Joseph Lipari
Joseph Lipari (NYLJ/Rick Kopstein)

For a tax professional, one of the most tedious requirements of the job is sifting through (on paper or online) opinions issued each week by the various courts and trying to determine which decisions are relevant to issues faced by our clients. On first glance, the recent case, In re SuperMedia, DTA No. 826264 (N.Y. Div. Tax App., May 25, 2017), appeared to be one that could be skipped since it deals with the sales tax of “yellow pages” phone books, an industry with few participants. However, the particular issue in the case, whether certain commercial delivery services qualified as “common carriers,” is of high importance to sellers and buyers of art. The narrow definition of the term advanced by the Tax Department and accepted by the administrative law judge (ALJ), is likely to dictate how art shipments will be arranged for the foreseeable future.

Publishers of yellow pages phone books such as SuperMedia make money by selling advertisements in the phone books, since the books are delivered free to consumers. SuperMedia printed the phone books out of state, and arranged for them to be delivered to consumers in New York via the U.S. Postal Service (USPS) or one of three non-governmental carriers: FedEx, PDC, or DDA.

New York generally imposes use tax on personal property used in New York for which sales tax was not previously paid. N.Y. TAX LAW §1110(a).1 “Use” is defined to “include the distribution of … promotional materials.” N.Y. TAX LAW §1101(b)(7). However, an exception provides that “printed [promotional] materials … shall be exempt from [sales and use tax] where the purchaser of such promotional materials mails or ships such promotional materials … to its customers … , without charge to such customers … , by means of a common carrier, United States postal service or like delivery service.” N.Y. TAX LAW §1115(n)(4) (emphasis added).

SuperMedia would owe use tax on the distribution of phone books other than those covered by the common carrier exception. Due to the express statutory provision for USPS and her finding that FedEx was a common carrier, the ALJ held that the books USPS and FedEx delivered were excepted from use tax. (There was no dispute as to whether FedEx was a common carrier.) However, she held that PDC and DDA were not common carriers, and, therefore, that the phone books they delivered were subject to use tax.

In reaching her conclusions, the ALJ relied on Yellow Book of New York v. Commissioner of Taxation and Finance, 75 A.D.3d 931 (3d Dep’t 2010), lv. denied, 16 N.Y.3d 704 (2011), a Third Department case from 2010. Yellow Book, determined against the taxpayer on facts and issues almost identical to SuperMedia, articulated two characteristics that distinguish common from “private” or “contract carriers”: (1) A common carrier “holds itself out to the public as a carrier,” as opposed to a carrier “that carries for some particular person under some particular arrangement, but makes no public profession that it will carry for all who apply,” Yellow Book, 75 A.D.3d at 933 (internal citations and quotation marks omitted); and (2) A common carrier’s rates and schedules are generally fixed (as opposed to specifically negotiated and contracted for), see Yellow Book, 75 A.D.3d at 933.

In applying the rationale of Yellow Book, the ALJ noted that petitioner had contracts with PDC and DDA, but not with USPS. Whereas common carriers “provide shipping services to the general public,” private carriers “usually provide[] shipping services pursuant to bilateral contracts that were individually negotiated.” SuperMedia Conclusions of Law ¶ B (internal citations and quotation marks omitted). The ALJ continues that “[i]t is the ongoing relationship, service commitment, and commercial link between the carrier and its shippers that render contract carriage services inherently different from common carriage service alternatives.” SuperMedia Conclusions of Law ¶ B (internal citations and quotation marks omitted). Although, petitioner also had a contract with FedEx with respect to certain shipments made via “Smartpost,” a certain FedEx delivery mechanism that allowed shipment tracking, presumably FedEx has sufficient common carrier-like qualities that these “bad facts” did not alter the determination.2

Second, the arrangements with respect to rates, schedules, and delivery instructions with respect to PDC and DDA were negotiated and specific, which is more like a contract carrier than common carrier arrangement. The phone books that USPS delivered were delivered as part of normal postal service. Petitioner did not have any particular degree of control over the deliveries. In contrast, the contracts with PDC and DDA “set[] forth … standards for delivery times, packaging and reporting requirements and, further, allow[ed] for such other services as the parties agree upon,” as well as contained “petitioner’s right to submit change orders, procedures for handling complaints, protection of confidential and proprietary information and certain insurance requirements.” Additionally, “[the PDC] contract also set[] forth the required manner and method of delivery, the authority to provide additional copies of directories, the maintenance of detailed delivery records, provision for address corrections, verification of deliveries and for quality checks.” SuperMedia Conclusions of Law ¶ C (internal citations and quotation marks omitted). This level of specificity in services, as opposed to the “off the shelf” delivery offered by USPS and FedEx, made PDC and DDA look far more like private carriers.

Third, PDC and DDA were carriers specialized in the delivery of phone books (among certain other things), which make them more like contract carriers than common carriers. Unlike USPS or FedEx, neither PDC nor DDA was a general purpose carrier. This goes to the “commercial link” quality mentioned above.

Finally, the ALJ noted that PDC and DDA hired independent contractors to make deliveries, rather than using their own employees. Although the ALJ did not get into detailed reasoning on this point, presumably the use of contractors (rather than employees) makes the arrangement look more bespoke to the customer, as drivers are utilized when needed as opposed to working on a set schedule.

If the determination in SuperMedia only affected the taxability of free phone books, it would not justify the writing or reading of an article. However, the distinction between common and private carriers is often critical in determining when a sale of art is subject to sales tax.

In New York, sales tax is generally a “destination tax,” meaning that whether tax is due depends on whether “[t]he point of delivery or point at which possession is transferred by the vendor to the purchaser, or the purchaser’s designee” is in New York. 20 N.Y.C.R.R. §525.2(a)(3) (emphasis added). Thus, if a work of art is sold by a New York seller to a buyer located outside New York, it will be subject to New York sales tax if the buyer takes possession of the art in New York, regardless of how quickly thereafter the buyer brings the art outside the state. If, instead, the art work is transferred by the seller to a shipper who then delivers the art to the buyer outside the state, whether sales tax applies depends upon (1) whether the shipper is or is not a common carrier and (2) whether the shipper was hired by the buyer or the seller. See, e.g., N.Y. Advisory Op. No. TSB-A-11(10)S (April 8, 2011). A private or contract carrier is considered the agent of the party who engaged the carrier, a common carrier is considered an independent party. Thus, if the buyer engages a private carrier to pick up a work of art in New York and deliver it to the buyer out of state, the sale is subject to New York sales tax in the same manner as if the buyer took possession himself. In the art world, most works are shipped by specialized carriers under negotiated contracts with specific instructions, to ensure that the art will be handled with an appropriate degree of care. Thus, most art shippers would be considered private carriers under SuperMedia.

Although many practitioners, including the author, have previously expressed doubt as to the correctness of the Tax Department’s narrow definition of “common carrier,” see Joseph Lipari and Debra Silverman Herman, “The Need for Care in Requesting and Researching Advisory Opinions,” N.Y.L.J. (Sept. 9, 2011), in light of the recent case law, it is probably time to throw in the towel. In the past, most art dealers have preferred that their customers arrange for the shipping of works (to avoid issues regarding insurance or damage during shipping). We understand, however, that for the last few years, most art dealers have taken responsibility for arranging for shipping on the assumption that art shippers will be considered private carriers and that there would be a sales tax if the buyer made the arrangements. We have also heard that auditors have argued in some circumstances that the carrier should be considered to have been engaged by the buyer solely by reason of the fact that the buyer is charged a separate shipping charge. We do not believe these arguments have merit.


1. This rule only applies to property purchased while a New York resident. See N.Y. TAX LAW §1118(b). Although it was not discussed in the case, petitioner was presumably a New York resident for sales and use tax purposes by virtue of doing business in New York. See 20 N.Y.C.R.R. §526.15(b) (defining resident for sales and use tax purposes for persons other than individuals).

2. Additionally, for the Department to take the position that FedEx was not a common carrier would have likely been a losing position, and may have tainted their other claims.