The New York State Department of Taxation and Finance (Department) has just revised its Guide to Sales Tax in New York State, Publication 750.
The Guide will be particularly useful for companies that are just starting to do business in New York State. It provides a well-organized and easy-to-read outline of the steps that should be taken to register as a vendor selling products that are subject to the sales tax and to collecting and remitting taxes. Small businesses and their advisors will find the Guide particularly useful.
The Guide confirms the State’s required adherence to the United States Supreme Court decision in Quill Corp. v. North Dakota (a case in which the taxpayer was represented by McDermott Will & Emery) to the effect that an out-of-state company must have a physical presence in New York to be required to collect use tax on sales to New York customers. It confirms that a company need not collect use tax on sales to New York buyers if its only contact with the State is the delivery of its products into the State by the U.S. Postal Service or a common carrier. It cautions, however, that use tax must be collected if the company has employees, sales persons, independent agents or service representatives located in, or who enter, New York. Although the law has been clear for many years that a sales representative can create nexus for an out-of-state company even though he or she is an independent contractor and not an employee, some companies still seem to be under the mistaken impression that this is not the case. Moreover, although there is no New York authority directly in point, cases in other states have established the principle that nexus can be created by the presence in the state of a single telecommuting employee, even if the employee’s work is not focused on the state.
The Guide contains a cryptic reference to New York’s click-through nexus rule under which an out-of-state company can be compelled to collect use tax on sales to New York purchasers if people in the state refer customers to the company and are compensated for doing so. Such persons are presumed to be soliciting sales for the company and, although the presumption can be rebutted, that will prove to be impossible in the vast majority of cases. The Guide contains cross-references to Department rulings that explain the presumption and the manner in which it can be rebutted, but it would have been helpful if the Guide could have provided more detail about these rules.
One attractive feature of the Guide is that people accessing it online can use links in the Guide to get to relevant rulings.
In addition to the state-wide sales and use tax, special sales taxes that are imposed only within New York City are discussed. These include taxes on credit rating services and certain localized personal services such as those provided by beauty salons, barber shops, tattoo parlors and tanning salons. Interestingly, the Guide does not address the Department’s position that services provided by credit rating agencies in rating debt and preferred stock offerings are taxable. This represents a reversal of a position that the Department had taken in audits for some 40 years. McDermott Will & Emery represented the industry in negotiating the terms of the change of position with the Department. Under the Department’s new position, offerings after September 1, 2015, are subject to the New York City tax if the invoice address of the issuer or representative is in the city.
The Guide discusses the treatment of taxable business purchases. Although one can argue that all purchases by a business that sells products that are subject to the sales tax should be exempt from tax, the law has never so provided and, while there are exemptions for property purchased for resale and for property directly used in manufacturing goods that are sold, the purchases of many items that contribute to the production of taxable items (e.g., computers, furniture, supplies) are subject to the tax, even though their cost is effectively included in the price of the taxable products that the company sells to its customers.
The discussion of the resale exclusion indicates that the exclusion does not apply if “you later use the property or services rather than reselling them.” This does not address the common situation in which property that was purchased and is being held for resale is incidentally used for other purposes. Companies often pledge their inventory as collateral for loans and the Department has never contended that this use defeats the resale exclusion. It would be helpful if the Department issued guidance on the incidental situation.
Companies and their advisors should be aware that the resale exclusion is just that: an exclusion and not an exemption. It is part of the definition of what constitutes a taxable retail sale. This can be important in audits and litigation, because the law is clear that the Department has the burden of persuasion if the issue involves the interpretation of a statute imposing a tax whereas the taxpayer bears this burden in a case involving the application of an exemption. Since the resale exclusion is part of the definition of a taxable retail sale, the burden with respect to its application is on the Department.
The Guide contains a useful section on procedures for filing sales and use tax returns. Although it mentions that a vendor is “a trustee for the state” in connection with the remittance of sales tax that it collects, it does not mention that the responsible persons at a company can be personally liable for sales taxes that are not remitted. This often comes up in audits and it is common for the Department to ask a company’s officers to agree to extend the statute of limitations on collections of delinquent taxes from them personally. We hope that future editions of the Guide will mention this point.
Unfortunately, the Guide does not discuss the many controversial issues involving cloud computing and internet transactions.