Finding that Tax Law § 481(1)(b)(i) effectively operates as a criminal penalty, the Northern District  held that the assessment of a tax penalty by the Department of Taxation and Finance under § 481(1)(b)(i) following the taxpayer’s previous prosecution and conviction by the Attorney General for the same offense under Tax Law § 1814, violated the Double Jeopardy Clause of the Fifth Amendment. Abuziad v. N.Y.S. Department of Taxation & Finance, No.1:08-CV-1213, 2/19/10, (NDNY), motion to reconsider denied, 5/12/10; appeal docketed, No. 10-1210, 3/22/10 (2nd Circuit).

[Tax Law § 481 authorizes a cigarette tax of $15 per carton by means of tax stamps. Abuzaid was charged under Tax Law § 1814(e) with purchasing cigarettes for sale bearing counterfeit tax stamps, a class E felony. On November 13, 2006, approximately seven months after Abuzaid pled and was sentenced for the crime of possessing unlawfully stamped cigarettes, the N.Y.S.  Department of Taxation and Finance (“the Department”) assessed a penalty under Tax Law § 481(1)(b)(i) for the same conduct.

Abuzaid filed an administrative appeal with the Division of Tax Appeals (DTA) asserting that the assessment violated both the state and federal constitutions. On March 19, 2009, ALJ Timothy J. Alston issued a Determination which denied the petition of Abuzaid and sustained the Department’s Notice of Determination. ]

The ALJ Determination

Judge Alston first addressed the issue of whether the penalty under Tax Law § 481(1)(b)(i) was civil or criminal in nature. The ALJ determined that the penalty was civil in nature for two reasons:  First, the tribunal found that “the fact that authority to impose the subject penalty was conferred on an administrative agency is prima facie evidence that the Legislature intended to provide for a civil sanction.”  Second, the ALJ noted that the existence of a criminal sanction in Tax Law § 1814(e) for the same conduct “indicates that the Legislature intended a civil fine under Tax Law § 481(1)(b)(i).” Judge Alston concluded that since § 481(1)(b)(i) is “clearly a civil statute [] penalties imposed thereunder are not ‘punishment’ for purposes of the double jeopardy clause.”

[On August 21, 2009, Abuzaid joined an action which had been commenced by three other similarly situated persons who had been arrested in the same sting operation. Before the District Court were Plaintiff taxpayers’ and the Defendant Department’s cross-motions for summary judgment.]

The District Court Opinion

The District Court’s opinion first addressed the issue of whether the federal court had jurisdiction over the action. The Tax Injunction Act (“TIA”) precludes a district court from enjoining the collection of any tax under State law where an effective remedy exists in the courts of such State. The District Court concluded that TIA was inapplicable, since the Notices of Determination (NODs) themselves indicated that the assessments were penalties, and not taxes. The court then addressed the Fifth Amendment Claim.

The first issue involved a determination of whether the imposition of penalties under § 481(1)(b) following criminal conviction under § 1814(e) constituted multiple criminal punishments for the same offense, thereby violating the Double Jeopardy Clause. In resolving this inquiry, the court framed the issue before it as “whether the statutory scheme was so punitive either in purpose or effect, as to transfor[m] what was clearly intended as a civil remedy into a criminal penalty.”

The court concluded that in enacting § 481(1)(b)(i), the “Legislature did not intend to create a criminal sanction.” However, the court noted that “aspects of  481(1)(b)(i), however, indicate that that the Legislature did not clearly intend a purely civil penalty either,” since § 481 provides that “the commissioner may impose a penalty.”

The court also noted that the imposition of penalties under § 481(1)(b) is “dependent on the offender’s mental state, with more severe penalties resulting from when the violator ’knowingly’ possesses the unlawful cigarettes.” Therefore, the statute was intended to “punish and deter criminal activity.”

The court concluded that even if the Legislature had intended to adopt a civil sanction, since § 481(1)(b)(i) “operates as a criminal penalty [] the imposition of penalties subsequent to a prior criminal prosecution for the same conduct [violates] Plaintiffs’ rights under the Fifth Amendment.”

Analysis

Taxpayers contesting Department tax assessments must first petition the Division of Tax Appeals for a hearing. The Tax Law imposes a presumption of correctness in favor of the Department at hearing. Exceptions from an ALJ Determination may be taken to the Tax Appeals Tribunal. In  fiscal year 2008-09, the Department boasted a won-loss record of 31-2 in the Tribunal. (Cf. Koufax ’65, 26-8; Seaver ’69, 25-7).

Only after the Tribunal has ruled may the taxpayer seek review in the Appellate Division. Entry to the Appellate Division is guarded tenaciously by CPLR Article 78, which greets appellants with burdensome bonding requirements. Once the case has been docketed, the “arbitrary and capricious” standard of review of Tribunal decisions imposed by Article 78 is difficult to surmount.

Given the difficulty of prevailing in the administrative tribunal, taxpayers have sought judicial review elsewhere, either before or after exhausting administrative appeals. Although Tax Law §§ 690(b), 1090(b) and 1140 state that review by the Tax Tribunal is the “exclusive remedy available to any taxpayer for the judicial determination” of tax liability, New York courts routinely rule in declaratory judgment actions in matters involving the constitutionality or inapplicability of the Tax Law, or where the Department has exceeded its taxing jurisdiction.

As Abuzaid illustrates, federal courts may also assert jurisdiction in disputes involving constitutional issues. It would appear that where constitutional interests are implicated, an Article 78 proceeding might also be commenced in the Appellate Division, bypassing the Division of Taxation.