STATE OF NEW YORK
DIVISION OF TAX APPEALS
________________________________________________
In the Matter of the Petition
of
SODEXHO USA, INC.
for Revision of a Determination or for Refund of Sales
and Use
Taxes under Articles 28 and 29 of the Tax Law for the Period
March 1, 1998 through February 29, 2000.
________________________________________________
In the Matter of the Petition
of
DETERMINATION
SODEXHO OPERATIONS, LLC
DTA NOS. 820020,
820021, 820022,
for Revision of a Determination or for Refund of
Sales and Use
820023 AND 820024
Taxes under Articles 28 and 29 of the Tax Law for
the Period
December 1, 1999 through November 30, 2002.
________________________________________________
In the Matter of the Petition
of
SODEXHO MANAGEMENT, INC.
for Revision of a Determination or for Refund of
Sales and Use
Taxes under Articles 28 and 29 of the Tax Law for the Period
September 1, 1999 through November 30, 2002.
________________________________________________
Petitioner Sodexho USA, Inc., 10 Earhart Drive, Buffalo,
New York 14421-7078, filed a petition for revision of a determination or for refund of
sales and use taxes under Articles 28 and 29 of the Tax Law for the period March 1, 1998
through February 29, 2000.
Petitioner Sodexho Operations, LLC, 10 Earhart Drive,
Williamsville, New York 14221-7078, filed a petition for revision of a determination or
for refund of sales and use taxes under Articles 28 and 29 of the Tax Law for the period
December 1, 1999 through November 30, 2002.
Petitioner Sodexho Management, Inc., 10 Earhart Drive,
Williamsville, New York 14221-7078, filed petitions for revision of determinations or for
refund of sales and use taxes under Articles 28 and 29 of the Tax Law for the period
September 1, 1999 through November 30, 2002.
A hearing was commenced before Arthur S. Bray,
Administrative Law Judge, at the offices of the Division of Tax Appeals, 500 Federal
Street, Troy, New York, on May 24, 2005 at 10:30 A.M., continued at the same offices on
May 25, 2005 at 9:15 A.M. and completed on May 26, 2005 at 9:15 A.M., with all briefs
submitted by October 6, 2005, which date began the six-month period for the issuance of
this determination. Petitioners appeared by McDermott, Will & Emery LLC (Arthur R.
Rosen, Esq. and Karen S. Dean, Esq., of counsel). The Division of Taxation appeared by
Christopher C. O’Brien, Esq. (Lori P. Antolick, Esq., of counsel).
ISSUES
I. Whether petitioners’ purchases of nonfood items
were exempt from sales and use taxes because they were procured as agents of tax exempt
entities or because they were purchased for resale to their tax exempt client.
II. Whether the Division of Taxation is estopped from
assessing sales and use taxes.
FINDINGS
OF FACT
1. Petitioner Sodexho Operations LLC (“Sodexho
Operations”) is organized as a Delaware limited liability company with its principal
office in Gaithersburg, Maryland. Petitioner Sodexho USA, Inc. (“Sodexho
USA”) was merged with petitioner Sodexho Operations in 2000. Before that time,
Sodexho USA was organized as a Massachusetts corporation with its principal office in
Gaithersburg, Maryland. Petitioner Sodexho Management, Inc. (“Sodexho
Management”) is organized as a New York corporation with its principal office in
Gaithersburg, Maryland. Petitioners are the successors to various entities thathad
contractual relationships with tax exempt clients during the relevant audit periods.
2. The Division of Taxation (“Division”)
issued Notice of Determination L-021426296-8 dated August 29, 2002 to petitioner Sodexho
USA seeking additional tax due of $5,116.00 and interest of $1,572.92 for a balance due of
$6,688.92 for the audit period March 1, 1998 through February 29, 2000.
3. The Division issued Notice of Determination
L-022947802-6, dated August 28, 2003, to petitioner Sodexho Operations seeking additional
tax of $31,125.02 and interest of $4,667.04 for the period December 1, 1999 through
November 30, 2002. The Division also issued Notice of Determination L-022947801-7 dated
August 29, 2003 to petitioner Sodexho Operations seeking additional tax of $102,298.25 and
interest of $13,981.71, less credits or payments of $112,400.35, for a balance due of
$3,879.61 for the audit period December 1, 1999 through November 30, 2002.
4. The Division issued Notice of Determination
L-023578537-7 dated March 12, 2004 to petitioner Sodexho Management seeking additional tax
of $357,014.54 and interest of $73,671.15 for a balance due of $430,685.69 for the period
September 1, 1999 through November 30, 2002. The Division also issued Notice of
Determination L-023578538-6 dated March 15, 2004 to petitioner Sodexho Management seeking
additional tax due of $1,151,183.57 and interest of $240,367.73, less credits or payments
of $825,304.78, for a balance due of $566,246.52 for the period September 1, 1999 through
November 30, 2002.
5. Sodexho USA is protesting the entire Notice of
Determination issued to it.
6. Sodexho Operations is protesting $13,722.00 of the
total amount of tax sought in the notices of determination issued to it. Sodexho
Operations filed a timely claim for refund relating to overpayments of tax on expense
purchases, which was disallowed by the Division. Sodexho Operations is protesting
$3,279.00 of the disallowed refund that relates to the tax exempt clients.
7. Sodexho Management is protesting $343,468.00 of the
total amount of tax sought in the Sodexho Management notices of determination. Sodexho
Management filed a timely claim for refund relating to overpayments of tax on expense
purchases, which was disallowed by the Division. Sodexho Management is protesting
$108,134.00 of the disallowed refund that relates to the tax exempt clients.
8. During their respective audit periods, petitioners,
or their predecessors, were engaged in the business of providing food and facilities
management services to nonprofit hospitals, healthcare facilities and educational
institutions, as well as to certain for-profit clients. Petitioners’
predecessors offered their clients the same types of services that are provided by
petitioners. Petitioners, and their predecessors, each conducted business in New York
State.
9. Petitioners provided two types of services:
full-service contracts and management contracts.
10. In a full-service contract, petitioners assume
responsibility for operating all of the client’s food or facility functions.
Specifically, petitioners provide all of the employees to manage and perform the food or
facilities operations located at the tax exempt clients’ facilities.
11. In a management contract, petitioners provide a
layer of management employees to facilitate the tax exempt clients’ food or
facilities operations that are performed by the tax exempt client’s employees.
12. Management contracts can be viewed as having two
components: (1) the management of the hourly employees employed by the clients who
physically perform the food and facility functions; and (2) the management of the
procurement of food and nonfood items for use in the clients’ food or facilities
operations.
13. Petitioners entered into management agreements to
provide management services to certain tax exempt clients. The tax exempt clients were
exempt organizations for purposes of sales and use taxes pursuant to Tax Law § 1116. The
tax exempt clients would not be liable for sales and use tax had the tax exempt clients
directly purchased the nonfood items that are the subject of the notices of determination
relating to the agency issue and the resale issue.
Petitioners’ Food
Management Services: The Lenox Hill Arrangement
14. During the period in issue, the Lenox Hill
arrangement was governed by the terms and conditions of the contract dated January 1, 1997
and the contract dated July 31, 2000.
15. The Lenox Hill nutrition services department is
responsible for the preparation, service, and sale of food, beverages, merchandise, and
other items at Lenox Hill Hospital that relate to patient food and nutrition service,
retail cafeteria operations and vending machine services.
16. The Lenox Hill arrangement was based on a management
contract pursuant to which Sodexho was hired to provide management employees to supervise
Lenox Hill’s nutrition services department. The contracts expressly appointed
petitioners as an agent of Lenox Hill with respect to the management of the nutrition
services department. Under the contracts, Sodexho was required to “manage and
operate” the following patient services for Lenox Hill: purchasing and
production services, patient food and tray services and clinical dietetic services.
Sodexho was also required to “manage and operate” the cafeteria services and
special functions and catering services for Lenox Hill. Petitioners are contesting only
the portion of the assessments that relate to purchases of nonfood items for use by Lenox
Hill in its patient food service and retail cafeteria operations.
17. Pursuant to the management contract arrangement with
Lenox Hill, petitioner provided management and professional employees to manage the
nutritional services operations including: the director of food and nutrition services,
the clinical nutrition manager, an assistant director of operations, an assistant director
for patient services, two cafeteria managers, a patient services manager, the clinical
nutritionist and an administrative assistant.
18. After a recommendation was made by Sodexho, Lenox
Hill made the final decision over which Sodexho management employees were placed on-site
in the nutrition services department, including which general manager should be the
department head of the nutrition services management. If Lenox Hill became unhappy with
Sodexho employees, Lenox Hill had the right to request that the situation be addressed or
that the employee be removed from Lenox Hill. The control that Lenox Hill exercised over
Sodexho’s on-site management employees was comparable to the control that Lenox Hill
exercised over its own employees. All Sodexho employees placed on-site at Lenox Hill were
required to attend Lenox Hill’s hospital orientationand other Lenox Hill training
programs.
19. Sodexho’s on-site general manager, Tom Dooley,
was the Director of Nutrition Services. Mr. Dooley functioned, and was recognized by Lenox
Hill, as a department head within Lenox Hill. The other Sodexho employees on-site at Lenox
Hill were management employees who reported to Mr. Dooley. Those Sodexho employees were
responsible for supervising various aspects of Lenox Hill’s food service operations,
including managing the Lenox Hill employees who performed the patient food service
operations and retail service cafeteria operations, and managing the clinical dieticians.
20. Lenox Hill employed all of the nonmanagement, hourly
employees who actually performed all of the day-to-day operations of Lenox Hill’s
patient food service and cafeteria operations of Lenox Hill’s nutrition services
department. These Lenox Hill hourly employees were unionized workers.
21. Under the terms of the union contract, petitioners
were not permitted to perform any functions performed by a union employee except in an
emergency or training situation. Sodexho employees did not physically perform the
day-to-day operations of the nutrition services department.
22. Lenox Hill furnished and maintained the premises
where the patient food service and cafeteria operations of the nutrition services
department were performed, including office space and kitchen facilities. Lenox Hill also
owned, provided, and maintained all of the equipment, including all of the kitchen
equipment, used by its nutrition services employees in the perrformance of the patient
food service and cafeteria operations.
23. Lenox Hill’s policies governed all aspects of
the operations of the nutrition services department and Sodexho employees were required to
manage the department in accordance with those policies. Sodexho was required to manage
the nutrition services department in a manner that complied with the regulations imposed
by the Joint Commission on Accreditation of Healthcare Organizations to which Lenox Hill
was required to adhere.
24. Lenox Hill decided all aspects of the performance of
the nutrition services operations, including choosing the menu items that were to be
served to the patients and to patrons of the cafeteria, determining the quantity and
quality of food to be served, setting the prices of the meals and other items served, and
deciding on the hours of cafeteria operation and the times when patient meals were to be
served. Before Lenox Hill made its decisions on the foregoing items, Sodexho recommended
the recipes and production methods.
25. Lenox Hill’s policies governed all aspects of
Sodexho’s management of the Lenox Hill nutrition services department employees,
including Lenox Hill’s human resources policies governing the hiring and discipline
of nutrition department employees. Sodexho’s role in the hiring of Lenox Hill’s
nutrition services employees consisted of interviewing the candidates screened by Lenox Hill’s human resources department
and making recommendations as to whom should be hired. Lenox Hill made the ultimate hiring
and other human resource decisions concerning the nutrition services hourly employees and
any nutrition services department management employees employed by Lenox Hill.
26. Lenox Hill set and administered the overall budget
for the nutrition services department. Sodexho’s role was to “maintain” the
budget.
27. Sodexho was required to ensure that a minimum of 80
percent of the food and nonfood items used by Lenox Hill in the performance of the food
service operations were acquired from vendors affiliated with Premier, a group purchasing
organization (“GPO”) in which Lenox Hill participated through Greater New York
Hospital. The Premier GPO arrangement provided the basis of the Purchasing Guidelines that
were followed by the nutrition services department. Said guidelines provided that only
Premier/Sodexho-approved suppliers were permitted to be utilized.
28. The quantity of food and nonfood supplies, including
the items at issue, needed for use in the operations of the nutrition services department
was determined based upon the volume of meals served, which was determined by the number
of patients. However, authorized usage guidelines were established by the district manager
who was a Sodexho employee.
29. A Lenox Hill employee, typically its purchasing
agent, placed orders for the food or nonfood items and supplies by phone. To the extent at
issue here, the items purchased included plastic utensils, paper supplies and cleaning
agents used in conducting food service operations. The vendors were provided with
Lenox Hill’s exemption certificate.
30. Once the food and nonfood items were ordered, the
vendors delivered the items to Lenox Hill’s loading dock. The items were received and
checked in by Lenox Hill employees and then placed into storage facilities at the hospital
owned by Lenox Hill by a storeroom clerk employed by Lenox Hill. Lenox Hill owned all of
the inventories of smallwares, food beverages and other supplies used in the patient food
service and cafeteria operations.
31. When it was time for the items to be used in the
performance of the food service operations, Lenox Hill employees retrieved them from
storage. The items were then used by the Lenox Hill union employees to prepare and cook
the food for delivery to the patients or to the cafeteria.
32. Meals prepared for delivery to the patients were
sent to the tray line where the trays for each patient were assembled with the meal,
napkins and utensils. When the trays were completed, they were placed on a cart and taken
upstairs to the patient floors where the meal trays were delivered to the patients. When
the patients were through with the meal, the trays were picked up, placed back on the cart
and returned to the kitchen where the trays were cleaned and set up for the next patient
service. Throughout the process, all of the tasks were performed by Lenox Hill employees.
33. Meals intended for sale in the cafeteria were placed
in serving vessels and then placed on the cart and taken on the elevator to the cafeteria.
The meals were unloaded by the cafeteria workers and placed in the display stations. The
meal items were served to the cafeteria patrons, who paid for the meals at the cafeteria
registers operated by Lenox Hill employees. After the patrons were done with their meals,
the used trays were picked up, placed back on the cart and returned to the kitchen where the trays were cleaned and
set up for the next cafeteria delivery. Throughout this process, all tasks were
performed by Lenox Hill employees.
34. Sodexho’s role with respect to the purchases
was the management of the purchasing activities and the management and coordination of the
billings from the vendors. The vendor invoices for the purchased items were generally sent
to Sodexho at the Lenox Hill facilities. The vendor invoices were all addressed to Sodexho
and Lenox Hill. They were not addressed to Sodexho as an agent for Lenox Hill.
Sodexho’s on-site employees sent the vendor invoices to Sodexho’s control center
in Buffalo, New York. Upon receipt of the invoices, the Buffalo control center remitted
payment for the purchased items to the vendors.
35. Under the terms of the contracts, Lenox Hill paid
Sodexho a flat management fee to compensate Sodexho for the management of Lenox
Hill’s patient services operations and cafeteria operations.
36. The contracts required Sodexho to collect and
deposit gross revenues from Lenox Hill patient food service and cafeteria services and
then invoice Lenox Hill for “Operating expenses in excess of net cash receipts.”
Any excess net cash receipts from the cafeteria operations were credited to the operations
costs of the patient food service. “Operating expenses” specifically included
the cost of supplies, and the taxes thereon, used in the patient services and cafeteria
operations. As a result of this arrangement, Sodexho was reimbursed dollar-for-dollar for
the amounts that it had advanced for Lenox Hill’s purchases.
37. Sodexho provided weekly “pre-bills” to
Lenox Hill. For each aspect of the food service operations, that is, patient food service,
cafeteria and vending, the pre-bill contained line-item breakdowns of the estimated fees
and expenses for the next week including the management fee, estimated expenses and, for
the cafeteria, the estimated credit for cash receipts collected. At the end of each month,
Sodexho’s accounting office reconciled the actual expenses incurred with the actual
cash credits from the cafeteria services, plus amounts received from Lenox Hill in the
payment of the pre-bills. In addition, Sodexho provided a monthly operating statement to
Lenox Hill, which detailed the back-up information to the invoices sent to Lenox Hill
showing the cash sales for the month, the outlays for purchases of food and supplies, and
labor costs.
Petitioners’ Facilities
Management Services: The Burke Arrangement
38. The Burke arrangement during the audit period was
governed by the terms and conditions of the contract dated January 1, 1999, the amendment
to the 1999 Burke contract dated June 25, 1999, the amendment to the Burke contract dated
February 22, 2000, the amendment to the 1999 Burke contract dated January 3, 2001 and the
amendment to the 1999 Burke contract dated December 7, 2001.
39. The Burke arrangement was a management contract
pursuant to which petitioners provided management employees to supervise the housekeeping
and laundry services of Burke’s environmental services department. The contracts
expressly appointed petitioners as Burke’s agent with respect to the management of
purchasing activities.
40. Under the contracts, Sodexho was required to
“manage and operate” the housekeeping and laundry services at the Burke
facilities, which were part of Burke’s environmental services department. The
environmental services department was responsible for housekeeping tasks such as cleaning
and disinfecting the hospital premises, including stripping, waxing and burnishing
corridors, cleaning patient rooms and sanitizing equipment. The department was not
responsible for general maintenance tasks such as changing light bulbs or checking pipes
or fans.
41. Pursuant to the management contract with Burke,
Sodexho provided management and professional employees to manage the environmental
services operations, including the general manager and the operations manager.
42. Burke had control over which Sodexho management
employees were placed on-site in the environmental services department, including which
general manager should be the department head of the environmental services department.
Burke made the final decision after the general manager, an employee of Sodexho, screened
for the best possible candidate. If Burke became unhappy with a Sodexho employee, Burke
had the right to request that the situation be addressed or that the employee be removed
from Burke.
43. Sodexho’s general manager, David Schleissmann,
supervised the management and function of Burke’s environmental services department.
Mr. Schleissmann functioned, and was recognized by Burke, as a department head within
Burke. The only other Sodexho employee on-site at Burke was the operations director, who
reported to Mr. Schleissmann and who was responsible for supervising the performance of the
day-to-day housekeeping and laundry operations by Burke employees.
44. All of the hourly employees who performed the
housekeeping services were employed by Burke. The actual performance of the environmental
services operations was done by Burke’s hourly employees. Sodexho employees did not
physically perform the day-to-day operations of the environmental services department.
45. Burke provided and maintained the premises at which
the housekeeping and laundry services were performed by Burke employees. Burke also owned
and provided all of the equipment used in the performance of the housekeeping and laundry
services.
46. Burke’s policies governed all aspects of the
operations of the environmental services department and Sodexho employees were required to
manage the department in accordance with those policies. Sodexho was also required to
manage the environmental services department in a manner that complied with the
regulations imposed by the Joint Commission on Accreditation of Healthcare organizations
to which Burke was required to adhere.
47. Burke dictated the areas of service for the
environmental services department, that is, which of its facilities were to be cleaned,
and the cleaning specifications for each area of service, including the types of tasks
that the environmental services employees were to perform and how frequently these tasks
were to be performed.
48. Burke’s policies governed all aspects of
Sodexho’s management of the Burke environmental services department employees,
including Burke’s human resources policies governing the hiring and discipline of
Burke’s environmental services employees.
49. Sodexho’s role in the hiring of Burke’s
environmental services employees consisted of interviewing the candidates screened by
Burke’s human resources department and making recommendations concerning which
candidate should be hired. Upon a reasonable request by Sodexho’s on-site managers,
Burke, as the employer of the nonmanagement environmental services employees, hired,
discharged, or disciplined its employees. Burke made all of the ultimate hiring and other
human resource decisions concerning the environmental services employees employed by
Burke.
50. Burke set the overall budget for the environmental
services department. Sodexho’s role was to “administer” the budget.
51. The quantity of supplies, such as toiletry items,
toilet tissue, cleaning products and germicides needed for use in the operations of the
environmental services was determined based on the weekly inventory by a Burke supervisor
of the stock on hand. On the basis of its management expertise, Sodexho told Burke the
number of items to purchase, when to purchase the items and how the items were to be
delivered. In furtherance of their duties, petitioners created a schedule which explained
where the supplies should be sent within the hospital.
52. Orders were placed by a Burke supervisor with the
vendors by phone. When Sodexho first took over, Burke was using Burke’s vendors.
Thereafter, Burke switched to Sodexho’s vendors in order to save money. When Sodexho
became involved with Burke, the vendors were provided with Burke’s exemption
certificate.
53. The vendors delivered the items directly to
Burke’s receiving area. The labels on the packages bore Burke’s address,
generally under the names of Sodexho and Burke. Once delivered, the items were received by
Burke’s receiving department and placed by Burke’s receiving department
employees into the storage facilities at the hospital owned by Burke. Burke owned
all of the inventories and supplies used in the environmental services operations.
54. Sodexho’s role with respect to the purchases
was the management of the purchasing activities and the management and coordination of the
billings from the vendors. The vendor invoices for the purchased items were generally sent
to Sodexho at the Burke facilities. The invoices were all addressed to Sodexho and Burke.
They were not addressed to Sodexho as an agent for Burke. All vendor invoices were sent by
Sodexho’s on-site employees to Sodexho’s control center in Buffalo, New York.
Upon receipt of the invoices, the Buffalo control center remitted payment for the
purchased items to the vendors.
55. When it came time for the items to be used in
Burke’s environmental services operations, the items were requisitioned by one of the
Burke supervisor employees and then distributed to the Burke hourly employees who actually
used the items to perform the Burke environmental services operations.
56. Under the terms of the contracts, Burke paid Sodexho
a flat management fee to compensate Sodexho for the management of Burke’s
housekeeping and laundry operations.
57. Pursuant to the contracts, Sodexho invoiced Burke
for all operating expenses in connection with the housekeeping and laundry services.
Operating expenses specifically included items purchased on behalf of the housekeeping and
laundry services. As a result, Sodexho was reimbursed dollar-for-dollar for the amounts
that it advanced for Burke’s purchases.
58. Sodexho provided weekly pre-bills to Burke with a
breakdown of estimated fees and expenses for the next week, including the management fee
and the estimated expenses. At the end of each month, Sodexho’s accounting office
reconciled the actual expenses incurred with the amounts from Burke in payment of the
pre-bills.
59. The terms of the contract specifically provided
that, in the event sales and use taxes were assessed against items used in the
environmental services operations, Burke was required to reimburse Sodexho for the
assessment and any interest and penalties thereon.
Petitioners’ Letter and The
Division’s Response
60. On or about November 11, 1993, petitioner’s
predecessor, Marriott Management Services Corp., (“MMS”) wrote a letter to the
Department of Taxation and Finance’s Technical Services Bureau requesting advice on
the correct tax treatment of MMS’s purchases of food and nonfood supplies and repairs
performed on the food service equipment belonging to an exemptorganization. On or about
April 30, 1993, the Division advised MMS that the purchases of food and nonfood items as
well as the repairs to the food service equipment were all purchases for resale since MMS
issued a bill to the tax exempt organization after making purchases of the tangible
personal property or repair service. In examining the correct tax treatment of MMS’spurchases,
the Division specifically focused upon three factors: all inventory was owned by the
exempt organization and it was its expense to maintain and replace the inventory; all food
service equipment was owned by the exempt organization, and MMS provided only management
employees. The Division further pointed out that in order to qualify for the exemption,
thepurchaser and seller must both be registered New York State sales tax vendors and,
unless the hospital is a Federal or New York State owned and operated institution, it must
provide MMS with a properly completed Exempt Organization Certification.
61. On the basis of this letter, petitioners did not
accrue tax on items that met the criteria of the letter.
62. In accordance with New York State Administrative
Procedure Act § 307(1), petitioners’ proposed findings of fact have been generally
accepted and incorporated herein. It is noted that proposed finding of fact “6”
was modified to include petitioners’ estoppel argument. Proposed findings of
fact “23,” “28,” “29,” “30,” “33,”
“35,” “55,” “57,” and “59 ” weremodified because
portions thereof were argumentative. Proposed findings of fact “20, ”
“26,” “31,” and “56” were modified to conform to the record.
A portion of proposed finding of fact “36” was rejected as unnecessary for the
determination. Additional findings of fact were also made.
PROCEDURAL
MATTERS
63. Petitioners are contesting the notices of
determination and denials of the refund claims only with respect to purchases of nonfood
items made pursuant to food management contracts and facilities management contracts with
certain tax exempt clients.
64. Prior to the hearing held on this matter on May 24,
2005 to May 26, 2005, the parties resolved certain portions of the contested assessments.
The parties also stipulated that the notices of determination issued to Sodexho Operations
and Sodexho Management would be revised in accordance with the stipulated resolution of
the issue.
65. The only issues to be resolved in this matter are
whether petitioners purchased the nonfood items as agents on behalf of their tax exempt
clients, whether petitioners purchased nonfood items for resale to tax exempt clients or
whether the Division is estopped from assessing sales and use tax on petitioners’
purchases of nonfood items.
CONCLUSIONS
OF LAW
A. In general, all retail sales of tangible personal
property are subject to sales tax pursuant to Tax Law § 1105. Petitioners contend,
however, that certain purchases were exempt from tax because they were made as agents on
behalf of tax exempt organizations. At the hearing and in their brief, petitioners have
drawn a distinction between two distinct business arrangements. In one type of
arrangement, Sodexho offered what has been referred to as full-service. That is, Sodexho
provided the employees who performed the work. For example, in order to provide food
service, Sodexho employees performed the tasks of cooking, cutting and cleaning. In this
situation, petitioners agree that sales tax is due on their purchases of nonfood supplies
since they are consuming the supplies when they are performing the service.
In this case, however, Sodexho provided only management
personnel, and the actual operations were conducted by employees of the tax-exempt
institution. Petitioners submit that in this situation where the purchases were on behalf
of the institutions and used by the institutions’ employees, their purchases were
exempt from tax because the items were purchased as an agent for the tax-exempt
institutions. In response, the Division submits that petitioners have not established that
they were acting as agents for their tax exempt clients when they made the purchases in
issue and, as a result, their purchases were properly found to be taxable.
B. The question presented here is under what
circumstances petitioners, who are unquestionably not exempt from sales tax, may stand in
the shoes of their tax exempt clients and make purchases without liability for sales tax.
This issue has been raised in New York on previous occasions. In Matter of the Seiler Corporation
(State Tax Commn., September 13,
1985), a case involving one of petitioners’ predecessors, the State Tax Commission
determined that Seiler’s recurring purchases were taxable. Seiler was not able to
utilize its clients’ hospitals’ exemption from sales and use tax when providing
administrative and financial services to the hospitals’ food service departments
because Seiler was the purchaser of record, Seiler used the items in providing food
service operations and there was a lack of proof of the extent of the hospital’s
control over Seiler’s activities in operating the food service departments.
In Matter of Custom Mgt. Corp. v.
State Tax Commn. (148 AD2d 919, 539
NYS2d 550), the taxpayer set up and managed food service facilities at educational and
health care institutions which were exempt from tax. In general, the client provided the
dining area and petitioner ran the entire food service operation including ordering,
preparing and cleaning up the food. In order to perform this task, the taxpayer provided
trained food service managers who hired the individuals who worked in the dining halls.
The taxpayer’s invoices separately stated the costs of food, supplies, repairs,
labor, payroll, other expenses and the taxpayer’s fee. The taxpayer asserted that its
purchases of plastic spoons and cups, paper supplies, napkins and cleaning products were
exempt from sales tax because it was an agent for the tax-exempt clients. The Court
rejected this argument and stated:
We conclude from the record that petitioner’s
control over the details of its food management service supports the determination that it
was not merely an agent for the tax-exempt entities. Indeed, it was specifically hired so
that its institutional clients would be relieved of the responsibility for running the
service. Evidence that petitioner purchases the food and supplies, usually
determineswhich vendors to use, performs the bookkeeping functions and generally places
all of the employees on its payroll supports respondent’s determination. In sum,
petitioner did not meet its burden of showing that it was acting solely on behalf of and
subject to the control of its institutional clients. (Matter of Custom Mgt. Corp. v. State Tax Commn., supra, at 920.)
C. A review of the factors examined in Custom Management supports the Division’s position. Here, as in Custom Management, the record establishes that petitioners were hired in order to relieve the management of the responsibility
for running the environmental and food service operations. The exempt institutions looked
to Sodexho to perform tasks that they did not know how to perform. Namely, Sodexho was
expected to manage the environmental and food service operations in an appropriate and
cost effective manner. Petitioners’ witnesses acknowledged that they were selected
because of their expertise in managing the forgoing areas and, in return for these
services, Sodexho received a management fee. Under the circumstances, petitioners’
argument that their purchases were solely as an agent does not comport with the facts
presented (see, Matter of
Custom Mgt. Corp. v. State Tax Commn., supra, 539 NYS2d at 551).
Second, as was the case with the taxpayer in Custom Management, petitioners were the purchasers of record. The
invoices were sent to petitioners at the location of the respective institution.
All of the vendor invoices were sent to Sodexho’s office in Buffalo, New York, and
the Buffalo office, in turn, paid the vendors.
Third, as part of its management function, Sodexho
exercised significant influence over which vendors to use. Although individuals in the
respective hospitals’ purchasing departments contacted the vendors, the record shows
that Sodexho managed all purchasing activity and coordinated the billing process with the
respective vendors. The Lenox Hill purchasing guidelines show that items were to be
purchased according to purchasing agreements where it was to Sodexho’s overall
advantage to do so and only Premier/Sodexho-approved suppliers were to be utilized with respect to nutritional product
supplies. Similarly, after it was retained, Burke began using Sodexho-approved vendors in
order to save money.
Sodexho performed bookkeeping functions for its clients
through its furnishing of a prebill procedure which outlined estimated cash, credit for
cash from the cafeteria, the management fee and estimated expenses. The pre-bill permitted
Sodexho’s clients to estimate a portion of their anticipated expenses and revenues.
The last factor which the Court focused upon was that
the taxpayer placed all of the employees on its payroll. Petitioners are correct that the Custom Management case is different in that the taxpayers in this matter
did not place the employees on their payroll. However, the point is not whether Sodexho
placed the hourly employees on its own payroll. It is whether Sodexho acted solely as an
agent or whether it exercised independent discretion. On this point, it is clear that
Sodexho had significant input regarding the hiring of a particular employee. For example,
the record shows that the Lenox Hill human resources department did the initial screening
of the job applicants. If the persons passed the initial screening, they were sent to
Sodexho for an interview. If Sodexho approved of the person, it would recommend that Lenox
Hill hire the individual. Sodexho also had input regarding the individuals who were hired
by Burke. Furthermore, in each institution, Sodexho management supervised the employees of
the client.
D. On the basis of the forgoing it is concluded that
petitioners have not established that they were merely agents of the tax-exempt
institutions and that it was permissible for petitioners to rely upon the tax-exempt
status of their clients to exempt their purchases from taxation. Under the
circumstances, the factors cited by petitioners regarding the agency provisions in the contracts between them and their clients and the
purported disclosures of the principal-agency relationship are irrelevant. Moreover,
petitioners’ claim that the tax-exempt institutions were the purchasers of the
nonfood items does not comport with the record.
E. In the alternative, petitioners argue that the
purchases of the nonfood items are excluded from tax as purchases for resale. It is
submitted that the subsequent sales of the nonfood items to petitioner’s exempt
clients are exempt from tax as sales to tax exempt clients.
F. The forgoing argument is also without merit. The
Court of Appeals has held that an item is purchased for resale, for purposes of Tax Law §
1101, when the purchaser acquires the item for the purpose of resale (see, Matter of Albany Calcium Light Co. v.
State Tax Commn., 44 NY2d 986, 408
NYS2d 333; Matter of
Micheli Contr. Corp. v. New York State Tax Commn., 109 AD2d 957, 486 NYS2d 448). Any resale which is
purely incidental to the primary purpose of the business is not a purchase for resale as
such (see, Matter of
Custom Mgt. Corp. v. New York State Tax Commn., 148 AD2d 919, 539 NYS2d 550; Matter of Laux Advertising v. Tully, 67 AD2d 1066, 414 NYS2d 53).
Petitioners did not purchase the items in order to
resell them. Rather, they purchased the items in order to provide a service. At Lenox
Hill, for example, petitioners agreed to “manage and operate” a variety of
nutritional services. Furthermore, the regulations of the Commissioner of Taxation
provide, in part:
Napkins, straws, stirrers, plastic knives, forks,
spoons and other similar items are not purchased for resale as such nor are they packaging
materials or components thereof. Purchases of these items by restaurants and similar establishments are not purchases for resale nor exempted from tax by
paragraph (19) of section 1115(a) of the Tax Law and are subject to tax. (20 NYCRR
528.20[d][2]; emphasis added.)
Here, since the recurring purchases were used in its
service of managing a food service, the items were clearly not purchased for resale.
Similarly the items delivered to Burke were not
purchases for resale as such. Rather, they were acquired as a part of a service. Sodexho
was hired by Burke for its management expertise and to establish control over the
supplies. As a result, Sodexho told Burke the number of items to purchase, when to
purchase the various items and how the items were to be delivered. Moreover, in
performing its duties under the contract, Sodexho created a schedule which explained where
the supplies should be sent within the hospital.
G. Petitioners argue that the Division should be
estopped from assessing tax because they relied upon a letter issued by the Division on
April 30, 1993. In general, unless there are exceptional facts which require its
application to avoid a manifest injustice, the doctrine of estoppel does not apply to
governmental acts (Matter
of Consolidated Rail Corp., Tax
Appeals Tribunal, August 24, 1991, confirmed 231 AD2d 140, 660 NYS2d 459, appeal dismissed 91 NY2d 848, 667 NYS2d 683). This rule is considered
especially strong when a taxing authority is involved, because public policy supports the
enforcement of the Tax Law (Matter of Glover Bottled Gas Corp., Tax Appeals Tribunal, September 27, 1990).
The Tax Appeals Tribunal has utilized a three-part test
in order to determine whether to invoke an estoppel. The test asks if there was a right to
rely on the representation, whether there was such reliance and whether the reliance was
to the detriment of the party who relied upon the representation (see, Matter of Consolidated Rail Corp., supra).
H. The record shows that on or about November 11, 1992,
MMS, a predecessor of petitioners, wrote a letter to the Division asking for the correct
tax treatment of its purchases of food, nonfood supplies and repair services performed on
food service equipment belonging to an exempt hospital. MMS had entered into a contract
with a tax exempt hospital to provide meals and cafeteria facilities. The Division
responded that MMS’s purchases of food, nonfood supplies and repair services to the
equipment owned by the hospital were purchases for resale since MMS would bill the
hospital for the purchases of the tangible personal property and repair services.
I. The Division argues that the facts do not support
invoking the remedy of estoppel. According to the Division, the facts in the present
case do not mirror the facts set forth in the letter inasmuch as petitioners were not
hired to provide patient meals or cafeteria facilities and they did not perform repair
work. In contrast, petitioners maintain that the material facts are nearly identical to
those cases where an estoppel has been granted.
An examination of the record shows that the material
facts in the matter at hand and the facts underlying the 1993 opinion letter are
substantially identical. In each case, the taxpayer was contacted by exempt organizations
to provide management services for the operation of food services. In each instance,
petitioners used their expertise to purchase food and nonfoodsupplies. Ultimately, in both
cases, all of the inventory was owned by the tax exempt organization. In the earlier
matter and the current matter, all of the food service equipment was owned by the exempt
organization. Lastly, petitioners provided only management employees in both the earlier
matter and the current matter. The fact that petitioners’ predecessor arranged for
repairs on the food service equipment or that Sodexho was not hired to provide patient
meals is irrelevant. In sum, the material facts underlying the previous letter and the
current matter are largely the same.
J. The record supports petitioners’ position that
all of the elements of an estoppel are present. Petitioners had a right to rely on the
letter they received from the Division. It is reasonable to expect a taxpayer to accept
written guidance from the Division regarding the taxability of a particular transaction
and to rely upon the same (see, e.g., Matter of Bolkema Fuel Co., Tax Appeals Tribunal, March 4, 1993). Petitioners
have also established that they relied upon the letter. Internal memoranda of MMS show
that MMS made administrative decisions based upon whether the three criteria set forth in
the letter of April 30, 1993 were satisfied. Lastly, it is clear that the reliance was to
the detriment of the taxpayer. Since petitioners were advised that the activity that they
outlined was not subject to tax, they did not have the option of either accruing the tax
or changing their business practice to avoid the imposition of the tax (Matter of Consolidated Rail Corporation,
supra). Accordingly, theDivision
is estopped from assessing tax or denying a refund to the extent that the tax assessed or
refund claimed is based upon the purchase of nonfood items during the period in issue.
K. The petitions of Sodexho USA, Inc., Sodexho
Operations, LLC and Sodexho Management, Inc. are granted to the extent of Conclusion of
Law “J” and the Division is directed to modify the notices of determination and
denial of the claims for refund accordingly.
DATED: Troy, New York
March 30, 2006
/s/
Arthur S. Bray
ADMINISTRATIVE LAW JUDGE
Petitioners and the Division have
stipulated that the terms and language contained in the agreements between Sodexho
Management and Lenox Hill (the “Lenox Hill arrangement”) are representative of
the terms and language contained in all of the contracts governing the arrangements
between petitioners and the tax exempt clients to whom petitioners provided food
management services. The Division and petitioners have also stipulated that the
determination of the Division of Tax Appeals concerning the agency issue and the resale
issue based on the contractual terms and the evidence presented with respect to the Lenox
Hill arrangement will control the resolution of the contested portions of the notices of
determination of each petitioner that relate to food management services provided to
petitioners tax exempt clients.
-
Under the terms of the contracts,
Sodexho provided the vending services and was responsible for managing and stocking the machines. The
contested portions of the assessments do not relate to items sold in the vending machines.
-
Smallwares include items such as
dishware, glassware, flatware, utensils, pots and pans.
-
The Division and petitioners have
stipulated that the terms and language contained in the arrangements between petitioner Sodexho Management
and Burke Rehabilitation Hospital (the “Burke Arrangement”) are representative
of the terms and language contained in all of the contracts governing the arrangements
between petitioners and the tax exempt clients to whom petitioners provided facilities
management services. The Division and petitioners have also stipulated that the
determination of the Division of Tax Appeals concerning the agency issue and the resale
issue based on the contractual terms and evidence presented with respect to the Burke
arrangement will control the resolution of the contested portions of the notices of
determination of each petitioner that relate to the facilities management services
provided to petitioners’ tax exempt clients. The terms “facilitiesmanagement”
and “environmental services” have been used interchangeably to describe the
general housekeeping operations performed at the tax exempt clients’ facilities. The
term “facilities management” includes both environmental services, such as
housekeeping, and engineering services, such as changing light bulbs or taking care of
structural issues. At Burke, Sodexho’s operations were limited to the management of
Burke’s environmental services operations, that is, the daily cleaning of the
facility.
In Matter of Seiler Corp. (State Tax Commn., Sept. 13, 1985) it
was observed that while the invoices included the name of both the hospital
and the petitioner, such information would, of necessity, be included for purposes of
delivery.