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SALT TALK: Substance or Forlorn; or How I Stopped Worrying and Learned to Love Tax Planning

Wayne Berkowitz CPA, J.D., LL.M. 08.21.2017 | SALT TALK

[Readers Note: In conjunction with my firm’s centennial, 1917-2017, this happens to be my 100th blog. Where does the time go?]

Following in the spirit of the 1964 film “Dr. Strangelove” the New York State Department of Taxation and Finance has recognized that perceived anti-abuse legislation is only a deterrent if everyone knows about it. Just this week the Department has issued a Technical Memorandum[1] explaining how legislation effective April 10, 2017 purports to eliminate certain sales and use tax planning techniques perceived to be abusive.

While most other taxing schemes look to interpret the underlying law and regulations so as to put substance over form, sales tax has notoriously been recognized for taking the opposite approach. The simplest example being of two separate businesses having 100% common ownership and one sells taxable services to the other as a valid business reason (liability issues, perhaps) exists to have the employees of the selling entity separate from the recipient of the services. Had the employees of the seller been instead employees of the purchaser, no tax would result for essentially the identical transaction.

Capitalizing on the form over substance mantra championed by the sales tax, a common planning technique used for large expenditures would have the purchaser set up a new special purpose entity (SPE) to make the capital outlay. The SPE would purchase the items for resale and accordingly would be exempt from sales tax on the initial purchase. The SPE would lease the property to its 100% parent (the intended purchaser/user) and charge the proper sales tax on the monthly lease payments. With a significant capital outlay, this would result in much smaller monthly outlays of sales tax. Oftentimes the asset would be disposed of before its useful life was through and as a result only a fraction of the sales tax due on an outright purchase would end up in the State’s coiffeurs. 

New York’s new legislation no longer permits resale exclusion on the initial asset purchase among certain related parties. Single member LLCs, partnerships, and trustees of a trust may no longer purchase for resale property that is going to be leased to the respective owner or beneficiary. If a leasing structure is put in place the Memorandum emphasizes that the tax will be due and owing twice; once on the purchase of the asset and again on the lease payment itself.

Why am I forlorn about this? Well, notably absent from the list are corporations. A wholly owned SPE formed as a corporation can still purchase tangible personal property for resale (and not pay the New York State tax) and continue to only charge the tax on the periodic lease payments made by its owner. This seems to be, intentional or not, a gaping hole in the attempted loophole closure. So while I have learned to stop worrying and love tax planning, I’m not sure why this distinction exists. Maybe so we can continue our true love? If this raises any questions in light of your circumstances, I can be reached at WBerkowitz@BerdonLLP.com or contact your Berdon advisor.

Wayne K. 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.

[1] TSB-M-17(4)S (August 14, 2017)

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