Matter of Paychex, Inc. v. Department of Taxation & Fin.

Matter of Paychex, Inc. v Department of Taxation & Fin.

2026 NY Slip Op 04538 July 23, 2026

Appellate Division, Third Department Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This decision is uncorrected and subject to revision before publication in the Official Reports. In the Matter of Paychex, Inc., Appellant,

v

Department of Taxation and Finance et al., Respondents.

Decided and Entered:July 23, 2026

CV-25-0098

Calendar Date: June 1, 2026

Before: Clark, J.P., Fisher, Powers, Mackey And Corcoran, JJ.

Hodgson Russ LLP, Buffalo (Christopher L. Doyle of counsel), for appellant. Letitia James, Attorney General, Albany (William M. Hayes of counsel), for respondents. [*1]

Powers, J.

Appeal from a judgment of the Supreme Court (Sherri Brooks-Morton, J.), entered December 19, 2024 in Albany County, which, in a combined proceeding pursuant to CPLR article 78 and action for declaratory judgment, among other things, granted respondents' motion for summary judgment dismissing the petition/complaint. Petitioner is a professional employer organization (hereinafter PEO) that enters contractual co-employment relationships with its clients meant to streamline the management of employee benefits, payroll and other human resource services (see generally Labor Law §§ 916, 922). As part of these contracts, petitioner is responsible for the payment of, among other things, employee wages and unemployment insurance and provides certain services, such as withholding and remitting employment taxes and providing for workers' compensation coverage. PEOs, like petitioner, pay such expenses and then seek reimbursement from their clients for services rendered. Corporations doing business in New York must pay a franchise tax based upon the total "business income apportioned within the state," computed by utilizing what has been titled the business apportionment factor (hereinafter BAF) (Tax Law § 210 [1] [a]). The BAF "is a fraction, determined by including only those receipts, net income, net gains, and other items described in [Tax Law § 210-A] that are included in the computation of the taxpayer's business income," with the amounts required to be included in the numerator and denominator of that fraction explicitly set forth by statute (Tax Law § 210-A [1]; see 20 NYCRR 4-1.2 [a]). Through major statutory amendments in 2015, the BAF fraction was modified in key respects (see Tax Law §§ 210 [1] [a]; 210-A) and, as a result of that statutory overhaul, respondent Department of Taxation and Finance (hereinafter the Department) repealed the then-existing regulations and promulgated new regulations relevant to the franchise tax in 2023 (see 20 NYCRR ch I, subch A). The promulgation of the new regulations came after nearly a decade of ongoing discussions with stakeholders, during which petitioner communicated to the Department on multiple occasions taking issue with that aspect of the regulations that would exclude PEO reimbursements from consideration as business receipts for purposes of the BAF. The Department promulgated the challenged regulations (see 20 NYCRR 4-1.2 [b] [6]; [c]) despite petitioner's voiced disagreement. Not long after promulgation, petitioner commenced the instant combined action and proceeding alleging that the exclusion of PEO reimbursements from the BAF will significantly increase its New York tax liability. Petitioner sought a declaration that the challenged regulations are invalid based upon alleged inconsistencies with the enabling legislation and contended that the promulgation thereof was contrary to the Legislature's policy reflected in Tax Law § 210-A and was arbitrary, capricious and in excess of the Department's jurisdiction[*2]. Petitioner also claimed that, insofar as the challenged regulations apply retroactively to tax periods beginning on or after January 1, 2015, that retroactive application violates its due process rights. Respondents joined issue and simultaneously moved for summary judgment dismissing the petition/complaint arguing, among other things, that petitioner lacked standing, the action/proceeding was unripe for review and petitioner had failed to exhaust administrative remedies. Petitioner opposed respondent's motion and cross-moved for summary judgment in its favor. Supreme Court granted respondents' motion for summary judgment and, as a result, dismissed the declaratory judgment action and the CPLR article 78 proceeding. The court noted that it was "not willing" to dismiss for lack of standing and, therefore, denied respondent's motion on that basis. Yet, it then held that petitioner failed to exhaust its administrative remedies and, because of that failure, will not suffer an injury until a notice of deficiency is issued by the Department. The court also denied petitioner's cross-motion,

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finding, in part, that petitioner's due process rights were not violated by the retroactive application of the regulations in question.^FN1 Petitioner appeals.

Although Supreme Court confused the issue slightly, it properly granted respondent's motion for summary judgment seeking dismissal of the declaratory judgment action. Petitioner's claimed harm remains conjectural in nature and, "[i]f the anticipated harm is insignificant, remote or contingent, the controversy is not ripe" (Sullivan v New York State Joint Commn. on Pub. Ethics, 207 AD3d 117, 131 [3d Dept 2022] [internal quotation marks, brackets and citations omitted]).^FN2

"In a declaratory judgment action, there must be a real dispute between adverse parties, involving substantial legal interests for which a declaration of rights will have some practical effect" (Site Safety LLC v New York State Dept. of Taxation & Fin., 237 AD3d 1395, 1396 [3d Dept 2025] [internal quotation marks and citations omitted]; see Church of St. Paul & St. Andrew v Barwick, 67 NY2d 510, 518 [1986], cert denied 479 US 985 [1986]). "For a challenge to administrative action to be ripe, the administrative action sought to be reviewed must be final, and the anticipated harm caused by the action must be direct and immediate" (Weingarten v Town of Lewisboro, 77 NY2d 926, 928 [1991] [citations omitted]). "Ripeness pertains to the administrative action which produces the alleged harm to [the petitioner]; the focus of the inquiry is on the finality and effect of the challenged action and whether harm from it might be prevented or cured by administrative means available to the [petitioner]" (Matter of Ward v Bennett, 79 NY2d 394, 400 [1992] [internal quotation marks, emphasis and citation omitted]; see Sullivan v New York State Joint Commn. on Pub. Ethics, 207 AD3d at 131; Matter of Adirondack Council, Inc. v Adirondack Park Agency, 92 AD3d 188, [*3]190 [3d Dept 2012]; Matter of New York Blue Line Council, Inc. v Adirondack Park Agency, 86 AD3d 756, 760 [3d Dept 2011], appeal dismissed 17 NY3d 947 [2011], lv denied 18 NY3d 806 [2012]).

Relevant here, if it is determined after an audit that a taxpayer owes a deficiency, the Department may issue a notice of deficiency, which then becomes final after 90 days if no action is taken by the taxpayer (see Tax Law § 1081 [b]). However, if it so chooses, the taxpayer may institute an administrative challenge to the notice of deficiency. This may be done by either filing an administrative appeal with the Division of Tax Appeals (see Tax Law §§ 1089, 2000, 2002) or seeking a conciliation conference (see Tax Law § 170 [3-a] [a]) and, if still unsatisfied after conciliation, the taxpayer may then file a petition with the Division of Tax Appeals (see Tax Law § 170 [3-a] [e]). No notice of deficiency had been issued when petitioner commenced the underlying combined action and proceeding. Consequently, administrative review had yet to occur. Thus, while petitioner is correct that it had "no administrative remedies to exhaust" at the time of commencement, this is because it had not let the administrative process unfold. That process would determine not only if petitioner is harmed by the regulation, but also whether the anticipated harm

"may be prevented by further administrative action" (Matter of New York Blue Line Council, Inc. v Adirondack Park Agency, 86 AD3d at 761; see Matter of Acevedo v New York State Dept. of Motor Vehs., 132 AD3d 112, 117 [3d Dept 2015], affd 29 NY3d 202 [2017]; Matter of Adirondack Council, Inc. v Adirondack Park Agency, 92 AD3d at 191; Matter of Hospital Assn. of N.Y. State v Axelrod, 164 AD2d 518, 526 [3d Dept 1990]). Accordingly, respondents correctly allege that there was no ripe controversy at the outset (see Site Safety LLC v New York State Dept. of Taxation & Fin., 237 AD3d at 1396; Grand S. Point, LLC v Bassett, 230 AD3d 49, 61 [3d Dept 2024], appeal dismissed 42 NY3d 1025 [2024], lv denied 43 NY3d 907 [2025]). The parties have informed us that a notice of deficiency has since been issued, and administrative proceedings have commenced. In any event, it still remains to be seen whether further administrative action will ameliorate any claimed harm (see Matter of Tree Hill Innovations, LLC v New York State Cannibis Control Bd., 250 AD3d 21, 24 [3d Dept 2025]; Matter of Buenos Hill Inc. v Saratoga Springs Planning Bd., 240 AD3d 990, 993 [3d Dept 2025], appeal dismissed 44 NY3d 1015 [2025]; see also Matter of Jamaica Water Supply Co. v Public Serv. Commn. of State of N.Y., 152 AD2d 17, 20-21 [3d Dept 1989]). For these reasons, petitioner's requests for declaratory judgment are unripe for review and, although Supreme Court "blurred the distinction between these two defensive doctrines" by holding that petitioner had failed to exhaust administrative remedies (Matter of Ward v Bennett, 79 NY2d at 400),^FN3 it correctly granted respondents' [*4]motion for summary judgment dismissing all but petitioner's constitutional claims.^FN4

Finally, petitioner claims that the Department has applied the regulations retroactively in violation of its due process rights. Initially, although promulgated in 2023, the regulations at issue were intended to interpret and construe the statutory scheme which had been enacted in 2015 to be applied only prospectively and, therefore, did not "impose new duties with respect to transactions already completed" (Barenboim v Starbucks Corp., 21 NY3d 460, 472 n 4 [2013] [internal quotation marks and citation omitted]). The regulations at issue elaborate upon the Department's understanding of the requirements for computing the BAF set forth in Tax Law § 210-A and did not work to impose taxes retroactively. Even assuming the opposite is true, we find petitioner's claim to be without merit.

"[R]etroactivity provisions in tax statutes [and regulations], if for a short period, are generally valid"

(AmerisourceBergen Drug Corp. v New York State Dept. of Health, 227 AD3d 1286, 1291 [3d Dept 2024] [internal quotation marks and citation omitted], appeal dismissed 42 NY3d 1023 [2024]; see James Sq. Assoc. LP v Mullen, 21 NY3d 233, 246 [2013]; see also Matter of Varrington Corp. v City of N.Y. Dept. of Fin., 85 NY2d 28, 32-33 [1995]). "

[W]hether a retroactive statute comports with due process principles is a question of degree that turns on the length of the retroactivity period, the taxpayer's forewarning of a change in legislation as relevant to reliance interests and the public purpose for retroactive application" (Matter of Regina Metro. Co., LLC v New York State Div. of Hous. & Community Renewal, 35 NY3d 332, 376 [2020] [internal quotation marks and citation omitted]; see Matter of Mackenzie Hughes LLP v New York State Tax Appeals Trib., 178 AD3d 1313, 1315 [3d Dept 2019]; see also Matter of WL, LLC v Department of Economic Dev., 97 AD3d 24, 32 [3d Dept 2012], affd sub nom. James Sq. Assoc. LP v Mullen,

21 NY3d 233 [2013]). First, petitioner argues that the length of retroactivity is nine years. However, that is not true as applied to petitioner. Petitioner settled any claims through May 31, 2019 and the challenged regulations were adopted in December 2023; accordingly, as a result of that settlement, the relevant retroactivity

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