On April 10, 2017, New York Governor Andrew Cuomo (D) signed the FY 2018 Executive Budget (A. 3009C), which contains sales and use tax changes that might significantly affect a number of related-party leasing structures and similar arrangements.

Before enactment of these provisions, New York law exempted purchases of tangible personal property or services for resale from sales and use tax.¹ Under this new provision, which took effect immediately, disregarded single member LLCs or subsidiaries may not claim the resale exemption when purchasing property that they will resell (including by lease or rental) to their own member or owner. Instead, such purchases will be deemed to be retail sales immediately subject to sales tax. The change also applies to transactions involving other related-party entity structures, including partnerships and trusts.

The goal of this change is to remove the incentive for creating entities for the "purpose of sales tax avoidance." Specifically, the New York Department of Taxation and Finance (NY DoTF) has concluded that certain related entities were taking advantage of the resale exemption by purchasing property exempt from sales tax and leasing it to a member or owner using long-term leases, or imposing lease payments that were a small fraction of the fair market value of the property when originally purchased. The new provision seeks to close this perceived sales tax loophole, thereby increasing state tax receipts by an estimated $9 million in the first year of implementation, and $11 million per year thereafter.

Implications

No exceptions are provided under the new law for companies employing internal leasing structures using legitimate arm's-length pricing. Accordingly, going forward, transactions involving "leasing and purchasing companies" (that involve disregarded single member LLCs, partnerships, trusts, or their subsidiaries) that will resell or lease the purchased items internally (i.e., to their related members or owners) will not be exempt as sales for resale, and instead will be treated as retail sales upon original purchase. Companies that have implemented or are implementing purchasing or leasing company structures, must review their current structures, and may need to begin paying sales tax upon the initial purchase of property to be leased (or resold), rather than on each successive transaction (as under former law). Such action may have significant negative sales and use tax consequences, both from a timing and a residual value perspective.

The NY DoTF previously indicated that its intent was not to affect situations in which related parties are leasing products to each other with legitimate arm's-length pricing (i.e., purchasing and leasing companies). In addition, the NY DoTF has not yet provided express guidance on how subsequent internal sales and leases will be treated; specifically, whether such subsequent transactions will be tax-free, and what documentation may be required to prevent the possibility of double- or multiple-taxation. EY will continue to monitor these sales tax developments in New York and will provide follow-up regarding the proper operation of internal procurement and leasing company structures once specific guidance is issued by the NY DoTF.

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ENDNOTES

¹ N.Y. Tax Law Section 1101(b)(4).