MoFo New York Tax Insights - Volume 4, Issue 4, April 2013

New York Court of Appeals Upholds “Amazon” Statute

As this issue went to press, the Court of Appeals, New York's highest court, issued its decision holding that the State's “click-through nexus” statute does not violate the Commerce Clause or the Due Process Clause, and therefore an Internet vendor may be presumed to have nexus in New York State, and be required to collect sales tax from New York customers, when a link to the vendor's website appears on websites of New York residents who are compensated via a commission arrangement. Overstock.com, Inc. & Amazon.com, LLC, et al., 2013 NY Slip Op. 02102 (N.Y. Mar. 28, 2013).

The New York law was amended in 2008 to provide a presumption that the definition of a “vendor,” required to collect New York State sales tax on sales to New York customers, includes an entity that enters into an agreement with a New York resident under which the resident refers potential customers, including by a link on a website, “for a commission or other consideration.” Tax Law § 1101(b)(8)(vi). Amazon and Overstock challenged the facial constitutionality of that presumption.

In brief, the Court of Appeals has now found that it was rational for the legislature to presume that New York residents who were compensated on a commission basis would seek to increase their business by soliciting New York customers, and that the ability to rebut the presumption through an annual certification “sensibly” placed the burden on the retailers to demonstrate the lack of solicitation activities.

One judge dissented, finding that the placing of links on a website was no more than advertising, and that the change in compensation method for such advertising-from a flat fee to a commission-does not change its essential nature.

Guilty Plea and $5.5 Million Settlement Resolve False Claims Case

By Hollis L. Hyans

A settlement, including a guilty plea to felony charges and payment of $5.5 million in tax, was reached to resolve civil claims concerning unpaid New York sales and income taxes that were due from a tailor, Mohanbhai “Mohan” Ramchandani, and his company, Mohan's Custom Tailors, Inc. According to the Attorney General's office, the claims had first been raised by a “whistleblower” under New York State's False Claims Act, which had been revised in 2010 to permit claims to be brought alleging violation of the tax laws.

On March 5, 2013, a civil complaint was filed, concluding an investigation that had begun when a former employee filed a claim against Mr. Mohan and his business under the False Claims Act. The complaint alleged that Mr. Mohan falsified his sales tax returns over a period of many years, going back to 2002. The investigation discovered that Mr. Mohan had been manipulating the numbers he used to report taxable sales to be consistent with his belief in numerology, ensuring that the digits added up to a multiple of ten. The result was reporting of alleged receipts with a level of consistency that was unlikely to have occurred by chance. By Mr. Mohan's own admission, he and the business failed to remit to the State at least $1.7 million in state and local sales taxes that had been collected from customers since 2002, and failed to pay at least $256,000 in state and local personal income taxes for 2007 through 2009.

Mr. Mohan was well known as a tailor to famous New Yorkers, including, according to press reports, Patrick Ewing, Wilt Chamberlain, Walt Frazier, and former mayors Rudolph Giuliani and the late Edward Koch, some of whom had appeared in promotions for the business.

Under the terms of the settlement, Mr. Mohan and Mohan's Custom Tailors, Inc. both pleaded guilty to filing false returns, and in addition the business pleaded guilty to falsifying business records. Mr. Mohan acknowledged that, between September 2002 and June 2012, his business made over $28 million in taxable retail sales, but reported only a little over $5.6 million.

In exchange for the guilty plea, Mr. Mohan will be sentenced to a prison term of one to three years, in addition to paying $5.5 million in damages and penalties. The former employee who blew the whistle will receive $1.1 million of that amount. Mr. Mohan is also expected to plead guilty to federal charges.

Additional Insights

According to the Attorney General's office, this is the first time that the new False Claims Act was used in resolving a tax case. As reported in the March 2011 issue of New York Tax Insights, the 2010 amendment to the statute for the first time permitted actions to be brought by private parties, called qui tam actions, alleging violations of state and local tax laws. The Attorney General may then take over those lawsuits and recover treble damages, plus penalties, attorneys' fees and costs, from anyone found to have submitted a “false claim” for money or property to the State government. In 2011, the Attorney General announced the formation of a Taxpayer Protection Unit to aggressively pursue violators of the tax laws. The statute offers large financial rewards to the qui tam plaintiff, who may, as in this case, receive a percentage of the amount for which a defendant is ultimately held liable, including a portion of the tax, treble damages, and penalties assessed.

City ALJ Dismisses Case Seeking Interest on $30 Million Refund

By Amy F. Nogid

A New York City Administrative Law Judge dismissed a case brought by Deutsche Bank AG seeking...