New York State can be a scary place for sales tax. If you operate in New York State, and have a wholly owned subsidiary, please read this article to avoid a very expensive tax trap.
NY is focused on related party leasing arrangements considered by NY to be abusive. Specifically, they want to stop the following:
- Tax-free purchases of tangible personal property, followed by,
- Leases to related parties over an unreasonably long lease term, and/or,
- Leases to related parties that are a small fraction of the market rate.
Here is a transaction that you must be very careful to avoid:
- Company A is an operating company that owns 100% of Company B, an LLC.
- Company B is a Single Member LLC, disregarded as an entity separate from its owner (which is Company A) for federal income tax purposes.
- Company B owns Machinery & Equipment (M&E) that it leases to Company A.
- Effective 4/10/17, Company B is no longer entitled to a resale exemption when it acquires M&E which it intends to lease to Company A—i.e., it must pay the sales tax upon purchase of the M&E.
- Now, here’s the trap. The lease of the M&E to Company A is also subject to sales tax;
- Yes, double tax.
- This applies to a straight sale as well (remember, in New York, a lease is also considered a “sale”:
- Company B purchases equipment for resale to Company A (not a lease, but a straight sale);
- Company B pays the sales tax to the vendor, and then charges sales tax to Company A upon the sale.
This trap only applies to the related party relationship noted above, i.e. an operating company owning 100% of an LLC. Although narrow in scope, you do not want to be in this double-tax situation.
It’s time to revisit your related party leasing arrangements and restructure them to avoid the double-tax. The related party leasing structure is a tried and true strategy for the management of M&E and its related cash flows, so don’t let this recent NY legislation stop you from using related party leasing arrangements. The proper structure can avoid the NY double-tax.
John Fontanella is a principal based out of our Syracuse, NY office.