When a resident purchases tangible personal property outside New York State, and then brings it into the State, use tax is due at the time of first use in the State. The Tax Law provides an exemption from use tax to the extent sales tax was paid on the same property in another state. A recent decision reveals that the method used by the Department for calculating the credit can yield unexpectedly harsh results. Matter of Philip Cimino, DTA No. 823748 (N.Y.S. Div. Tax App., July 19, 2012).

In 2003, Philip Cimino, a New York resident, purchased a boat in Florida for $267,000, on which he paid $16,000 in Florida sales tax. In 2007, Mr. Cimino moved the boat to Long Island, but did not report or remit any New York use tax on the boat. In 2009, the Department received information from the U.S. Coast Guard that the boat was being moored in New York State waters, and commenced a use tax audit.

When a New York resident’s property is used outside of the State for more than six months before its first use in New York, the use tax is based on the current market value of the property at the time of first use in the State, rather than on the original purchase price. Tax Law§ 1111(b)(1). The law contains an exemption from New York use tax to the extent that sales tax was paid on the property to another state. Tax Law § 1118(7)(a).

On audit, the Department determined the use tax due on the boat, using National Automobile Dealers Association guidelines to ascertain a fair market value of $130,000. Applying the combined State and local tax rate of 8.625% to the $130,000 valuation yielded a use tax, before credit, of $11,234. In order to calculate the credit for the sales tax Mr. Cimino had already paid to Florida, the Department took the Florida sales tax rate of 6% and multiplied it by the $130,000 fair market value of the boat at the time it was brought into New York, deriving a $7,815 credit. After applying the $7,815 credit against the $11,234 use tax, the Department assessed additional use tax of $3,419, plus interest and penalties.

Mr. Cimino first argued that the fair market value used by the Department was too high, but the ALJ found that the taxpayer did not provide any documentation regarding the proper value. Mr. Cimino then argued that the credit formula used by the Department was flawed. He claimed that no use tax was due because he should have been given a full credit for the $16,020 in sales tax paid to Florida upon purchasing the boat, an amount that was greater than the use tax determined by the Department. According to the ALJ, the taxpayer’s position was “without merit.” The ALJ held that “[t]here is no provision in the statute or case law that allows the credit to be calculated in the manner suggested by [Mr. Cimino].” The ALJ also upheld the imposition of penalties, noting that nothing in the statute supported Mr. Cimino’s belief that there was dollar-for-dollar credit.

Additional Insights. Buyers often assume that if sales tax is paid to another state on the purchase of property, no further use tax is due when the property is brought into New York. The ALJ’s decision reveals that this assumption is often incorrect. Curiously, neither the law nor the regulation cited by the ALJ actually sets out the formula used by the auditor to limit the credit, and the result seems harsh inasmuch as the Florida sales tax paid by Mr. Cimino was greater than the New York use tax. The upholding of penalties under these circumstances is particularly surprising, given the lack of guidance provided by the statute or regulations.