On August 14, 2017, the New York State Department of Taxation & Finance issued a Technical Memorandum, TSB-M-17(4)S, which will be of interest to many New York-area art dealers and collectors.
The Technical Memorandum (TM) was issued, in part, to provide guidance regarding certain provisions of New York State's recently-enacted 2017 budget legislation (Part CC of Chapter 59 of the Laws of 2017) that amended how NYS Sales Tax applies to sales of tangible personal property between certain related entities, effective with respect to sales on or after April 10, 2017. Generally, a purchase of tangible personal property with the intention of reselling such property in the ordinary course of the purchaser's business is eligible for the so-called "resale exception" and is not subject to NYS Sales Tax. However, the 2017 NYS budget legislation amended Section 1101(b)(4) of the NYS Tax Law to add an exception to this exception. Under this amendment, the "resale exception" will not apply to any of the following sales of tangible personal property and will be subject to NYS Sales Tax:
- sales to a single-member LLC treated as a disregarded entity for federal income tax purposes (or a subsidiary of such LLC) for resale to its member or owner;
- sales to a partnership for resale to one or more of its partners; or
- sales to a trustee of a trust for resale to one or more beneficiaries of such trust.
The TM illustrates the application of this exception to the resale exception with the following example:
A New York resident creates a single-member LLC that purchases artwork in New York City with the intent to lease the artwork to the single member of the LLC. The LLC is treated as a disregarded entity for federal income tax purposes. The purchase of the artwork by the LLC does not qualify as a purchase for resale and is subject to sales tax at the rate in effect in New York City. In addition, the lease of the artwork by the LLC to its single member is also a taxable sale.
The TM further notes that if the sole member of the LLC in the above example instead were to purchase the artwork directly, without involving the LLC, the purchase would be subject to NYS Sales Tax only once.
By citing as an example the sale of artwork to an LLC intended for subsequent resale to such LLC's sole member, the TM highlights the potential application of the 2017 legislative amendment to the many art dealers and galleries organized either as single-member LLCs, partnerships or, presumably, multi-member LLCs treated as partnerships for income tax purposes that often acquire artworks intended for subsequent transfer to one or more of their partners or members. In this respect, the 2017 legislative amendment of the NYS Tax Law may present a significant trap for the unwary.
While such art dealers and galleries previously were subject to NYS Sales Tax only once when they purchased artworks intended for subsequent resale to one or more of their members or partners, they now are subject to a double dose of NYS Sales Tax upon such purchases and sales.
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