Opinion
Submitted May 29, 1979
Decided June 12, 1979
Appeal from the Appellate Division of the Supreme Court in the Third Judicial Department, HAROLD J. HUGHES, J.
J. Paul Troue for appellants. Robert Abrams, Attorney-General (Michael F. Colligan and William J. Kogan of counsel), for respondent.
We hold that the Legislature validly and constitutionally imposed upon vendors, who have already collected sales taxes upon their sales made between March 1 and March 20, the statutory obligation to accelerate their sales tax payments which become due on March 20 by estimating their sales and resultant taxes thereon for the balance of that month, in order to pay their full monthly tax liability prior to the close of the State's fiscal year on March 31.
Upon the heels of the financial crisis confronting the State, and in order to establish a more sound fiscal operating policy to coincide with the close of each fiscal year, the 1975 Extraordinary Session of the Legislature enacted chapter 894 of the Laws of 1975 (superseded by L 1976, ch 89), all of which became section 1137-A of the Tax Law, effective March 1, 1976. The announced purpose therefor was to serve as a revenue raising measure to truly balance the State budget at the close of the fiscal year each March 31. The statute requires vendors to pay on March 20 their estimated sales tax liability for the entire month of March, although the vendors have, of course, not yet collected any taxes on sales they expect to make between March 20 and March 31. Adjustments reflecting actual sales taxes collected during this period are to be made in the vendor's April monthly return, with the required additional payments or refunds, whichever may be appropriate.
Petitioners, large automobile dealers, who are affected by the statute, brought an article 78 proceeding seeking a declaration that section 1137-A of the Tax Law is unconstitutional. The proceeding was properly converted into an action for a declaratory judgment by Supreme Court, Albany County (HUGHES, J.), all necessary parties having appeared and answered (CPLR 103, subd [c]). An article 78 proceeding, as such, does not lie to challenge the constitutionality of a legislative enactment (New York Public Interest Research Group v Steingut, 40 N.Y.2d 250; Matter of Kovarsky v Housing Dev. Admin. of City of N Y, 31 N.Y.2d 184). Having converted the action, as it is empowered to so do, Supreme Court entered a judgment declaring that the challenged statute was valid and constitutional. The Appellate Division, with one Justice dissenting, affirmed, and the petitioners appeal to this court as of right (CPLR 5601, subd [a]).
Measures enacted in the exercise of the taxing power for the purpose of raising revenues violate the due process clause "'only if the act be so arbitrary as to compel the conclusion that it does not involve an exertion of the taxing power, but constitutes, in substance and effect, the direct exertion of a different and forbidden power, as, for example, the confiscation of property.' (Magnano Co. v. Hamilton, 292 U.S. 40, 44)" (Shapiro v City of New York, 32 N.Y.2d 96, 102, app dsmd 414 U.S. 804; see, also, United States v Smith, 484 F.2d 8, cert den 415 U.S. 978). The Legislature has nearly unconstrained authority in the design of taxing measures unless they are utterly unreasonable or arbitrary (Matter of Long Is. Light. Co. v State Tax Comm., 45 N.Y.2d 529; Gautier v Ditmar, 204 N.Y. 20).
Measured against this standard, it is clear that taxes on sales or uses are constitutional and within the power of governments to levy. Petitioners, recognizing this, do not challenge the State's authority to tax sales, their only argument being that the State has no power to impose a tax on sales before they are actually consummated.
We are quick to point out, however, that advance taxation has been consistently sustained in other areas, both by our court and the United States Supreme Court. In People ex rel. Bass, Ratcliff Gretton v State Tax Comm. ( 232 N.Y. 42, affd sub nom. Bass, Ratcliff Gretton v Tax Comm., 266 U.S. 271) we sustained a statute requiring prepayment of an annual corporate franchise tax levied on the privilege of doing business in this State, and in Salomon v State Tax Comm. ( 278 U.S. 484) the requirement that taxpayers post security for a deferred payment of future taxes was likewise upheld. In Phillips v Commissioner ( 283 U.S. 589) the requirement that stockholders remit unpaid Federal taxes on the income and profits of their corporation before any hearing is held to determine their actual liability was also found not to violate the due process clause (accord Commonwealth Dev. Assn. of Pa. v United States, 365 F. Supp. 792, affd 503 F.2d 1398).
The advance payment of taxes on income not yet earned is neither new, novel nor improper, and is a fact of life for millions of taxpayers in New York State and the United States. Both jurisdictions provide for installment payments of estimated income tax including, inter alia, the requirement that the taxpayer pay, in installments each year on June 15 and September 15, the taxes due on estimated income through the end of each month, including, of course, June and September (US Code, tit 26, § 6153; Tax Law, § 656). Such a method of paying and collecting the tax has been upheld — and for good, legal and logical reasons (see, e.g., Beacham v Commissioner of Internal Revenue, 255 F.2d 103; Erwin v Cranquist, 253 F.2d 26, cert den 356 U.S. 960). In Erwin, the statute required the taxpayer to estimate his income for the whole of the taxable year and to pay the estimate in four equal payments, in advance. The taxpayer argued that the statute was unconstitutional because it required that a tax return be filed when there had been no discernible or measurable income and, also required the taxpayer to "guess" what his income will be and pay a tax thereon. Precisely the same argument is made by the petitioners in this case, and, like the Federal courts, we reject it.
These Federal and State enactments require the filing of advance declarations of estimated tax on annual income and a payment of a tax on income yet unearned. In each jurisdiction, the first payment is due April 15, covering the full months of January, February, and March; the second is due June 15, covering April, May and all of the month of June; the third is due September 15, covering July, August and all of the month of September; and the fourth is due January 15, covering the previous months of October, November and December.
The only feature to distinguish the tax here under consideration from those involved in the above-cited cases is that sales taxes are generally said to be paid by the purchaser to the vendor, and the vendor is required to collect the tax due from the purchaser and hold it as trustee for the State (Tax Law, § 1132, subd [a]). Thus, petitioners argue, the vendor is not liable for anything until a sale is made and, it is claimed, a statute requiring advance payment is a deprivation of property without due process of law.
This very argument has been rejected by this court in a sales tax case involving the liability for and collection of New York City sales taxes. There, we noted that the obligation imposed upon the vendor is described as "in the nature of a tax. He must file a return of his receipts from sales. * * * The duty of payment to the city is laid upon the vendor, not the purchaser. His liability is not measured by the amount actually collected from the purchaser but by the receipts required to be included in such return. * * * He must pay the tax even if failure to collect is due to no fault of his own" (Matter of Atlas Tel. Co., 273 N.Y. 51, 57). Our holding that there is no due process violation is in complete accord with the decisions of our sister States as well (see, e.g., Stevens Enterprises v State Comm. of Revenue Taxation, 179 Kan. 696; Piedmont Canteen Serv. v Johnson, 256 N.C. 155; Calvert v Canteen Co., 371 S.W.2d 556 [Tex]; Robert H. Hinckley, Inc. v State Tax Comm., 17 Utah 2d 70; White v State, 49 Wn.2d 716).
We cannot adopt appellants' theory that as anticipatory vendors they may not be cast in liability since they are mere potential vendors, and nothing more. As to their status as vendors in a tax collection capacity, we take note of the trustee relationship with which appellants have no quarrel. On the question of their "status" we can state it no more clearly than did this court in (Matter of Grant Co. v Joseph ( 2 N.Y.2d 196, 203, mot to amend remittitur granted 2 N.Y.2d 992, cert den 355 U.S. 869) where the court stated that "[t]here is no doubt that the sales tax law imposes upon the vendor the obligation of a taxpayer in addition to that of a collecting trustee. In plain and unequivocal language, it declares that the tax 'shall be paid by the purchaser to the vendor as trustee for and on account of the city and the vendor shall be liable for the collection thereof and for the tax' (Administrative Code, § N41-2.0, subd. e). While the incidence of the tax is, in the first instance, placed on the consumer, this court has flatly held that 'vendors * * * are to be deemed taxpayers under this legislation' (Matter of Fifth Ave. Bldg. Co. v. Joseph, 297 N.Y. 278, 283), that 'the obligation imposed on the vendor is in the nature of a tax'" (see, also, Matter of Atlas Tel. Co., supra; Matter of Merchants Refrig. Co. v Taylor, 275 N.Y. 113, 118).
Accordingly, the order of the Appellate Division should be affirmed, with costs.
I cannot agree with the majority. I would hold that vendors may not constitutionally be required to pay estimated sales taxes in advance.
I recognize that we have classified vendors as taxpayers of the sales tax for some purposes (e.g., Matter of Atlas Tel. Co., 273 N.Y. 51). The label, however appropriate and useful it is in some contexts, cannot determine the substantive aspects of the role played by the vendors in the collection of the taxes. The economic burden of the sales tax falls on the purchaser; the vendor is simply the collecting and remitting agent. My difficulty with the conclusion reached by the majority is that, however demanding may be the obligation of the vendor to see to the collection and remittal of taxes, the vendor cannot constitutionally be obliged to advance its own funds for prepayment with respect to taxes which are not yet due because the incidence of the tax — the sale to the purchaser — has not yet occurred and may never occur.
It is one thing, for convenience and advantage in the administration and collection of taxes, to require the economic taxpayer to make advance payments in installments on account of a tax, the due date for which has not yet arrived but the taxable incidence of which has already occurred. Thus, we are familiar with the constitutionally permissible withholding of taxes from current compensation and required filing of declarations of estimated taxes and payment of quarterly installments thereunder. But even when it is the ultimate taxpayer from whose compensation there is to be a withholding or who is obliged to make the quarterly payments from his own funds, such withholding and payments are attributable to income already earned or received. It is precisely on this economic analysis that challenges to withholding and prepayment have been rejected. (E.g., Erwin v Cranquist, 253 F.2d 26, 27, cert den 356 U.S. 960 — "We know of no reason why Congress may not require those who are in the process of earning or deriving income to file informational returns, or to pay currently installments of tax based on those returns.") Indeed, the popular explanation and economic justification for the inauguration of such procedures accurately employed the slogan, "Pay as You Go". The essence of that principle is that the taxpayer pays out his own money for income taxes as he earns or receives it.
The majority correctly points out that with respect to payments on declarations of estimated taxes, payment of the installments due on June 15 and September 15 are to cover income to be received through the end of each of those months. It does not appear that the constitutionality of this particular aspect of declaration of estimated tax program has ever been addressed. Even here, however, the payment can be said to be attributable to income received as of the 15th of the month. In economic analysis this may result in initial taxation at an interim rate higher than will finally prove to be applicable. On any analysis the June 15 and September 15 prepayments would not be confiscatory unless the effective rate of the tax were 100%, or the total amount of income received prior to the 15th were less than the amount of the tax installment then payable; only then would the taxpayer have to advance funds in excess of all income received to the date of the prepayment.
With sales taxes, unlike income taxes, there is no accumulation factor with a graduated rate of tax. The incidence of the tax is a series of discrete taxable transactions; each sale separately is the taxable event. Indeed, the identity of the individuals — the economic taxpayers — who will become the purchasers liable for the sales taxes during the second half of the month cannot possibly be known on the 15th.
As I analyze the realities of the vendor's position, I must conclude that the vendor-collector-"taxpayer" cannot constitutionally be compelled to advance its own funds with respect to sales taxes on taxable transactions which have not yet occurred. It makes no legal difference that the estimate is to be made by the vendor and may be based on its own experience as to taxable transactions reasonably to be anticipated, thus predicting a tax liability to a high degree of probability. Nor do the evident advantages to the public revenue of prepayment by large volume vendors justify departure from constitutional principle (cf. Flushing Nat. Bank v Municipal Assistance Corp. for City of N.Y., 40 N.Y.2d 731).
Not one of the cases cited in the majority opinion has addressed factual circumstances comparable to those we confront in this case, and none has upheld the advance exaction from a vendor-collecting agent out of its own funds of estimated sales taxes with respect to transactions which have not yet taken place.
Accordingly, I would reverse the order of the Appellate Division and declare section 1137-A of the Tax Law unconstitutional.
Chief Judge COOKE and Judges WACHTLER and MEYER concur with Judge GABRIELLI; Judge JONES dissents and votes to reverse in a separate opinion in which Judges JASEN and FUCHSBERG concur.
Order affirmed.