The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.
This post is the seventh in a series analyzing the New York Budget Bill, and summarizes the sales tax provisions in the Budget Bill.
Dodd-Frank Act Relief Provisions
The Budget Bill includes provisions that provide relief from potential sales and use tax implications arising from compliance with certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank). Under Dodd-Frank, large financial services organizations must develop and implement resolution plans allowing for an orderly wind-down of their banking and broker/dealer operations in the event of an adverse financial event, such as another financial crisis. The affected financial services organizations and their regulators have agreed in principle to plans where front-office and back-office assets and operations would be segregated into separate legal entities. As a result, many affected financial services organizations are implementing plans whereby back-office functions are being placed into separate bankruptcy remote legal entities as a way to ensure that an orderly wind-down of the affected entities could occur, with the back-office functions remaining available to all potentially affected entities.
Without the relief provided by the Budget Bill, the Dodd-Frank-mandated reorganizations could have resulted in increased New York sales tax compliance burdens and increased New York sales tax liabilities, both upon the reorganization itself and on an ongoing basis. Many transactions that formerly occurred between different units within the same legal entity (and hence were not subject to sales tax) will have to occur between different legal entities after the restructurings and thus will be taxable. To prevent this increase in sales tax burdens and liabilities, an exemption was inserted into the Budget Bill that will apply to sales of property or services that are entered into or conducted as a result of the resolution planning required by Dodd-Frank, so that the affected companies are not subject to sales or use tax on transactions that occur solely as a result of their compliance with a federal law that has been put in place to make the global financial systems safer.
The exemption provided by the Budget Bill is tied to the status of the buyer and the seller as a “covered company” or “material company” as defined in section 243.2(l) of the Code of Federal Regulations, which is one of the sections implementing the Dodd-Frank Act. Under the exemption, sales of tangible personal property or services among related parties are exempt from the New York sales and use tax if the vendor and the purchaser are referenced as either a “covered company” or a “material entity” in a resolution plan (or the vendor and the purchaser are separate legal entities pursuant to a divestiture authorized by the Dodd-Frank [...]