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New York: New Law to Close Loopholes for Related Parties

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Last month the Department of Taxation and Finance issued TSB-M-17(4)S, Amendments Regarding Sales Tax Rules for Transactions between Certain Related Entities and for Purchases Made by Nonresident Businesses, to provide guidance on sales tax legislation that was enacted earlier this year as part of the FY 2018 budget. This legislation is applicable to transactions occurring on or after April 10, 2017.

The State is always looking to close “loopholes,” especially those concerning related-parties using multiple entities or transactions to avoid or mitigate the payment of sales and use tax. This legislation eliminates the resale exclusion on sales of tangible personal property between the following related entities:

  • Sales to a single-member LLC (“SMLLC”) or its subsidiary for resale to its member or owner, when the SMLLC or its subsidiary is disregarded as an entity separate from its owner for federal income tax purposes;
  • Sales to a partnership for resale to one or more of its partners; or
  • Sales to a trustee of a trust for resale to one or more beneficiaries of the trust.

As noted in TSB-M-17(4)S, the resale exclusion prevents a New York resident from creating a SMLLC to purchase high-priced property such as artwork tax-free (for resale) then selling or leasing the artwork back to the single member at a reduced cost, resulting in less sales tax being remitted to the State.

This legislation also narrows the use tax exclusion for purchases made by nonresident businesses outside New York State. If a nonresident business brings taxable tangible personal property into the State for use here, the property will be subject to New York use tax unless the nonresident has been “doing business” outside of New York for at least six months prior to bringing the property into the State. Doing business means that the business is actively engaged in normal operating activities, such as hiring employees, having a payroll, and making routine purchases and sales. Merely being organized as a legal entity is not a sufficient indication of doing business absent other normal operating activities.

The above changes were just one of three sales tax-related provisions introduced in the FY 2018 executive budget. Another provision requiring marketplace providers such as Amazon to collect tax on sales they facilitate failed to be enacted again, while a third provision, which was merely a clarification on when charges for transporting, transmitting or distributing natural gas or electricity are subject to sales tax, was enacted.

Your comments and questions are invited - and greatly appreciated.

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Other recent “New York (NY)” posts by Tom Mazurek, CPA:

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