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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
THE PEOPLE OF THE STATE OF NEW
YORK, by LETITIA JAMES, Attorney
General of the State of New York; Index No. 452106/2019
STATE OF NEW YORK ex rel. RD
LITIGATION ASSOCIATES, LLC, Motion Seq. No. 001
Plaintiff,
Oral Argument Requested
-against-
B&H FOTO & ELECTRONICS CORP.,
Defendant.
PLAINTIFF’S MEMORANDUM OF LAW
IN OPPOSITION TO
DEFENDANT’S MOTION TO DISMISS
LETITIA JAMES
Attorney General of the State of New York
Taxpayer Protection Bureau
28 Liberty Street, 21st Floor
New York, New York 10005
Tel.: (212) 416-6012
Of Counsel:
Thomas Teige Carroll
Scott J. Spiegelman
Bryan P. Kessler
Laura Jereski
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TABLE OF CONTENTS
TABLE OF AUTHORITIES .......................................................................................................... ii
PRELIMINARY STATEMENT ..................................................................................................... 1
THE FACTS ALLEGED IN THE COMPLAINT .......................................................................... 2
ARGUMENT .................................................................................................................................. 7
I. THE COMPLAINT STATES A CLAIM UNDER THE TAX LAW ............................. 7
A. The Instant Rebate Reimbursements B&H Received Are Taxable Receipts .......... 7
B. B&H’s Arguments to The Contrary Are Meritless ............................................... 10
II. THE COMPLAINT STATES A CLAIM UNDER THE N.Y. FALSE CLAIMS ACT ... 14
A. B&H’s Sales Tax Filings Contained False Statements Material to Its
Obligation to Remit Sales Tax to the State ........................................................... 15
B. B&H’s False Statements Were Made Knowingly................................................. 16
III. THE COMPLAINT STATES A CLAIM UNDER EXECUTIVE LAW § 63(12) ...... 20
CONCLUSION ............................................................................................................................. 22
WORD COUNT CERTIFICATION ............................................................................................. 23
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TABLE OF AUTHORITIES
CASES PAGE(S)
Am. Express Co. v. United States,
262 F.3d 1376 (Fed. Cir. 2001) ............................................................................................... 14
Colon v. Rent-A-Center,
276 A.D.2d 58 (1st Dep’t 2000) .............................................................................................. 14
Future Motors, Inc. v. State Tax Comm’n,
1978 WL 25640 (Sup. Ct. Albany County Nov. 27, 1978)....................................................... 8
Galanis v. N.Y.C. Envtl. Control Bd.,
No. 83 CIV 0701 (SWK), 1986 WL 642 (S.D.N.Y. Jan. 2, 1986) ......................................... 14
Ginarte Gallardo Gonzalez & Winograd, LLP v. Schwitzer,
No. 159991/2018, 2019 WL 5696013 (Sup. Ct. N.Y. County Nov. 4, 2019)......................... 17
Hamilton v. Yavapai Cmty. Coll. Dist.,
No. CV-15-08095, 2019 WL 1356599 (D. Ariz. Mar. 26, 2019) ........................................... 17
Kaur v. N.Y. St. Urban Dev. Corp.,
15 N.Y.3d 235 (2010) ............................................................................................................. 14
Leon v. Martinez,
84 N.Y.2d 83 (1994) ................................................................................................................. 2
New York ex rel. Seiden v. Utica First Ins.,
96 A.D.3d 67 (1st Dep’t 2012) ................................................................................................ 16
Oster v. Kirschner,
77 A.D.3d 51 (1st Dep’t 2010) ................................................................................................ 16
People ex rel. Cuomo v. First Am. Corp.,
76 A.D.3d 68 (1st Dep’t 2010) ................................................................................................ 21
People ex rel. Schneiderman v. Sprint Nextel Corp.,
26 N.Y.3d 98 (2015) ........................................................................................................ passim
People ex rel. Schneiderman v. Sprint Nextel Corp.,
41 Misc.3d 511 (Sup. Ct. N.Y. County 2013) ................................................................... 15, 21
Popular Services, Inc.,
DTA Nos. 810667, 810668, 1995 WL 351163
(N.Y. Tax App. Trib., May 11, 1995) ..................................................................................... 13
Prima Asphalt Concrete, Inc. v. N.Y.S. Tax App. Trib.,
162 A.D.3d 1281 (3d Dept. 2018) ............................................................................................. 7
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Thor Power Tool Co. v. Comm’r,
439 U.S. 522 (1979) ................................................................................................................ 14
United States ex rel. Bahnsen v. Bos. Sci. Neuromodulation Corp.,
No. CV 11-1210, 2017 WL 6403864 (D.N.J. Dec. 15, 2017) ................................................ 19
United States ex rel. Farmer v. City of Houston,
523 F.3d 333 (5th Cir. 2008) ................................................................................................... 17
United States ex rel. Mei Ling v. City of Los Angeles,
No. CV 11-974, 2018 WL 3814498 (C.D. Cal. July 25, 2018) .............................................. 19
United States v. Adams,
371 F. Supp. 3d 1195 (N.D. Ga. 2019) ................................................................................... 16
United States v. Bourseau,
531 F.3d 1159 (9th Cir. 2008) ................................................................................................. 17
United States v. Krizek,
111 F.3d 934 (D.C. Cir. 1997) ................................................................................................ 17
Urquilla-Diaz v. Kaplan Univ.,
780 F.3d 1039 (11th Cir. 2015) ............................................................................................... 17
STATE STATUTES
Executive Law § 63(12) .......................................................................................................... 20, 21
State Finance Law § 188(3)(a) ...................................................................................................... 16
State Finance Law § 188(5) .......................................................................................................... 15
State Finance Law § 189(1)(g) ................................................................................................ 15, 16
Tax Law § 1101(b)(3) ..................................................................................................................... 7
Tax Law § 1105(a) .............................................................................................................. 7, 16, 21
Tax Law § 1132(c)(1) ..................................................................................................................... 8
STATE REGULATIONS
N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(1) ..................................................................... 11
N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(2) ....................................................................... 8
N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(3) ..................................................................... 11
N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(d)(2) ..................................................................... 11
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STATE ADMINISTRATIVE GUIDANCE
Publication 838, A Guide to Sales Tax for Automobile Dealers (December 2012) ............ 9, 12, 13
Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies
(August 1998) ...................................................................................................................... 8, 12
TB-ST-140, Coupons and Food Stamps (March 26, 2010) .......................................................... 10
TB-ST-145, Customer Loyalty Cards (September 29, 2011) ................................................... 9, 12
TB-ST-860, Taxable Receipt – How Discounts, Trade-Ins, and Additional Charges
Affect Sales Tax (June 16, 2011 and reissued November 3, 2014) ..................................... 8, 10
TSB-A-98(88)S (December 30, 1998) .......................................................................................... 12
TSB-A-99(10)S (March 1, 1999) .................................................................................................. 13
TSB-M-01(02)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items
Used to Make or Repair Exempt Clothing (February 12, 2001) ............................................... 9
TSB-M-03(4)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used
to Make or Repair Exempt Clothing (July 28, 2003) ................................................................ 9
TSB-M-04(9)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used
to Make or Repair Exempt Clothing (December 15, 2004) ...................................................... 9
TSB-M-11(10)S, Tax Department Policy on Manufacturer’s Discounts Received
Using Store Loyalty Cards (June 29, 2011) .............................................................................. 9
TSB-M-78(13)S, Coupons, Discounts, Premiums (July 17, 1978) ................................................. 9
TSB-M-87(12)S, Exemption From Sales Tax on Purchases of Eligible Food with Food
Stamps (September 18, 1987).................................................................................................... 9
OTHER AUTHORITIES
Answer ID 1683, available at
https://nystax.custhelp.com/app/answers/detail/a_id/1683 ..................................................... 10
2010 N.Y. Sess. Laws Ch. 379 (McKinney) ................................................................................. 16
1 RICHARD D. POMP, STATE & LOCAL TAXATION § 7-57 (9th ed. 2019) ...................................... 14
S. Rep. No. 99-345 (1986) ............................................................................................................ 17
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PRELIMINARY STATEMENT
B&H has known for years that it owes sales tax on the instant rebate reimbursements it
received from manufacturers. But instead of following the law, since 2006 B&H has knowingly
failed to pay more than $7 million in New York sales taxes.
The underlying tax rules that govern this case are simple and clear. Sales tax applies to
“receipts” from the sale of property. The Tax Law defines a “receipt” as “the amount of the sale
price…received in money or otherwise.” The taxable sale price can be reduced by discounts, but
not if those discounts are reimbursed. Thus, if a manufacturer wants to discount its product and
asks a retailer to pass along that discount in return for a reimbursement, then the sale price is not
reduced for sales tax purposes. That is, sales tax applies not only to the discounted price paid by
the customer, but also to the reimbursement paid by the manufacturer, because both payments
form part of the “sale price…received” and are therefore part of the “receipt.”
The arrangement described above is exactly what happened in this case. Consumer
electronics manufacturers reimbursed B&H for discounts that B&H provided to customers
pursuant to the terms of instant rebate promotions created by the manufacturers. Thus, under the
rule described above, these reimbursements were taxable “receipts” because they were part of the
“sale price…received in money or otherwise.”
Indeed, since 2006, B&H has known this rule and its application to the instant rebate
reimbursements it received. As detailed in the Complaint, B&H repeatedly acknowledged its
understanding that New York required B&H to remit sales tax on the instant rebate
reimbursements it received. B&H told various manufacturers that B&H considered the instant
rebate reimbursements it was receiving to be taxable. B&H circulated copies of the relevant tax
regulations, with the applicable provisions highlighted in bright yellow ink. And even after
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learning about the State’s investigation, B&H continued admitting to third-parties that it should
be remitting the sales tax owed on the instant rebate reimbursements it was receiving.
B&H nevertheless chose not to pay that sales tax to maintain a competitive advantage—
B&H thought it would cost too much to explain the sales tax rules to its customers, and feared
that it would lose customers if other retailers were not complying with the law. Having been
caught, B&H now tries to disavow its earlier knowledge of the Tax Law, and argues that when a
manufacturer reimburses a retailer for a discount that was not “required to be passed on to the
customer,” Def. Mem. at 7, that reimbursement is not part of the retailer’s receipts. But this
distinction cannot possibly be derived from the Tax Law, which focuses on what the retailer
received and why, and not on what the retailer was or was not required to do. As B&H has
known for years, its current argument is just wrong.
Because these allegations, set forth in greater detail below and in the Complaint, surpass
the requirements necessary to state claims for violations of the New York False Claims Act, the
Tax Law, and the Executive Law, B&H’s motion to dismiss should be denied.
THE FACTS ALLEGED IN THE COMPLAINT
On a motion to dismiss, the court is required to “accept[] facts as alleged in the complaint
as true, accord[] the plaintiff the benefit of every possible favorable inference, and determine[]
whether the facts as alleged fit within any cognizable legal theory.” People ex rel. Schneiderman
v. Sprint Nextel Corp., 26 N.Y.3d 98, 113 (2015) (“Sprint”) (citing Leon v. Martinez, 84 N.Y.2d
83, 87-88 (1994)). The following facts thus must be taken as true for purposes of this motion:
Since at least 2006, B&H has participated in instant rebate promotions with various
manufacturers of cameras and electronics. Compl. ¶¶ 42-43. Under these instant rebate
promotions—which are intended to convey manufacturer discounts to the customer—
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manufacturers agree to reimburse B&H for certain discounts that B&H offers on the
manufacturers’ products during certain periods of time. Id. ¶¶ 19-24. For example, Sony
described one of its “instant rebate” promotions in 2017 as giving customers “an instant rebate
up to $3,000 for the purchase of a [selection of Sony products]. Sony will reimburse sellers who
provide the instant rebate to end user customers.” Id. ¶ 24. In order to receive reimbursement
from a manufacturer as part of an instant rebate promotion, retailers like B&H are generally
required to submit to the manufacturer invoices that specify, at a minimum, (1) the promotion
period in which the sales were made; (2) the product eligible under the promotion; (3) the
amount of discount given; and (4) the number of units sold. Id. ¶ 25. And regardless of whether
the instant rebate promotion requires the retailer to offer a certain discount amount, retailers
always offer customers the maximum discount amount in order to be able to compete with other
retailers who are doing the same. Id. ¶ 24.
B&H frequently advertises instant rebate promotions, which it calls “Instant Savings,” on
specified products featured on its website next to the original product price. Id. ¶ 42. B&H has
never disclosed to its customers that manufacturers were reimbursing B&H for some or all of the
instant savings discount amount, id. ¶¶ 43, 72, although B&H also knew that New York
regulations specify that a retailer must itself pay the sales tax on reimbursement received in
connection with a manufacturer-funded discount—like the instant rebates here—if it fails to
disclose to the customer that the manufacturer provided the discount. Id. ¶¶ 34, 42, 43, 98-100.
During the period from 2006 through July 2017, manufacturers reimbursed B&H at least $67
million for the “Instant Savings” that B&H offered on their products to B&H’s customers. Id. ¶
43. But at no time has B&H collected or remitted New York sales tax on those instant rebate
reimbursements. Id. ¶¶ 48-51, 53, 101.
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In 2006, when B&H began to participate in instant rebate promotions, B&H was already
a decades-old retailer with roughly $1.3 billion in sales. Id. ¶¶ 42-43, 46, 54. As a seller of
personal property, B&H had received a certificate of authority from the New York Tax
Department to collect sales tax. Id. ¶ 46. B&H had an in-house tax department, headed by a Tax
Director who was responsible for B&H’s compliance with the tax laws. Id. ¶ 56.
Yet from 2006 until 2011, B&H did absolutely nothing to ensure that it was applying the
correct sales tax treatment to the substantial instant rebate reimbursements that B&H was
receiving. Id. ¶¶ 57-58. Although B&H knew that manufacturers’ mail-in rebates do not reduce
the receipts subject to New York sales tax, id. ¶ 60, neither B&H’s Tax Director nor anyone else
at B&H made any inquiry about instant rebates at all: they did not look at the Tax Law; they did
not consult an outside accountant or hire a lawyer; and they did not ask others in the industry. Id.
¶ 57. Even a cursory inquiry in 2006 would have revealed that the instant rebate reimbursements
that B&H was receiving were receipts subject to New York sales tax. Id. Since 2006, the relevant
regulations, multiple pieces of Tax Department guidance issued prior to 2006, and the Tax
Department’s own website have all made clear that discounts on the purchase price of an item
must be included in the taxable receipts to the extent the retailer is reimbursed for the discount
by a third party. Id. ¶¶ 32-38, 58.
Finally, in January 2011, B&H began an inquiry into the issue. Id. ¶ 65. B&H’s Tax
Director was quickly and correctly informed that manufacturer-funded discounts were taxable
receipts in New York, and that “these rules have been around forever.” Id. ¶¶ 66, 67. B&H’s Tax
Director passed this information on to B&H’s CFO, who expressed concern that if B&H
followed the law, it could lose sales to competitors who did not. Id. ¶¶ 69, 70. B&H’s CFO
instructed the Tax Director to ask outside tax counsel, and a communication with B&H’s outside
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tax counsel occurred in March 2011. Id. ¶ 69. B&H’s outside tax counsel did not tell B&H that
New York sales tax was not owed on the instant rebate reimbursements that B&H was receiving.
Id. No later than December 2011, B&H’s CFO—who presumably was aware of whatever legal
advice B&H received, since it had been requested at his direction—discussed calculation of the
tax liability with other B&H executives. Id. ¶ 72. One of those executives understood that sales
tax was owed on the instant rebate reimbursements B&H was receiving, advising: “calculate tax
for the amount supported by the vendor ([instant rebate] of $50 but vendor only gives $40 should
be taxed on the $40 only).” Id. And in January 2012, B&H’s CFO met with B&H’s Owner and
Chief Operating Officer “to decide on tax compliance” because, in the words of B&H’s CFO,
B&H was “currently at risk of undercharging tax on rebates.” Id. ¶¶ 71, 75.
But after that meeting, B&H did not start collecting or remitting sales tax on millions of
dollars of instant rebate reimbursements it was receiving. Id. ¶¶ 74, 75. Instead, starting in early
2012, B&H adopted a plan to dress up manufacturer-reimbursed instant rebates as non-taxable
retailer discounts by asking manufacturers to modify their existing agreements with B&H so that
“B&H may decide, in its sole discretion, whether to convey such rebate or discount to its
customers.” Id. ¶¶ 76-78. B&H knew this change was superficial—in order to compete
effectively, as a matter of practice B&H always conveyed (and always intended to convey) every
manufacturers’ instant rebate promotion to its customers. Id. ¶ 81. And B&H knew this change
was meaningless for New York sales tax purposes. Id. ¶ 83. B&H knew taxability did not depend
on whether instant rebates were “required” to be passed on to its customers: when B&H received
an instant rebate reimbursement from a manufacturer, that reimbursement was part of the taxable
receipt, whether or not B&H had been “required” to offer the discount to the customer. Id.
In any event, B&H’s plan failed: all but one of the manufacturers rejected B&H’s
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proposal. Id. ¶¶ 76, 95. But in the process of attempting to convince manufacturers to alter their
agreements with B&H, B&H repeatedly admitted that it knew what New York law clearly
required. Id. ¶¶ 79, 82, 84, 88, 91. On June 8, 2012, a B&H employee explained to other B&H
employees that the plan was driven by B&H’s knowledge that “B&H has a NYS Sales Tax issue
with products for which a vendor-sponsored rebate or discount is offered since we are required to
collect NYS Sales Tax on the total product price, even when the rebate or discount reduces the
price our customer pays.” Id. ¶ 79. And when a manufacturer asked, “Just so I am clear, if we are
offering [B&H] a $50 instant rebate on a $200 item, is your customer paying tax on it at $200 not
$150?,” B&H’s assistant general counsel answered that the tax was due on the $200 without
subtracting the manufacturers’ instant rebate. Id. ¶ 84. Likewise, on March 12, 2013, B&H
explained to Canon that “promotions which are sponsored by a vendor (e.g. discounts or rebates)
are required to be included in the overall sales price. Even though there is a promotional discount
on the product, the price must reflect the total price, before the discount. We are then required to
collect New York State sales tax on the entire price.” Id. ¶ 91. B&H also sent Canon a copy of
the applicable New York regulation, with the following passage highlighted: “[w]here a store
issues a coupon, entitling a purchaser to a credit on the item purchased, for which it is
reimbursed by a manufacturer or distributor, the tax is due on the full amount of the receipt. The
receipt is composed of the amount paid and the amount of the coupon credit.” Id. ¶ 92.
B&H finally abandoned its effort to disguise instant rebates as non-taxable retailer
discounts in 2013. Id. ¶ 96. But despite its multiple admissions that New York sales tax was
owed on the instant rebate reimbursements it was receiving, id. ¶¶ 79, 82, 84, 88, 91, B&H made
no effort to start collecting or remitting that tax. Id. ¶ 96. Even after the State began investigating
B&H’s conduct, B&H continued to acknowledge, both internally and externally, that it was
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required to remit New York sales tax on the instant rebate reimbursements it was receiving. Id.
¶¶ 98-100. But B&H chose not to pay the tax because, among other reasons, doing so would be a
“customer service nightmare” that would result in “hundreds of people e-mailing and calling in”
and “hundreds of man hours” of customer service to handle. Id. ¶ 98.
B&H is still not following the law. Id. ¶ 101. After consultation between the Tax
Department and the Attorney General, the State filed this civil enforcement action asserting
claims under the Tax Law, the New York False Claims Act, and Executive Law § 63(12). 1
ARGUMENT
I. THE COMPLAINT STATES A CLAIM UNDER THE TAX LAW
A. The Instant Rebate Reimbursements B&H Received Are Taxable Receipts
The instant rebate reimbursements B&H received from manufacturers are receipts subject
to sales tax.
Sales tax is due on “receipts” from the sale of tangible personal property. Tax Law
§ 1105(a). The Tax Law defines “receipt” as “[t]he amount of the sale price of any property ...
valued in money, whether received in money or otherwise ….,” Tax Law §1101(b)(3), and it
does not limit the source of such “receipts” to the purchaser—taxable receipts may come from a
third party as part of the transaction. See Prima Asphalt Concrete, Inc. v. N.Y.S. Tax App. Trib.,
162 A.D.3d 1281, 1283 (3d Dep’t 2018) (“New York law defines sales taxes as transactional and
not necessarily tied to the ultimate price paid by the consumer”), leave to appeal denied, 32
1
See Letter from Tax Commissioner Schmidt to Attorney General James dated October 7, 2019, at 1-2
(stating that the Attorney General, “in coordination with [the Tax Department], has been conducting a
confidential investigation of B&H regarding alleged improper sales tax treatment of manufacturer rebates,”
and authorizing the Attorney General to assert claims under the Tax Law on the State’s behalf). Jereski Aff.
Ex. A.
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N.Y.3d 914 (2019) (citation omitted). All receipts from the sale of tangible personal property are
“subject to tax” until and unless the “contrary is established.” Tax Law § 1132(c)(1).
Manufacturer reimbursements of discounts provided by a retailer are “receipts.” This
principle is long-standing: when a manufacturer pays a reimbursement to a retailer for providing
a discount, that reimbursement is a “receipt” because it is part of the sale price. See Future
Motors, Inc. v. State Tax Comm’n, 1978 WL 25640, at *2 (Sup. Ct. Albany County Nov. 27,
1978) (holding that “the amount of the rebate should not be deducted from the amount of the
sales price in computing the amount of receipts” because “the Legislature has not specifically
authorized the deduction for rebates from the computation of receipt”). The relevant regulations
and decades of Tax Department guidance (some of which are described below) have also
consistently applied the principle that discounts on the purchase price of an item—whether by
coupon, loyalty card, or rebate—do not reduce the taxable receipt to the extent the manufacturer
or other third party reimburses the retailer for the discount.
Tax Department regulations explicitly apply this principle to coupons:
[w]here a store issues a coupon, entitling a purchaser to a credit on the item
purchased, for which it is reimbursed by a manufacturer or distributor, the tax is
due on the full amount of the receipt. The receipt is composed of the amount paid
and the amount of the coupon credit.
20 N.Y.C.R.R. § 526.5(c)(2).
Tax Department guidance has repeatedly applied this principle to other arrangements,
including rebates. For example:
• Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies,
at 16 (issued August 1998) (“Sales tax is due on the entire amount of
the consideration received by a vendor for the item being sold, including
any reimbursement by a third party.”);
• TB-ST-860, Taxable Receipt – How Discounts, Trade-Ins, and
-8-
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Additional Charges Affect Sales Tax, at 3 (originally issued June 16,
2011 and reissued November 3, 2014) (“Manufacturers’ rebates (e.g., a
rebate on the purchase of a car or an appliance) are not deductible from
the amount of the taxable receipt. This is so whether the rebate is
assigned to or paid to the seller at the time of sale, or later paid directly
to the purchaser by the manufacturer. Even though the purchaser’s out-
of-pocket expense is reduced by the amount of the rebate, the price paid
to the seller is not. In effect, the manufacturer is subsidizing the
consumer’s purchase, and the full sales price is subject to sales tax.”)
(emphasis in original);
• TB-ST-145, Customer Loyalty Cards, at 1 (issued September 29, 2011)
(“Manufacturer’s discount means the manufacturer of an item
reimburses the store for selling the item at a discount.…When a
manufacturer’s discount applies, sales tax is due on the full price of the
item, not on the discounted price.”);
• Publication 838, A Guide to Sales Tax for Automobile Dealers, at 10
(issued December 2012) (“The amount subject to tax includes . . . the
amount of a customer rebate or customer incentive, provided or
reimbursed by the manufacturer…”). 2
And the Tax Department’s website has long stated, in response to the question “When an
item is purchased on sale, is sales tax due on the original price or the reduced price of the item?,”
2
Jereski Aff., Exs. B, C, D, and E, respectively. Other guidance applying this principle includes: TSB-M-
78(13)S, Coupons, Discounts, Premiums (issued July 17, 1978); TSB-M-87(12)S, Exemption From Sales
tax on Purchases of Eligible Food with Food Stamps (issued September 18, 1987); TSB-M-01(02)S, Sales
and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing
(issued February 12, 2001); TSB-M-03(4)S, Sales and Use Tax Exemption on Clothing, Footwear, and
Items Used to Make or Repair Exempt Clothing (issued July 28, 2003); TSB-M-04(9)S, Sales and Use Tax
Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (issued December
15, 2004); TSB-M-11(10)S, Tax Department Policy on Manufacturer’s Discounts Received Using Store
Loyalty Cards (issued June 29, 2011) (“If the store is reimbursed for the amount of the discount by the
manufacturer, distributor or other third party, it is a manufacturer’s discount”). See Jereski Aff. Exs. F, G,
H, I, J and K, respectively.
Preview
FILED: NEW YORK COUNTY CLERK 12/01/2022 04:14 PM INDEX NO. 100015/2016 NYSCEF DOC. NO. 300 RECEIVED NYSCEF: 12/01/2022 EXHIBIT 35 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK THE PEOPLE OF THE STATE OF NEW YORK, by LETITIA JAMES, Attorney General of the State of New York; Index No. 452106/2019 STATE OF NEW YORK ex rel. RD LITIGATION ASSOCIATES, LLC, Motion Seq. No. 001 Plaintiff, Oral Argument Requested -against- B&H FOTO & ELECTRONICS CORP., Defendant. PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS LETITIA JAMES Attorney General of the State of New York Taxpayer Protection Bureau 28 Liberty Street, 21st Floor New York, New York 10005 Tel.: (212) 416-6012 Of Counsel: Thomas Teige Carroll Scott J. Spiegelman Bryan P. Kessler Laura Jereski 1 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................................................... ii PRELIMINARY STATEMENT ..................................................................................................... 1 THE FACTS ALLEGED IN THE COMPLAINT .......................................................................... 2 ARGUMENT .................................................................................................................................. 7 I. THE COMPLAINT STATES A CLAIM UNDER THE TAX LAW ............................. 7 A. The Instant Rebate Reimbursements B&H Received Are Taxable Receipts .......... 7 B. B&H’s Arguments to The Contrary Are Meritless ............................................... 10 II. THE COMPLAINT STATES A CLAIM UNDER THE N.Y. FALSE CLAIMS ACT ... 14 A. B&H’s Sales Tax Filings Contained False Statements Material to Its Obligation to Remit Sales Tax to the State ........................................................... 15 B. B&H’s False Statements Were Made Knowingly................................................. 16 III. THE COMPLAINT STATES A CLAIM UNDER EXECUTIVE LAW § 63(12) ...... 20 CONCLUSION ............................................................................................................................. 22 WORD COUNT CERTIFICATION ............................................................................................. 23 -i- 2 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 TABLE OF AUTHORITIES CASES PAGE(S) Am. Express Co. v. United States, 262 F.3d 1376 (Fed. Cir. 2001) ............................................................................................... 14 Colon v. Rent-A-Center, 276 A.D.2d 58 (1st Dep’t 2000) .............................................................................................. 14 Future Motors, Inc. v. State Tax Comm’n, 1978 WL 25640 (Sup. Ct. Albany County Nov. 27, 1978)....................................................... 8 Galanis v. N.Y.C. Envtl. Control Bd., No. 83 CIV 0701 (SWK), 1986 WL 642 (S.D.N.Y. Jan. 2, 1986) ......................................... 14 Ginarte Gallardo Gonzalez & Winograd, LLP v. Schwitzer, No. 159991/2018, 2019 WL 5696013 (Sup. Ct. N.Y. County Nov. 4, 2019)......................... 17 Hamilton v. Yavapai Cmty. Coll. Dist., No. CV-15-08095, 2019 WL 1356599 (D. Ariz. Mar. 26, 2019) ........................................... 17 Kaur v. N.Y. St. Urban Dev. Corp., 15 N.Y.3d 235 (2010) ............................................................................................................. 14 Leon v. Martinez, 84 N.Y.2d 83 (1994) ................................................................................................................. 2 New York ex rel. Seiden v. Utica First Ins., 96 A.D.3d 67 (1st Dep’t 2012) ................................................................................................ 16 Oster v. Kirschner, 77 A.D.3d 51 (1st Dep’t 2010) ................................................................................................ 16 People ex rel. Cuomo v. First Am. Corp., 76 A.D.3d 68 (1st Dep’t 2010) ................................................................................................ 21 People ex rel. Schneiderman v. Sprint Nextel Corp., 26 N.Y.3d 98 (2015) ........................................................................................................ passim People ex rel. Schneiderman v. Sprint Nextel Corp., 41 Misc.3d 511 (Sup. Ct. N.Y. County 2013) ................................................................... 15, 21 Popular Services, Inc., DTA Nos. 810667, 810668, 1995 WL 351163 (N.Y. Tax App. Trib., May 11, 1995) ..................................................................................... 13 Prima Asphalt Concrete, Inc. v. N.Y.S. Tax App. Trib., 162 A.D.3d 1281 (3d Dept. 2018) ............................................................................................. 7 - ii - 3 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 Thor Power Tool Co. v. Comm’r, 439 U.S. 522 (1979) ................................................................................................................ 14 United States ex rel. Bahnsen v. Bos. Sci. Neuromodulation Corp., No. CV 11-1210, 2017 WL 6403864 (D.N.J. Dec. 15, 2017) ................................................ 19 United States ex rel. Farmer v. City of Houston, 523 F.3d 333 (5th Cir. 2008) ................................................................................................... 17 United States ex rel. Mei Ling v. City of Los Angeles, No. CV 11-974, 2018 WL 3814498 (C.D. Cal. July 25, 2018) .............................................. 19 United States v. Adams, 371 F. Supp. 3d 1195 (N.D. Ga. 2019) ................................................................................... 16 United States v. Bourseau, 531 F.3d 1159 (9th Cir. 2008) ................................................................................................. 17 United States v. Krizek, 111 F.3d 934 (D.C. Cir. 1997) ................................................................................................ 17 Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039 (11th Cir. 2015) ............................................................................................... 17 STATE STATUTES Executive Law § 63(12) .......................................................................................................... 20, 21 State Finance Law § 188(3)(a) ...................................................................................................... 16 State Finance Law § 188(5) .......................................................................................................... 15 State Finance Law § 189(1)(g) ................................................................................................ 15, 16 Tax Law § 1101(b)(3) ..................................................................................................................... 7 Tax Law § 1105(a) .............................................................................................................. 7, 16, 21 Tax Law § 1132(c)(1) ..................................................................................................................... 8 STATE REGULATIONS N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(1) ..................................................................... 11 N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(2) ....................................................................... 8 N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(c)(3) ..................................................................... 11 N.Y. Comp. Codes R. & Regs.tit. 20, § 526.5(d)(2) ..................................................................... 11 - iii - 4 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 STATE ADMINISTRATIVE GUIDANCE Publication 838, A Guide to Sales Tax for Automobile Dealers (December 2012) ............ 9, 12, 13 Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies (August 1998) ...................................................................................................................... 8, 12 TB-ST-140, Coupons and Food Stamps (March 26, 2010) .......................................................... 10 TB-ST-145, Customer Loyalty Cards (September 29, 2011) ................................................... 9, 12 TB-ST-860, Taxable Receipt – How Discounts, Trade-Ins, and Additional Charges Affect Sales Tax (June 16, 2011 and reissued November 3, 2014) ..................................... 8, 10 TSB-A-98(88)S (December 30, 1998) .......................................................................................... 12 TSB-A-99(10)S (March 1, 1999) .................................................................................................. 13 TSB-M-01(02)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (February 12, 2001) ............................................... 9 TSB-M-03(4)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (July 28, 2003) ................................................................ 9 TSB-M-04(9)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (December 15, 2004) ...................................................... 9 TSB-M-11(10)S, Tax Department Policy on Manufacturer’s Discounts Received Using Store Loyalty Cards (June 29, 2011) .............................................................................. 9 TSB-M-78(13)S, Coupons, Discounts, Premiums (July 17, 1978) ................................................. 9 TSB-M-87(12)S, Exemption From Sales Tax on Purchases of Eligible Food with Food Stamps (September 18, 1987).................................................................................................... 9 OTHER AUTHORITIES Answer ID 1683, available at https://nystax.custhelp.com/app/answers/detail/a_id/1683 ..................................................... 10 2010 N.Y. Sess. Laws Ch. 379 (McKinney) ................................................................................. 16 1 RICHARD D. POMP, STATE & LOCAL TAXATION § 7-57 (9th ed. 2019) ...................................... 14 S. Rep. No. 99-345 (1986) ............................................................................................................ 17 - iv - 5 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 PRELIMINARY STATEMENT B&H has known for years that it owes sales tax on the instant rebate reimbursements it received from manufacturers. But instead of following the law, since 2006 B&H has knowingly failed to pay more than $7 million in New York sales taxes. The underlying tax rules that govern this case are simple and clear. Sales tax applies to “receipts” from the sale of property. The Tax Law defines a “receipt” as “the amount of the sale price…received in money or otherwise.” The taxable sale price can be reduced by discounts, but not if those discounts are reimbursed. Thus, if a manufacturer wants to discount its product and asks a retailer to pass along that discount in return for a reimbursement, then the sale price is not reduced for sales tax purposes. That is, sales tax applies not only to the discounted price paid by the customer, but also to the reimbursement paid by the manufacturer, because both payments form part of the “sale price…received” and are therefore part of the “receipt.” The arrangement described above is exactly what happened in this case. Consumer electronics manufacturers reimbursed B&H for discounts that B&H provided to customers pursuant to the terms of instant rebate promotions created by the manufacturers. Thus, under the rule described above, these reimbursements were taxable “receipts” because they were part of the “sale price…received in money or otherwise.” Indeed, since 2006, B&H has known this rule and its application to the instant rebate reimbursements it received. As detailed in the Complaint, B&H repeatedly acknowledged its understanding that New York required B&H to remit sales tax on the instant rebate reimbursements it received. B&H told various manufacturers that B&H considered the instant rebate reimbursements it was receiving to be taxable. B&H circulated copies of the relevant tax regulations, with the applicable provisions highlighted in bright yellow ink. And even after 6 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 learning about the State’s investigation, B&H continued admitting to third-parties that it should be remitting the sales tax owed on the instant rebate reimbursements it was receiving. B&H nevertheless chose not to pay that sales tax to maintain a competitive advantage— B&H thought it would cost too much to explain the sales tax rules to its customers, and feared that it would lose customers if other retailers were not complying with the law. Having been caught, B&H now tries to disavow its earlier knowledge of the Tax Law, and argues that when a manufacturer reimburses a retailer for a discount that was not “required to be passed on to the customer,” Def. Mem. at 7, that reimbursement is not part of the retailer’s receipts. But this distinction cannot possibly be derived from the Tax Law, which focuses on what the retailer received and why, and not on what the retailer was or was not required to do. As B&H has known for years, its current argument is just wrong. Because these allegations, set forth in greater detail below and in the Complaint, surpass the requirements necessary to state claims for violations of the New York False Claims Act, the Tax Law, and the Executive Law, B&H’s motion to dismiss should be denied. THE FACTS ALLEGED IN THE COMPLAINT On a motion to dismiss, the court is required to “accept[] facts as alleged in the complaint as true, accord[] the plaintiff the benefit of every possible favorable inference, and determine[] whether the facts as alleged fit within any cognizable legal theory.” People ex rel. Schneiderman v. Sprint Nextel Corp., 26 N.Y.3d 98, 113 (2015) (“Sprint”) (citing Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994)). The following facts thus must be taken as true for purposes of this motion: Since at least 2006, B&H has participated in instant rebate promotions with various manufacturers of cameras and electronics. Compl. ¶¶ 42-43. Under these instant rebate promotions—which are intended to convey manufacturer discounts to the customer— -2- 7 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 manufacturers agree to reimburse B&H for certain discounts that B&H offers on the manufacturers’ products during certain periods of time. Id. ¶¶ 19-24. For example, Sony described one of its “instant rebate” promotions in 2017 as giving customers “an instant rebate up to $3,000 for the purchase of a [selection of Sony products]. Sony will reimburse sellers who provide the instant rebate to end user customers.” Id. ¶ 24. In order to receive reimbursement from a manufacturer as part of an instant rebate promotion, retailers like B&H are generally required to submit to the manufacturer invoices that specify, at a minimum, (1) the promotion period in which the sales were made; (2) the product eligible under the promotion; (3) the amount of discount given; and (4) the number of units sold. Id. ¶ 25. And regardless of whether the instant rebate promotion requires the retailer to offer a certain discount amount, retailers always offer customers the maximum discount amount in order to be able to compete with other retailers who are doing the same. Id. ¶ 24. B&H frequently advertises instant rebate promotions, which it calls “Instant Savings,” on specified products featured on its website next to the original product price. Id. ¶ 42. B&H has never disclosed to its customers that manufacturers were reimbursing B&H for some or all of the instant savings discount amount, id. ¶¶ 43, 72, although B&H also knew that New York regulations specify that a retailer must itself pay the sales tax on reimbursement received in connection with a manufacturer-funded discount—like the instant rebates here—if it fails to disclose to the customer that the manufacturer provided the discount. Id. ¶¶ 34, 42, 43, 98-100. During the period from 2006 through July 2017, manufacturers reimbursed B&H at least $67 million for the “Instant Savings” that B&H offered on their products to B&H’s customers. Id. ¶ 43. But at no time has B&H collected or remitted New York sales tax on those instant rebate reimbursements. Id. ¶¶ 48-51, 53, 101. -3- 8 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 In 2006, when B&H began to participate in instant rebate promotions, B&H was already a decades-old retailer with roughly $1.3 billion in sales. Id. ¶¶ 42-43, 46, 54. As a seller of personal property, B&H had received a certificate of authority from the New York Tax Department to collect sales tax. Id. ¶ 46. B&H had an in-house tax department, headed by a Tax Director who was responsible for B&H’s compliance with the tax laws. Id. ¶ 56. Yet from 2006 until 2011, B&H did absolutely nothing to ensure that it was applying the correct sales tax treatment to the substantial instant rebate reimbursements that B&H was receiving. Id. ¶¶ 57-58. Although B&H knew that manufacturers’ mail-in rebates do not reduce the receipts subject to New York sales tax, id. ¶ 60, neither B&H’s Tax Director nor anyone else at B&H made any inquiry about instant rebates at all: they did not look at the Tax Law; they did not consult an outside accountant or hire a lawyer; and they did not ask others in the industry. Id. ¶ 57. Even a cursory inquiry in 2006 would have revealed that the instant rebate reimbursements that B&H was receiving were receipts subject to New York sales tax. Id. Since 2006, the relevant regulations, multiple pieces of Tax Department guidance issued prior to 2006, and the Tax Department’s own website have all made clear that discounts on the purchase price of an item must be included in the taxable receipts to the extent the retailer is reimbursed for the discount by a third party. Id. ¶¶ 32-38, 58. Finally, in January 2011, B&H began an inquiry into the issue. Id. ¶ 65. B&H’s Tax Director was quickly and correctly informed that manufacturer-funded discounts were taxable receipts in New York, and that “these rules have been around forever.” Id. ¶¶ 66, 67. B&H’s Tax Director passed this information on to B&H’s CFO, who expressed concern that if B&H followed the law, it could lose sales to competitors who did not. Id. ¶¶ 69, 70. B&H’s CFO instructed the Tax Director to ask outside tax counsel, and a communication with B&H’s outside -4- 9 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 tax counsel occurred in March 2011. Id. ¶ 69. B&H’s outside tax counsel did not tell B&H that New York sales tax was not owed on the instant rebate reimbursements that B&H was receiving. Id. No later than December 2011, B&H’s CFO—who presumably was aware of whatever legal advice B&H received, since it had been requested at his direction—discussed calculation of the tax liability with other B&H executives. Id. ¶ 72. One of those executives understood that sales tax was owed on the instant rebate reimbursements B&H was receiving, advising: “calculate tax for the amount supported by the vendor ([instant rebate] of $50 but vendor only gives $40 should be taxed on the $40 only).” Id. And in January 2012, B&H’s CFO met with B&H’s Owner and Chief Operating Officer “to decide on tax compliance” because, in the words of B&H’s CFO, B&H was “currently at risk of undercharging tax on rebates.” Id. ¶¶ 71, 75. But after that meeting, B&H did not start collecting or remitting sales tax on millions of dollars of instant rebate reimbursements it was receiving. Id. ¶¶ 74, 75. Instead, starting in early 2012, B&H adopted a plan to dress up manufacturer-reimbursed instant rebates as non-taxable retailer discounts by asking manufacturers to modify their existing agreements with B&H so that “B&H may decide, in its sole discretion, whether to convey such rebate or discount to its customers.” Id. ¶¶ 76-78. B&H knew this change was superficial—in order to compete effectively, as a matter of practice B&H always conveyed (and always intended to convey) every manufacturers’ instant rebate promotion to its customers. Id. ¶ 81. And B&H knew this change was meaningless for New York sales tax purposes. Id. ¶ 83. B&H knew taxability did not depend on whether instant rebates were “required” to be passed on to its customers: when B&H received an instant rebate reimbursement from a manufacturer, that reimbursement was part of the taxable receipt, whether or not B&H had been “required” to offer the discount to the customer. Id. In any event, B&H’s plan failed: all but one of the manufacturers rejected B&H’s -5- 10 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 proposal. Id. ¶¶ 76, 95. But in the process of attempting to convince manufacturers to alter their agreements with B&H, B&H repeatedly admitted that it knew what New York law clearly required. Id. ¶¶ 79, 82, 84, 88, 91. On June 8, 2012, a B&H employee explained to other B&H employees that the plan was driven by B&H’s knowledge that “B&H has a NYS Sales Tax issue with products for which a vendor-sponsored rebate or discount is offered since we are required to collect NYS Sales Tax on the total product price, even when the rebate or discount reduces the price our customer pays.” Id. ¶ 79. And when a manufacturer asked, “Just so I am clear, if we are offering [B&H] a $50 instant rebate on a $200 item, is your customer paying tax on it at $200 not $150?,” B&H’s assistant general counsel answered that the tax was due on the $200 without subtracting the manufacturers’ instant rebate. Id. ¶ 84. Likewise, on March 12, 2013, B&H explained to Canon that “promotions which are sponsored by a vendor (e.g. discounts or rebates) are required to be included in the overall sales price. Even though there is a promotional discount on the product, the price must reflect the total price, before the discount. We are then required to collect New York State sales tax on the entire price.” Id. ¶ 91. B&H also sent Canon a copy of the applicable New York regulation, with the following passage highlighted: “[w]here a store issues a coupon, entitling a purchaser to a credit on the item purchased, for which it is reimbursed by a manufacturer or distributor, the tax is due on the full amount of the receipt. The receipt is composed of the amount paid and the amount of the coupon credit.” Id. ¶ 92. B&H finally abandoned its effort to disguise instant rebates as non-taxable retailer discounts in 2013. Id. ¶ 96. But despite its multiple admissions that New York sales tax was owed on the instant rebate reimbursements it was receiving, id. ¶¶ 79, 82, 84, 88, 91, B&H made no effort to start collecting or remitting that tax. Id. ¶ 96. Even after the State began investigating B&H’s conduct, B&H continued to acknowledge, both internally and externally, that it was -6- 11 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 required to remit New York sales tax on the instant rebate reimbursements it was receiving. Id. ¶¶ 98-100. But B&H chose not to pay the tax because, among other reasons, doing so would be a “customer service nightmare” that would result in “hundreds of people e-mailing and calling in” and “hundreds of man hours” of customer service to handle. Id. ¶ 98. B&H is still not following the law. Id. ¶ 101. After consultation between the Tax Department and the Attorney General, the State filed this civil enforcement action asserting claims under the Tax Law, the New York False Claims Act, and Executive Law § 63(12). 1 ARGUMENT I. THE COMPLAINT STATES A CLAIM UNDER THE TAX LAW A. The Instant Rebate Reimbursements B&H Received Are Taxable Receipts The instant rebate reimbursements B&H received from manufacturers are receipts subject to sales tax. Sales tax is due on “receipts” from the sale of tangible personal property. Tax Law § 1105(a). The Tax Law defines “receipt” as “[t]he amount of the sale price of any property ... valued in money, whether received in money or otherwise ….,” Tax Law §1101(b)(3), and it does not limit the source of such “receipts” to the purchaser—taxable receipts may come from a third party as part of the transaction. See Prima Asphalt Concrete, Inc. v. N.Y.S. Tax App. Trib., 162 A.D.3d 1281, 1283 (3d Dep’t 2018) (“New York law defines sales taxes as transactional and not necessarily tied to the ultimate price paid by the consumer”), leave to appeal denied, 32 1 See Letter from Tax Commissioner Schmidt to Attorney General James dated October 7, 2019, at 1-2 (stating that the Attorney General, “in coordination with [the Tax Department], has been conducting a confidential investigation of B&H regarding alleged improper sales tax treatment of manufacturer rebates,” and authorizing the Attorney General to assert claims under the Tax Law on the State’s behalf). Jereski Aff. Ex. A. -7- 12 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 N.Y.3d 914 (2019) (citation omitted). All receipts from the sale of tangible personal property are “subject to tax” until and unless the “contrary is established.” Tax Law § 1132(c)(1). Manufacturer reimbursements of discounts provided by a retailer are “receipts.” This principle is long-standing: when a manufacturer pays a reimbursement to a retailer for providing a discount, that reimbursement is a “receipt” because it is part of the sale price. See Future Motors, Inc. v. State Tax Comm’n, 1978 WL 25640, at *2 (Sup. Ct. Albany County Nov. 27, 1978) (holding that “the amount of the rebate should not be deducted from the amount of the sales price in computing the amount of receipts” because “the Legislature has not specifically authorized the deduction for rebates from the computation of receipt”). The relevant regulations and decades of Tax Department guidance (some of which are described below) have also consistently applied the principle that discounts on the purchase price of an item—whether by coupon, loyalty card, or rebate—do not reduce the taxable receipt to the extent the manufacturer or other third party reimburses the retailer for the discount. Tax Department regulations explicitly apply this principle to coupons: [w]here a store issues a coupon, entitling a purchaser to a credit on the item purchased, for which it is reimbursed by a manufacturer or distributor, the tax is due on the full amount of the receipt. The receipt is composed of the amount paid and the amount of the coupon credit. 20 N.Y.C.R.R. § 526.5(c)(2). Tax Department guidance has repeatedly applied this principle to other arrangements, including rebates. For example: • Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies, at 16 (issued August 1998) (“Sales tax is due on the entire amount of the consideration received by a vendor for the item being sold, including any reimbursement by a third party.”); • TB-ST-860, Taxable Receipt – How Discounts, Trade-Ins, and -8- 13 of 28 FILED: NEW FILED: NEW YORK YORK COUNTY COUNTY CLERK CLERK 12/01/2022 01/30/2020 04:14 05:22 PM PM INDEX NO. INDEX NO. 100015/2016 452106/2019 NYSCEF DOC. NYSCEF DOC. NO. NO. 300 17 RECEIVED NYSCEF: RECEIVED NYSCEF: 12/01/2022 01/30/2020 Additional Charges Affect Sales Tax, at 3 (originally issued June 16, 2011 and reissued November 3, 2014) (“Manufacturers’ rebates (e.g., a rebate on the purchase of a car or an appliance) are not deductible from the amount of the taxable receipt. This is so whether the rebate is assigned to or paid to the seller at the time of sale, or later paid directly to the purchaser by the manufacturer. Even though the purchaser’s out- of-pocket expense is reduced by the amount of the rebate, the price paid to the seller is not. In effect, the manufacturer is subsidizing the consumer’s purchase, and the full sales price is subject to sales tax.”) (emphasis in original); • TB-ST-145, Customer Loyalty Cards, at 1 (issued September 29, 2011) (“Manufacturer’s discount means the manufacturer of an item reimburses the store for selling the item at a discount.…When a manufacturer’s discount applies, sales tax is due on the full price of the item, not on the discounted price.”); • Publication 838, A Guide to Sales Tax for Automobile Dealers, at 10 (issued December 2012) (“The amount subject to tax includes . . . the amount of a customer rebate or customer incentive, provided or reimbursed by the manufacturer…”). 2 And the Tax Department’s website has long stated, in response to the question “When an item is purchased on sale, is sales tax due on the original price or the reduced price of the item?,” 2 Jereski Aff., Exs. B, C, D, and E, respectively. Other guidance applying this principle includes: TSB-M- 78(13)S, Coupons, Discounts, Premiums (issued July 17, 1978); TSB-M-87(12)S, Exemption From Sales tax on Purchases of Eligible Food with Food Stamps (issued September 18, 1987); TSB-M-01(02)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (issued February 12, 2001); TSB-M-03(4)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (issued July 28, 2003); TSB-M-04(9)S, Sales and Use Tax Exemption on Clothing, Footwear, and Items Used to Make or Repair Exempt Clothing (issued December 15, 2004); TSB-M-11(10)S, Tax Department Policy on Manufacturer’s Discounts Received Using Store Loyalty Cards (issued June 29, 2011) (“If the store is reimbursed for the amount of the discount by the manufacturer, distributor or other third party, it is a manufacturer’s discount”). See Jereski Aff. Exs. F, G, H, I, J and K, respectively.