NEW YORK -- A state appeals court upheld a ruling that frees banks from having to pay for audits performed by the New York State Department of Taxation and Finance.

The New York State Bankers Association sued the state last year over a provision tucked at the last minute into a 1991 budget bill that would have required them to pay for the audits.

A lower court ruled that the provision was unconstitutional because it was inserted into the budget bill without going through the normal legislative process and because it imposed a significant burden only on banks.

A five-judge panel of the appellate division in Rochester unanimously rejected on Wednesday the state's arguments that the fee was permissible.

The New York Bankers Association was recruited into the fight by a community bank in upstate Cayuga County that received a bill from a state tax auditor charging it $110 an hour for an audit. The bank refused to pay the bill.

"This is a very significant decision," said Michael Smith, executive vice president of the association. The state could appeal again, he added, "but we hope we've seen the last of this."

A source from the attorney general's office, which represented the state, said an appeal was likely. It will be up to an appeals court to decide whether to hear the case. David Glass, general counsel of the bankers association, said, "We will carry it to the next stage" if necessary.

State banks paid $3 million in audit fees between April 1, 1990, and March 31, 1991. Still unresolved is whether they will receive refunds in light of the court decision.

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