MoFo New York Tax Insights – Volume 6, Issue 9

Tribunal Upholds Personal Liability of LLC Members for Sales Tax –

The New York State Tax Appeals Tribunal has affirmed the determination of an Administrative Law Judge that a member of a limited liability company (“LLC”) holding a minority interest in the LLC is liable for a portion of a sales and use tax assessment against the LLC itself. Matter of Eugene Boissiere and Jason Krystal, DTA Nos. 824467, et al. (N.Y.S. Tax App. Trib., July 28, 2015).

Eugene Boissiere and Jason Krystal held 14% and 13% membership interests, respectively, in an LLC. Neither individual had managerial responsibility, knowledge or control over the LLC’s financial affairs, or authority to sign the LLC’s tax returns. The New York State Department of Taxation and Finance performed a sales tax audit of the LLC, and assessed sales tax, plus interest, against the company for the period June 1, 2004 through May 31, 2009. The Department also issued separate Notices of Determination to Mr. Boissiere and Mr. Krystal, each assessing the full amount of the sales tax, plus penalty and interest, for the period during which each held a membership interest in the LLC. After negotiations between the Department and the taxpayers, and in keeping with the Department’s policy as set forth in Technical Memorandum, TSB-M-11(17)S (N.Y.S. Dep’t of Taxation & Fin., Sept. 19, 2011), the Department reduced the individuals’ liability for the sales tax to reflect their percentage of ownership in the business, plus interest.

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continued on page 3
3 MoFo New York Tax Insights, September 2015
ALJ Decision. The ALJ readily concluded that the
Department’s position was baseless. First, she reviewed
the statute, Tax Law § 631, and the regulations
promulgated pursuant to the statute, and found no
support in them for the Department’s position. The
regulations state that a business is carried on wholly
within New York State when it is conducted solely within
New York and no activities are carried on outside New
York. 20 NYCRR § 132.12. A business is carried on
partly in New York if activities are “systematically and
regularly” conducted in New York and also outside
New York. 20 NYCRR § 132.14, and when the business
is carried on partly outside New York, income is
apportioned both inside and outside New York by using
one of a variety of apportionment methods. 20 NYCRR
§§ 132.12, 132.15. Since Mr. Carr maintained no office
or place of business whatsoever in New York, nothing
in the regulations provided a basis for allocating 100%
of Mr. Carr’s income to New York without applying any
method of apportionment.
The ALJ also reviewed the cases relied upon by the
Department and found them inapplicable. In both
Carpenter v. Chapman and Matter of Vigiliano the
attorneys did not merely maintain a New York license,
but had New York offices where they actually practiced,
had no law offices outside the state and were not
licensed in any other state. In both cases, the taxpayers
were nonresidents during the years in issue, and argued
they should be permitted to apportion outside New York
income earned either while working at a non-New York
residence (Chapman), or on projects that were taking
place outside New York (Vigliano). The ALJ found those
cases were inapposite because the taxpayers, unlike
Mr. Carr, had maintained offices in New York, and had
no offices outside New York. The ALJ explicitly found
that “merely holding a license to practice law in New
York is not the equivalent of carrying on a profession
in New York State,” in the absence of any evidence that
activities were systematically and regularly carried out
in New York “with a fair measure of permanence and
continuity,” and that the Department’s position was
inconsistent with its own regulations. In addition, the
ALJ found no support in the record for the Department’s
contention that Mr. Carr’s pro hac vice admission in
Florida was solely based on his New York license, noting
that the Florida rules require that an attorney seeking
pro hac vice admission list all jurisdictions in which
the attorney is licensed to practice, and Mr. Carr was
licensed in both New York and New Jersey.
The ALJ also concluded that, although later found
unconstitutional, during the years in issue, Judiciary
Law § 470 required that nonresident attorneys who were
licensed to practice in New York maintain a physical
office in New York. Since Mr. Carr had no such office,
the ALJ found he was not authorized to practice in New
York under the Judiciary Law, yet another reason why
his income could not be allocated entirely to New York.
Additional Insights
Based on the facts as set out in the decision, it is hard
to understand what support there could possibly have
been for the Department’s arguments in this audit. Its
own regulations deal with lawyers who maintain offices
and regularly practice in New York, and appear to have
no application to a lawyer with no office in New York at
all. The cases on which it relied arose from very different
facts and involved lawyers who were licensed only in New
York, had active practices in New York and were seeking
to apportion part of their income outside the state based
on where work was physically done — a very different
situation from Mr. Carr’s, who had no office in New York
and had been properly admitted pro hac vice in Florida to
perform legal services in one matter.
As the ALJ noted, the “office” requirement in Judiciary Law
§ 470 was found unconstitutional by a federal district court
after the years in issue in this matter. On appeal, the federal
Court of Appeals asked New York State’s highest court to
interpret the statute and rule on what exactly was required
under the statutory direction that a nonresident lawyer
maintain “an office for the transaction of law businesses,”
as that term is used in Judiciary Law § 470. In response,
the state Court of Appeals held that the statute required
nonresident attorneys to maintain a physical law office
within the State — further support for the ALJ’s conclusion
that, under Judiciary Law § 470, Mr. Carr would not
have met the State’s requirements for being authorized to
practice law in New York, despite his bar admission. The
question of the constitutionality of the statute is, as of this
writing, still pending before the federal Court of Appeals.
STATE ISSUES GUIDANCE
ON NEXUS FOR FOREIGN
CORPORATE MEMBER
OF DISREGARDED LLC
INVESTMENT COMPANY
By Irwin M. Slomka
The New York State Tax Department has issued
important guidance regarding the scope of the
exemption from Article 9-A for non-U.S. corporations
that use limited liability companies to engage in
qualifying investment activities in New York. Advisory
Opinion, TSB-A-15(5)C (N.Y.S. Dep’t of Taxation & Fin.,
July 10, 2015).
continued on page 4
4 MoFo New York Tax Insights, September 2015
The facts presented are straightforward. A Swiss
holding company is the sole member of a Delaware
limited liability company (“LLC”) that is treated as
a disregarded entity for federal and state income tax
purposes. The LLC is solely engaged in investing in
securities in private equity funds, hedge funds and
operating-companies for its own account. The LLC has
an office in New Jersey, and has never owned or leased
real property in New York. The Swiss holding company
is not otherwise engaged in the conduct of a U.S. trade or
business for federal income tax purposes, and thus does
not have effectively connected income under IRC § 882.
Generally, under IRC § 864(b)(2), trading in securities
or commodities by a non-dealer is not considered a trade
or business within the United States for federal income
tax purposes. Therefore, a foreign corporation engaged
in those activities in the United States does not have
effectively connected income.
The question presented was whether the Swiss holding
company will become subject to Article 9-A if the LLC
were to relocate its office from New Jersey to New
York City. The Department ruled that so long as the
LLC continues to engage solely in qualifying activities
in New York within the meaning of IRC § 864(b)(2),
and the Swiss holding company continues not to have
effectively connected income, the holding company
will not be subject to Article 9-A. This is based on the
language of Tax Law § 209(2-a), which provides that an
alien (i.e., non U.S.) corporation that is not treated as a
“domestic corporation” for federal purposes and that has
no effectively connected income is not subject to Article
9-A. Under corporate tax reform, alien corporations no
longer have an annual franchise tax filing requirement.
In response to the question regarding what may be
required to substantiate entitlement to the exemption,
the Department would say only that it may be necessary
to produce the alien corporation’s books and records
to confirm, for example, that the corporation’s New
York activities are limited to the investment or trading
activities described in IRC § 864(b)(2).
Additional Insights
The Advisory Opinion specifies that it applies only to
situations where the LLC’s in-State activities are limited
solely to investment activities prescribed under IRC
§ 864(b)(2). It does not address the consequences if the
Swiss holding company has effectively connected income
from some other activity conducted wholly outside the
State. It also does not discuss the result if the holding
company has other affiliates that do have effectively
connected income in the United States. It should be
noted that alien corporations that are not treated as
“domestic corporations” and that do not have effectively
connected income cannot be included in a New York
combined return.
The Department provided this guidance as an Advisory
Opinion, even though it has informally indicated that it
would generally address interpretations under corporate
tax reform through regulations and Corporate Tax
Reform FAQs posted on its website, rather than through
Advisory Opinions.
ONLINE AND REMOTE ACCESS
COMPUTER OFFERINGS NOT
SUBJECT TO SALES TAX OR
TELECOMMUNICATION
EXCISE TAX
By Michael J. Hilkin
The New York State Department of Taxation and Finance
has issued an Advisory Opinion ruling that four different
online and remote access computer offerings are not
subject to New York sales tax or telecommunication excise
tax. Advisory Opinion, TSB-A-15(28)S (N.Y.S. Dep’t of
Taxation & Fin., July 9, 2015).
The Advisory Opinion examined four different products
(the “Products”). The first product, an “Online Meeting
Product,” allows subscribers to conduct multiparty
conferences over the Internet for a monthly or annual
fee. A user of the Online Meeting Product must
download a Java applet that permits a secure connection
between the user and the Online Meeting Product
provider. However, the applet has no functionality
without being connected to the Online Meeting Product
provider’s proprietary system over the Internet. Fees for
usage of the Online Meeting Product are paid solely by
the subscriber organizing an online meeting, and there
is no charge for downloading the applet. A subscriber
must pay other providers for telecommunication or
Internet access service to the Online Meeting Product
provider’s service.
continued on page 5
[A]n alien (i.e., non U.S.) corporation
that is not treated as a “domestic
corporation” for federal purposes
and that has no effectively connected
income is not subject to Article 9-A.
5 MoFo New York Tax Insights, September 2015
The second product, a “Web Seminar Product,” allows a
subscriber to organize and hold seminars on the Internet
with up to 1,000 attendees. The Web Seminar Product
provider transfers data using end-to-end encryption
with the aid of free-of-charge applets similar to those
used to access the Online Meeting Product.
The third product, an “Online Remote Support Product,”
enables shared screen, mouse, text chat and keyboard
control between computers, so that a subscriber’s
technicians may provide remote computer technical
support over the Internet. In order to use the Online
Remote Support Product, the subscriber’s technicians
and the computer user in need of remote support must
download a free-of-charge applet similar to those
required for the other Products. Subscribers are charged
for the Online Remote Support Product on a monthly
per-user basis or on a day-pass basis.
The final product, a “Remote Computer Access Product,”
provides remote computer access capability via the
Internet. Using free-of-charge applets similar to those
required for the other Products, a subscriber can access
and use a host computer remotely from another computer.
Tax Law § 1105 imposes sales tax on retail sales of tangible
personal property, including prewritten computer software
and certain enumerated services, and specifically imposes
sales tax on sales of intra-state “telephony and telegraphy
and telephone and telegraph service[s].” The terms
“telephony and telegraphy” are defined by regulation
to include the “use or operation of any apparatus for
transmission of sound, sound reproduction or coded or
other signals.” 20 NYCRR § 527.2(d)(2). Separately,
Tax Law §186-e imposes an excise tax on certain
telecommunication services by a telecommunication
services provider. According to the Department, the sales
tax and telecommunication excise tax “are to be construed
together, given the overlap in their subject matter.”
In the Advisory Opinion, the Department
determined that none of the Products are telephone
or telecommunication services for purposes of the
sales tax or the telecommunications excise tax laws,
and therefore are not subject to either tax. The
Department described the Products as making a mere
connection or “bridge” on the Product provider’s
communication server because the users of the Products
must provide their own Internet connections to the
Product provider’s server, and relied on prior Advisory
Opinions ruling that “bridging” services are not
telephone or telecommunication services for sales tax
or telecommunication excise tax purposes. Further,
the Department concluded that none of the Products
constituted the sale of prewritten software, which
would be subject to sales tax, despite the provision of
the applets, deciding that the applets provide “limited
functionality” in the overall context of the services
provided by the Products.
Finally, the Advisory Opinion identified three previously
released Advisory Opinions classifying the following
services as telephony or telegraphy services subject to
sales tax and/or telecommunications excise tax:
(1) a consulting service that routed a customer’s calls
through a switch to gather information for purposes
of optimizing the customer’s use of long distance
communications (Advisory Opinion, TSB-A-82(31)S
(N.Y.S. Dep’t of Taxation & Fin., Sept. 1, 1982)); (2) a
voice messaging service for subscribing physicians to
record messages for retrieval by patients via telephone
(Advisory Opinion, TSB-A-04(16)S (N.Y.S. Dep’t of
Taxation & Fin., June 16, 2004)); and (3) a video
switching service allowing customers to send video
programming transmissions to one another (Advisory
Opinion, TSB-A-10(41)S (N.Y.S. Dep’t of Taxation &
Fin., Sept. 22, 2010)). The Advisory Opinion stated that,
to the extent that the determinations in those previously
released Advisory Opinions are inconsistent with the
current Advisory Opinion, those prior Advisory Opinions
no longer reflect Department policy.
Additional Insights
The Tax Law classifies “pre-written computer software”
as tangible personal property subject to sales tax
“regardless of the medium by means of which such
software is conveyed to a purchaser.” Tax Law
§ 1101(b)(6). The Department has concluded in other
Advisory Opinions that online services may constitute
a transfer of pre-written software subject to sales
tax, even when the purchaser of the service never
downloaded or possessed any software from the service
provider. Here, the Department implicitly accepted the
provider’s representation that it alone was the user of
“proprietary software used to provide” the Products and
continued on page 6
The Department described the Products
as making a mere connection or
“bridge” on the Product provider’s
communication server . . . and relied
on prior Advisory Opinions ruling that
“bridging” services are not telephone
or telecommunication services for sales
tax or telecommunication excise tax
purposes.
6 MoFo New York Tax Insights, September 2015
that customers were charged for the Products, but not
for the use of software. In concluding that the Products
were not taxable, the Department implicitly accepted the
provider’s representation. A company providing services
over the Internet to New York customers should consider
whether it could similarly support a position that any
software used in providing its online services was used
solely by the company, rather than its customers, in order
to demonstrate that no sales tax should apply.
Further, it is notable that the Products analyzed in
the Advisory Opinion required users to download a
Java applet in order to be functional. The Department
classified the applets as “software,” but nonetheless
determined that the Products themselves are not
prewritten software subject to sales tax because the
applets had “limited functionality.”
INSIGHTS IN BRIEF
Section 184 Tax is No Longer Applicable to Mobile
Telecommunication Service Providers
The Department of Taxation & Finance has issued a
technical memorandum regarding the Tax Law
§ 184 tax on telecommunications services. Technical
Memorandum, “Application of Taxation Law Section
184 to Mobile Telecommunication Service Providers,”
TSB-M-15(6)C (N.Y.S. Dep’t of Taxation & Fin., July
24, 2015). In an Advisory Opinion issued in the year
2000 (TSB-A-00(18)C), the Department had taken
the position that wireless communications service
providers that furnish intra-LATA and inter-LATA
communications were conducting a local telephone
business and were therefore subject to the § 184
tax. In the new TSB-M, the Department states
that in light of changes to the telephone industry
since 2000, the 2000 Advisory Opinion no longer
represents the Department’s position, and that mobile
telecommunications service providers are not engaged
in a local telephone business and are therefore not
subject to the § 184 tax. Such providers may be
entitled to refunds of tax to the extent that the statute
of limitations for refund is still open.
Sales of CLE Self-Study Programs With CDs and DVDs
Are Not Subject to Sales Tax if Accompanied by CLE
Affirmation Form
Receipts from sales of CLE self-study programs offering
CLE credit delivered on CDs and DVDs are receipts from
the provision of an educational service that is not subject to
State and local sales tax and are not for the sale of tangible
personal property, provided the seller includes its CLE
affirmation form for the customer to return to the CLE
provider upon completing study of the program materials.
Advisory Opinion, TSB-A-15(26)S (N.Y.S. Dep’t of Taxation
& Fin., July 10, 2015). However, receipts from such sales
made without CLE credit, and from sales of books and
reference materials on legal subjects, are subject to sales tax
if delivered to customers at locations in this State.
State Tribunal Allows QEZE Credit for Real Estate
Taxes
Reversing an Administrative Law Judge, the New York
State Tax Appeals Tribunal has held that a Qualified
Empire Zone (“QEZE”) credit for real property tax was
properly claimed for rent paid in 2007 under a lease
agreement executed in 2008 but specifically dated
“‘as of’ June 1, 2005.” Matter of William and Andrea
McNeary, DTA No. 825093 (N.Y.S. Tax App. Trib.,
Aug. 3, 2015). The Tribunal found that the lease clearly
specified that it was intended to have been made as of
June 2005, and identified its commencement date as
June 1, 2005, despite that fact that it was not executed
until 2008, and that the rent paid pursuant to the lease
therefore met the QEZE credit requirement that it
be paid under a written lease agreement executed or
amended on or after June 1, 2005. The Tribunal found
that New York law recognizes and enforces retroactive
effective dates agreed to by parties to an agreement and
that the cases relied upon by the ALJ were not relevant
since they dealt with attempts to impose a liability
against a third party, where in this case the McNearys
were not seeking to impose any obligation, but only
asking that their valid contract be recognized.
Department Rules That Receipts From Party Cruises Are
Subject to Tax When Meal and Beverage Are Included
In an Advisory Opinion, TSB-A-15(30)S (N.Y.S.
Dep’t of Taxation & Fin., July 15, 2015), the New
York State Department of Taxation and Finance has
ruled that sales tax applies to tickets to a sightseeing
cruise around New York Harbor when the charge
for the cruise includes access to a catered meal
and two alcoholic or nonalcoholic drinks served on
board the vessel. Tax Law § 1105(d) imposes sales
tax on the receipts from food and beverages sold by
“establishments,” and includes in taxable receipts any
cover, minimum, entertainment or other charge unless
the food and drink are “incidental.” The Petitioner was
found to be operating an establishment with receipts
from food and drink, and the receipts were found
not incidental to the boat cruise, since the Petitioner
provided hot catered food in a separate dining area
and paid the boat owner to serve drinks in a bar, and
was required to maintain a liquor license to do so.
However, if the price of the ticket did not entitle the
passengers to food or drink, the receipts would not be
subject to sales tax.
continued on page 7
7 MoFo New York Tax Insights, September 2015
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informational purposes only. None of the statements made herein constitute financial, accounting, tax or other professional advice of any kind. Please
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© 2015 Morrison & Foerster LLP
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Astoria Financial v. New York City
Citicorp v. California
Citicorp v. Maryland
Clorox v. New Jersey
Colgate Palmolive Co. v. California
Consolidated Freightways v. California
Container Corp. v. California
Crestron v. New Jersey
Current, Inc. v. California
Deluxe Corp. v. California
DIRECTV, Inc. v. Indiana
DIRECTV, Inc. v. New Jersey
Dow Chemical Company v. Illinois
DuPont v. Michigan
EchoStar v. New York
Express, Inc. v. New York
Farmer Bros. v. California
frog design, inc. v. New York
General Motors v. Denver
GMRI, Inc. (Red Lobster, Olive Garden) v. California
GTE v. Kentucky
Hair Club of America v. New York
Hallmark v. New York
Hercules Inc. v. Illinois
Hercules Inc. v. Kansas
Hercules Inc. v. Maryland
Hercules Inc. v. Minnesota
Hoechst Celanese v. California
Home Depot v. California
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Intel Corp. v. New Mexico
Kohl’s v. Indiana
Kroger v. Colorado
Lorillard Licensing Company v. New Jersey
Lorillard Tobacco Co. v. Michigan
McGraw-Hill, Inc. v. New York
MCI Airsignal, Inc. v. California
McLane v. Colorado
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