Consolidated Rail Corp. v. Tax Appeals Tribunal of State of N.Y.

• Decision Date: 17 July 1997
• Citation: 660 N.Y.S.2d 459,231 A.D.2d 140
• Parties: In the Matter of CONSOLIDATED RAIL CORPORATION, Petitioner, v. TAX APPEALS TRIBUNAL OF The STATE OF NEW YORK et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 459

660 N.Y.S.2d 459

231 A.D.2d 140

In the Matter of CONSOLIDATED RAIL CORPORATION, Petitioner, v. TAX APPEALS TRIBUNAL OF The STATE OF NEW YORK et al., Respondents.

Supreme Court, Appellate Division,

Third Department.

July 17, 1997.

Loselle, Greenawalt, Kaplan, Blair & Adler (James N. Blair, of counsel), New York City, for petitioner.

Dennis C. Vacco, Attorney-General (Andrew D. Bing and Peter H. Schiff, of counsel), Albany, for New York State Commissioner of Taxation and Finance, respondent.

Before CARDONA, P.J., and MIKOLL, CREW, CASEY and YESAWICH, JJ.

CARDONA, Presiding Justice.

Proceeding pursuant to CPLR article 78 (initiated in this court pursuant to Tax Law § 2016) to review a determination of respondent Tax Appeals Tribunal which sustained a deficiency of a petroleum business tax imposed under Tax Law article 13-A.

Petitioner is the owner and operator of a railroad system which operates in New York and at least 13 other states. As part of its business, petitioner purchases substantial quantities of petroleum fuel from out-of-State suppliers, brings the fuel into New York and stores it until used in locomotives which travel both in and outside of New York. On September 1, 1990, Tax Law article 13-A was amended (see, L. 1990, ch. 190) providing that a "petroleum business" is one importing fuel for "use, distribution, storage or sale in the state" (Tax Law § 300[b][1][i] ), and a tax was imposed on fuel sold or "used" by a petroleum business in the State (Tax Law § 301-a [c][1] ).

Thereafter, petitioner began filing monthly returns pursuant to the amended law. In the returns, petitioner reduced its taxable diesel fuel gallons by an adjustment for "allocation of fuel used outside the State", reflecting petitioner's view that only imported fuel actually consumed by locomotives in New York would be taxable under Tax Law § 301-a (c)(1). In March 1991, respondent Commissioner of Taxation and Finance conducted an audit of petitioner for the period between September 1, 1990 and December 31, 1990. As a result of the audit, the Department of Taxation and Finance (hereinafter Department) issued a notice of deficiency in the amounts of $376,988 due in taxes, $24,679.16 in interest, and imposed a penalty of $63,064.30.

Petitioner filed a petition with the Division of Tax Appeals seeking redetermination of the amount of tax due. The Administrative Law Judge (hereinafter ALJ) sustained the Department's findings. Petitioner thereafter filed a notice of exception with respondent Tax Appeals Tribunal. The notice of exception asserted, inter alia, a violation of the Commerce Clause of the U.S. Constitution. The Tribunal, inter alia, sustained the ALJ's determination and petitioner thereafter commenced this CPLR article 78 proceeding claiming that Tax Law § 301-a (contained in Tax Law article 13-A) facially discriminates against interstate commerce in violation of the Commerce Clause of the U.S. Constitution.

Initially, we reject the Commissioner's contention that the petition should be dismissed because petitioner first raised the constitutional claim before the Tribunal. Notably, the Tribunal correctly declined to rule on the constitutional issue based on the fact that it had no jurisdiction to consider whether a statute is unconstitutional on its face (see, Matter of Lunding v. Tax Appeals Tribunal of State of N.Y., 218 A.D.2d 268, 269, 639 N.Y.S.2d 519, revd. on other grounds 89 N.Y.2d 283, 653 N.Y.S.2d 62, 675 N.E.2d 816, cert. granted --- U.S. ----, 117 S.Ct. 1817, 137 L.Ed.2d 1026). Thus, it is irrelevant that petitioner did not raise this claim before the ALJ. In addition, since this CPLR article 78 proceeding is not the proper vehicle to attack the constitutionality of Tax Law § 301-a, "we will convert that portion of the instant proceeding seeking such relief into a declaratory judgment action (see, CPLR 103[c] ) and retain the remaining portion thereof as a proceeding commenced pursuant to CPLR article 78 since petitioner[ ] also seek[s] annulment of [the Tribunal's] determination upholding the tax assessment" (id., at 270, 639 N.Y.S.2d 519).

Turning to petitioner's challenge to Tax Law § 301-a, we note that this statute states in pertinent part that "there is hereby imposed upon every petroleum business * * * a monthly tax * * * equal to the sum of the motor fuel * * * determined pursuant to paragraph one of subdivision (c) of this section" (Tax Law § 301-a [a] ). Tax Law § 301-a (c)(1) ¹ states that the tax "shall be determined by multiplying the motor fuel * * * rate times (1) the number of gallons of * * * motor fuel sold or used by a petroleum business in this state" (emphasis supplied). ² Use was broadly defined, by reference to Tax Law § 1102 (see, Tax Law § 300[g] ), to include any exercise of dominion over the fuel, including the "withdrawal from storage" (Tax Law § 1102[e] ). As such, included in the definition of use is the situation described by respondents when petitioner withdraws the imported fuel from storage in New York and dispenses it by fueling it into locomotives. Petitioner was not taxed on any fuel that came into New York in the fuel tanks of its locomotives.

"It is well settled that a State taxing statute challenged under the Commerce Clause may be sustained if 'the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State' " (Matter of Tug Buster Bouchard Corp. v. Wetzler, 217 A.D.2d 192, 194-195, 635 N.Y.S.2d 803, affd. 89 N.Y.2d 830, 653 N.Y.S.2d 271, 675 N.E.2d 1223, quoting Complete Auto Tr. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326). Petitioner in the instant case maintains that the tax at issue discriminates against interstate commerce and, in this context, "discrimination means dissimilar treatment of in-State and out-of-State economic interests, benefiting the former and burdening the latter" (Matter of Tug Buster Bouchard Corp. v Wetzler, supra, at 195, 635 N.Y.S.2d 803).

Here, citing this court's decision in Matter of Tug Buster Bouchard Corp. v Wetzler (217 A.D.2d 192, 635 N.Y.S.2d 803, supra ), petitioner argues that Tax Law § 301-a facially discriminates against interstate commerce in that it results in multiple taxation of those who purchase fuel in other states for consumption in New York when compared with those who purchase fuel here for use in the State. In Matter of Tug Buster Bouchard Corp. v. Wetzler (supra ), this court reviewed a similar, though not identical, taxing scheme involving consumption of fuel and declared Tax Law § 301(a)(1)(ii) to be unconstitutional as violative of the Commerce Clause of the U.S. Constitution.

In our view, the subject case is distinguishable from Tug Buster in that the "taxable event" triggering the tax is the "withdrawal from storage" of the fuel. In the case of Nashville, Chattanooga & St. Louis Ry. v. Wallace, 288 U.S. 249, 53 S.Ct. 345, 77 L.Ed. 730, the U.S. Supreme Court rejected a railroad's challenge to a Tennessee use tax on the in-state withdrawal of gasoline from storage in Tennessee that the railroad later used to power locomotives in its interstate...