and make it a point to file timely petitions to avoid the worst possible outcome, i.e., the virtual inability to obtain a refund. *

* An excise tax is defined as a tax imposed on an act, occupation, privilege, manufacture, sale, or consumption. This term has been applied to just about every tax except the Income Tax and the Property Tax.

Milette Shanon, JD, is a senior
in the State and Local Tax Depart-
ment of Ernst & Young LLP. Ms. Shanon was a tax litigator at the New York City Department of Finance for three years before entering public accounting.

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M. R. Weiser & Co LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP