New York – Empire Zone Benefits Denied

SALT Report 1267 – The New York Division of Taxation denied a taxpayer’s claim for a sales tax refund because the taxpayer did not qualify as an Empire Zone enterprise and, therefore, was ineligible for the Empire Zone exemption

The taxpayer leased a hotel located in Rochester, New York and entered into an agreement with a hotel management company to operate the hotel on the taxpayer’s behalf.  Under the terms of that agreement the management company, not the taxpayer, employed and assumed all responsibility for the personnel hired to operate the hotel as well as all employee compensation, fringe benefits and bonuses.  The management company was authorized to use funds from the operating account, which was funded by the taxpayer’s cash contributions and money generated by the hotel itself.

Based on the above facts, the Department determined that the taxpayer “did not use his own employees” to compute the employment test and that the employees were in fact, the employees of the management company.  Therefore, the taxpayer could not have met the employee requirements for certification as an Empire Zone business and the exemption benefits granted under that certification.  Additionally, the taxpayer applied for the Empire Zone exemption using the EIN number of the hotel management company.

The taxpayer contends that he should be entitled to the sales tax exemption since he bore all the economic burdens of operating the hotel.  He believes that he satisfied the employment test as well, because he was responsible for the costs associated with employing the hotel employees.  He further argues that the agreement with the management company established an agency relationship which, he believed, created a pass-through relationship permitting him to claim the QEZE certification belonging to the management company.

However, an Administrative Law Judge upheld the Department’s denial of the taxpayer’s claim for refund on the basis that the taxpayer was never eligible to receive Empire Zone benefits because he did not use his own employees to compute the employment test, and never received proper Qualified Empire Zone Enterprise certification. Furthermore, the taxpayer’s argument that he should have qualified for the exemption based on the agency relationship he had with the hotel operator was found to be without merit.

For Further Information:

New York Division of Tax Appeals – Administrative Law Judge Unit No. 823344