Understanding Declaratory Judgments and Administrative Proceedings in New York Tax Law Cases

When tax laws become a maze, involving complexity and ambiguity, businesses and taxpayers often turn to the court system to clarify their tax obligations. The recent Appellate Division, Third Department case, Site Safety LLC v. New York State Department of Taxation and Finance (2025 NY Slip Op 02255), sheds light on the use of declaratory judgments in tax law, specifically, sales and use tax. However, while declaratory judgments are a valuable tool to determine a party’s obligations, they are not always the appropriate or immediate remedy.

What is a Declaratory Judgment?

A declaratory judgment is a court ruling that determines the rights, duties, or obligations of parties without ordering specific actions or awarding damages. In New York, under CPLR § 3001, a court may issue a declaratory judgment to resolve a "justiciable controversy" where parties seek clarity on their legal positions. For tax disputes, businesses may request a declaratory judgment to challenge the applicability of a tax statute, as seen in Site Safety LLC, where the plaintiffs sought a declaration that their site safety services were not subject to New York sales tax under Tax Law § 1105(c)(8).

By way of background, the New York sales tax law is a tax on protective and detective services, including services related to alarm or protective systems, guard services, alarm monitoring and private investigation. Historically, the statute applied to services for alarm company monitoring and security guard services. Today, and without formal rulemaking, the New York Department of Taxation and Finance is attempting to tax site safety managers and companies alike under the broad taxing statute, without adopting a formal rule. In Site Safety LLC, as explained in further detail below, plaintiffs sought a declaratory judgment that their site safety services were not subject to sales tax under Tax Law § 1105(c)(8).

Declaratory judgments are beneficial when a party faces uncertainty about a law’s application. Meaning, and the question that should be asked is, “when reading the statute, is it clear that site safety construction services are subject to sales tax as protective and detective services?” If the answer is no, declaratory judgment can be a remedy. However, in order seek a declaratory judgment, the action must involve a ripe, concrete dispute with substantial legal interests, as courts will not issue advisory opinions on hypothetical scenarios (Hernandez v. State of New York, 173 AD3d 105, 109-110 [3d Dept 2019]).

Declaratory Judgments vs. Administrative Proceedings

In New York, tax disputes typically follow a structured administrative process before being heard in court. The Site Safety case highlights the tension and determination of seeking a declaratory judgment or adhering to administrative remedies.

Administrative Proceedings

Upon completion of an audit, the NYDTF issues a Notice of Determination. From there, the NYDTF oversees tax disputes through a multi-step administrative process:

• Conciliation Conference: A taxpayer receiving a notice of determination, a notice of deficiency or a proposed audit change can request a conciliation conference through the Bureau of Conciliation and Mediation Services (BCMS). This informal process aims to resolve disputes without formal hearings (20 NYCRR 4000.3).
• Division of Tax Appeals: If the conciliation conference does not resolve the issue, the taxpayer may petition the Division of Tax Appeals for a formal hearing before an Administrative Law Judge (ALJ). The ALJ’s decision can be appealed to the Tax Appeals Tribunal (Tax Law § 2006).
• Judicial Review: Only after exhausting these administrative remedies can a taxpayer seek judicial review via a CPLR Article 78 proceeding in the Appellate Division, Third Department (Tax Law § 2016).

These proceedings allow the NYDTF to apply its knowledge to factual and technical tax issues. As a general rule, exhaustion of administrative remedies is generally required before a taxpayer can challenge a tax determination in court (Metro Enters. Corp. v. New York State Dept. of Taxation & Fin., 171 AD3d 1377, 1379 [3d Dept 2019]).

Declaratory Judgments

Unlike administrative proceedings, a declaratory judgment action is filed directly in a New York Supreme Court, bypassing the NYDTF’s administrative process. It is a judicial remedy designed to resolve legal questions, such as whether a tax statute applies to a taxpayer’s activities.

However, New York courts strictly limit this approach. A taxpayer may skip the allowable administrative remedies only in narrow circumstances, such as when they challenge a tax statute as “wholly inapplicable” to them, alleging that the taxing authority lacks jurisdiction (Bankers Trust Corp. v. New York City Dept. of Fin., 1 NY3d 315, 322 [2003]). This exception applies only when no factual disputes exist regarding the subject matter of the tax.

Key Differences

Issues in the Lower Court and Appellate Division’s Ruling

Lower Court (Supreme Court)

In Site Safety LLC, eleven plaintiffs sought a declaratory judgment that their site safety services were not subject to sales tax under Tax Law § 1105(c)(8).

The NYDTF issued an advisory opinion classifying these services as taxable “protective and detective services” and initiated audits against seven plaintiffs. The Supreme Court dismissed the complaint, ruling:

• The claims of four plaintiffs (Site Safety LLC, Nova Safety Associates, LLC, Nextwave Safety Consulting LLC, and NYC Façade Safety Corp.) were unripe because they had not been audited.
• The claims of the seven audited plaintiffs were dismissed for failing to exhaust administrative remedies through the DTF’s process.

Appellate Division (Third Department)

The Appellate Division, in its April 17, 2025 decision (2025 NY Slip Op 02255), partially reversed the Supreme Court’s order. The Appellate Division affirmed the dismissal of claims by the four non-audited plaintiffs, agreeing that their claims were unripe. Without audits or tax assessments, these plaintiffs faced no actual harm (Hernandez v. State of New York, 173 AD3d at 109-110).

For City Safety Compliance Corp., Construction Realty Safety Group Inc., and Safety Dynamics, LLC, the court modified the reasoning but upheld dismissal. Although these plaintiffs were under audit, the audits were incomplete, and no tax liability had been imposed, rendering their claims unripe.

The court reversed the dismissal of claims by Safety and Quality Plus, Inc., AP Tristate-Safety Corp., Menotti Enterprise, LLC, and The Casa Group, Inc. These plaintiffs had received statements of proposed audit changes or letters from the DTF asserting tax liability, making their claims ripe (Compass Adjusters & Investigators v. Commissioner of Taxation and Fin., 197 AD2d 38, 41 [3d Dept 1994]).

Additionally, the court found that these plaintiffs qualified for the “wholly inapplicable” exception, as they challenged the DTF’s jurisdiction under Tax Law § 1105(c)(8) without raising factual disputes (Bankers Trust Corp., 1 NY3d at 322).

The case was remitted to the Supreme Court, allowing the DTF to file an answer within 20 days for the four remaining plaintiffs’ claims.

Impact on Future New York Tax Cases

The ruling reinforces that a declaratory judgment requires a concrete injury, such as a completed audit or a definitive tax assessment. Businesses cannot seek judicial relief based on speculative harm.

The decision, in our view, shows New York’s strong preference for exhausting administrative remedies. Only challenges asserting that a tax statute is wholly inapplicable, with no factual disputes, can proceed directly to court.

The Appellate Division’s recognition and acceptance of the exception for the four remaining plaintiffs highlights its narrow scope. Businesses must clearly articulate that the taxing authority lacks jurisdiction and avoid factual disputes to qualify for this exemption. For example, the plaintiffs’ focus on site safety services as defined by the New York City Building Code helped avoid factual issues.

Companies facing NYDTF audits should carefully assess whether their challenge fits the “wholly inapplicable” exception. If factual issues exist, pursuing administrative remedies through the New York Conciliation Conference or the Tax Appeals Tribunal may be necessary.

The ruling may encourage businesses providing government-mandated services, like site safety inspections, to challenge their taxability under New York Tax Law § 1105(c)(8), better known as the protective and detective service statutes. If the remaining plaintiffs succeed, it could set a precedent exempting similar services from sales tax, impacting industries subject to regulatory mandates.

Contact Sales Tax Helper to Navigate Tax Concerns

Declaratory judgments are powerful tools for businesses to clarify their tax obligations, but their use is tightly constrained by the requirements of ripeness and exhaustion of administrative remedies. The Appellate Division’s ruling clarifies when businesses can bypass administrative proceedings, providing a pathway for jurisdictional challenges while reinforcing the need for concrete harm to be demonstrated.

If your business is dealing with a tax dispute or seeking clarity on tax obligations, consult with our experienced tax law attorneys to explore your options. Contact our New York Tax Attorneys today to ensure compliance with tax law and plan your tax strategies.