The New York Department of Taxation and Finance (Department) issued guidance¹ on the elimination of the resale exemption for sales² of tangible personal property between certain related entities and the narrowing of the use tax exclusion for purchases made out of state by nonresident businesses. Both changes were enacted earlier this year as part of the FY 2018 Executive Budget (A. 3009C, see Tax Alert 2017-0633) (FY2018 Budget Act), and apply to sales made and uses occurring on or after April 10, 2017.

Application of sales tax to transactions between certain related entities

Under the provisions of the FY2018 Budget Act, a disregarded single member limited liability company (SMLLC) or subsidiary is precluded from claiming the resale exemption when purchasing property that it will resell (including by lease or rental) to its own member or owner. Instead, such purchases will be deemed to be retail sales immediately upon purchase and subject to sales tax. The change also applies to transactions involving other related-party entity structures, including partnerships and trusts.

The guidance includes an example of how this provision applies. In this example, the Department noted that a disregarded SMLLC purchasing artwork from a supplier not only must pay sales tax to the supplier (i.e., can no longer claim resale exemption), but that a subsequent sale or lease of the property to its single member is also a taxable sale.

The Department noted that sellers accepting a valid exemption document in good faith from a purchaser will not be liable for any tax due.

Use tax exclusion for purchases by nonresident businesses

New York generally excludes from use tax a nonresident's purchase of property and services; the legislation, however, narrows the exclusion for a nonresident business entity based on how long it was doing business (i.e., actively engaged in normal operating activities, such as hiring employees, having a payroll, making routine purchases and sales) outside New York. The state imposes use tax when a nonresident business brings tangible personal property or a taxable service into the state for use, unless the nonresident business has been doing business outside New York for at least six months before the date the property or service is brought into the state. The guidance includes several examples to illustrate how the narrowed use tax exclusion applies.

The use tax exclusion restriction does not apply to individuals.

A reciprocal credit for sales or use tax paid in another state may be available when a nonresident business paid sales or use tax in another state upon the purchase of the property or service subject to New York use tax under the new provisions in the FY2018 Budget Act.³

Implications

Regarding transactions between certain related entities, New York does not provide exceptions to this law for companies with internal purchasing/leasing structures using legitimate arm's-length pricing. Therefore, transactions involving "purchasing/leasing companies" (that involve transactions with disregarded SMLLCs, partnerships, trusts, or their subsidiaries) that will resell or lease the purchased items internally (i.e., to their related members or owners) no longer qualify as exempt sales for resale and will be immediately treated as retail sales upon original purchase. Businesses that use such purchasing or leasing company structures must review these structures and related-party transactions and may need to pay sales tax upon the initial purchase of property to be leased (or resold) and also on each successive transaction (as under former law). This may have significant negative sales and use tax consequences.

The Department has not previously indicated that it intended 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), but the guidance does not offer insight on how such transactions would be treated differently from other transactions. Without any further instruction, business entities doing business in New York may need to make adjustments to their current structure to avoid double-taxation or re-institute a purchasing or leasing company structure that does not involve the entity structures highlighted in the FY2018 Budget Act change. Alternatively, business entities doing business in New York with "purchasing/leasing companies" that are affected can request an Advisory Opinion from the Department to secure a binding commitment as to how the Department plans to address the purchase and the subsequent resale/lease among related parties under the new law.

EY will continue to monitor New York's sales tax developments and provide follow-up on the proper operation of internal procurement and leasing company structures when specific guidance, if any, is issued by the Department.

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ENDNOTES

¹ N.Y. Dept. of Taxn. and Fin., TSB-M-17(4)S (August 14, 2017).

² "Sale" includes any transfer of title or possession, or both, for a consideration, including exchanges, barters, rentals, leases or licenses to use or consume tangible personal property. See N.Y. Tax Law §1101(b)(5) (defining "Sale, selling or purchase").

³ See N.Y. Dept. of Taxn. and Fin., TB-ST-765 (Oct. 9, 2013) for additional information on the reciprocal credit.