                          State of New York
                   Supreme Court, Appellate Division
                      Third Judicial Department
Decided and Entered: February 25, 2016                   519472
________________________________

In the Matter of LEV WOLKOWICKI
   et al.,
                    Petitioners,
      v                                     MEMORANDUM AND JUDGMENT

NEW YORK STATE TAX APPEALS
   TRIBUNAL et al.,
                    Respondents.
________________________________


Calendar Date:   January 8, 2016

Before:   Peters, P.J., Garry, Egan Jr., Devine and Clark, JJ.

                             __________


      Law Office of Barry Leibowicz, Great Neck (Scott Ahroni of
counsel), for petitioners.

      Eric T. Schneiderman, Attorney General, Albany (Robert M.
Goldfarb of counsel), for Commissioner of Taxation and Finance,
respondent.

                             __________


Egan Jr., J.

      Proceeding pursuant to CPLR article 78 (initiated in this
Court pursuant to Tax Law § 2016) to review a determination of
respondent Tax Appeals Tribunal sustaining sales and use tax
assessments imposed under Tax Law articles 28 and 29.

      At all times relevant, petitioner Winners Garage, Inc. was
a taxicab agent licensed by the New York City Taxi and Limousine
Commission (hereinafter TLC) that operated a fleet of New York
City medallion taxicabs. Petitioner Ruth Wolkowicki was the
president and 100% shareholder of Winners Garage, and petitioner
Lev Wolkowicki was its vice-president. Winners Garage owned or
                               -2-                519472

managed the taxicabs and leased the medallions from their
respective owners; in turn, Winners Garage leased the taxicabs
and re-leased the medallions, attached to the taxicabs, to
individual drivers. The taxicab leases were subject to state
sales tax, while the medallion leases were not.

      By letter dated February 5, 2004, the Audit Division of
respondent Department of Taxation and Finance notified Winners
Garage that its sales and use tax records – encompassing the
period from March 1, 2001 through November 30, 2003 – had been
scheduled for a field audit beginning on March 1, 2004.1 This
letter expressly provided that "[a]ll books and records
pertaining to the sales and use tax liability, for the audit
period, must be available on the appointment date." Attached
thereto was a list of requested records, which included the
corporation's sales tax returns, federal income tax returns,
state corporate tax returns, general ledger, general journal,
sales invoices, fixed asset purchase/sales invoices, expense
purchases and bank statements. At the bottom of the list of
requested records, in bold type, was the following notation: "Any
of the above items may be submitted in electronic format, if
available, and this may facilitate the audit process."

      The audit subsequently was reassigned to auditor David
Perl, who, by letter dated February 26, 2004, confirmed the
rescheduled audit appointment for March 16, 2004. This letter
reiterated that "[a]ll books and records pertaining to the sales
and use tax liability, for the audit period, must be available on
the appointment date" and, attached thereto, was a list of
requested records. Notably, the list of requested records
attached to this letter expressly requested copies of leases for
the entire audit period, as well as computer generated files –
for the entire audit period – that were identical to the books
and records maintained by the corporation. At the request of
Winners Garage, the audit was postponed until May 3, 2004. Perl
confirmed the rescheduling of the audit in a letter dated March
2, 2004, at which time Winners Garage was advised that, in


     1
        The audit period subsequently was amended to include
sales and use tax records through February 29, 2004.
                               -3-                519472

addition to the previously requested documents, it would be
required to produce materials relative to its sales and use tax
liability for the amended audit period. Again, a list of
requested records was attached to this letter.

      When the audit began on May 3, 2004, Winners Garage made
certain books and records available to Perl and his supervisor,
including sales tax worksheets, federal income tax returns for
2001 and 2002, bank statements for a portion of the audit period,
a printout of the corporation's computerized general ledger's
revenue accounts for December 5, 2003 through January 7, 2004,
the daybook for that same period and the medallion leases for
December 1, 2003 through February 29, 2004. In his follow-up
letter dated May 4, 2004, Perl suggested that a test period of
December 1, 2003 through February 29, 2004 be used for reviewing
the corporation's expense invoices and scheduled a second audit
appointment for June 3, 2004. Perl further advised Winners
Garage that certain requested materials still were required for
the audit, including, among other things, bank statements and
lease contracts for the drivers.2

      The scheduled audit was postponed – again at the request of
Winners Garage – until July 7, 2004, at which time some, but not
all, of the records set forth in the May 2004 letter were
produced and reviewed. With respect to the drivers' leases, Perl
testified that the records maintained by Winners Garage indicated
that 75 cars were leased during the test period of December 1,
2003 through February 29, 2004; of those 75 lease contracts, only
18 of these agreements were provided for Perl's review. When
questioned on this point, Perl indicated that he was advised by a
representative of Winners Garage that it "would take . . . too
much time" to produce all 75 leases and "just to do 18." As to
the sufficiency of the 18 lease contracts provided, Perl
testified that he "did not see a single contract that could be
considered . . . an adequate contract" for purposes of the




     2
        Perl also suggested a test period of December 1, 2003
through February 29, 2004 for review of the drivers' leases.
                              -4-                519472

underlying audit.3

      By letter dated November 17, 2004, Perl scheduled a third
field audit appointment for December 21, 2004. In this letter,
Perl again advised Winners Garage of the outstanding records
needed for the sales tax audit, including certain bank statements
and, more to the point, the lease contracts for the drivers. In
this regard, the letter indicated, "To date, [Winners Garage has]
provided approximately one fifth of [the] lease contracts for the
suggested test period of [December 1, 2003 through February 29,
2004]. We must review all contracts for the test period (if not
for the audit period as a whole)." Neither the subject bank
statements nor the requested lease agreements were produced at
the scheduled audit appointment, as a result of which Perl was
unable to determine, among other things, whether the lease
agreements between Winners Garage and the drivers were long-term
leases (see Tax Law § 1111 [i] [A]) for purposes of the special
tax on passenger car rentals imposed under Tax Law § 1160 (a)
(1).

      Perl ultimately concluded that the records provided by
Winners Garage were inadequate to conduct a complete audit; as a
result, Perl resorted to external sources to conduct an estimated
audit to determine whether the correct amount of sales taxes owed
by Winners Garage for the audit period had in fact been paid. In
early 2005, the Department issued a notice of determination to
Winners Garage reflecting additional sales and use taxes due in
the amount of $299,865.48, together with interest and penalties.


     3
        Perl elaborated as to the inadequacy of the lease
agreements, stating, "There were names missing, signatures
missing. There was never a single instance when a contract
[indicated when it] was supposed to begin and when it was
supposed to end. Most of them did not show dollar amounts[,]
never mind how much was to be taxable, how much was to be
nontaxable. No information at all. There was no information.
Most of them didn't say the owner of the medallion, just put the
medallion number on it without saying who was actually the owner
of the medallion. So there was no way to trace that information.
Most [leases] did not have signatures."
                              -5-                519472

The Department also issued notices of determination to Lev
Wolkowicki and Ruth Wolkowicki, as officers or responsible
persons of Winners Garage, for additional sales and use taxes due
in the amount of $217,491.23, together with interest and
penalties.

      Petitioners contested the notices of determination, and a
consolidated hearing was held on various dates between July 1,
2008 and December 3, 2009. During the course of the hearing,
petitioners submitted, among other things, copies of 140
purported lease agreements between Winners Garage and their
drivers, together with affidavits from 47 drivers who allegedly
leased "taxicab vehicles from medallion owners or vehicle owners
managed by Winners [Garage]." In August 2011, an Administrative
Law Judge (hereinafter ALJ) issued a written decision sustaining
the notices of determination. Specifically, the ALJ found, among
other things, that the Division made "clear and unequivocal
written requests for books and records of Winners Garage's
sales," in response to which Winners Garage "did not make
available sales books and invoices, all contracts with drivers,
complete bank statements or other source documentation from which
the auditor could verify Winners Garage's taxable sales as
reported on the sales and use tax returns." For this reason, the
ALJ found, "[t]he Division reasonably concluded that the books
and records provided for the audit period were incomplete and
inadequate to . . . conduct a complete audit from which the exact
amount of tax due could be determined" and, hence, "it was proper
for the Division to resort to the use of external indices" to
compute the tax due. As to the actual methodology employed, the
ALJ concluded that petitioners failed to establish – by clear and
convincing evidence – that the audit method was unreasonable or
that the amount of tax assessed was incorrect. Finally, the ALJ
upheld the 5% special tax on passenger car rentals imposed by Tax
Law § 1160 (a) (1),4 finding that petitioners failed to document
that the underlying leases with the drivers were for a term of


    4
        Effective June 1, 2009, Tax Law § 1160 (a) (1) increased
the tax imposed on passenger car rentals from 5% to 6% as applied
to transactions on or after that date (see L 2009, ch 57, part
R-1, §§ 1, 2, 3).
                              -6-                519472

one year or more (see Tax Law § 1111 [i] [A]). Following oral
argument in October 2013, respondent Tax Appeals Tribunal
affirmed the ALJ's decision in April 2014, prompting petitioners
to commence this CPLR article 78 proceeding to challenge the
Tribunal's determination.

      With certain limited exceptions not applicable here, Tax
Law § 1105 (a) imposes sales tax upon "[t]he receipts from every
retail sale of tangible personal property." A retail sale is
defined, in relevant part, as the "sale of tangible personal
property to any person for any purpose" (Tax Law § 1101 [b] [4]
[i]) and encompasses "any transaction, including a lease, in
which there is a transfer of title or possession or both of
tangible personal property for consideration" (Matter of Moerdler
v Tax Appeals Trib. of State of N.Y., 298 AD2d 778, 779 [2002];
see Tax Law § 1101 [b] [5]; Matter of Statharos v Tax Appeals
Trib. of State of N.Y., 306 AD2d 650, 651 [2003]). As applied to
the matter before us, the agreements whereby Winners Garage
leased taxicabs to drivers constituted taxable retail sales (see
Matter of Statharos v Tax Appeals Trib. of State of N.Y., 306
AD2d at 651), whereas the leases of the medallions, representing
an intangible right to operate a taxicab in New York City, were
not.

      Consistent with the provisions of Tax Law § 1135, "[e]very
person required to collect tax shall keep records of every sale
. . . and of all amounts paid, charged or due thereon and of the
tax payable thereon" (Tax Law § 1135 [a] [1]) and, further, must
make such records "available for inspection and examination at
any time upon demand" (Tax Law § 1135 [g]; see Matter of
Rodriguez v Tax Appeals Trib. of the State of N.Y., 82 AD3d 1302,
1304 [2011], lv denied 17 NY3d 702 [2011]; 20 NYCRR 533.2). Upon
an audit of a taxpayer's transactions, the Division is required
to request appropriate records and undertake "a sufficient
investigation" thereof in order to determine whether such
materials are capable of supporting a complete audit (Matter of
King Crab Rest. v Chu, 134 AD2d 51, 53 [1987]). Should the
records produced by the taxpayer prove to be insufficient "to
verify taxable sales receipts and conduct a complete audit"
(Matter of Giordano v State Tax Commn., 145 AD2d 726, 727
[1988]), the Division may rely upon "external indicies" to
                              -7-                519472

estimate the correct amount of tax due (Tax Law § 1138 [a] [1];
accord Matter of MacLeod v Megna, 75 AD3d 928, 930 [2010]; Matter
of Del's Mini Deli v Commissioner of Taxation & Fin., 205 AD2d
989, 991 [1994]). Where, as here, an indirect audit method has
been employed, "the taxpayer challenging such an audit has the
burden of establishing by clear and convincing evidence that the
audit method or tax assessment was erroneous" (Matter of Hwang v
Tax Appeals Trib. of the State of N.Y., 105 AD3d 1151, 1153
[2013] [internal quotation marks, brackets and citation omitted];
see Matter of Roebling Liqs. v Commissioner of Taxation & Fin.,
284 AD2d 669, 672 [2001], appeal dismissed 97 NY2d 637 [2001],
cert denied 537 US 816 [2002]; Matter of Del's Mini Deli v
Commissioner of Taxation & Fin., 205 AD2d at 991).

      Petitioners initially contend that the Division failed to
adequately request and review the books and records kept by
Winners Garage – specifically, any electronic records so
maintained – and, therefore, improperly resorted to the use of an
indirect audit method to ascertain the sales and use tax due. We
disagree. Without belaboring the point, suffice it to say that
the Division – as evidenced by its February 5, 2004 and February
26, 2004 letters and the lists of requested records attached
thereto – indeed advised petitioners that any of the requested
documents "may be submitted in electronic format" and, further,
expressly requested the production of any "Computer Generated
Files That Are Identical to Books and Records for [the] entire
audit period." Thus, petitioners' primary premise – that the
Division never sought to review any of the computerized records
maintained by Winners Garage – is belied by the record.

      Petitioners' related assertion – that the Division failed
to request all of the documents necessary to conduct a proper
audit of Winners Garage's taxicab business – is equally
unavailing. Correspondence contained in the record on review –
specifically, letters from Perl dated May 4, 2004 and November
17, 2004 – reflects that Winners Garage was expressly advised of
the particular documents that still needed to be produced in
order to complete the sales tax audit, including copies of the
lease agreements for the drivers. As evidenced by both the
documentary evidence and Perl's hearing testimony, petitioners
did not even come close to complying with the Division's document
                               -8-                519472

requests – particularly with respect to the subject taxicab
leases. In this regard, the record fully supports the Tribunal's
finding that "[t]he 18 driver contracts were the only source
documents of taxicab rentals provided [by Winners Garage] to the
Division on audit," and Perl's testimony reflects that – as noted
previously – key terms and provisions, such as lease term dates
and stated rates, were missing from each of the 18 contracts
provided. Although Perl apparently did not make a list of the 18
specific contracts reviewed, during the course of the
administrative hearing, petitioners submitted copies of contracts
for 140 taxicab drivers – all of which suffered from a variety of
infirmities similar to those identified by Perl relative to the
18 contracts produced for his review. Specifically, although
each of the 140 contracts tendered stated that it was for a 53-
week period, none of those documents bore a starting or ending
date for the lease term or identified the vehicle being leased,5
and only one of the contracts set forth the weekly rental rate to
be paid by the driver. Additionally, a substantial number of the
contracts were missing other pertinent information – such as the
driver's name, the owner of the medallion and/or the driver's
signature. Under these circumstances, we have no quarrel with
the Tribunal's finding that, "given the limited records provided
in response to the Division's requests," resort to an indirect
audit methodology was entirely appropriate.6

      Petitioners' further claim – that the audit method employed
by the Division was not reasonably calculated to reflect the
taxes due – is equally unpersuasive. The Division employed a
method previously negotiated by the Metropolitan Taxicab Board of


     5
        Notably, each lease provided that it "cover[ed] all cars
driven by [t]he [d]river" and, hence, the individual contracts
could not be linked to the lease of a particular vehicle.
     6
        To the extent that petitioners contend that they never
consented to the test period utilized by Perl, the conflicting
testimony on this point presented a credibility issue "for the
taxing authority to resolve" (Matter of Brahms v Tax Appeals
Trib., 256 AD2d 822, 825 [1998]; see Matter of Rubin v Tax
Appeals Trib. of State of N.Y., 29 AD3d 1089, 1092 [2006]).
                              -9-                519472

Trade and the Division and thereafter adopted by the Tribunal
(see Matter of Statharos v Tax Appeals Trib. of State of N.Y.,
306 AD2d at 651-652). This method utilizes a fair market rental
value for a taxicab for a 12-hour shift of $24 and a 16.40%
allowance for taxicab downtime – multiplied by two shifts per
day, seven days per week and 13 weeks per quarter. Using records
obtained from the TLC, the Division then multiplied the resulting
number by the number of medallions managed by Winners Garage
during each of the relevant quarters – 85 during the first six
quarters and 77 during the last six quarters. The Division
further assessed the 5% special tax imposed on passenger car
rentals set forth in Tax Law § 1160 (a) based upon petitioners'
failure to demonstrate that the underlying taxicab leases were
for a period of one year or more (see Tax Law § 1111 [i] [A]).

      Petitioners' objections to the challenged audit method
primarily are directed to the specific components thereof, i.e.,
utilizing the number of medallions obtained from the TLC to
estimate the number of taxicabs leased during the relevant period
and utilizing the industry standard of 16.40% to compute taxicab
downtime. Simply put, inasmuch as petitioners failed to produce
sufficient records – including complete copies of the drivers'
leases – from which the Division could determine the actual
number of taxicabs leased during the period at issue, petitioners
cannot now be heard to complain that the Division resorted to
external indicies, including records maintained by a
disinterested third party (see Matter of MacLeod v Megna, 75 AD3d
at 930-931), in order to calculate the tax due. Nor did
petitioners establish – by clear and convincing evidence – that
either the shift rental rate of $24 or the industry allowance for
downtime of 16.40% was erroneous. Finally, given the infirmities
previously identified in the drivers' contracts, including the
absence of a stated lease term, petitioners failed to establish
that the subject leases were long-term leases within the meaning
of Tax Law § 1111 (i) (A) and, hence, the 5% special tax set
forth in Tax Law § 1160 (a) (1) was properly imposed.

      The case law makes clear that "the Tribunal's
determination will be confirmed if it is rationally based upon
and supported by substantial evidence" (Matter of Ingle v Tax
Appeals Trib. of the Dept. of Taxation & Fin. of the State of
                              -10-                 519472

N.Y., 110 AD3d 1392, 1393 [2013] [internal quotation marks and
citation omitted]; see Matter of Salh v Tax Appeals Trib. of the
State of N.Y., 99 AD3d 1124, 1125 [2012], lv denied 20 NY3d 863
[2013]). Upon reviewing the record as a whole, we are satisfied
that this evidentiary standard was met here. Petitioners'
remaining contentions, including their claim of auditor bias and
their challenge to the penalty imposed, have been examined and
found to be lacking in merit.

     Peters, P.J., Garry, Devine and Clark, JJ., concur.



      ADJUDGED that the determination is confirmed, without
costs, and petition dismissed.




                             ENTER:




                             Robert D. Mayberger
                             Clerk of the Court
