Utility tax settlement for unmetered services announced.

The Department of Finance has issued a Statement of Audit Procedures (SAP) for the audit of landlords who provide unmetered electricity and chilled water to their tenants.

The purpose of the SAP is to provide a simple, fair and economical way for landlords and the city to resolve outstanding tax liabilities for providing these services to tenants before 1998. The SAP explains the basis for the utility tax liability and the method (an accelerated audit procedure - AAP) of resolving this matter. The time period in which to request an AAP is limited.

The Real Estate Board of New York (RERNY) and Roberts & Holland LLP negotiated the basic agreement with the Department, following REBNY' ssuccessful effort in 1998 to change the law to exclude the sale of unmetered electricity, including HVAC and chilled water to tenants, provided the supplier has paid the utility tax on the sale to the landlord.

"We strongly recommend landlords who provide these services to their tenants to review their records and take advantage of the AAP, if they have any outstanding utility tax liability for any year prior to 1998, whether or not they have been subject to audit by the Department," said REBNY President Steven Spinola. "The Department has advised us that they have identified approximately 100 taxpayers that they strongly believe have outstanding tax liabilities for unmetered electricity and chilled water. During the negotiation of this agreement, the Department suspended all utility tax audit activity, including audits in the settlement phase and the notification of landlords who they planned to audit. Regular utility tax audits, however, will resume at the end of the AAP period."

The AAP is available to all landlords that have a utility tax liability for unmetered electric. The AAP is imprecise about the resolution of the sale of chilled water. Until the pending litigation on chilled water is decided, REBNY understands that based on current accelerated audit closing agreements the Department is negotiating with landlords, 25 percent of a landlord's 1997 tax liability for the sale of chilled water will be accepted to settle this issue. There will be no utility tax on charges for HVAC.

At the end of the AAP period, the Department plans to audit aggressively any remaining landlords who they believe have an outstanding utility tax liability.

Finally, the State has expressed a willingness to provide a similar settlement for gross receipts tax liability which includes utility services, except that the state will not require any tax payment with respect to chilled water. Though the State has not audited as aggressively as the City, there is still a potential tax liability. REBNY expects a formal agreement with the State by the end of the year.

REBNY members may contact Michael Slattery at [phone], or Jonathan Robin, Department of Finance, at [phone] with any questions about this opportunity to resolve unmetered electricity and chilled water tax liability.

Background

Section 11-1102 of the New York City Administrative Code imposes a Utility Tax on every "Vendor of Utility Services" (Vendor) in the City. The tax is imposed on the "Gross Operating Income" of the Vendor. "Utility Services" include, in pertinent part, the furnishing or sale of gas, electricity, steam, water, refrigeration or the furnishing or sale of gas, electricity, steam, water, refrigeration or telecommunications services. A landlord furnishing or selling such items or services to tenants is within the definition of a Vendor of Utility Services.

The Utility Tax was amended in 1998 to simplify Utility Tax compliance for a landlord selling or furnishing Utility Services. The amendment was effective for periods beginning on and after January 1, 1998. Under this change, the Gross Operating Income of a landlord derived from furnishing or selling gas, electricity, steam, water or refrigeration to tenants or selling or rendering gas, electricity, steam, water or refrigeration services to tenants as an incident to the landlord's activity of renting premises to tenants is excluded from the tax base. In the case of gas, electricity or steam, the Gross Operating income is excludable only if the Utility Tax was paid for such Utility Services on a prior sale.

For periods prior to the effective date of the amendment, landlords must include receipts from such services or sales in the tax base. In computing Gross Operating Income for periods beginning prior to January 1, 1998, electricity furnished by a landlord on a rent inclusion basis is computed using the methodology sanctioned in Sage Really Corp. v. O'Cleireacain (1996). Under this precedent, a landlord is able to deduct its cost for redistributed electricity, upon which the landlord's supplier has already paid a Utility Tax. The deductible costs include the full amount for redistributed electricity attributable to the demised premises of the tenants, as well as the common areas.

While the Sage case was being litigated, a number of pending matters were, with the agreement of affected taxpayers, placed in "on hold" status. In addition, although a number of landlords were identified as Utility Tax non-filers, they were not contacted concerning possible Utility Tax liability while the issues associated with redistribution of electricity to tenants were being resolved. With the Sage case and the revision of the Utility Tax now concluded, liability for periods prior to January 1, 1998 can be addressed.

Accelerated Audit Procedure

As an alternative to existing audit procedures, landlords with Outstanding Liabilities will be given the option of requesting an Accelerated Audit. The landlord requests the Accelerated Audit by consenting to an accelerated audit. Taxpayers under audit as of the effective date of this SAP will be contacted by the auditor to explain the options described in this SAP. For audits initiated after the effective date, the appointment letter initiating the audit will include information describing the Accelerated Audit.

The scope of an Accelerated Audit will be limited. Only the tax periods included within the period January 1, 1997 through December 31, 1997 (Audit Period) will be subject to a detailed audit.

Under the AAP, taxpayers that have not filed returns and taxpayers that have filed but have not correctly computed the tax will be required to compute the correct tax liability under a self-audit procedure. The auditor will prepare a self-assessment audit plan for the taxpayer to follow. The audit plan may include a sample worksheet to guide the taxpayer in the computation of its correct Utility Tax liability, as well as an information document request outlining any additional information that the taxpayer is expected to supply. The taxpayer will be given a fixed period of time within which to complete the audit.

Once the auditor receives the completed self-audit, the auditor will review it for accuracy and completeness and submit the audit for review by his or her supervisor. Any issues concerning the audit should be resolved through correspondence or field visits. If the self-assessment audit is not completed within the time limits due to the taxpayer's failure to fulfill its responsibilities under the audit plan, the taxpayer will no longer be eligible for this expedited process.

The Accelerated Audit is concluded by an Accelerated Audit Closing Agreement (AACA), under which the taxpayer agrees to a final liability for the Audit Period (Proposed Final Liability) and the Department agrees to accept the Proposed Final Liability as final payment for all Outstanding Liabilities. If the taxpayer does not agree with the terms of the AACA, the Accelerated Audit will be discontinued and the auditor will audit all open periods other than the Audit Period and conclude the audit as a traditional audit.

Sale of Chilled Water

The AAP may also be used to resolve any tax liability arising from the sale of chilled water by a landlord to a tenant. Such resolution shall be on terms appropriate to the facts and circumstances.