Governor Andrew Cuomo’s 2017-2018 New York State Executive Budget Bill (“FY 2018 Budget Bill”), proposes several tax-related changes, including changes to various tax credits, the real estate transfer tax, and the state sales and use tax. This post summarizes the FY 2018 Budget Bill’s key sales and use tax proposals, which are similar to proposals made in the Governor’s 2015-2016 New York State Executive Budget Bill (“FY 2016 Budget Bill”).
The FY 2018 Budget Bill proposes to amend certain provisions of the Tax Law to require that “marketplace providers” collect and remit sales and use tax on taxable sales of tangible personal property that they facilitate. This proposal is very similar to a proposal made in the FY 2016 Budget Bill.
A “marketplace provider” is defined as “[a] person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by such marketplace seller. . ..” A person “facilitates a sale” for this purpose if (i) the person provides the forum in which, or by means of which, the sale takes place or the offer of sales is accepted (including a shop, store, or booth, an internet website, catalog, or similar forum) and (ii) the person or its affiliate (defined as persons having more than 5% direct or indirect common ownership) collects the receipts paid by a customer to a marketplace seller for a sale of tangible personal property or contracts with a third party to collect such receipts. A “marketplace seller,” in turn, is defined as “any person . . . who has an agreement with a marketplace provider under which the marketplace provider will facilitate sales of tangible personal property by such person . . ..” There is a safe harbor for certain “small” marketplace providers, whereby a person is not considered to be a “marketplace provider” subject to the proposed sales and use tax collection obligations if the person facilitates less than $100 million of sales annually for every calendar year after 2015.
The FY 2018 Budget Bill shifts from the marketplace seller to the marketplace provider the duty (and burden) to collect and remit sales and use tax on sales to New York customers facilitated by the marketplace provider. Under current law, vendors (i.e., sellers) and co-vendors are required to collect New York sales or use tax on sales made to New York customers. In contrast, under the FY 2018 Budget Bill (as under the FY 2016 Budget Bill), a vendor or co-vendor that qualifies as a marketplace seller would no longer be required to collect New York sales or use tax on sales facilitated by a marketplace provider if the marketplace seller receives, in good faith, a properly completed certificate of collection from the marketplace provider. The form of the certificate is to be developed by the Commissioner and would certify that the marketplace provider is registered to collect and will collect tax on all taxable sales of tangible personal property by the marketplace seller.
The proposed statute also provides that the Commissioner may develop or approve a standard provision by which a marketplace provider obligates itself to collect the tax on behalf of all marketplace sellers for whom the marketplace provider has facilitated sales of tangible personal property to New York customers and may provide by regulation or other guidance that the inclusion of such a provision in the publicly-available agreement between the marketplace provider and marketplace seller will have the same effect as a certificate of collection. The FY 2018 Budget Bill also authorizes the Department of Taxation and Finance to publish a list on its website of marketplace providers whose certificate of authority has been revoked, and permits the Department, if necessary, to provide by regulation or otherwise that a marketplace seller will be relieved of its duty to collect sales or use tax only if the marketplace provider does not appear on such list at the commencement of the calendar year in which the sale is made.
The proposal does not appear to allow a marketplace seller to collect and remit tax instead of the marketplace provider if the marketplace seller so desired. There is also nothing directly addressing the information that would need to be provided by the marketplace seller to the marketplace provider (e.g., information regarding the nature of the transaction or dollar amounts) so that the proper amount of tax can be collected and remitted. However, the Budget Bill contains some relief for marketplace providers whereby the marketplace provider would be relieved of liability for failure to collect the correct amount of tax if the marketplace provider can show that the error was due to incorrect information provided by an unaffiliated marketplace seller.
As noted above, this marketplace provider provision is similar to a proposal made in the FY 2015 Budget Bill which was sharply criticized for its potential to create substantial compliance burdens for internet marketplaces and its questionable constitutionality. The current marketplace provider proposal does not appear to do much to alleviate those concerns. For example, it imposes the same duties and compliance burdens on marketplace providers and does not expressly provide that only marketplace providers with nexus would be subject to the collection requirement (which raises constitutional questions).
If enacted, the marketplace provider provisions would be effective immediately and apply to tax years beginning on or after September 1, 2017.
Transactions Between Related Entities
Under current law, purchases of tangible personal property for resale are not subject to sales or use tax, regardless of whether the purchaser resells the property to a related person. The FY 2018 Budget Bill would narrow this sale for resale exclusion by amending the definition of “retail sale” to include any transfer of tangible personal property to certain entities when that property will be resold to certain related persons or entities, specifically: (1) sales to single member limited liability companies or subsidiaries that are disregarded for federal income tax purposes for resale to its member or owner; (2) sales to a partnership for resale to one or more of its partners; and (3) sales to a trustee of a trust for resale to one or more beneficiaries of such trust. The Memorandum in Support of the FY 2018 Budget Bill indicates that this provision is intended to close an “existing tax loophole” that allows related entities to rely on the sale for resale exclusion to “purchas[e] high-dollar-value property exempt from sales tax and then leas[e] the property to a member or owner using long-term leases or lease payments that are a small fraction of the fair market value of the property.”
Interestingly, this proposal appears to be a twist on two similar proposals made in the FY 2016 Budget Bill. The first of the FY 2016 Budget Bill proposals provided that, with respect to leases of tangible personal property between related entities, sales tax would be due as of the date of the first payment under the lease (or, if the property was outside of New York on that date, the date the property was brought into New York) and provided the Commissioner with discretion to estimate the true value of the lease payments if the sum of the lease payments due under the lease do not reflect the “true value or cost of the property.” The second of the FY 2016 Budget Bill proposals provided that, for sales and use tax purposes, “a single member limited liability company [“SMLLC”] and the member of that limited liability company shall be deemed to be one person.” The intended result of this provision was that neither an SMLLC nor its owner could make a nontaxable sale for resale to the other. However, there were concerns that this provision would have had more sweeping consequences, turning previously taxable transactions (e.g., “non-resale” sales between the SMLLC and its owner) into nontaxable transactions and transforming nontaxable transactions (e.g., sales of an SMLLC’s interest) into taxable events.
While the FY 2018 Budget Bill proposal may not suffer from the same infirmities as the FY 2016 Budget Bill proposals, it seems that the FY 2018 proposal is much broader than needed to achieve its stated purpose (i.e., closing perceived loopholes with respect to related party leases ofhigh-dollar-value property). For example, the proposal would affect sales made to a partnership for resale to any partner, even if that partner is a minority limited partner that does not control or manage the partnership; in this situation, there seems to be little risk that the partner is merely using the partnership to avoid sales tax. Similarly, sales or leases between disregarded entities and their owners or between partnership and their partners often have a legitimate business purpose, such as the centralization of a corporate group’s purchasing function in one entity. The provision is broadly drafted so as to impact these types of legitimate, non-tax avoidance transactions. Thus, corporate groups that centralize their purchasing functions in an SMLLC (or other entity) that is disregarded for federal income tax purposes or in a partnership (or other flow-through entity that might be included in the definition of a “partnership) to make purchases of tangible personal property should be cognizant that this proposal would eliminate purchases made by that SMLLC or partnership from the resale exclusion even if the purchase is actually being made for resale to the owner or partners.
Additionally, and perhaps most importantly, this provision has the potential to lead to significant double-taxation of the affected transactions, as the disregarded entity, partnership or trustee purchasing the tangible personal property would have to pay tax on its initial purchase of the tangible personal property (absent some other exemption or exclusion, other than the sale for resale exclusion) and the subsequent resale to the owner, partner or beneficiary would also be subject to tax (absent an applicable exemption or exclusion, noting that there are some limited exemptions for transactions between entities and their owners). If this proposal moves forward, relief should be allowed for the subsequent resale to the owner, partner or beneficiary, either in the form of an exemption, exclusion or credit for taxes paid by the disregarded entity, partner or trustee.
If enacted, this proposal would take effect immediately.
Nonresident Use Tax Exemption
New York Tax Law section 1118(2) currently provides an exemption from use tax for the use within New York of tangible personal property or services purchased by a nonresident (either an individual or a business entity), provided that at the time of purchase the nonresident was not engaged in the conduct of a trade or business in New York in which the property or service was used. The New York State Department of Taxation and Finance’s regulations provide that a ‘‘resident’’ for this purpose includes “[a]ny corporation incorporated under the laws of New York, and any corporation, association, partnership or other entity doing business in [New York] or maintaining a place of business in [New York].” There is no requirement under current law that a nonresident do business or maintain a place of business outside of New York at the time the nonresident purchases the property or service.
Mirroring a proposal in the FY 2016 Budget Bill, the FY 2018 Budget Bill would eliminate this exemption for business entities (but not for individuals), unless that entity has been doing business outside of New York for at least six months prior to the date that the entity brought such property or service into the state. The Memorandum in Support of the FY 2018 Budget Bill indicates that this provision is intended to close an “existing tax loophole” that allows residents to create a new entity, such as an SMLLC, to purchase high-dollar-value property out of state and bring the property into New York to avoid the use tax. As with the FY 2016 Budget Bill’s nearly identical proposal, this proposal has the potential to negatively impact bona fide start-up businesses, rather than more narrowly targeting sham companies set up to take advantage of the nonresident exclusion.
If enacted, this proposal would take effect immediately.
Effected taxpayers should carefully consider these proposals and their implications. We will continue to monitor the status of the FY 2018 Budget Bill and publish any noteworthy developments.