STATE OF NEW YORK
DIVISION OF TAX APPEALS
___________________________________________
In the Matter of the Petition
of
BROADVIEW NETWORKS, INC.
ORDER
DTA NO. 822673
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, 2001
through August 31, 2004.
___________________________________________
Petitioner, Broadview Networks, Inc., 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, 2001 through August 31, 2004.
The Division of Taxation, by its representative Daniel Smirlock, Esq. (Robert A. Maslyn, Esq., of counsel), brought a motion filed July 27, 2009, with supporting documentation, seeking summary determination in the above-referenced matter pursuant to Tax Law § 2006(6) and 20 NYCRR 3000.9(b). Petitioner, appearing by Ryan, Inc. (Mark Weiss, Esq., and Charles Rice, Esq., of counsel), submitted a letter brief and supporting documentation on September 23, 2009 in opposition to the motion. The Division of Taxation was granted permission to submit a reply affirmation and did so on November 2, 2009, which date began the 90-day period for issuance of this order.
After due consideration of the motion and supporting affirmation of Robert A. Maslyn, Esq., the affidavit of David Samuel and the four exhibits attached thereto, petitioner's letter brief in opposition, the affidavit of David C. Sobel, CPA and the letter and schedule attached thereto, and the reply affirmation of Robert A. Maslyn, Esq., and all pleadings and proceedings had herein, Dennis M. Galliher, Administrative Law Judge, renders the following order.
ISSUE
Whether the Division of Taxation has established its entitlement to summary determination and that there is no material and triable issue of fact such that, as a matter of law, a determination can be made in its favor.
FINDINGS OF FACT
1. Petitioner, Broadview Networks, Inc. (Broadview), was formed in New York State in 1991, and operates as a network-based business communications provider primarily serving small and medium sized business customers throughout the Northeast and Mid-Atlantic states. Petitioner offers local and long distance voice communications, hosted and premises-based VoIP systems, data services, traditional telephone hardware, high-speed internet services, a full suite of managed services and a range of professional services.
2. Petitioner's corporate headquarters are located in Rye Brook, New York. Petitioner maintains leased offices in various cities in New York, Pennsylvania, New Jersey, Rhode Island, Maryland and Massachusetts, and also maintains switches in New York, Pennsylvania, Massachusetts and Virginia.
3. Petitioner was registered as a New York State sales tax vendor and filed sales and use tax returns. The Division of Taxation (Division) audited petitioner for the period spanning December 1, 2001 through August 31, 2004, and as a result of that audit issued to petitioner a Notice of Determination dated August 6, 2007 assessing additional sales and use taxes due in the amount of $690,369.78 for the period of the audit, plus penalty and interest.(1) The amount assessed was comprised of tax calculated as due on allegedly nontaxable or exempt sales ($581,701.48), recurring expense purchases ($64,554.32) and fixed asset purchases ($44,113.98).
4. Petitioner challenged the assessment by requesting a conciliation conference with the Division's Bureau of Conciliation and Mediation Services (BCMS). By a Conciliation Order dated September 5, 2008 (CMS No. 221404) the statutory notice was sustained in full.
5. Petitioner continued its challenge by filing a petition. As is relevant to this motion, petitioner alleged in paragraphs 23 and 24 of its petition that documentation had been presented during the audit to support a claim for credit or refund of sales tax remitted by petitioner on New York customer accounts which were uncollectible (bad debts) and had been written off by petitioner during the audit period. No such credit or refund has been allowed, and petitioner continues to assert its entitlement thereto, citing Tax Law § 1132[e] and 20 NYCRR 534.7.
6. The Division's answer alleged, in response, that petitioner did not properly apply for or provide substantiation in support of such (bad debt) credit or refund, and is not entitled to any such credit of refund.
7. The amount of tax determined and assessed as the result of the audit is not at issue in this motion, which challenges only petitioner's entitlement to credit or refund based on uncollectible accounts.
8. In support of its motion, the Division included an affidavit made by David Samuel, the Division employee who conducted the audit of petitioner's business. Mr. Samuel commenced the audit in August 2004. Source documents such as sales invoices or sales journals with respect to petitioner's sales were requested but were not provided for audit. Nonetheless, based upon the results of a prior audit, the auditor accepted petitioner's total sales as reported. However, the auditor determined that the portion of petitioner's total sales that were claimed to be exempt sales were not substantiated by proper documentation, and tax was assessed thereon, as was tax upon fixed asset purchases and upon recurring expenses.
9. In a September 15, 2005 meeting, petitioner's initial representative, Anthony Susak, advised the auditor that petitioner sought credit for tax paid on bad debts (i.e., sales tax paid [advanced] by petitioner based on sales it made which allegedly later became uncollectible), and provided some computer printouts with customer names and amounts (presumably representing such uncollectible sales). However, according to the auditor, the amounts set out in the computer printouts were not summarized. Further, since petitioner's sales information could not be reconciled with petitioner's accounting records, the auditor could not determine whether petitioner's total sales had been reported net of bad debts or otherwise. In addition, no supporting documentation was provided to show whether such claimed bad debts had been written off for federal income tax purposes or to substantiate that sales tax had been paid upon those sales being claimed as bad debts. In the face of these circumstances, the auditor advised petitioner's representative that petitioner's request for credit or refund based on bad debts did not constitute a sufficient application for credit or refund in either form or substance, and further advised that petitioner should file Form AU-11 (Application for Credit or Refund of Sales or Use Tax), including sufficient records to substantiate the claim that sales tax had been paid on the allegedly uncollectible sales amounts and to establish that such sales amounts were unpaid and uncollectible.
10. During an October 13, 2006 meeting, petitioner's second, and then-current representative, David Sobel, again brought up the subject of uncollectible debts, but provided no new or additional information or substantiation. Again, the auditor advised that Form AU-11 should be filed, accompanied by sufficient accounting records to substantiate any claim for credit or refund. The auditor suggested that petitioner's representative submit, with Form AU-11, a summary of the bad debts and journal entries showing the claimed bad debts and the removal of the same from petitioner's bad debt expense account. The auditor advised that the bad debt information had to be in "auditable condition." No Form AU-11 or information concerning claimed bad debts was provided in response.
11. By a letter dated May 31, 2007, submitted to the auditor in response to the Division's May 18, 2007 Statement of Proposed Audit Changes for Sales and Use Taxes, Mr. Sobel stated that petitioner "incurred substantial bad debt losses for telecommunications services rendered to New York customers during the audit period," but that the proposed audit changes (resulting in tax due) "do not reflect the taxpayer's entitlement to recover taxes paid to New York State that were never collected."
12. The auditor responded by a letter dated June 1, 2007 scheduling a field appointment at petitioner's office on June 27, 2007 and requesting the production of the requested books and records necessary to complete the audit in a timely manner. Petitioner's representative thereafter canceled the scheduled appointment. Petitioner did not file Form AU-11, nor was any further documentation submitted to the Division concerning or substantiating petitioner's request for credit or refund based on tax allegedly remitted by petitioner on sales which later became uncollectible. The August 6, 2008 Notice of Determination issued as the result of the Division's audit of petitioner did not include any credit or reduction based on petitioner's assertions with respect to sales tax paid on alleged bad debts.
13. In response to the Division's motion, petitioner submitted an affidavit made by David Sobel. Mr. Sobel notes, as above, that both he, in his May 31, 2007 letter, and petitioner's initial representative, apparently orally, requested credit based on bad debts. He goes on to state that petitioner presented a schedule, a copy of which is attached to his affidavit, to the auditor setting forth the amount ($1,726,669.00) sought as a bad debt credit for sales tax paid but not collected. Mr. Sobel alleges that petitioner gave the auditor access to its records, stating that such records listed the services sold to customers which were either partially paid or never paid and became bad debts for tax and accounting purposes. Such records allegedly set out the amount that could not be collected on the services and the amount of tax remitted on each transaction. Mr. Sobel states that petitioner also gave the auditor access to its financial statements and federal tax returns that set out the deductions taken for bad debts. Finally, Mr. Sobel alleges that petitioner did not provide one "all-encompassing" document that set out the bad debt transactions because the number of bad debt transactions was extremely large and the requisite documentary support would have been voluminous. Instead, petitioner allegedly offered to have a person in its IT (Information Technology) Department show the auditor how to navigate petitioner's system and audit the transactions to determine if a credit was due. Mr. Sobel also allegedly offered, in the alternative, that the auditor could review the bad debt transactions on a sample and projection basis in light of the volume of transactions and the amount of time it would take to review each transaction.
14. The schedule attached to Mr. Sobel's affidavit is a three-page document. The schedule reflects, for each of the sales tax quarterly periods encompassed within the audit period, various total dollar amounts listed under various categories. The initial three categories listed are "Payments & Credits," "Grand Total" and "Balance," followed by the categories "Charges & Usage" and "Taxes," and followed thereafter by various sub-categories listing different taxes and amounts (e.g., "911 Surcharge," "Loc. Gross," "State Excise," "State Franch.," etc.). This schedule is not dated, and includes no accompanying explanatory narrative or notes. Without more, it is not possible to determine with certainty what the document purports to establish. However, consistent with Mr. Sobel's affidavit, the bottom of the third page lists the total dollar amount $1,728,669.00, which is the cumulative total of the amounts listed under the tax sub-categories labeled "School District," "County Sales," "City Sales" and "State Sales," and is the bad debt credit amount alleged to have been presented to the auditor for consideration.(2) This schedule does not list customer names and amounts and thus would not appear to be the same information presented to the auditor by Mr. Susak on September 15, 2005 (see Finding of Fact 9).
CONCLUSIONS OF LAW
A. Any party appearing before the Division of Tax Appeals may bring a motion for summary determination as follows:
Such motion shall be supported by an affidavit, by a copy of the pleadings and by other available proof. The affidavit, made by a person having knowledge of the facts, shall recite all material facts and show that there is no material issue of fact, and that the facts mandate a determination in the moving party's favor. The motion shall be granted if, upon all papers and proof submitted, the administrative law judge finds that it has been established sufficiently that no material and triable issue of fact is presented and that the administrative law judge can, therefor, as a matter of law, issue a determination in favor of any party. The motion shall be denied if any party shows facts sufficient to require a hearing of any material and triable issue of fact (20 NYCRR 3000.9[b][1]; see also Tax Law § 2006[6]).
B. The standard with regard to a motion for summary determination has been set forth numerous times. A motion for summary determination made before the Division of Tax Appeals is "subject to the same provisions as motions filed pursuant to section three thousand two hundred twelve of the CPLR." (20 NYCRR 3000.9[c]; see also Matter of Service Merchandise, Co., Tax Appeals Tribunal, January 14, 1999). Summary determination is a "drastic remedy and should not be granted there is any doubt as to the existence of a triable issue" (Moskowitz v. Garlock, 23 Ad2d 943 [1965]; see Daliendo v. Johnson, 147 AD2d 312 [1989]). Because it is the "procedural equivalent of a trial" (Museums at Stony brook v. Village of Patchogue Fire Dept., 146 AD2d 572 [1989]), undermining the notion of a "day in court," summary determination must be used sparingly (Wanger v. Zeh, 45 Misc 2d 93, affd 26 AD2d 729 [1966]). If any material facts are in dispute, if the existence of a triable issue of fact is "arguable", or if contrary inferences may be reasonably drawn from the undisputed facts, the motion must be denied (Gerard v. Inglese, 11 AD2d 381 [1960]).
C. The Division's motion proceeds from the premise that petitioner was required to file a claim for refund, preferably on the Division's Form AU-11, and provide with such filing adequate substantiation supporting entitlement to the claimed credit or refund. In this case, since the credit or refund sought pertains to alleged bad debts, petitioner would be required to establish, with respect to the transactions for which credit or refund is sought, that the tax was paid (by petitioner) and that the receipt upon which the tax was paid has been ascertained to be uncollectible. (see Tax Law §§ 1139, 1132; 20 NYCRR 534.7[a][1],[2]; 534.2[a][1][i][2]). The application would have to be filed within the applicable period of limitations (i.e., within three years from the date the tax was payable by the applicant (petitioner) to the Division (id., 20 NYCRR 534.7[b],[d]). The Division maintains that, since petitioner did not follow this procedure and did not file such a "proper" claim within the period of limitations, it has thus forfeited its right to seek a credit or refund based on bad debts. The Division further asserts that petitioner has not established entitlement to any credit or refund in any event since it did not provide the requisite substantiation to support the same.
D. The Division's position correctly sets forth the general requirements for filing and substantiating a discrete or "stand alone" claim for credit or refund brought by a taxpayer outside the context of a Division audit of that taxpayer. In the ordinary course of events, the Division would thereafter respond by either granting or denying the claim. If denied, petitioner would then be entitled to challenge the same by filing a timely protest with either the Division's Bureau of Conciliation and Mediation Services (BCMS) or the Division of Tax Appeals. However, the claim for credit or refund in this instance is not a discrete or "stand alone" claim brought by petitioner, but rather was raised as an issue by petitioner as a part and during the course of the Division's audit of petitioner. This bad debt credit or refund issue was specifically raised initially during the audit by petitioner's first representative (see Finding of Fact 9), was raised again as an audit issue by petitioner's second representative (see Finding of Fact 10), and was again raised by petitioner's second representative in direct response to the Division's May 18, 2007 Statement of Proposed Audit Changes (see Finding of Fact 11).
E. The claim that petitioner was entitled to a refund or credit was set forth in the petition (see Finding of Fact 5), and was denied by the Division's answer thereto as not properly filed and for lack of proper substantiation (see Finding of Fact 6). As borne out by the quarterly periods set forth on the schedule accompanying petitioner's response to the subject motion, the credit or refund sought by petitioner pertains to the same period of time as is covered by the audit (see Finding of Fact 14).(3) There is no allegation that the petition was not timely filed, and thus the issue of whether petitioner is entitled to any credit or refund for tax it paid on receipts which became uncollectible, as raised on audit, has been preserved in this proceeding. In fact, there is no apparent bar to a taxpayer making a claim for credit or refund, even at the time it files a petition challenging a statutory notice of determination issued by the Division, so long as the petition is timely filed. Accordingly, the Division's argument that petitioner's claim is barred as an improper and untimely application for credit or refund is rejected.
F. The Division's argument, in its reply affirmation, that petitioner failed to provide any credible evidence that the bad debt credit or refund issue was raised is undercut by the auditor's affidavit which specifically acknowledges that petitioner's first and second representatives both raised the issue, claiming entitlement to such credit or refund based on bad debts during the course of the audit. Moreover, as noted above, entitlement to credit or refund may be raised in response to a statutory notice assessing tax at any time prior to a hearing, so long as a timely protest against such notice has been filed and so long as the opposing party (here the Division) is able to be afforded a reasonable opportunity to investigate and respond thereto. The Division's remaining argument on this motion is that petitioner has failed to provide adequate (or in fact any) substantiation to meet its burden of proving entitlement to any credit or refund. This argument as to the sufficiency of evidence to support a claim presents a question of fact and not an issue of law and is not amenable to resolution by summary determination. Accordingly, since petitioner has raised and preserved a claim for credit or refund, and since there exists a triable issue of fact concerning the sufficiency of the proof of petitioner's entitlement to any amount of credit or refund based on bad debts, the Division's motion for summary determination must properly be denied.
G. The Division's motion for summary determination is hereby denied and a hearing on the issues will be conducted in due course as scheduled.
DATED: Troy, New York
January 7, 2010
1. Petitioner executed consent documents with respect to the period of limitation on assessment such that sales and use taxes for the period December 1, 2001 through August 31, 2004 could be assessed at any time on or before September 20, 2007.
2. It is unclear, and there is no information provided to explain how "school district," i.e., property based, taxes might properly be included as sales tax subject to a "bad debt" based credit or refund in any event.
3. This fact eliminates the somewhat thornier issues of filing and timeliness presented with respect to refund claims which extend to periods outside of the audit period.