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Legislative Memo

Ken Pokalsky
T 518.465.7511
www.bcnys.org

BILL:

S.2009 (Budget)/A.3009 (Budget), Part CC

Support

SUBJECT:

Sales taxation of transactions between related entities

 

DATE:

February 1, 2017

 

The Business Council opposes this legislation that would impose state sales tax on certain types of transactions between related entities.

The stated purpose of this amendment is to “remove the incentive to use or create those entities to avoid sales tax.”  While Part CC might impede a few abusive transactions, it will unfortunately also prevent businesses from executing many normal course-of-business purchase transactions that are not abusive.  It will add complexity and cost to these transactions for both vendors and purchasers.  Ironically, the businesses that would be most affected by Part CC are those that are doing the most selling and purchasing of tangible personal property in New York—that is, those that are investing in their in-state operation. 

We therefore recommend that Part CC be dropped from the final revenue bill. 

Specifically, Part CC would eliminate the resale exemption for three types of sales of tangible personal property:  sales to business entities that are disregarded for federal income tax purposes, for resale to a member or owner of the disregarded entity; sales to a partnership, for resale to a partner in the partnership; and sales to a trustee, for resale to a trust beneficiary.  

Businesses that invest in high volumes of capital equipment have for many years employed a simple, sensible strategy of implementing captive procurement companies to serve as central purchasing organizations.  These companies are often established as single-member limited liability companies (each, a “SMLLC”) that are disregarded for income tax purposes—that is, they are treated as branches of their owner.  For example, an operating company (“OpCo”) may set up such a SMLLC (“BuyCo”) as its direct, wholly owned subsidiary.  BuyCo would contract with all of the vendors that supply tangible personal property to OpCo and its operating-company subsidiaries (“OpCo-1,” “OpCo-2,” etc.).  BuyCo would provide each vendor with sales tax exemption certificates—for both New York and the other states where OpCo and its subsidiaries operate—establishing that it will be purchasing tangible personal property from the vendor for the purpose of reselling to OpCo and its operating company subsidiaries.

This simple structure benefits both vendors and purchasers.  For vendors, their multistate tax compliance is greatly simplified.  They will not need to collect sales tax from the customers who employ a captive purchasing company and will therefore not need to police the applicability of exemptions that may be complex and unique to particular industries.  For purchasers, similar benefits apply.  A purchaser that is eligible for complex or industry-specific exemptions will typically be more familiar with how these exemptions should apply than would a vendor that sells across multiple industries.  And the purchaser will have complete control over the process of collecting and remitting sales and use taxes, and can assure that the taxes it owes will be paid on time to all appropriate taxing authorities.

When State tax authorities audit these captive purchasing companies and their affiliates, all of the tax records for the business are in one place—with no need to deal with records that involve hundreds, or even thousands, of different vendors to the business.  And these efficiencies for vendors, purchasers, and even State tax authorities come with no tax cost to the State.  The taxes that are collected and remitted by the captive purchasing company are the same taxes that would have been collected and remitted by the original vendor, if the captive purchasing company did not exist.

Part CC would significantly disrupt the operation of captive procurement companies, and add undue complexity and cost to business operations that should have been allowed to continue unimpeded.  For example, under Part CC, BuyCo would be unable to purchase tangible personal property in New York on a tax-exempt basis from vendors for resale to OpCo, its owner.  But BuyCo would still be able to purchase such property on a tax-exempt basis for resale to OpCo’s operating subsidiaries, OpCo-1, OpCo-2, etc. 

The resulting complexity is apparent:  On the vendor side, every vendor that previously only sold to BuyCo would need to sell both to OpCo (assuming that OpCo would not choose to incur the double tax cost created by Part CC) and to BuyCo for resale to OpCo-1, OpCo-2, etc., which would still qualify for the resale exemption.  On the purchaser side, the OpCo group would need to restructure its purchasing procedures so that—in New York—tangible personal property to be used by OpCo would need to be ordered from vendors directly by OpCo, instead of through BuyCo, while other orders (for OpCo-2, OpCo-2, etc.) would still be made through BuyCo.

In exchange for introducing this new costly complexity for in-State businesses, the tax benefit to New York State is zero.

Importantly, the abuses being targeted by this legislation can be handled without the broad impact of Part CC.   The Memo recites two types of abusive transactions that are being targeted:  Tax-free purchases, followed by either a long-term lease, or by a lease featuring “lease payments that are a small fraction of the fair market value of the property.”  But both of these transactions are capable of being handled under existing law, without also interfering with normal, non-abusive business transactions.  Long-term leases, which are not structured to qualify as leases under GAAP or income tax guidelines, can be challenged on the basis that they are not really leases, but are instead installment sales, on which sales tax is due up front.  And leases that are drawn up so that the lease payment is only a “small fraction of the fair market value” of what the payments should be can be recast using other tools that are already available to New York’s tax authorities.

For these reasons, The Business Council respectfully opposes adoption of S.2009 (Budget)/A.3009 (Budget), Part CC.