Opinion
Argued October 8, 1996
Decided November 14, 1996
Dennis C. Vacco, Attorney-General, Albany (Andrew D. Bing and Peter H. Schiff of counsel), for appellant-respondent.
Schulz Associates, L.L.C., Melville (Thomas P. Schulz of counsel), for respondents-appellants.
CROSS APPEALS, on constitutional grounds, from an order of the Appellate Division of the Supreme Court in the Third Judicial Department, entered January 4, 1996, which modified, on the law, and, as modified, affirmed a judgment of the Supreme Court (James B. Canfield, J.), entered in Albany County in a proceeding pursuant to CPLR article 78, granting the petition to the extent of canceling notices of deficiency issued to petitioners by the State Department of Taxation and Finance and declaring that Tax Law § 301 is facially unconstitutional, and denying petitioners' request for attorneys' fees. The modification consisted of reversing so much of the judgment appealed from as declared Tax Law § 301 unconstitutional, and declaring Tax Law § 301 (a) (1) (ii) unconstitutional.
Petitioners are corporations duly organized and existing under the laws of New York that provide barge and/or towing services within New York Harbor and other ports located along the eastern seaboard of the United States. The vessels operated by petitioners are powered by petroleum fuel purchased from various out-of-State suppliers. In September 1991, the Department of Taxation and Finance conducted an audit of petitioners for the period January 1984 through August 1990, at the conclusion of which the Department issued an assessment in the aggregate amount of $258,313.74, including interest and penalties, pursuant to Tax Law article 13-A, commonly known as the "Tax on Petroleum Businesses". This assessment was based upon a finding that, during the relevant period, petitioners had purchased fuel in New Jersey and thereafter imported and consumed such fuel in New York without paying the requisite "privilege" tax pursuant to Tax Law § 301. Petitioners subsequently requested conciliation conferences and filed timely objections to the notices of deficiency. In November 1992, without having participated in any conciliation conferences, petitioners commenced this CPLR article 78 proceeding seeking cancellation of the notices of deficiency, a declaration that Tax Law § 301 facially discriminates against interstate commerce in violation of the Commerce Clause and 42 U.S.C. § 1983, and counsel fees pursuant to 42 U.S.C. § 1988. Respondent thereafter moved to dismiss the petition contending, inter alia, that petitioners had failed to exhaust their administrative remedies.
Supreme Court denied the motion, finding that petitioners' constitutional challenge fell within an exception to the exhaustion rule and that the petition stated a cause of action. Thereafter, Supreme Court granted petitioners' application to the extent that it canceled the notices of deficiency, declared Tax Law § 301 facially discriminatory against interstate commerce and awarded petitioners costs.
In the Appellate Division, respondent argued that Tax Law § 301 is not facially discriminatory because its "net practical effect" is to impose a tax upon all in-State consumers of petroleum products without regard to the place of purchase; that the tax imposed by Tax Law § 301 (a) (1) (ii) upon the purchasers and consumers of imported petroleum, such as petitioners, is also imposed upon the in-State purchasers and consumers of domestic petroleum because the sellers of domestic petroleum, who pay a use tax, "pass through" such tax to the in-State consumers in the form of higher prices; and that, thus, the tax is applied uniformly and, as such, does not violate the Commerce Clause.
The Appellate Division noted that respondent's entire argument is premised upon the assumption that the use tax paid by the in-State seller of domestic petroleum is equal to the tax imposed upon petitioners and those similarly situated, and such in-State seller will, in every instance, "pass along" the full amount of the use tax it paid to its customers, thereby negating the effect of, or offsetting, the burden imposed upon petitioners and those similarly situated by Tax Law § 301 (a) (1) (ii), and concluded that although the "pass-through" theory has been recognized as a way of shifting tax expenses to in-State consumers by way of increased prices, the fact remains that unless respondent's assumptions are transformed into economic reality, in-State sellers of domestic petroleum remain benefited while petitioners and those similarly situated remain burdened, thereby leading to the conclusion that the tax at issue violates the Commerce Clause; that the "privilege" tax imposed pursuant to Tax Law § 301 (a) (1) (ii) fails the "internal consistency" test, in which a hypothetical situation where other States have passed an identical statute is examined, and results in multiple taxation; that in light of the statute's severability clause, Supreme Court erred in declaring Tax Law § 301, in its entirety, to be unconstitutional; and that, accordingly, Supreme Court's judgment must be modified to the extent of striking only Tax Law § 301 (a) (1) (ii).
Matter of Tug Buster Bouchard Corp. v Wetzler, 217 A.D.2d 192, affirmed.
MEMORANDUM.
The order of the Appellate Division should be affirmed, with costs to petitioners payable by respondent.
Inasmuch as the respondent State explicitly conceded the unconstitutionality of the Petroleum Business Tax regime as applied to petitioners, we affirm the decision of the Appellate Division ( 217 A.D.2d 192) and conclude that we need decide nothing more with respect to this case.
Chief Judge KAYE and Judges SIMONS, TITONE, BELLACOSA, SMITH, LEVINE and CIPARICK concur.
Order affirmed, with costs, in a memorandum.