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The headline, “New York Court of Appeals Reverses Lower Courts in EchoStar Decision,” does scant justice to this litigation odyssey, with its victory through persistence by the little guy in the face of unremitting discouragement, daunting odds-against, an unrelieved succession of obtuse tax authorities, and escalating expenditures with no guarantee of eventual recovery. (That’s some dramatic hyperbole: The “little guy” here is actually DISH Network, a leading satellite television service provider with 14 million customers, 34,000 employees, and sufficient solvency to bankroll, out-of-pocket, the millions its quest for a just outcome demanded. Nevertheless, for tax trackers, this is an inspiring tale of perseverance and what it takes sometimes to “get it right.”)
To summarize this eight-year ordeal: The case arose following a 2005 audit by New York’s Department of Taxation and Finance (“DTF”) (EchoStar Satellite Corporation v. Tax Appeals Tribunal of the State of New York, Case No. 87, New York Court of Appeals, 2012 N.Y. LEXIS 3669). The accountants concluded that EchoStar (d/b/a “DISH Network Corporation” or simply “DISH”) had not paid the appropriate sales tax on its purchases of communications hardware subsequently provided to customers and installed at their premises to capture EchoStar’s video signals.
The equipment (mostly receivers and switches), purchased between March 2000 and February 2004, was costly; DTF calculated that EchoStar owed over $1.8 million in use tax on the TPP. EchoStar considered the purchases “sales for resale” and thus tax-exempt; it intentionally structured the transfers to end-users as leases carrying a modest monthly charge. Importantly, when it billed clients that fee, EchoStar correctly imposed, collected, and remitted to DTF all sales taxes due thereon – about $2 million over the period.
Transaction Tax Resources published a cogent summary of the dispute to this point:
"DTF disagreed with EchoStar’s approach. DTF took the position that providing the equipment to the customers was incidental to providing satellite television service. New York taxes only sales of services that are specifically designated as taxable, and providing satellite television is not designated as a taxable service. Therefore, DTF reasoned that the service, along with any incidental equipment provided with the service, is not taxable. Because DTF determined that the equipment was incidental to a non-taxable service, DTF concluded that EchoStar was not “selling” the equipment and should not collect sales tax on the equipment fee. Instead, DTF determined that EchoStar should have paid sales tax when it purchased the equipment."
The audit’s “Notice of Determination” demanded payment of $1.8 million in tax due. EchoStar requested that the $2 million it had already remitted concerning the goods be credited toward the arrearage. The agency summarily refused. For EchoStar even to contest DTF’s charges, it had to pay them up front and in full – over $2.4 million now, with interest – which it obediently did, while requesting a hearing before an Administrative Law Judge.
The ALJ subsequently agreed with DTF, corroborating its analysis and affording no taxpayer relief. EchoStar appealed the ALJ’s verdict to New York’s Tax Appeals Tribunal, as it was entitled to do. Upon deliberation, the Tribunal also found for DTF, upholding the Notice of Determination as issued. In the ultimate court’s words, “Although EchoStar charged its customers an equipment fee, the Tribunal did not consider this arrangement the equivalent of a ‘lease,’ and it viewed the equipment as ‘purely incidental’ to EchoStar’s primary business of selling satellite television programming.”
EchoStar then initiated an “Article 78 Proceeding” challenging governmental action, and the controversy migrated to the Supreme Court’s Appellate Division. An ensuing judicial evaluation reported, “The Appellate Division confirmed the Tribunal’s determination . . . similarly holding that ‘the equipment was provided as a part of petitioner’s services, and the additional charge in its monthly bills was merely an “add-on” for the use of the equipment, not a true rental.’”
Despite both parties’ agreeing: (1) that, in New York, “sale” and “resale” are equivalent terms; (2) “that the term ‘sale’ includes ‘any transfer of title or possession or both, rental, lease or license to use or consume . . . in any manner or by any means whatsoever for a consideration, or any agreement therefor”; and (3) that “a purchaser who acquires an item for the purpose of sale or rental . . . purchases it for resale within the meaning of the statute,” DTF nevertheless “maintain[ed] that the ... arrangement – the furnishing of equipment for a monthly fee – did not qualify as a ‘lease’ and, consequently, was not a resale under the Tax Law.”
New York’s highest judicial body, the Court of Appeals (here, quite literally, the court of last resort), granted EchoStar permission to appeal the Appellate Division’s ruling. There – at the last possible moment – a measure of common sense finally emerged. Here’s how the Court of Appeals incisively analyzed the dispute in its Opinion; the controlling precedent is Matter of Galileo International Partnership v. Tax Appeals Tribunal of the Department of Taxation and Finance of the State of New York (“Galileo”) (citation omitted):
Nearly all of the factors considered in Galileo to denote a lease are present here. Competent evidence adduced at the administrative hearing indicates that EchoStar’s customer agreements were structured as leases, distinguishing the service component from the provision of equipment; the equipment rental fees were directly proportional to the number of receivers provided; and the equipment charges were separately delineated on monthly invoices. The record demonstrates that EchoStar plainly satisfied its burden of proving that, as in Galileo, “the transfer of equipment was a lease and that such was a significant part of the transaction, not merely a trivial element of a contract for services.” Hence, we conclude that EchoStar purchased the equipment for “resale” consistent with the definition of the tax exemption afforded by Tax Law § 1101(b)(4)(i)(A).
Finally, it cannot be overlooked that the result sought by the Department – the State’s retention of the $2 million in sales tax that EchoStar collected from its customers when it leased the equipment, in addition to the levy of $1.8 million in use taxes on EchoStar’s equipment purchases from the manufacturers – would amount to an unwarranted windfall to the State (citations omitted). As such, the determination of the Tax Appeals Tribunal must be annulled, and EchoStar is entitled to a refund of the $1.8 million payment plus interest. Accordingly, the judgment should be reversed, with costs.
So, after enduring FIVE adverse (and erroneous!) decisions, from: (1) the auditors, (2) the New York State DTF, (3) the Administrative Law Judge, (4) the Tax Appeals Tribunal, and (5) the Supreme Court’s Appellate Division – none of whom recognized a lease when they saw it – EchoStar ultimately secured the correct outcome it had deserved all along. PERSEVERO!
Have a tale of justice delayed? Denied? Achieved? Please share!
Other recent “Telecom Taxation” posts by Marc Palmer Kram:
- DirecTV Seeks "Unfair Tax Treatment" Verdicts - and Is Disappointed
- GPSPS Penalized $9 Million For Cramming, Slamming … & Chutzpah!
- Kentucky’s Telecommunications Tax: Hanging in Limbo
- D.C. TV Station Is Not “High-Tech Company,” So No Tax Break
- Florida: America's Foremost Purveyor of Tax Nonsense?