The Third Department, reversing (modifying) Supreme Court, determined some of the plaintiffs had not failed to exhaust their administrative remedies in this action contesting the imposition of sales tax on the construction and demolition inspection services provided by plaintiffs. There is an exception to the “exhaustion of administrative remedies” requirement where, as here, plaintiffs claim the tax statute at issue is “wholly inapplicable” to them:
… [T]he remaining plaintiffs did not, as Supreme Court held, fail to exhaust their administrative remedies. Generally, a taxpayer must utilize statutory administrative remedies prior to commencing an action against the taxing entity … . That said, there is an exception to this requirement when, as relevant here, a tax statute is attacked as wholly inapplicable to the plaintiff … . “To challenge a statute as wholly inapplicable, the taxpayer must allege that the agency had no jurisdiction over it or the matter that was taxed” … . “This exception to the rule [mandating exhaustion of administrative remedies] is limited to those cases where no factual issue is raised” concerning the subject matter of the tax dispute … .
The remaining plaintiffs qualify for the “wholly inapplicable” exception, as the complaint alleges that DTF [Department of Taxation and Finance] lacks jurisdiction because Tax Law § 1105 (c) (8) does not apply to their site safety services. Further, there are no factual issues at play here. * * * … [T]he complaint simply seeks a declaration that site safety services, as specifically defined in the New York City Building Code, are exempt from sales tax … . Site Safety LLC v New York State Dept. of Taxation & Fin., 2025 NY Slip Op 02255, Third Dept 4-17-25
Practice Point: Here plaintiffs alleged the relevant sales-tax statute was wholly inapplicable to them and sought a declaratory judgment to that effect. The proceeding therefore is excepted from the “exhaustion of administrative remedies” requirement.