A recent decision by a New York State Administrative Law Judge illustrates some of the important sales tax issues that should be considered by a business entering into a contract to sell New York real property under which tangible personal property is also conveyed. Matter of Empire Holdings LLC, DTA No. 823762 (N.Y.S. Div. of Tax App., Sept. 6, 2012).
In 2004, Empire Holdings LLC (“Empire Holdings”) sold the Empire Hotel, located in Manhattan, to an unrelated purchaser. The sales contract provided that all furniture and supplies, the value of which was specifically described in the Closing Agreement as “de minimis,” were to be transferred as part of the sale. The sales contract did not allocate any part of the approximately $78 million purchase price to the tangible personal property. At the closing, a Bill of Sale was executed stating that the personal property was being transferred for ten dollars. No sales tax was paid on the transfer of the furniture, and a notice of bulk sale was not filed with the Department. However, New York State real estate transfer tax, at the rate of 0.4%, was paid on the full $78 million.
The purchaser planned to convert the hotel into condominium apartments. Having no interest in the hotel furniture and supplies, the purchaser donated them to a charitable organization and paid an additional $200,000 to the charity for removing the furniture from the hotel. Shortly before the sale, and in conjunction with the donation, the purchaser had the furniture and supplies independently appraised for $1,058,000, and it claimed a charitable deduction for that amount (plus the $200,000 payment) on its federal tax return.
The Department later commenced a sales tax audit of Empire Holdings. The audit eventually focused on the “bulk sale” of the furniture and supplies, and specifically on how to value those items. The auditor rejected as lacking sufficient detail the asset depreciation schedules furnished by Empire Holdings, which showed that the property was fully depreciated. Instead, the auditor valued the assets at their original cost of $5,184,000, and assessed sales tax on that amount against Empire Holdings as a vendor.
The transfer of business assets, other than in the ordinary course of business, is considered a bulk sale and is subject to sales tax, whether or not the transfer is a retail sale. 20 NYCRR 537.1(a). Empire Holdings took the position that there was no bulk sale of assets, maintaining that the only tangible personal property “sold” — the furniture and supplies — was of de minimis value. The ALJ found that the sales contract clearly provided for the sale of furniture and supplies, that the assets were in fact transferred, and therefore that a bulk sale had occurred.
On the question of what value should be attributed to the furniture and supplies, the ALJ agreed with the Department that Empire Holdings had failed to prove that the value was zero, referring to the “scant depreciation” documents in evidence as unconvincing. The ALJ also noted that he was not bound by the sales price allocation for the furniture in the sales contract. However, he concluded that the Department’s valuation, based on the original cost with no allowance for depreciation, was unreasonable. Instead, the ALJ found the most reliable evidence of valuation to be the independent appraiser’s contemporaneous valuation of $1,058,000. Thus, the ALJ held that $1,058,000 was the correct value of the furniture subject to sales tax.
The ALJ also rejected the taxpayer’s claims that any sales tax owed should be offset by the New York State and City realty transfer taxes paid on the consideration attributed to the furniture under the doctrines of estoppel and equitable recoupment. He held that since the taxpayer did not pay the transfer taxes in reliance on an act or representation of the Department, the estoppel doctrine was inapplicable, and because equitable recoupment does not permit an offset for a different type of tax against the taxpayer’s sales tax liability, that doctrine was inapplicable as well.
Additional Insights. Where a business conveys personal property in a contract of sale for real estate, real estate transfer tax and sales tax may both be due on the consideration attributable to each. This is true even when the personal property has a negligible value to the parties, or even a negative value because the purchaser must pay to have it removed. In order to avoid paying sales tax on personal property conveyed in a sale of real estate, it is critical that the seller ensure that the lack of value of the personal property is thoroughly documented because the Department is not required to accept the allocation of purchase price set forth in a contract of sale. Presumably Empire Holdings would be entitled to a refund of State transfer taxes paid on the $1,058,000 found subject to sales tax in the unlikely event the statute of limitations for transfer tax refunds remains open.