| Matter of DaimlerChrysler Co., LLC v Billet |
| 2008 NY Slip Op 04575 [51 AD3d 1284] |
| May 22, 2008 |
| Appellate Division, Third Department |
| In the Matter of DaimlerChrysler Company, LLC, Petitioner, vBarbara G. Billet, as Commissioner of Taxation and Finance, et al.,Respondents. |
—[*1] Andrew M. Cuomo, Attorney General, Albany (Robert M. Goldfarb of counsel), forCommissioner of Taxation and Finance, respondent.
Kane, J. Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law§ 2016) to review a determination of respondent Tax Appeals Tribunal which sustained asales and use tax assessment imposed under Tax Law articles 28 and 29.
Petitioner manufactures motor vehicles which it sells to franchised dealers, who then sell thevehicles to consumers. Under the New Car Lemon Law (hereinafter the Lemon Law), when amotor vehicle manufacturer is unable to remedy substantial defects in a new vehicle, themanufacturer is required to, at the consumer's option, either replace the defective vehicle with acomparable one or refund the full purchase price to the consumer (see General BusinessLaw § 198-a [c] [1]). Petitioner accepted the return of 21 defective motor vehicles fromconsumers and provided comparable replacement vehicles that petitioner purchased fromfranchised dealers. Realizing that sales tax was paid on the purchase of the original vehicles andthe replacement vehicles, petitioner sought a refund of the sales tax it paid on the replacementvehicles. The Department of Taxation and Finance denied the request. An Administrative LawJudge upheld [*2]the denial after a hearing, and respondent TaxAppeals Tribunal affirmed that determination. This proceeding ensued.
The governing statutes and regulations required petitioner to pay sales tax on its purchase ofthe replacement vehicles. A refund of sales tax to a vendor is permitted if a contract is cancelledand the property is returned (see 20 NYCRR 534.6 [a]). Similarly, if merchandise isexchanged, sales tax is only required for the price difference between the new item and thereturned item (see 20 NYCRR 534.6 [b] [2]). These regulations do not apply here, sincepetitioner was not the original vendor. While the property was returned and exchanged for adifferent vehicle, no direct exchange occurred. Instead, petitioner received the defective vehiclesfrom the consumers and purchased replacement vehicles from dealers to provide to theconsumers. That purchase from the dealers constituted a second sale subject to sales tax(see Tax Law § 1105 [a]; compare Matter of Sverdlow v Bates, 283 AppDiv 487, 490 [1954]). Although purchases for resale are excluded from the definition of retailsales (see Tax Law § 1101 [b] [1], [4] [i] [A]; 20 NYCRR 526.6 [c]), and thus notsubject to sales tax, petitioner did not resell the replacement vehicles; petitioner provided them tothe consumers without further payment in fulfillment of its statutory obligation under the LemonLaw (compare Matter of West Val. Nuclear Servs. Co. v Tax Appeals Trib. of State ofN.Y., 264 AD2d 101, 103 [2000], lv denied 95 NY2d 760 [2000]).
Neither the Lemon Law nor the Tax Law entitles petitioner to a sales tax refund. The LemonLaw requires manufacturers to accompany purchase-price refunds to consumers with anapplication and notice for a refund of sales tax from the Department (see GeneralBusiness Law § 198-a [c] [2]), but does not address sales tax refunds when the consumerchooses to have the manufacturer provide a replacement vehicle. Similarly, Tax Law §1139 (f) explicitly states that the Department shall refund sales tax to consumers who receive arefund of the full purchase price of a defective vehicle pursuant to the Lemon Law, but does notprovide for a sales tax refund to manufacturers and does not address the sales tax situation whenthe replacement vehicle option is selected by the consumer. Although the legislative schemeappears to be aimed at avoiding double taxation when a manufacturer fulfills its statutoryobligation under the Lemon Law, the plain language of the Lemon Law and Tax Law onlyprovides for sales tax refunds where consumers choose to receive a refund of the purchase price,not where they choose to receive a comparable replacement vehicle. Even construing the taxstatutes most favorably to petitioner as the taxpayer (see Debevoise & Plimpton v New YorkState Dept. of Taxation & Fin., 80 NY2d 657, 661 [1993]), it is clear that no provision ismade for refunds to manufacturers of sales tax paid on purchases of replacement vehiclesfrom dealers simply because the purchases satisfy the consumers' requests for replacementvehicles under the Lemon Law. Hence, the statutes themselves do not support petitioner's requestfor a sales tax refund.
The Tax Appeals Tribunal correctly concluded that "the Lemon Law does not specify themethod by which the manufacturer is to obtain the replacement vehicle." That is, if the consumerelects a replacement in lieu of a refund, the manufacturer may either purchase a comparablevehicle from a dealer (or another source) and give it to the consumer—as petitioner electedto do here—or may supply a vehicle from its inventory. If the former method is selected, amanufacturer who elects to purchase a replacement vehicle is bound by the taxable consequencesof that retail sale (see Tax Law § 1105; see also Matter of CS Integrated, LLC v Tax Appeals Trib. of State ofN.Y., 19 AD3d 886, 889 [2005]). While manufacturers—unlikedealers—are precluded from selling (or leasing) vehicles directly to consumers(see Vehicle and Traffic Law § 463 [2] [y]), petitioner has not shown that it isprecluded from taking a car from its [*3]inventory and givingit to the consumer as a replacement, which would avoid a taxable consequence associatedwith purchasing the replacement vehicle from a dealer. While manufacturers are only required toprovide a "comparable vehicle" (General Business Law § 198-a [c] [1]), not a new vehicle,as a replacement, and manufacturers such as petitioner may not generally possess used vehicles,the record does not support petitioner's argument that manufacturers are forced topurchase a comparable replacement vehicle to comply with their Lemon Law obligations. TheLemon Law does not dictate the method by which manufacturers must obtain replacementvehicles, nor the tax consequences of such purchases.
Petitioner did not meet its heavy burden of overcoming "beyond a reasonable doubt" the"strong presumption of constitutionality" attaching to the sales tax laws as they relate tocompliance with Lemon Law obligations (Port Jefferson Health Care Facility v Wing, 94NY2d 284, 289 [1999], cert denied 530 US 1276 [2000]; accord Miriam OsbornMem. Home Assn. v Chassin, 100 NY2d 544, 547 [2003]). Petitioner's equal protectionclaim[FN1] is premised on the differential sales tax treatment that may result when manufacturers and dealersreplace vehicles in order to meet their Lemon Law obligations, as follows: (1) when amanufacturer elects to purchase a replacement vehicle from a dealer, it must pay sales tax on thatpurchase, whereas (2) when a dealer elects to provide a used replacement vehicle from itsinventory (and does not need to purchase one), no sales tax is due on the replacement vehiclebecause no "retail sale" occurred (Tax Law § 1105 [a]).[FN2]
First, the argument rests on the faulty premise that manufacturers are required topurchase comparable vehicles from dealers; they are not, as discussed above. The otherunsupported supposition is that dealers will always have comparable vehicles in their inventoryto use as replacement vehicles and will never need to purchase a replacement vehicle and paysales tax on that purchase.
Equal protection review, which is the same under the Federal and State Constitutions (seeUnder 21, Catholic Home Bur. for Dependent Children v City of New York, 65 NY2d 344,360 n 6 [1985]), of differential taxation consequences is "subject to the lowest level of judicial[*4]review, whether any rational basis supports the legislativechoices" (Port Jefferson Health Care Facility v Wing, 94 NY2d at 289). Such review hasbeen described as "a paradigm of judicial restraint" (FCC v Beach Communications, Inc.,508 US 307, 314 [1993]), and "is especially deferential in the context of classifications made bycomplex Tax Laws" (Nordlinger v Hahn, 505 US 1, 11 [1992]; see Trump v Chu,65 NY2d 20, 25 [1985], appeal dismissed 474 US 915 [1985]). The burden is onpetitioner "to negative every conceivable basis which might support it" (Madden vKentucky, 309 US 83, 88 [1940]; see Trump v Chu, 65 NY2d at 25). This petitionerhas not done.
The disparity about which petitioner complains is a function not of an unconstitutional salestax scheme but, rather, of the different circumstances of automobile manufacturers and dealers aswell as the legislative policy choice underlying the Lemon Law to afford different remedies toconsumers of defective new and used vehicles (compare General Business Law §198-a [c] [1] [manufacturer, at consumer's option, must either refund purchase price or replacemotor vehicle], with General Business Law § 198-b [c] [1] [dealer required torefund purchase price to consumer but may elect to provide comparable vehicle subject toconsumer's approval]). "The Equal Protection Clause does not forbid classifications. It simplykeeps governmental decisionmakers from treating differently persons who are in all relevantrespects alike" (Nordlinger v Hahn, 505 US at 10 [citation omitted and emphasisadded]). In several key and obvious respects, manufacturers and dealers are not "alike" orsimilarly situated: dealers sell directly to consumers and ordinarily have inventory of used andnew vehicles and provide warranties on used vehicles, whereas manufacturers largely havemostly newer model vehicles and do not directly sell to consumers, although they provide thewarranties on new vehicles. Recognizing these and other differences, parallel but not identicalLemon Law rights and responsibilities were enacted for consumers of new vehicles, who seekredress from manufacturers, and consumers of used vehicles, whose remedy is with the dealerwho sold the car to them. Petitioner has failed to demonstrate any constitutional shortcoming inthe Lemon Law scheme and its distinctions.
There is similarly no constitutional infirmity with regard to petitioner's claims of an equalprotection violation from the disparate tax consequences that may result as between amanufacturer's compliance with the Lemon Law in replacing a new vehicle and a dealer'sprovision of a comparable used vehicle. A manufacturer who takes a new (or newer) vehiclefrom its inventory to use as a replacement vehicle is treated the same as a dealer who takes acomparable used vehicle from its inventory to use as a replacementvehicle—neither makes a retail sale subject to sales tax. If either a manufacturer ordealer purchases a vehicle in order to provide a replacement vehicle to a consumer, bothare acting in a taxable manner and must pay sales tax.[FN3] Thus, when dealers and manufacturers are similarly situated, they are taxed in the same manner.Neither the fact that manufacturers often opt (or need) to purchase a comparable replacementvehicle from dealers for practical or financial reasons, whereas dealers often have a supply ofcomparable used vehicles on hand to use as replacement vehicles, nor the fact that [*5]dealers are never required to provide replacement vehicles underthe used car Lemon Law (see General Business Law § 198-b) results in an equalprotection violation just because manufacturers must pay sales tax on their purchases. The EqualProtection Clause "imposes no iron rule of equality, prohibiting the flexibility and variety that areappropriate to reasonable schemes of state taxation" (Allied Stores of Ohio, Inc. vBowers, 358 US 522, 526 [1959]; accord Port Jefferson Health Care Facility v Wing,94 NY2d at 290).
Thus, the different tax consequences resulting from manufacturers' and dealers' compliancewith Lemon Law obligations are neither "palpably arbitrary" nor a product of "invidiousdiscrimination" (Trump v Chu, 65 NY2d at 25 [internal quotation marks and citationsomitted]) and have a rational basis (see Nordlinger v Hahn, 505 US at 11). Contrary topetitioner's contentions, as all purchases of replacement vehicles are subject to sales tax,similarly situated taxpayers are treated uniformly and no equal protection violation has beenshown (see id. at 10-16; Port Jefferson Health Care Facility v Wing, 94 NY2d at289-292; Tilles Inv. Co. v Gulotta, 288 AD2d 303, 305 [2001], appeal dismissed97 NY2d 725 [2002], lv denied 98 NY2d 605 [2002]). Any argument that manufacturers'usual manner of complying with their Lemon Law obligations to replace vehicles by purchasingthem from dealers should be exempt from sales tax can only be rectified by the Legislature andnot by judicial intervention.
Cardona, P.J., Spain, Carpinello and Malone Jr., JJ., concur. Adjudged that the proceeding ispartially converted to an action for declaratory judgment, without costs, it is declared thatGeneral Business Law § 198-a and Tax Law § 1105 (a) have not been shown to beunconstitutional as applied to petitioner, remainder of petition dismissed and determinationconfirmed.
Footnote 1: A challenge to theconstitutionality of legislation may not be brought under CPLR article 78, and the matter shouldbe converted to a combined article 78 proceeding and action for declaratory judgment (see Walton v New York State Dept. ofCorrectional Servs., 8 NY3d 186, 194 [2007]; Matter of Seymour v Nichols, 21 AD3d 1234, 1235 [2005];Matter of Capital Fin. Corp. v Commissioner of Taxation & Fin., 218 AD2d 230, 232[1996], appeal dismissed 88 NY2d 874 [1996], lv denied 88 NY2d 811 [1996];see also CPLR 103 [c]).
Footnote 2: The dealer's acquisition of itsinventory of cars would not have been subject to sales tax, as purchases for resale are exemptfrom sales tax (see Tax Law § 1101 [b] [1], [4] [i] [A]).
Footnote 3: The automobile dealers are notrepresented in this matter and no support is offered by petitioner for its claim that dealers whopurchase used replacement vehicles from others are not subject to sales tax on thosepurchases as retail sales.