The opinion of the court was delivered by: Smith, J.:
This opinion is uncorrected and subject to revision before publication in the New York Reports.
Regulations of the New York City Taxi & Limousine Commission limit the rates that may be charged by owners of taxicabs who lease those cabs to drivers. In this case, owners challenge a Commission regulation that prohibits owners from collecting sales tax in addition to the maximum permitted lease rates. We hold that the regulation must be annulled, because the Commission has not shown any rational basis for it.
The Commission was created by the New York City Charter to serve a number of purposes, among them "to adopt and establish an overall public transportation policy governing taxi . . . services" and "to establish certain rates" (New York City Charter § 2300). A more specific charter provision authorizes the Commission to regulate the "rates of fare" charged to taxicab passengers (New York City Charter § 2304 [b]), but the Commission has also exercised the authority (not challenged in this case) to regulate the rates at which the owners of taxicabs lease them to drivers. A Commission rule (Rules of City of NY [35 RCNY] § 1-78 [a]) establishes a "Standard Lease Cap" for each 12 hour shift, ranging from $105 for day shifts to $129 for night shifts on Thursday, Friday and Saturday.
At issue in this case is the Commission's Rule § 1-78
"No owner . . . may charge to or accept from a driver any payment of any kind, such as a tax . . ., for the lease of a medallion or of a medallion and a vehicle, other than a lease amount no greater than the applicable Standard Lease Caps . . . [with exceptions not relevant here]."
Petitioners, three firms in the business of leasing taxicabs and a trade association of such firms, challenge this regulation only insofar as it prohibits the collection of sales tax in addition to the Standard Lease Cap. Supreme Court upheld the regulation (Metropolitan Taxicab Bd. of Trade v New York City Taxi & Limousine Commn., 27 Misc 3d 254 [Sup Ct, NY County 2009]), and the Appellate Division affirmed (71 AD3d 508 [1st Dept 2010]). We granted leave to appeal, and now reverse.
The Commission adopted Rule 1-78 (a) (4) in 2009. Until then, for at least ten years, it had been the general practice for owners whose rates were capped by the Commission to charge sales tax in addition to the Standard Lease Caps. The practice was not concealed: the record shows that rates that exceeded the caps when sales tax was included were contained in rate sheets and displayed on signs.
A taxi driver's affidavit submitted by the Commission acknowledges that "excluding taxes from lease caps is the predominant practice in the industry," but the Commission asserts that the practice was not consistent. There is no evidence, however, of any real inconsistency: the Commission's evidence shows only that there were times when the total charge to a driver for a particular shift, including sales tax, was equal to or below the Standard Lease Cap. This may -- and according to petitioners, does -- mean only that, for certain shifts, market conditions did not permit owners to charge as much as they thought the regulations allowed. The Commission points to no example of an owner who charged, for all shifts, an amount equal to or less than the Standard Lease Cap when sales tax was included.
The Commission's decision in 2009 to change the prevailing practice, and make the Standard Lease Caps inclusive of sales tax, was admittedly not based on any economic analysis. Indeed, no information about the owners' costs was before the Commission when the decision was made. Petitioners claim that by adopting the regulation without considering their costs the Commission violated New York City Charter § 2304 (c), which says in relevant part:
"In determining the rates of fare, the commission may consider all facts which in its judgment have a bearing on a proper determination, with due regard among other things . . . to the gross revenues derived from operation, to the net return derived from operation, to the expenses of operation including the income of drivers or operators, to the return upon capital actually expended and the necessity of making reservations out of income for surplus and contingencies. . .."
The Commission argues, in substance, that the words "may consider" in the Charter provision imply that whether to consider financial information is discretionary with the Commission, while petitioners argue that the "due regard" ...