New York: Sales Tax Owed on Equipment Transferred as Part of LLC Acquisition

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Detailed New York Development

An Administrative Law Judge (ALJ) for the New York Division of Tax Appeals recently addressed whether a taxpayer owed sales tax on property, equipment, and custom software it acquired under the terms of an LLC purchase agreement. The taxpayer, a corporation in the business of providing news and information regarding financial markets, acquired 100 percent of the equity in the LLC, which owned various assets, including property and equipment, and internally developed software. After the acquisition, the LLC remained a disregarded entity while continuing to provide its services as a subsidiary of the taxpayer. On audit of the taxpayer, the Division assessed sales tax on the basis that the acquisition transaction, in part, constituted the sale of tangible personal property. After remitting the tax assessed under protest, the taxpayer contested the tax due related to the purchase of tangible personal property. In the taxpayer’s view, the acquisition was merely a transfer of the intangible equity interests in an LLC, and the purchase agreement supported its position that the transaction was not intended to be a purchase of tangible assets. Alternatively, the taxpayer argued that some of the assets transferred in acquisition were exempt from sales tax.

The ALJ rejected the taxpayer’s argument that the purchase agreement supported a conclusion that it did not acquire tangible assets in the transaction.  Based in part on the purchase agreement and other documents evidencing separate costs allocated to different assets, the ALJ reasoned that the acquisition was not just one, but rather multiple transactions. Additionally, the assets became comingled on the taxpayer’s balance sheet, and the transfer of title to the assets was required in the purchase agreement. Having determined that the taxpayer acquired tangible assets, the ALJ next considered whether any of those transfers were exempt from sales and use tax.  The software at issue was custom software that would have been taxable if it was sold or transferred to a third party. However, the taxpayer owned 100 percent of the equity in the LLC and therefore the transfer of the custom software was between affiliates (i.e., subsidiary to owner) and was exempt from sales tax. Lastly, the ALJ determined that certain assets related to buildouts of the LLC’s office space. These assets qualified as leasehold improvements exempt from sales tax because they remained in the space and became part of the sublease to a third party.  As such, the ALJ reduced the assessment to apply only to the remaining tangible personal property transferred. For more information on In re Matter The Street.com, Inc. please contact Judy Cheng at 212-872-3530.

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US