One aspect of the New York State Budget Bill enacted this past spring, intended to close sales and use tax "loopholes," involved the narrowing of both the resale exclusion for certain related entity transactions and the exclusion for purchases made by nonresident businesses, applicable to transactions and purchases on or after April 10, 2017. Part CC, Chapter 59, Laws of 2017. The Department of Taxation and Finance has now issued a Technical Memorandum discussing those new provisions. Technical Memorandum, "Amendments Regarding Sales Tax Rules for Transactions between Certain Related Entities and for Purchases Made by Nonresident Businesses," TSB-M-17(4)S (N.Y.S. Dep't of Taxation & Fin., Aug. 14, 2017).

Transactions Between Certain Related Entities. The definition of a "retail sale" of tangible personal property has been expanded to include sales of tangible personal property: (i) to a single-member LLC or its subsidiary, disregarded for federal income tax purposes, for resale to a member or owner; (ii) to a partnership for resale to one or more of its partners; or (iii) to a trustee of a trust for resale to one or more trust beneficiaries. The purpose of this enactment was to discourage taxpayers from buying tangible personal property and claiming resale treatment by then leasing the property to such an entity, thereby avoiding (or at a minimum delaying) the payment of sales tax on the purchase.

The Technical Memorandum contains an example in which a New York City resident purchases artwork for lease to its newly formed single-member LLC that is disregarded for income tax purposes. The example makes clear that the purchase by the New York City resident no longer qualifies as a purchase for resale, and that the lease to the LLC is also a taxable retail sale (i.e., sales tax is ultimately due twice). If the single member purchased the artwork directly, sales tax would only be due once.

Narrowing of Use Tax Exclusion for Purchases by Nonresident Business Entities. The sales tax law was also amended to eliminate the exemption from use tax for property or services purchased outside New York State but brought into the State by a nonresident unless the nonresident has been "doing business" outside the State for at least six months prior to the date the property or services are brought into the State.

The Technical Memorandum defines "doing business" as actively engaging in normal operating activities, such as hiring employees, having a payroll, and making routine purchases and sales; it then sets out several examples. The examples make clear that the business must have been actively conducted for at least six months prior to when the property or services are brought into New York. There is no requirement, however, that the property actually be used outside the State by the nonresident business in order to qualify for the exclusion.

In one example (Example 4), a corporation in New York forms a subsidiary on May 1, 2017. On June 1, 2017, the subsidiary purchases a sculpture for installation in the lobby of the parent's New York City office building. On February 1, 2018 -- more than six months after the subsidiary was formed -- the subsidiary brings the sculpture into New York to be installed. Under the example, the subsidiary will owe use tax when it brings the sculpture into New York because, although it has been in existence for more than six months when it brings the sculpture into the State, it has not been "doing business" for the requisite six months. The Technical Memorandum makes clear, however, that this new use tax restriction does not apply to individuals who bring property or services into New York.