Taxpayer Not Entitled to Refund Because It Had Not Repaid Its Customers

Jul 31st, 2014

The New York Division of Tax Appeals ("Division") recently decided that a taxpayer could not get a refund because the taxpayer had not repaid its customers for the tax it had collected from them.

The taxpayer sold internet access services. For several years, it collected sales tax on these services and remitted it to the state. New York does not tax internet access services. As part of the settlement of a class action lawsuit, the taxpayer had agreed to reimburse customers who had paid tax on these services.

New York permits taxpayers to seek refunds of tax paid in error. State law permits the state to issue a refund if the taxpayer shows that it has repaid the tax the taxpayer mistakenly collected from the customer.

The Division determined that the taxpayer had to repay its customers before the state could issue a refund. It was not enough that the taxpayer would be required to repay the amount later. The law clearly stated that a taxpayer had to repay its customers before it could receive a refund. A settlement agreement to pay later was not enough.