The plan was simple. New York State, like many other jurisdictions, allowed a purchaser, to purchase for resale, tangible personal property (TPP) that is subsequently leased to another taxpayer. The theory is simple. The sales and use tax (sales tax) is meant to be a tax on the actual use or consumption of goods and is not intended to pyramid on each transaction, but only impose its burden on the end user. Accordingly, the purchaser – lessor buys TPP from a vendor for resale and doesn’t pay sales tax. The purchaser – lessor leases the TPP to the lessee and collects and remits sales tax on the monthly lease payments. So far, all seems in balance. The sales tax is imposed only once on the intended party, the lessee as end user.
So what is the perceived problem with this arrangement? Let’s say that purchaser – lessor buys equipment costing $50 million. The New York sales tax on that could be as much as $4.4 million, which if not purchased for resale, would be due and owing to the State. However, our purchaser – lessor buys the equipment for resale (as permitted before the law change) and pays no sales tax at this time. The sales tax is billed, collected and remitted every month based on the amount of the lease payment. Hence the State is getting much smaller payments over a longer period of time.
Certainly this arrangement would raise no suspicion where the lessee is an unrelated third party. The State will respect an arms-length negotiated lease payment and not seek to interfere. However, perceived abuses with related party leases motivated the State to quash this arrangement with certain related members. Effective September 1, 2017, a sale to a single member LLC for resale to its member, a sale to a subsidiary for resale to its owner, where the single member LLC or subsidiary is disregarded for federal tax purposes, will be regarded as a retail sale and tax must be paid on the full purchase price at that time. The rule also applies to a sale to a partnership for resale to one or more partners as well as a sale to a trustee for one or more beneficiaries of the trust.
It would appear that existing leases would be respected. It is imperative though that any prospective leases be reviewed. Revenue shortfalls and federal funding cuts to the states are likely to motivate more jurisdictions to move in this direction. If you have questions about the implications of this coming change on prospective leases, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.