The New York Appellate Division, Third Department recently held that a group of taxpayer-plaintiffs were not required to exhaust administrative remedies before commencing an action to declare their services were exempt from sales tax, even though they had not challenged their audit determinations before the New York State Tax Appeals Tribunal.
Ordinarily, taxpayers in New York must protest audit findings before the New York State Tax Appeals Tribunal before filing an action in a judicial forum challenging such findings. However, New York law provides for an exception to this general rule and permits a taxpayer to skip proceedings before the Tax Appeals Tribunal if the tax at issue is “wholly inapplicable” to the taxpayer and there are no factual issues raised concerning the subject matter of the tax dispute.
New York imposes sales tax on the sale of “protective and detective services.” And in 2020, the Department of Taxation and Finance issued an advisory opinion (to a nonparty) holding that site safety services provided by licensed site safety managers that performed inspections of construction and demolition projects in New York City, as required by the New York City Building Code, were subject to sales tax as “protective and detective services.”
The plaintiffs in Site Safety were a group of licensed site safety managers providing these services in the City seeking a declaratory judgment that their services were beyond the scope of “protective and detective services.” The plaintiffs commenced their action in New York Supreme Court (a trial level court). At the time the action was commenced, some plaintiffs had already been audited and received a determination that their services were taxable; some were undergoing audit when the action was commenced; and some had not yet been audited. Supreme Court dismissed the plaintiffs’ complaint, ruling that plaintiffs failed to exhaust their administrative remedies.
The Appellate Division, Third Department affirmed as to the plaintiffs who had not been audited or whose audits were not yet completed (as to the latter group, for different reasons than expressed by Supreme Court). However, with respect to the group of plaintiffs who had received a determination from the Department of Taxation and Finance that their services were subject to sales tax, the Appellate Division reversed, holding that the “wholly inapplicable” exception applied.
The plaintiffs that received determinations from the Department argued that the sales tax provision imposing tax on “protective and detective services” was “wholly inapplicable” to them and, therefore, the Department lacked jurisdiction to tax. The Department argued that there were factual questions that had to be resolved because the plaintiffs failed to details regarding the services they provided and therefore “wholly inapplicable” exception did not apply.
The Appellate Division rejected the Department’s argument explaining that the plaintiffs merely sought a declaration that site safety services as specifically defined in the City Building Code are exempt from sales tax, and that plaintiffs conceded other services that fall outside the building code would not be subject to the declaration—thus, there were no factual issues that barred the judgment. The case was remanded to Supreme Court to permit the Department to serve an answer.
Site Safety LLC v. New York State Department of Taxation and Finance, 237 A.D.3d 1395 (Apr. 2025).