Chevron Doctrine Overruled: Does It Make Any “Deference” In New York?

The Deference Is in the Details

[In our second installment of Board Briefs for 2024, Tax Notes State advisory board members discuss the U.S. Supreme Court’s recent decision in Loper Bright to overturn Chevron and its impact (or lack thereof) on the state and local tax landscape.

This article is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.]

Chevron Doctrine Overruled: Does It Make Any “Deference” in New York?

Glenn McCoy, Jr. is a Principal in Ryan’s New York office.

For approximately four decades, the Supreme Court of the United States interpreted the Administrative Procedure Act to require federal courts to provide deference to administrative agencies’ interpretations of statutes which they administered. This deference was recognized first in Chevron U. S. A. Inc. v. Natural Resources Defense Council Inc., but Chevron recently was overturned by Loper Bright Enterprises v. Gina Raimondo, Secretary of Commerce.^[1] Many pundits have hailed Loper Bright as both an “historic” and a “landmark” case because it overruled the Chevron^[2] doctrine — but given that New York’s courts have never even cited to the Chevron decision, what happened to Chevron really makes no “deference” in New York.

With that said, although New York’s courts have never cited Chevron as precedent, they have from time to time applied their own limited Chevron-type deference to agency interpretations of statutes. Like the federal courts, New York’s trend is to abandon any deference to state agencies.

Historically, New York’s courts have only applied Chevron-type deference when an agency’s statutory interpretation of a statute “involves some type of specialized knowledge.”^[3] Although under New York law, the proper interpretation of a statute ordinarily presents an issue of law reserved for the courts, New York courts have recognized that:

An administrative agency’s interpretation of the statute it is charged with implementing is entitled to varying degrees of judicial deference depending upon the extent to which the interpretation relies upon special competence the agency is presumed to have developed in its administration of the statute.^[4]

By contrast, when no specialized knowledge is required to interpret a statute, the New York courts have given the agency’s views little or no weight. For instance, in Matter of Gruber,^[5] the court provided:

 [W]here the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency. In such circumstances, the judiciary need not accord any deference to the agency’s determination and is free to ascertain the proper interpretation from the statutory language and legislative intent.^[6]

Thus, New York’s courts have deferred to agency expertise only in situations requiring “specialized knowledge” of the subject matter, which means that they have given far less deference to agency interpretations than Chevron ever did. Even so, New York’s trend is to completely avoid giving any deference at all to agency decisions, which is like, albeit more subtle than, what happened to the Chevron doctrine.

A current example of this can be found in a February 2024 decision in which an administrative law judge with the New York Division of Tax Appeals refused to defer to guidance issued by the New York State Department of Taxation and Finance (“Department”) that was contrary to the taxpayer’s position. The ALJ held that a taxpayer not directly engaged in manufacturing was eligible to file its franchise tax return as a qualified New York manufacturer (QNYM) and obtain a zero percent tax rate.^[7]

In In the Matter of E. & J. Gallo Winery,^[8] the taxpayer was a beverage manufacturing, marketing, and distributing company, which acquired a vineyard in New York. The taxpayer executed a service agreement with a land-management contractor to control and operate the taxpayer’s vineyard. Although the taxpayer maintained oversight and approval over the grape production process, it did not produce the grapes.

The question before the ALJ was whether the taxpayer was a QNYM. Under New York law,^[9] the only relevant issue was whether Gallo itself had principally used the property in the production of goods by manufacturing (including viticulture).

The New York Department of Taxation and Finance (Department) had issued an on-point technical services bureau memorandum (TSB-M), ruling that subcontracting manufacturing was not manufacturing.^[10] Accordingly, the Department argued that because the taxpayer’s subcontractor controlled and operated the vineyards, Gallo could not qualify as a QNYM.

Rather than rely on the TSB-M,^[11] the ALJ conducted his own independent analysis of the statute and found that nothing in the law suggested that the taxpayer could not subcontract the labor on or related to the manufacturing property. The ALJ determined that the New York-located property was “used by” Gallo under the ordinary meaning of that term and regardless of who was subcontracted to perform the day-to-day labor at the vineyard, Gallo employed its grapevines for a purpose and put the grapevines into service, and thus qualified as a QNYM. In this instance, the ALJ followed the New York State Administrative Procedure Act by using the “ordinary meaning” of the term “used by.”^[12] While section 201 of the New York State Administrative Procedure Act^[13] provides “every agency shall strive to ensure that, to the maximum extent practical, its rules, regulations and related documents are written in a clear and coherent manner, using words with common and everyday meanings,” it makes absolutely no reference about giving deference to the Department. Accordingly, the ALJ gave no deference to the Department’s TSB-M because he reasoned that TSB-Ms are “informational statements of the Division of Taxation’s policies” that are “advisory in nature” and “do not have legal force or effect.” Therefore, based on his own analysis of the QNYM statute, the ALJ ruled that the taxpayer satisfied the “principally used by” test and qualified for the QNYM 0 percent franchise tax rate. The ALJ also found that, under New York precedent, the QNYM statute is a tax imposition statute and therefore all ambiguities must be resolved in the taxpayer’s favor.

Does the Gallo case imply that New York’s agency deference is as “dead” as Chevron deference? Maybe not. The ALJ concluded that a plain reading of the statute confirmed that the taxpayer qualified as a QNYM, leaving no need to rely on specialized knowledge of the Department. But stay tuned. Based on my 40-plus years of tax practice, this will not be the last time we will see the New York courts grapple with the plain meaning of words in a statute. To quote my fellow Oklahoma statesman, Will Rogers: “The minute you read something that you can’t understand, you can almost be sure that it was drawn up by a lawyer.” And we have quite a few of them in our legislature!

¹ See Loper Bright Enterprises v. Raimondo, No. 22-451 (U.S. 2024) and Relentless Inc. v. Department of Commerce, No. 22-1219 (U.S. 2024).

² Chevron U. S. A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

³ Belmonte v. Snashall, 813 N.E.2d 621, 624 (N.Y. 2004).

⁴ Matter of Rosen v. Public Employee Relations Board, 72 N.Y.2d 42, 47 (1988).

⁵ Matter of Gruber, 89 N.Y.2d 225, 231 (1996).

⁶ In re Gruber, 674 N.E.2d 1354, 1358 (N.Y. 1996) (internal citations omitted).

⁷ In the Matter of E. & J. Gallo Winery, Nos. 830227 and 850146 (N.Y. Div. Tax App. Feb. 15, 2024).

⁸ Id.

⁹ N.Y. Tax Law sections 210(1)(a)(vi) and 210-b(1)(b)(i)(A).

¹⁰ TSB-M-15(3)C, (3)I (Feb. 26, 2015) (advising that “[a] taxpayer that contracts out its production activities to another entity cannot consider those activities in determining its eligibility as a manufacturer.”).

¹¹ The Department argued that the taxpayer was required to follow the TSB-M.

¹² Codified in NY Const., art. V, section 3.

¹³ State A.P.A., ch. 82, art. 2, section 201.