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”:
  1. Company B purchases equipment for resale to Company A (not a lease, but a straight sale);
  2. 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.

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