The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.
This post is the seventh in a series analyzing the New York Budget Bill, and summarizes the sales tax provisions in the Budget Bill.
Dodd-Frank Act Relief Provisions
The Budget Bill includes provisions that provide relief from potential sales and use tax implications arising from compliance with certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank). Under Dodd-Frank, large financial services organizations must develop and implement resolution plans allowing for an orderly wind-down of their banking and broker/dealer operations in the event of an adverse financial event, such as another financial crisis. The affected financial services organizations and their regulators have agreed in principle to plans where front-office and back-office assets and operations would be segregated into separate legal entities. As a result, many affected financial services organizations are implementing plans whereby back-office functions are being placed into separate bankruptcy remote legal entities as a way to ensure that an orderly wind-down of the affected entities could occur, with the back-office functions remaining available to all potentially affected entities.
Without the relief provided by the Budget Bill, the Dodd-Frank-mandated reorganizations could have resulted in increased New York sales tax compliance burdens and increased New York sales tax liabilities, both upon the reorganization itself and on an ongoing basis. Many transactions that formerly occurred between different units within the same legal entity (and hence were not subject to sales tax) will have to occur between different legal entities after the restructurings and thus will be taxable. To prevent this increase in sales tax burdens and liabilities, an exemption was inserted into the Budget Bill that will apply to sales of property or services that are entered into or conducted as a result of the resolution planning required by Dodd-Frank, so that the affected companies are not subject to sales or use tax on transactions that occur solely as a result of their compliance with a federal law that has been put in place to make the global financial systems safer.
The exemption provided by the Budget Bill is tied to the status of the buyer and the seller as a “covered company” or “material company” as defined in section 243.2(l) of the Code of Federal Regulations, which is one of the sections implementing the Dodd-Frank Act. Under the exemption, sales of tangible personal property or services among related parties are exempt from the New York sales and use tax if the vendor and the purchaser are referenced as either a “covered company” or a “material entity” in a resolution plan (or the vendor and the purchaser are separate legal entities pursuant to a divestiture authorized by the Dodd-Frank Act), and the sale would not have occurred between such related entities were it not for the resolution plan or divestiture. (For purposes of this provision, parties are considered to be related if they bear a relationship described in Internal Revenue Code Section 267.) Furthermore, the exemption is only available to the extent that the related-party vendor did not claim a resale exemption upon its original purchase of the property. This exemption provision will apply only to sales made, services rendered or uses occurring on or before June 30, 2019 (or pursuant to sales made, services rendered or uses occurring pursuant to a binding contract entered into on or before June 30, 2019). However, in no event will this exemption apply after June 30, 2024.
New Sales and Use Tax Provisions for Boats and Aircraft
The Budget Bill also provides sales and use tax benefits for the purchase and use in New York of expensive boats and general aviation aircraft. These changes were enacted in an effort to make New York’s aviation and boating sales and use tax policies more competitive with the policies of neighboring jurisdictions.
Under the new rules, boats, including yachts, will be subject to sales and use tax in New York on only the first $230,000 of the sales price. In addition, use tax will not be owed on the use of a boat within New York State unless (1) the boat is registered, or is required to be registered, under New York’s vehicle and traffic laws, or (2) the boat is used in New York State for more than 90 days.
With respect to aircraft, the Budget Bill provides an exemption from the sales and use tax for “general aviation aircraft,” plus machinery or equipment installed on such aircraft. Changes also have been made with respect to small non-commercial aircraft. Previously, leases of certain small non-commercial aircraft were subject to acceleration of sales or use tax on the lease payments, whereby all sales or use tax was required to be paid on all lease payments up-front at the time of inception of the lease. Under the Budget Bill provisions, however, sales or use tax on lease payments for such aircraft would no longer need to be accelerated.
Furthermore, the provision for tax-free transfers of tangible personal property due to a merger, contribution or distribution between related parties formerly did not apply to aircraft. (Instead, the purchaser of the aircraft in such a related-party transaction was entitled to a refund or credit against the sales or use tax due in the amount of sales or use tax paid by the seller upon its purchase or use of the aircraft.) The Budget Bill broadens the application of this exemption so that the transfer of certain aircraft pursuant to a merger, contribution or distribution between related parties will now qualify as a tax-free transfer.
Additional Sales and Use Tax Provisions
The Budget Bill included various other sales and use tax provisions, including the following:
- In recognition that breweries, distilleries, cideries and wineries are a growing part of New York’s economy, and to encourage more tastings throughout the state, the Budget Bill (1) expands the current sales and use tax exemption for wine furnished for consumption at a wine tasting to also apply to the bottles, corks, caps and labels used to package the wine, and (2) adopts a similar exemption for other alcoholic beverages furnished to customers for consumption at no charge at a tasting held by a licensed brewery, farm brewery, cider producer, distillery or farm distillery in accordance with New York’s Alcoholic Beverage Control Law.
- The Budget Bill contains incentives for solar power purchase agreements by providing an exemption from the sales and compensating use tax for receipts from the sale of electricity by a person primarily engaged in the sale of solar energy system equipment and, in certain circumstances, electricity generated by a residential or commercial solar energy system.
- The definition of taxable prepaid telephone calling services has been amended to include certain prepaid mobile calling services. In addition, the sourcing rules for prepaid telephone calling services have been amended to provide that in certain circumstances (e., when the sale does not take place at the vendor’s place of business, there is no item shipped in connection with the sale, or the vendor doesn’t have the address associated with the customer’s mobile telephone number) the vendor of the prepaid telephone calling service can source a sale to an address that reasonably reflects the customer’s location at the time of the sale or recharge, as approved by the Commissioner.
For a more detailed description of these provisions, see our previous post, Inside the New York Budget Bill: Proposed Sales Tax Amendments.
Sales and Use Tax Provisions Not Included
A large part of the story concerning the sales tax provisions in the Budget Bill concerns the provisions that did not make it into the version that was passed by the legislature. The governor’s initial draft of the Budget Bill contained provisions that were designed to address what were referred to as “tax avoidance” structures. One of those provisions would have required the acceleration of sales tax on lease payments for all related-party leases of tangible personal property, and another would have limited the exemption for certain transfers between related parties as part of a contribution, distribution or merger. (Technically, the exemption was removed, and a corresponding credit was provided that was meant to put taxpayers in the same position as if the original exemption existed, but in theory there were many gaps in coverage under the corresponding credit, and many taxpayers may have been harmed by such provision in a manner never intended by the legislature.) In addition, the Budget Bill did not include the provisions that would have significantly affected e-commerce companies by imposing a sales and use tax collection responsibility on marketplace providers. For more information on these eliminated provisions, see our prior posts Inside the New York Budget Bill: Proposed Sales Tax Amendments and The New “Click-Through”?: New York Budget Proposal Requires Marketplace Providers to Collect Tax.