The New York State Tax Appeals Tribunal has affirmed a decision holding that the transfers of motor vehicles between related parties were retail sales subject to New York State sales tax, even though no cash consideration was actually paid to the transferors. Matter of CLM Associates, LLC, DTA No. 826735 (N.Y.S. Tax App. Trib., Feb. 12, 2018).
Facts. CLM Associates (“CLM”), a single member LLC located in Westchester County, was part of a group of related auto dealerships, each of which was also a singlemember LLC owned by the same closely held parent. Following a restructuring, CLM ceased to be a dealership and instead became the administrative entity for the group of dealerships.
The tax dispute concerned “loaner cars” that dealerships offer to customers who service their vehicles at the dealerships. As part of the restructuring, the loaner cars, which had been acquired and then used exclusively by the dealership entities, thereafter were to be titled and insured in CLM’s name. This was done for various business reasons, including limiting potential liability of any one dealership in the event of an accident involving a loaner car.
To effectuate the transfers of the loaner cars to CLM, each dealership created an invoice or bill of sale designating CLM as the purchaser. No amounts were paid by CLM to the dealerships for the loaner cars and, although sales tax was often shown on the invoice, no sales tax was ever actually paid. The loaner cars were then registered with the Department of Motor Vehicles in CLM’s name.
During the course of an audit of a related entity, the Department became aware of the intercompany loaner car transfers, and a sales and use tax audit of CLM was commenced. The auditor examined all loaner car transfers made during a test period, including the bills of sale, and concluded that the loaner car transfers constituted taxable sales of tangible personal property, apparently based on the purchase price reflected in the bills of sale. However, since CLM often traded in used loaner cars to the dealerships when it received a new loaner car (which were then sold by the dealerships as used vehicles), the auditor allowed CLM a credit for tradeins that were either identified in the invoices or, if not identified, were shown to have been traded in on the same day as CLM acquired a new loaner car. The auditor then extrapolated the results over the entire audit period, and the Department issued a Notice of Determination for sales tax of approximately $1.1 million, plus interest.
ALJ Determination. After a hearing, the Administrative Law Judge held that the intercompany loaner car transfers were retail sales of tangible personal property and subject to sales tax. The ALJ rejected CLM’s claim that there was no consideration for the transfers, noting that CLM provided consideration to the dealerships by, among other things, becoming jointly and severally liable for losses that could arise from use of the loaner cars and becoming jointly and severally liable on the financing for their initial acquisitions by the dealerships. The ALJ also held that CLM was not entitled to a credit for use tax that the dealerships paid on certain long-term loaner cars, concluding that use tax paid by one entity could not be credited against the sales tax liability of a different entity. CLM appealed the ALJ determination.
Tribunal Decision. The Tribunal upheld the ALJ’s determination that the intercompany transfers of the loaner cars constituted taxable sales, rejecting CLM’s contention that there was no consideration for the transfers. The Tribunal agreed with the ALJ “that the spreading of liability and the benefit of administrative convenience in managing the combined loaner fleet constituted the consideration required to qualify the transfer of the loaner titles to petitioner as retail sales.” The Tribunal pointed to the “form petitioner chose to conduct its business” and “the record of the accounting entries created for the transfers” as sufficient evidence that “consideration was exchanged,” citing Matter of Hygrade Casket Corp., DTA No. 809681 (N.Y.S. Tax App. Trib., Dec. 16, 1993), aff’d, 212 A.D.2d 843 (3d Dep’t, 1995). Under the sales tax regulations, transfers between related corporations are “taxable to the extent of the consideration paid, or the fair market value, if the consideration paid is not an adequate indication of the true value of the property transferred.” 20 NYCRR § 526.6(d)(8)(i).
However, the Tribunal agreed with CLM that it was entitled to a credit for use tax paid on the loaners by the individual dealerships. The Tribunal noted that the ALJ found that the auditor did allow a credit for sales tax paid by dealerships on certain long-term loaner cars. Since the Department conceded at the hearing that the sales tax paid by the dealerships could be credited against CLM’s sales tax liability, “[u]nder these specific facts,” the Tribunal saw no reason to deny CLM a credit for use tax paid by the dealerships on the loaner cars.
The sales tax largely remains a form-driven tax, and the fact that the related parties documented the transfers of the loaner cars as actual sales for consideration, evidenced by actual invoices and bills of sale, and created intercompany receivables and payables in connection with the transfers, was sufficient to find that the intercompany transfers were taxable sales. Although sales tax is imposed on the “consideration” for the transfer of tangible property, sales tax regulation § 526.6(d)(8)(i) provides that tax can be imposed on the property’s “fair market value” in certain instances, creating uncertainty as to when tax will be imposed on intercompany transfers. Unfortunately, since it can be assumed that many, if not most, intercompany transfers provide benefits to the parties in question, the fact that there is no actual payment of cash consideration does not, under Matter of CLM Associates, shield such intercompany transfers from sales tax.