City of New York v. Feiring

Background

New York City sought payment of a local sales tax from the estate of a business that went bankrupt after selling tangible goods in the city. The business had failed to collect most of the tax from its buyers, and the single issue was whether the city’s claim should be paid ahead of ordinary creditors in the bankruptcy case. Lower courts held the claim was not a tax entitled to priority; the city appealed to the Supreme Court.

Reasoning

The Court examined the municipal law that required sellers to collect the tax, file returns, and pay the tax to the city, while also making buyers alternatively liable if sellers did not collect. The Court looked beyond local labels and asked whether the burden was in substance a tax for supporting government. Because the obligation was an involuntary pecuniary burden imposed to raise revenue, enforceable against seller or buyer and subject to collection measures, the Court concluded it had all the characteristics of a tax. The Court therefore held the seller’s obligation is a tax that qualifies for priority payment under Section 64 of the Bankruptcy Act.

Real world impact

Municipal sales-tax claims like this one can be paid before general creditors in bankruptcy, even when the seller did not actually collect the tax from buyers. Businesses that fail to collect taxes may still leave tax liabilities that get priority treatment in insolvency. The decision reverses the lower courts and confirms that the statutory duty to pay city sales taxes is treated as a tax for bankruptcy priority purposes.

Dissents or concurrances

Justice Roberts disagreed and would have affirmed the lower court’s judgment for the reasons the Court of Appeals gave.