MoFo New York Tax Insights, Volume 5, Issue 7, July 2014

DEPARTMENT OF FINANCE ANNOUNCES UPDATED COMMERCIAL RENT TAX AUDIT POLICY ON BILLBOARDS By Irwin M. Slomka

The New York City Department of Finance has issued an "Update on Audit Issues" regarding the commercial rent tax treatment of amounts paid for the placement of advertising on billboards and digital signs in Manhattan. Update on Audit Issues, Commercial Rent Tax, Billboards, May 28, 2014. According to the Audit Update, the tenant of a billboard lease in Manhattan (for premises south of the center line of 96th Street, and for an annual gross rent of at least $250,000) must file commercial rent tax ("CRT") returns. For businesses that are not in compliance and that are not under audit by the Department, the Audit Update recommends participation in the Department's Voluntary Disclosure and Compliance Program.

For those businesses that are under audit, the Department has announced that it will accept payment of tax and interest for the most recent six CRT years in full satisfaction of the taxpayer's CRT deficiency. The Department's auditors will also consider the impact of the billboard payments on the taxpayer's general corporation tax ("GCT") and unincorporated business tax ("UBT") returns (typically, through adjustments to the property factor of the business allocation percentage). If such adjustments are necessary, "the Department may choose to address the matter separately or as part of a single resolution with the CRT deficiency."

Additional Insights

Over the past year, many businesses have been the subject of CRT audits with respect to their payments to display advertising on digital signs affixed to buildings principally in the Times Square area of Manhattan. The Department has claimed that the payments are for the use or occupancy of commercial premises. The issue has been a contentious one for several reasons. For one thing, although the regulations provide that advertising signs "occupied or used by a tenant" are taxable premises, the Department undertook the CRT audit initiative after many years of non-enforcement. The CRT audit initiative subjected businesses to lengthy (and unexpected) CRT assessments. In addition, there is the legal question of whether the signage arrangements are truly for the use or occupancy of commercial premises within the meaning of the CRT law. The new limited lookback is a reasonable effort by the Department to avoid the egregious impact of retroactive enforcement, but does not resolve the underlying question of the taxability of these arrangements.

The Audit Update specifically leaves open for resolution on a case-by-case basis the resulting impact on the GCT and UBT from treating the billboard payments as payments for the use or occupancy of premises. It does not address whether the Department will treat the arrangements as resulting in taxable nexus for a business that has no other connection with the City of New York, although that would appear to be a consequence of the Department's audit policy.

ALJ FINDS NO HEARING RIGHT TO CHALLENGE NOTICE AND DEMAND, AND CORPORATE "PRESIDENT" IS PERSONALLY LIABLE By Hollis L. Hyans

A New York State Administrative Law Judge has held that an action brought by a restaurant to challenge a Notice and Demand for sales tax could not be sustained, and that the individual who signed on behalf of the company as president could be held personally responsible. Matter of Ji Chao Zheng & Pacific World Buffet, Inc., DTA No. 824597 (N.Y.S. Div. of Tax App., June 5, 2014).

Pacific World Buffet opened a restaurant in Elmhurst, N.Y., in March 2009. It filed a monthly return for the month of December 2009, as required, with a check for approximately $29,000. The return was not signed and the check was returned unpaid by the bank on which it was drawn. A final quarterly sales tax return was filed for the period December 1, 2009, through February 28, 2010, and sometime thereafter the restaurant ceased operations.

On June 17, 2010, the Department issued a Notice and Demand for the $29,000 for which the check had been returned unpaid, plus penalty and interest, and in November 2010 it issued a Notice of Determination to Ji Chao Zheng as a responsible person. Mr. Zheng had signed, as president, the company's application to register for a sales tax certificate of authority; four of the company's monthly sales and use tax returns; three of its quarterly returns; its 2008 corporation franchise tax return and MTA surcharge returns; and, as president, its quarterly combined withholding, wage reporting, and unemployment insurance returns for the first and second quarters of 2009.

Petition and Hearing. Pacific World Buffet filed a petition, signed by Mr. Zheng, as president, challenging the Notice and Demand. Mr. Zheng filed a separate petition challenging the Notice of Determination, asserting that the actual owner and responsible person for Pacific World Buffet is Tin Ming Cheng, and that Mr. Zheng, a cook, and his son were hired by Mr. Cheng on the condition that Mr. Zheng sign the documents as president.

At the hearing, the company conceded that the self-reported amount was correct and that the company was liable. Mr. Zheng, although present at the hearing, did not testify. The sole witness for petitioners was Wei Xin Liu, the second...