On January 16, Governor Cuomo introduced the 2018 New York State Executive Budget Legislation. The bill proposes a number of changes to the New York State sales tax law. Below is a summary of the highlights.
Sales and Use Tax
- “Marketplace Providers”
The governor’s bill proposes to impose sales tax registration and collection requirements, traditionally imposed on vendors, on “marketplace providers.” This provision is essentially an effort to obtain sales tax on sales to New York customers that make purchases over the internet from companies that have no physical presence in New York and do not collect sales tax in New York when those companies make sales through online marketplaces. In the governor’s Memorandum of Support of this bill, he affirmatively states that “the bill does not expand the rules concerning sales tax nexus”. Although, as noted below, this claim may not be true.
The bill effectively shifts the sales tax collection burden from the traditional vendor to the marketplace provider. The bill defines marketplace provider as “a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by such marketplace seller or sellers.”
A person “facilitates a sale of tangible personal property” if the person meets both of the following conditions:
(i) such person provides the forum by which the sale takes place, including a shop, store, or booth, an internet website, a catalog, or a similar forum; and
(ii) such person or an affiliate of such person collects the receipts paid by a customer to a marketplace seller for a sale of tangible personal property.
The bill caveats that “a person who facilitates sales exclusively by means of the internet is not a marketplace provider for a sales tax quarter when such person can show that it has facilitated less than one hundred million dollars of sales annually for every calendar year after [2015].”
Unlike the definition of the term “vendor” in the current Tax Law, the definition of “marketplace provider” does not contain a doing business or physical presence component. Accordingly, despite the governor’s assertion that the bill does not expand the rules concerning sales tax nexus, this provision may expand the sales tax nexus rules by potentially imposing a sales tax collection obligation on marketplace providers that do not have a physical presence in New York.
In an effort to minimize the number of entities with a collection requirement, the bill provides that if a marketplace seller obtains a certificate of collection from the marketplace provider, it is not required to collect sales tax as a vendor. The bill caveats that if the marketplace provider and the marketplace seller are affiliated parties, and the marketplace provider fails to collect the tax, the marketplace seller will remain liable for the sales tax. For such purposes, parties are affiliated if they have as little as five percent of common ownership.
The proposed legislation would not permit marketplace sellers that sell to customers in New York through a marketplace provider to collect the sales tax themselves. One suggestion is to include a provision that allows marketplace sellers to collect the tax based on an agreement with the marketplace provider.
The bill provides some protection for marketplace providers if their failure to collect the correct amount of tax is due to incorrect information given to the provider by the marketplace seller. Again, affiliated parties would not get this protection.
The bill proposes that the act take effect on September 1, 2017 and apply prospectively.
- Related Entity Sales Tax Issues
The governor’s bill proposes amendments to the resale exclusion in an effort to stop companies from purchasing high-dollar-value property for resale to their affiliates, then leasing the property using a long-term lease or for a small fraction of the property’s fair market value thereby avoiding much of the sales tax on the transaction.
The governor’s bill proposes to solve the problem by eliminating the resale exclusion for (1) sales to a single member LLC or subsidiary that is disregarded for federal tax purposes for resale to its owner or parent company; (2) sales to a partnership for resale to one or more of its partners; and (3) sales to a trustee of a trust for resale to one or more of the beneficiaries of the trust.
This provision is broader than necessary to accomplish its goal since the provision also eliminates the resale exclusion for arms-length, good-faith transactions between related entities, thus potentially subjecting certain transactions to double taxation–once when the property is sold to the single member LLC, for example, and again when it is resold by the LLC to its owner.
The bill proposes that this section take effect immediately.
- Use Tax Exemption for Nonresidents
In response to the New York State Division of Taxation’s and the Attorney General’s recent focus on sales and use tax issues involving the sale of artwork, the governor’s bill proposes to provide an exception to the use tax exemption for the use of property or services in New York purchased by the user while the user was a nonresident. The governor’s goal is to prevent New York residents from creating foreign entities to purchase property (usually artwork) outside of New York and subsequently bringing the property into New York and avoiding the use tax.
The bill provides that the use tax exemption for nonresidents will not apply if the nonresident business has not been doing business outside the state for at least six months prior to the date that such nonresident brought the property or service into New York. This provision does not apply to individual nonresidents.
Again, this provision may be broader than necessary to “catch” those avoiding tax using the use tax exemption. This provision may impact businesses acting in good-faith without a tax avoidance scheme. A better idea may be to provide that a nonresident company will lose the use tax exemption if the company has no valid business purpose and was created solely to avoid tax.
The bill proposes that this section take effect immediately.
- Transportation, Transmission or Distribution of Gas or Electric
The governor’s bill also proposes the making of a technical change to NY Tax Law § 1105-C to clarify that sales tax is imposed on charges for transporting, transmitting, or delivering gas or electricity when the company providing the transportation, transmission, or distribution is also the provider of the commodity. This amendment is intended only to clarify the existing law.
The bill proposes that this section take effect immediately.
