Opinion 88-42

This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

SALES TAX -- Distribution of (adjustment by county of erroneous payments to other municipalities)

MUNICIPAL CORPORATIONS -- Setoff (right of county to recoup erroneous sales tax allocations to other municipalities)

TAX LAW, §1262(c): A town or village which receives a greater share of county sales tax revenues than that to which it is entitled is obligated to refund such moneys to the county for the benefit of the municipality entitled thereto. A county may recoup an excess payment by instituting legal action or by exercising its common law right of setoff. 1979 Opns St Comp No. 79-131 is superseded to the extent it is inconsistent herewith.

You have requested that we review our 1979 Opns St Comp No. 79-131, unreported, which concerned a situation where a county distributed sales tax revenues to towns and villages in the county in a manner which did not comply with the provisions of Tax Law, §1262. Specifically, in that opinion, we considered a situation where the county erroneously paid sales tax moneys which belonged to towns to villages.

In Opn No. 79-131, we expressed the view that one municipality should not be permitted to receive a windfall at the expense of another due to a county's erroneous calculations. We further concluded that the municipalities which received sales tax revenues in an amount greater than that to which they were entitled were obligated to refund the excess amounts for the benefit of the municipalities that received less than their proper share. To effectuate the proper distributions, we stated that the municipalities which received the excess revenues should pay them back to the county and that the county should then pay them over to the proper municipalities in the manner prescribed by Tax Law, §1262. We also concluded, however, that there was no statutory authority for the municipalities which received the excess moneys to pay them directly to those municipalities which received less than their proper share, nor was there statutory authority for the county to rectify its error by reducing future sales tax payments to the municipalities which received excess payments.

In Opn No. 79-131, certain municipalities received payments to which they were not entitled and others received less than the proper amount of sales tax distribution. Under such circumstances, it is our opinion that the county may not ignore its obligation to make the proper distribution of tax revenues as directed by statute (Tax Law, §1262[c]). Accordingly, we believe that the county initially should demand repayment of the improperly paid sales tax revenues and if such demand is refused, the county then has an obligation to proceed to collect the moneys improperly paid.

While Opn No. 79-131 correctly observes that nothing in Tax Law, §1262 provides a mechanism for correcting erroneous distributions of sales tax, the opinion does not consider the availability of common law remedies, including the self-help remedy of setoff. Setoff is a fundamental right, based on the principle that natural justice and equity require that the demands of parties mutually indebted be set off against each other (20 Am Jur2d, Counterclaim, Recoupment and Setoff, §7). A municipal corporation is entitled to avail itself of the right of setoff the same as a natural person (see, e.g., Mtr of Feinberg v Bd of Ed, 74 Misc 2d 371, 344 NYS2d 618, affd 51 AD2d 548, 378 NYS2d 426; 1980 Opns St Comp No. 80-752, p 207; 20 Am Jur2d, Counterclaim, Recoupment and Setoff, §110).

In our opinion, a county which has overpaid sales tax revenues to a municipality is entitled to collect the overpayment by withholding a portion of future sales tax payments pursuant to the common law right of set-off (see Canale v Department of Taxation and Finance, 64 Misc 2d 786, 378 NYS2d 566; Argiriou & Finkel v Marciante Luncheonette, II, Inc., 84 Misc 2d 660, 315 NYS2d 448). We believe that, since the municipality which received the overpayment had no statutory or other right to the excess moneys paid by the county, that municipality, in effect, owes a debt to the county. We also note that, while it would appear that a creditor may not utilize the self-help remedy of set-off against a municipality to take a credit against taxes owed to the municipality or to circumvent the audit and payment procedures usually applicable to claims against the municipality (County Law, §369; Village of Charlotte v Keon, 207 NY 364, 100 NE 1116; see generally, 20 Am Jur2d, Counterclaim, Recoupment and Setoff, §§110, 113), none of these concerns exist here since the right of set-off is being used by one municipality against another to effect a distribution required by statute. Of course, upon withholding the sales tax overpayments, the county should thereafter forward them to the municipalities originally entitled to receive the same. As an alternative to exercising its right of set off, the county may wish to consider the institution of legal proceedings to collect the erroneous payments.

1979 Opns St Comp No. 79-131, unreported, is hereby superseded to the extent it is inconsistent herewith.

September 20, 1988
Cornelius F. Healy
Deputy State Comptroller