Debevoise & Plimpton v. New York State Dept. of Taxation and Finance

• Decision Date: 08 January 1991
• Citation: 565 N.Y.S.2d 973,149 Misc.2d 571
• Court: New York Supreme Court
• Parties: DEBEVOISE & PLIMPTON, Plaintiff, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE and Roderick G.W. Chu, as Commissioner of Taxation, Defendants.

Page 973

565 N.Y.S.2d 973

149 Misc.2d 571

DEBEVOISE & PLIMPTON, Plaintiff, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE and Roderick G.W. Chu, as Commissioner of Taxation, Defendants.

Supreme Court, New York County IAS, Part 31.

Jan. 8, 1991.

Debevoise & Plimpton, New York City, for plaintiff.

Robert Abrams, Atty. Gen., New York City, for defendants.

BEVERLY S. COHEN, Justice:

Plaintiff moves and defendants cross-move for an order granting summary judgment in this declaratory action.

Plaintiff, a commercial tenant of premises leased for its office located at 875 Third Avenue, New York, New York ("premises"), challenges the right of defendants to impose and collect sales tax on payments by plaintiff to its landlord for overtime heating, ventilation and air conditioning ("HVAC").

On November 30, 1981, plaintiff Debevoise and Plimpton (the "tenant"), a partnership engaged in the practice of law, entered into an agreement with the landlord to rent space at the premises. Pursuant to § 3.01 of the lease, the tenant pays annual "fixed rent" in 12 equal monthly installments. "Fixed rent" includes the tenant's use of HVAC from 8:00 A.M. to 6:00 P.M. on regular business days. Pursuant to § 12.02 of the lease, the tenant is required to pay the landlord "additional rent" when HVAC is furnished during non-business hours and days.

HVAC has been ruled subject to New York State sales tax (Tax Law §§ 1105[b], 1107[a] and 1109[a] ("state sales tax") and commercial rent or occupancy tax (New York City Administrative Code § 11-701 implementing N.Y. Unconsol. Law § 9447; Time Inc., Matter of, v. Michael, 91 A.D.2d 1207, 458 N.Y.S.2d 965) ("commercial rent tax"). The state sales tax is included in the Landlord's bill and is paid to the Landlord by the tenant. The tenant remits the commercial rent tax, 6 percent of the total rent (fixed plus additional which includes the overtime HVAC) to the New York City Department of Finance.

In this action, the tenant seeks an order declaring that the imposition of the New York State sales tax on HVAC services provided by the Landlord at the subject premises is invalid.

Defendants cross-move for summary judgment, seeking dismissal of the complaint initially on the grounds that plaintiff has failed to exhaust administrative remedies. The defendants additionally claim that this action is not ripe for adjudication because there is a need to make a full record as to factual issues, relying, inter alia, on the opinion in New York Inst. for Educ. of Blind v. United Federation of Teachers' Committee for N.Y. Inst. for Educ. of Blind, 83 A.D.2d 390, 402-403, 444 N.Y.S.2d 637, aff'd 57 N.Y.2d 982, 457 N.Y.S.2d 244, 443 N.E.2d 492. In support of this contention, defendants point to the affidavit submitted by plaintiff's expert describing in detail how plaintiff's premises are heated and cooled and why heating is not accomplished by "steam," and air conditioning and ventilation are not accomplished by "refrigeration".

Preliminarily, defendants' argument as to the need for a full record is inappropriate, particularly in view of the procedural context of the present motion. Plaintiff's motion for summary judgment is supported by its submission of an expert's affidavit attesting to the facts. A party opposing such a motion must assemble and lay bare its proof to demonstrate the existence of a genuine triable issue of fact (Shaw v. Time-Life Records, 38 N.Y.2d 201, 379 N.Y.S.2d 390, 341 N.E.2d 817; Capelin Assoc. v. Globe Mfg. Corp., 34 N.Y.2d 338, 357 N.Y.S.2d 478, 313 N.E.2d 776). Here, defendants have failed to meet their burden. Merely requesting an opportunity to "make a record" without identifying any particulars as to what defendant hopes to discover or why he thinks the facts may be other than as attested to by plaintiff's expert is insufficient, and is tantamount to an impermissible request for a "fishing expedition" (see, Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994; Kennerly v. Campbell Chain Co., Campbell Chain Div. McGraw-Edison Co., 133 A.D.2d 669, 519 N.Y.S.2d 839).

Moreover, there is no need to exhaust administrative remedies where an agency's action is challenged as either unconstitutional or wholly beyond the agency's grant of power (Watergate II Apts. v. Buffalo Sewer Auth., 46 N.Y.2d 52, 57, 412 N.Y.S.2d 821, 385 N.E.2d 560). Here, plaintiff has alleged that collecting a sales tax on its additional rent payments for HVAC is beyond the statutory grant of power to the defendants. Therefore, the doctrine of exhaustion of administrative remedies is inapplicable.

Furthermore, dismissal of the complaint is not warranted because plaintiff brought this as an action for declaratory judgment and not as a CPLR Article 78 proceeding. The purpose of an action for a declaratory judgment is to serve some practical end in quieting and stabilizing an uncertain or undisputed jural relation either as to present or prospective obligations (James v. Alderton Dock Yards, 256 N.Y. 298, 305, 176 N.E. 401). Such an action is not subject to dismissal merely because the plaintiff is not entitled to the declaration which it seeks (Lanza v. Wagner, 11 N.Y.2d 317, 334, 229 N.Y.S.2d 380, 183 N.E.2d 670, app. dismd. 371 U.S. 74, 83 S.Ct. 177, 9 L.Ed.2d 163, cert. den. 371 U.S. 901, 83 S.Ct. 205, 9 L.Ed.2d 164). In that circumstance, rather than dismiss the complaint, the Court should make an appropriate declaration of the rights and obligations of the parties with respect to the subject matter of the litigation (Sweeney v. Cannon, 30 N.Y.2d 633, 331 N.Y.S.2d 444, 282 N.E.2d 332).

At bar, it is apparent that there is a justiciable controversy between the parties as to their rights and duties. The court must, therefore, render an appropriate declaration as to whether defendants are entitled to collect the sales tax on plaintiff's additional rent payments to its landlord for overtime HVAC.

Accordingly, defendants' cross motion to dismiss the complaint is denied, and the court reaches the merits of the complaint.

The plaintiff claims that under the applicable statute, Tax Law § 1105(b), enacted in 1965, overtime HVAC does not constitute a sale of gas, electricity, refrigeration or steam service as a matter of statutory construction and was not intended to by the legislature. The plaintiff also argues that even if the provision of these services did constitute a sale of "electric, refrigeration and steam service of whatever nature," it is not taxable in the circumstances presented here as the services are supplied incidental to the provision of habitable premises. The plaintiff maintains further that if one were to consider heating and air conditioning as refrigeration and steam service, then the landlord's initial purchase of steam, electricity and refrigeration which is used to produce the HVAC should be exempt from taxation as purchase for resale. The plaintiff also claims that the fact that it pays sales tax as well as occupancy tax on the landlord's costs for the production of the overtime HVAC results in impermissible double taxation.

The sales tax statute as enacted in 1965 imposed tax on far more than a "sale" of goods (which is broadly defined). It imposed a tax on a variety of other transactions as well, including, rentals of personal property, installations, repair and maintenance services, restaurants, hotel rooms, admissions and dues (Tax Law § 1105[c]. However, the section under which the overtime HVAC sales tax is collected by the defendants is Tax Law § 1105(b) which provides, in pertinent part, as follows:

"... there is hereby imposed and there shall be paid a tax of four percent upon:

"(b) The receipts from every sale, other than sales for resale, of gas, electricity, refrigeration and steam and gas, electric refrigeration and steam service of whatever nature...."

The defendants have, since its inception, broadly interpreted this section. In fact, § 527.2(c)(1) of the regulations of the New York State Department of Taxation and Finance, promulgated in 1976, specifically provides that "[t]he sale of air conditioning is a sale of refrigeration service," (20 NYCRR § 527.2[c][1]. Accordingly, the State deems these overtime HVAC charges to be subject to the State Sales Tax (Tax Law §§ 1105[b], 1107[a] and 1109[a].

However, the City Tax Administration considers the payment of these charges as rent, and on January 20, 1983, the Appellate Division, First Department, confirmed without opinion an administrative determination of the Finance Administrator of the City of New York that separately stated charges for HVAC services in a taxpayer's lease were taxable under the commercial rent tax law (Time Inc., Matter of, v. Michael, 91 A.D.2d 1207, 458 N.Y.S.2d 965). Thereafter, on February 4, 1983, the Commissioner of Finance of New York City issued Policy Bulletin 1-83 declaring that charges for "building services which the tenant could not provide on his own, independent of the landlord, such as central heating, central air conditioning, or elevator services" are includable in taxable rent "even if these charges are separately stated in the lease".

Thus, pursuant to the interpretation of the statutes and the regulations promulgated by those charged with enforcement thereof, plaintiff has been subjected to payment of sales tax as well as commercial rent or occupancy tax for its overtime HVAC payments.

The defendants rely on the long practice of so interpreting these statutes and argue that the interpretation of a statute by the agency charged with enforcement thereof, if not unreasonable, must be confirmed (American Tel. & Tel. Co. v. State Tax Comm., 61 N.Y.2d 393, 400, 474 N.Y.S.2d 434, 462 N.E.2d 1152 [1984].

Plaintiff, on the other hand, argues that, "where ... the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise...