Chartair, Inc. v. State Tax Commission

• Decision Date: 30 November 1978
• Citation: 65 A.D.2d 44,411 N.Y.S.2d 41
• Parties: In the Matter of CHARTAIR, INC., Petitioner, v. STATE TAX COMMISSION, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 41

411 N.Y.S.2d 41

65 A.D.2d 44

In the Matter of CHARTAIR, INC., Petitioner, v. STATE TAX COMMISSION, Respondent.

Supreme Court, Appellate Division, Third Department.

Nov. 30, 1978.

Michael J. Pichel, Ithaca (Connie Fern Miller, Ithaca, of counsel), for petitioner.

Louis J. Lefkowitz, Atty. Gen., Albany (Francis V. Dow and Ruth Kessler Toch, Albany, of counsel), for respondent.

Before MAHONEY, P. J., and GREENBLOTT, KANE, STALEY and MAIN, JJ.

KANE, Justice.

Petitioner operates a fixed base air service and flight school at the Tompkins County Airport. Its services include the sale of airplanes, aviation gasoline and supplies, and an air taxi service. In the fall of 1969, respondent audited petitioner's operation for sales taxes remitted for the period August 1, 1965 through February 28, 1969. The audit resulted in a tax deficiency and assessment which included penalties and interest. After protest and a hearing, downward adjustments were made by respondent and all penalties were cancelled. While the resulting monetary deficiency is not substantial, the issues raised by petitioner in seeking review of the respondent's determination dated December 5, 1975 are of considerable significance.

Petitioner contends: (1) that the use of a three-month "test period" audit to determine sales tax liability over a period of 43 months when sufficient detailed records were available lacked a rational basis; (2) that the Federal gasoline tax should not be included in gross receipts for sales tax purposes when that tax is ultimately refunded to the user; (3) that a 3-cent per gallon payment to Tompkins County should not be included in gross receipts; (4) that petitioner is within the statutory definition of an "airline" and thus subject to a sales tax exemption; and (5) that petitioner's solo flight instruction to licensed pilots should not be characterized as taxable rentals.

Although there is statutory authority for the use of a "test period" to determine the amount of tax due when a filed return is incorrect or insufficient (Tax Law, § 1138, subd. (a)), resort to this method of computing tax liability must be founded upon an insufficiency of record keeping which makes it virtually impossible to verify taxable sales receipts and conduct a complete audit (Matter of Grant Co. v. Joseph, 2 N.Y.2d 196, 159 N.Y.S.2d 150, 140 N.E.2d 244; Matter of Meyer v. State Tax Comm., 61 A.D.2d 223, 402 N.Y.S.2d 74, mot. for lv. to app. den. 44 N.Y.2d 645, 406 N.Y.S.2d ---, 377 N.E.2d 749; Matter of Markowitz v. State Tax Comm., 54 A.D.2d 1023, 388 N.Y.S.2d 176, affd. 44 N.Y.2d 684, 405 N.Y.S.2d 454, 376 N.E.2d 927). However, if records are available from which the exact amount of tax can be determined, the estimate procedures adopted by the respondent become arbitrary and capricious and lack a rational basis (see Matter of Babylon Milk & Cream Co. v. Bragalini, 5 A.D.2d 712, 169 N.Y.S.2d 124, affd. 5 N.Y.2d 736, 177 N.Y.S.2d 717, 152 N.E.2d 672).

In this case petitioner kept extensive records of all transactions including cancelled checks, tax returns, credit card records, and sales and purchase invoices in each area of operation. The only indication of incomplete records was testimony regarding petitioner's failure to segregate invoices according to whether solo flying instruction was given toward a license to fly or the upgrading of a license. This classification, in turn, would determine whether there was a rental of the aircraft or not and thus its taxability. Any tax liability based upon this instruction was in dispute at the hearing, and if there were a gap in petitioner's record keeping, it was insubstantial. Moreover, computation of a tax due upon that one phase of petitioner's operation could be effectuated with little difficulty. Additionally, we would observe that the record reflects another and more pragmatic reason for the respondent's desire to use a "test period" in this case. As stated by the tax examiner at the hearing, a complete audit "would have been very time consuming, it would have been burdensome upon the taxpayer, it would have been a costly venture on the Department as well as the taxpayer." We are not aware of any authority that would support an economic feasibility test as the basis for determining when a "test period" may be utilized. The honest and conscientious taxpayer who maintains comprehensive records as required has a right to expect that they will be used in any audit to determine his ultimate tax liability.

Petitioner's argument that the...