Opinion
0109673/2006.
May 16, 2007.
Decision and Order
This court grants the CPLR 3211(a)(2) motion of Defendant New York State Department of Taxation and Finance and its Commissioner, Andrew S. Eristoff (collectively, "DTF" or "defendant") to dismiss plaintiff, Mission Energy New York, Inc.'s ("MENY" or "plaintiff") complaint (Exhibit A to Motion), because the court lacks subject matter jurisdiction to hear this matter in the first instance in the context of a declaratory judgment action.
MENY's complaint essentially seeks a declaration that during the years 1998 and 1999, it should not have been liable for certain franchise taxes it mistakenly paid pursuant to Tax Law §§ 186 and 186-b ("Article 9 taxes"). MENY contends that it was only liable for Article 9-A taxes (i.e., general corporate franchise taxes for doing business in New York), because it was not actively engaged in the business of supplying water through mains or pipes, electricity, etc., but rather was a passive investor-partner in Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNY"), without any involvement in its day-to-day management and operation. Because of plaintiff's purported status as a passive investor and holding company, MENY argues it was legally exempt from paying Article 9 taxes and rests its claim exclusively on GTE Spacenet Corp. v. New York State Dept. of Taxation Finance, 224 A.D.2d 283, 638 N.Y.S.2d 29 (1st Dept., 1996), Iv. to app. den. 88 N.Y.2d 814, 651 N.Y.S.2d 15 (1996) ("GTE case"). Thus, MENY seeks an order declaring DTF's issuance of its February 23, 2004 Notice of Deficiency (for unpaid Article 9 taxes, interest and penalties totaling $1,530,361.87) (complaint at ¶ 28 as Exhibit A to Motion) and DTF's issuance of its September 8, 2004 letter denying plaintiff's refund claim for mistakenly paid Article 9 taxes totaling $1,146,807.00 (complaint at ¶ 31 as Exhibit A to Motion) as being in excess of defendant's statutory authority.
Article 9 taxes, which the Legislature has subsequently repealed (see Chapter 63, Laws of 2000), imposed certain franchise taxes on companies principally engaged in the business of producing water, steam, gas and/or electricity.
Defendant has produced an irrefutable paper trail of plaintiff's active participation in DTF's conciliation program as well as the initial administrative process vis-a-vis this identical claim before the DTF (see documentation annexed to O'Connell Affirmation in support of Motion). Against this backdrop, DTF contends that MENY must first exhaust its administrative remedies (i.e., participate in a hearing before an Administrative Law Judge at the DTF's Division of Tax Appeals and receive a final adverse determination from that tribunal) before seeking relief from the courts via CPLR Article 78 review. DTF further claims the doctrine of primary jurisdiction bars this declaratory judgment action as well.
Discussion
As a general rule, "a declaratory judgment action is an inappropriate vehicle for challenging a tax assessment determination where the plaintiff has failed to exhaust its administrative remedies". Allstate Ins. Co. v. Tax Comm'n of State of New York, 115 A.D.2d 831, 832, affd 67 N.Y.2d 999, 502 N.Y.S.2d 1004 (1986). This rule need not be followed if DTF's action was either unconstitutional or "wholly beyond the [DTF's] grant of power . . ." (bracketed matter added). Watergate II Apts. v. Buffalo Sewer Authority, 46 N.Y.2d 52, 57, 412 N.Y.S.2d 821, 824 (1978); Two Twenty East Ltd. Partnership v. New York State Dept. of Taxation Finance, 185 A.D.2d 202, 586 N.Y.S.2d 596 (1st Dept., 1992). Notably, MENY is neither challenging the constitutionality of now repealed Tax Law §§ 186 and 186-b nor DTF's statutory right to impose and collect Article 9 taxes per se. Cf., Empire State Bldg. Co. v. New York State Dept. of Taxation Finance, 150 Misc.2d 747, 749, 570 N.Y.S.2d 419 (Sup.Ct., N.Y. Co., 1990) affd., 185 A.D.2d 201, 586 N.Y.S.2d 597 (1st Dept., 1992), affd., 81 N.Y.2d 1002, 599 N.Y.S.2d 536 (1993). Stated differently, MENY's complaint does not seek a "pure statutory analysis regarding whether the [Article 9] tax applies [which] can be decided as a matter of law . . ." (bracketed matter added), 150 Misc.2d at 749, 570 N.Y.S.2d at 421. Here, plaintiff questions whether Article 9 taxes should have been assessed against MENY given the alleged passive nature of its business activity, i.e., as a mere investor rather than an active participant in the management and operation of BNY.
Empire State Bldg. Co., supra, involved the interpretation of a tax law and led to the conclusion that DTF did not have the statutory authority to impose a sales tax on the redistribution of non-metered electricity by a landlord to its tenants who paid for same as additional rent.
There is no dispute that plaintiff initiated informal administrative proceedings before the DTF's Bureau of Conciliation and Mediation Services and received Conciliation Orders which affirmed defendant's right to seek an outstanding deficiency in the amount of Article 9 taxes MENY still owed for tax years 1998 and 1999 and DTF's denial of MENY's requested refund of previously paid Article 9 taxes for those years. To that end, DTF had evidently examined the nature of MENY's corporate activities and determined its classification and taxability to pay Article 9 taxes. MENY strenuously disagrees with DTF's administrative determinations and has filed petitions for administrative review (see Exhibits D and E to Motion) with defendant's Division of Tax Appeals challenging same. In administrative pleadings before the Division of Tax Appeals, DTF is clearly challenging plaintiff's factual characterization of its business relationship with BNY (see Exhibits G and H to Motion).
At this juncture, this court finds that there exists a sharp factual dispute between the parties which requires plaintiff to exhaust its administrative remedies before seeking judicial review. This court further concludes that MENY's reliance on the GTE case is misplaced because that case, unlike this case, did not involve a factual dispute as to the taxpayers' status as passive investors inter alia based upon DTF's own field audit records.
At a hearing before an administrative law judge at the Division of Tax Appeals, plaintiff will have a full and fair opportunity to present testimony and documentary evidence to controvert DTF's classification of plaintiff as being principally engaged in BNY's utility business of which plaintiff receives more than 50% of its receipts.
Finally, "[d]eference to primary administrative review is particularly important where the matters under consideration are inherently technical and peculiarly within the expertise of the [DTF] . . ." ( Davis v. Waterside Housing Co., Inc., 274 A.D.2d 318, 319, 711 N.Y.S.2d 4, 5 [1st Dept., 2000], lv. to app. den. 95 N.Y.2d 770, 722 N.Y.S.2d 473), such as determining the classification and taxability of companies doing business in New York State. Further, "whether . . . [plaintiff is ultimately required to pay any Article 9 tax deficiency] manifestly is an interpretive exercise, requiring, in the first instance, the . . . [DTF's] review of the . . . [petition], and, if reasonably determined, judicial deference to the . . . [DTF's] findings . . ." (bracketed matter added)( Wong v. Gouverneur Gardens Housing Corp., 308 A.D.2d 301, 304, 764 N.Y.S.2d 53, 57 [1st Dept., 2003]). Thus, the doctrine of primary jurisdiction similarly bars this declaratory judgment action. See also, Sohn v. Calderon, 78 N.Y.2d 755, 579 N.Y.S.2d 940 (1991).
Accordingly, defendant's motion to dismiss this action is granted in its entirety. This constitutes this court's Decision and Order. Courtesy copies of same have been provided to counsel for the parties.