The opinion of the court was delivered by: WEXLER
New York State's perception of widespread corruption in the motor fuel industry has led to more active law enforcement and greater regulation of gasoline distribution throughout the state. This civil rights actions, which pits the New York State Tax Commission against the owner and proposed operator of a gasoline storage facility, is a consequence of New York State's attempt to eliminate tax evasion in the industry. While concluding that the federal courts are not the appropriate forum for the resolution of this dispute, this Court suggests that this case has important lessons for New York State.
Plaintiffs Ewe Distributors, Inc. ("Ewe Distributors") and Love Gas, Inc. ("Love Gas") commenced this action against Roderick W. G. Chu, Commissioner of New York State's Department of Taxation and Finance, Frank Munoz, Deputy Commissioner for Tax Enforcement, and Henry G. Williams, Commissioner of the Environmental Conservation ("DEC") pursuant to 42 U.S.C. § 1983, for defendants' collective refusal to allow plaintiff corporations to operate a gasoline storage facility located in Oceanside, New YOrk (the "Oceanside Terminal" or the "Terminal"). Plaintiffs and plaintiff-intervenor Hamilton Oil Brokers, Inc. ("Hamilton Oil") seek to enjoin defendants from interfering with plaintiffs' use of the Oceanside Terminal. Plaintiffs also seek declaratory relief and damages. For the reasons stated below, the relief is denied, the complaint is dismissed, and judgment is entered for defendants.
Pursuant to statute, New York State imposes a tax on the sale of motor fuel. N.Y. Tax L. §§ 282-89 (McKinney 1986). Prior to July 1985, the tax was collected from the consumer by the gasoline retailer; wholesalers were not taxed for sales made in the chain of distribution. N.Y. Tax L. § 284 (McKinney 1966). In 1984, however, the New York State tax authorities came to believe that the state was losing millions of dollars a year in motor fuel sales taxes.
The growing concern about sales tax evasion by gasoline distributors prompted state tax officials to investigate the motor fuel industry in an effort to stem the revenue loss. The Governor's Task Force on the Administration of Taxes on Petroleum Products and Businesses (the "Governor's Task Force") discovered subsequently that some gasoline distributors were employing a "daisy chain" scheme to avoid detection by state tax authorities.
State tax authorities proposed a legislative solution to the problem and shortly thereafter in July 1985, the New York State Legislature enacted the First Import Law, which made all gasoline taxable upon initial importation into the state rather than upon sale to the consumer. N.Y. Tax L. § 285a (McKinney 1986).
The First Import Law enhanced the ability of New York State's Department of Taxation and Finance (the "Tax Commission") to detect and deter illegal tax-evasion schemes through new criminal sanctions and reporting requirements. The new enforcement provisions, along with existing provisions of the Tax Law under § 283, now gave the Tax Commission broad authority to restrain the sale of gasoline, suspend a distributor's registration, and obtain a summary court order prohibiting the sale or importation of gasoline. In addition, the new statutory scheme required that all gasoline distributors must register with the Tax Commission, post a bond, keep accurate and current records, and make those records available at any time upon the request of the Tax Commission. N.Y. Tax L. § 283.
Subsequent to the passage of the First Import Law, Tax Commission investigators learned that quantities of untaxed gasoline had been delivered to the Oceanside Terminal, which was then owned by Dutch VEntures, Inc. ("Dutch Ventures"). Tax Commission investigators appeared before New York State Supreme Court Justice Sandifer and, on July 2, 1985, pursuant to N.Y. Tax L. § 283(7), obtained an ex parte summary order enjoining Dutch Ventures, its agents, and anyone who had received gasoline from Dutch Ventures, from selling or transferring any gasoline.
On July 23, 1985, the Tax Commission obtained a second ex parte summary order pursuant to § 283(7) from Nassau County Supreme Court Justice Alfred Samenga. This order also restrained Bogatin, Dutch Ventures, Lesez Petroleum, Inc. ("Lesez Petroleum"), and Valentino Motors, Inc. from selling or otherwise disposing of any gasoline. The second order differed from the order of July 2, 1985 only in that it was based on a separate time period. In all other respects, the two orders were identical.
The Tax Commission soon suspected that Judge Sandifer's order was being violated and, in an attempt to enforce the order, sought a finding of contempt against Dutch Ventures, David Bogatin, and Lesez Petroleum.
Prior to a hearing before Supreme Court Justice M. Hallstead Christ in Nassau County Supreme Court, the Tax Commission and Bogatin executed a stipulation requiring him, among other things, to post a $500,000 bond against sales tax liabilities, to cease doing business, and to close down the Oceanside Terminal. Paragraph 2(b) of the stipulation stated that
The Oceanside Terminal may resume operations or do business at such time when someone makes application to the New York State Tax Commission and The Tax Commission gives its express written consent in such terms and conditions as it deems fit. The Tax Commission will not unreasonably withhold its consent.
The stipulation consolidated all other legal proceedings involving these parties, adjourned the contempt proceedings as necessary while the parties litigated the constitutionality of the underlying tax law, and gave Justice Christ continuing jurisdiction over the consolidated cases. The stipulation, which was so-ordered by Justice Christ, was recorded and filed in the Nassau County Clerk's Office on August 8, 1985. The so-ordered stipulation was therefore reflected in chain of title of the property on which the Oceanside Terminal is located and, under N.Y.R.P.L. § 297(b) (McKinney 1985), all prospective purchasers were deemed to have notice of the Tax Commission's interest in the Oceanside Terminal. Bogatin has challenged the acts of the Tax Commission and the summary order provision of the Tax Law, N.Y. Tax L. § 283(7) (McKinney 1985), under the United States Constitution, the New York State Constitution, and various New York state statutes.
Late in August of the same year, Hamilton Oil sought the permission of the Tax Commission to operate the Oceanside Terminal.
On September 20, the Tax Commission denied Hamilton's application on the grounds that Hamilton Oil lacked sufficient experience to operate the Terminal. After learning of the denial, Hamilton Oil took no further action.
As a consequence of the so-called stipulation, on October 15, 1985 David Bogatin and his partner Michael Markowitz sold their interest in the Oceanside Terminal to Crossboro Energy, Inc. ("Crossboro"), a company wholly owned by Alexander Shkolnick.
Simultaneously, Bogatin and Markowitz resigned from their positions as officers and directors of Ewe Distributors and Love Gas. Two days later, on October 17, Carl Levine, plaintiffs' attorney, notified Deputy Commissioner Munoz of the sale and indicated Crossboro's intention to reopen the Oceanside Terminal and commence operations. Eleven days later on October 28, Levine again wrote Munoz, notifying him of a recently executed lease between Crossboro and Hamilton Oil and enclosing a copy of the lease for review by the Tax Commission. Levine stated expressly that the submission of the lease did not act as a waiver of Crossboro's contention that the Tax Commission had neither any interest in the Oceanside Terminal nor the right to review or reject the lease.