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New York Sales Tax

Navigating state sales and use tax laws can be onerous, even for taxpayers who strive to be compliant.  New York State is no exception.  Between competing interpretations of what is and is not subject to tax, shifting rules on how sales are “sourced”, and an upheaval of previously settled multistate issues of constitutional “nexus”, sales tax is rife with potential pitfalls and traps for the unwary.  Hodgson Russ’s State and Local Tax practice is at the forefront of these issues in New York as well as on a multistate basis, and can provide critical advice for those seeking to comply and defend those who find themselves on the wrong side of an audit.  Below are just some of the areas in which we specialize.

Cloud Computing and Sales Tax

Given the exponential rise of e-commerce, the taxation of “cloud computing” remains one of the more complex problems in sales and use tax.  States, including New York, have long wrestled with the tax implications of “software as a service” (SaaS).  State rulings in this area provide critical guidance.

In 2015, New York’s Department of Taxation and Finance determined that a company offering software as a service (SaaS) by allowing customers to access their own software and hardware through remote access to a computer was providing a nontaxable service rather than a taxable sale or license to use software.  Under similar rationale, “infrastructure as a service (IaaS)” may also be treated as a nontaxable service.

However, other New York rulings on cloud computing have found that “services” marketed by sellers in fact constituted taxable licenses to use hosted software.  As a whole, the rulings in this area demonstrate that the “software versus service” question is highly fact-intensive and typically hinges on whether there is a “transfer of possession” (actual or constructive) of the software that powers the service.  

Often, online services revolve around providing information, database access, and/or reports to customers.  This sets up another potential for taxation.  By statute, New York imposes sales tax on the service of “furnishing” information (i.e., in the form of access to searchable databases, market reports, statistics, etc.).  However, such “information services” are exempt if the information furnished is “personal or individual in nature” and incapable of being substantially incorporated into reports furnished to others.  In other words, if an entity furnishes information gleaned from a common database which can be used in multiple reports issued to multiple customers, sales tax may apply.  These inquiries are highly fact-intensive and, form our vantage point, have led to some inconsistent results  

Contractors and Sales Taxes

Construction work creates a unique conundrum in the context of sales and use tax: are contractors selling (taxable) tangible personal property along with installation services, or is the contractor selling the finished product—a (nontaxable) addition to real property?  The answer drastically impacts how contractors must account for sales and use tax on both their sales and their purchases.  New York has one of the more complex sales tax structures when it comes to construction contractors, and the cost of getting it wrong can be significant not only for contractors, but also their customers, subcontractors and materials suppliers.

Generally, New York treats the services of “installing” tangible personal property and “maintaining, servicing or repairing real property” as subject to tax.  However when the end result of such work is a “capital improvement” to real property, no tax is due on the contractor’s charges.  For example, patching shingles on a roof is a taxable “repair” service; the contractor must charge tax to the customer on both labor and materials.  However, the installation of a brand-new roof is a capital improvement, and the contractor need not charge tax at all.  It sounds simple, but determinations of what constitutes a capital improvement can be highly fact-intensive and subjective.  And since the determination affects not only the taxability of the contractor’s charge, but also the contractor’s purchases, the stakes are high.

Generally, contractors are required to pay tax on all purchases of tools and materials in New York.  But when the job constitutes a taxable repair, they may later claim a refund or credit for tax on the building materials transferred to the customer.  Such credit is not available for purchases materials on a capital improvement job.  Complicated enough?  Now consider that New York’s rules change when contractors are performing work for a tax-exempt organization.  In such cases, building materials can be purchased tax free, provided they become part of the building.

Given the dollars involved in construction projects, it is important for contractors, their suppliers and their customers to understand the rules, since the cost of getting it wrong can be high. 

Sales Tax on Accommodations

The rise of temporary-accommodations services like Airbnb have forced states like New York to confront the question of whether revenues generated through temporary stays (e.g. less than 30 days) are subject to sales tax as they would be for “hotel” stays.  Aside from questions over compatibility with municipal housing laws, such services have also raised the question in New York of whether the owners or the services are “hotel operators” for sales tax purposes.

A 2015 New York ruling determined that a converted college dormitory whose units were rented in one-month or longer terms were not considered hotels and were, therefore, subject to tax.  However, prior rulings have found that short-term rentals of accommodations such as furnished apartments for less than 30 days to be nontaxable in some instances.

New York also recently changed the sales tax structure applicable to online travel sites and “room remarketers”, effectively treating them as hotel operators, even though they merely remarket/resell other hotel operators’ rooms.

Use Tax on Luxury Items

New York has long grappled with the enforcement of use tax on big-ticket items such as artwork, aircraft, vessels, and motor vehicles that residents have purchased out of state but brought into New York.  Certain tax planning allowed New York residents to structure such purchases to avoid or defer the large sales tax hit on such items.  And New York for many years has been aggressive in addressing these perceived loopholes, resulting in numerous audits and legislative amendments.  Recent enforcement efforts by the Department of Taxation and Finance have included accessing customs records to identify artwork and other expensive items entering the state on which sales tax may not have been paid.  New York galleries and art dealers have also felt the pinch, with the Department focusing on whether sales to out-of-state buyers are, in fact, “in-state” sales (the question turns on whether delivery occurred via “common carrier” or “private carrier”).

New York recently decided to take a more taxpayer-friendly approach to airplanes and boats, though.  Effective September 1, 2015, New York amended the tax law to exempt “general aviation aircraft” from sales and use tax altogether—joining an already existing exemption for “commercial aircraft.”  Together, the exemptions mean sales of almost all aircraft are now exempt from tax.  Additionally, effective June 1, 2015, New York relaxed the rules regarding taxation of sales and uses of vessels in New York.  For vessels, only the first $230,000 of the purchase price is now subject to tax.  Also, a vessel purchased out of state can now enter New York waters without triggering any liability for use tax as long as it does not spend more than 90 consecutive days within the State and is not registered in New York (or required to be).

MULTISTATE “NEXUS” ISSUES

“Nexus” is the constitutional concept that governs how much contact is sufficient to allow a state to impose tax obligations on an out-of-state business.  For nearly 50 years, nexus for sales and use tax purposes has been governed by a “physical presence” standard—a product of the U.S. Supreme Court’s decisions in Quill Corp. v. North Dakota, and earlier in National Bellas Hess v. Illinois.  In other words, unless an out-of-state seller has some form of physical presence in the state, a state cannot obligate that seller to collect or pay sales tax on its in-state sales.  However, the explosion of the internet economy and e-commerce has spurned a wave of recent legislative activity—at both the state and federal level—attempting to change the playing field to allow states to reach “remote” online sellers.  Frustrated at the inability of Congress to pass federal legislation on the issue, a number of states have recently enacted or introduced legislation establishing an “economic nexus” standard.  Under these provisions, economic activity alone (i.e., a threshold level of in-state sales) can suffice to obligate an out-of-state seller to register and begin collecting sales tax.  Since these actions (consciously) directly conflict with Quill and the Supreme Court’s jurisprudence on constitutional nexus, it could eventually set the stage for the “physical presence” standard to be re-visited by the Supreme Court.

Even before this, states have been implementing so-called “attributional nexus” and “affiliate nexus” provisions, designed to reach out-of-state sellers who may have a presence in the state through separate but related entities or through sales “affiliates.” 

With the playing field in flux, online retailers and others are facing new uncertainty in multistate compliance.  The rise of selling through online “marketplace” sites such as Amazon’s “FBA” (“Fulfillment by Amazon”) program have also raised new questions about how nexus rules apply to such arrangements.  Hodgson Russ State and Local Tax attorneys have remained at the forefront in such issues, helping businesses navigate these multistate nexus issues, including, when warranted, taking advantage of valuable multistate voluntary compliance initiatives to reduce exposure. 

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Obviously, determining whether sales tax should be applied in specific situations or whether registration may be required is more complex than it may first appear. If you have any questions about your business’s sales tax obligations, contact a sales tax attorney at Hodgson Russ LLP.

Our New York state and local tax lawyers can review your situation and advise you how to proceed, whether it’s analyzing the taxability of your sales, preparing you for or representing you in a New York sales tax audit, or assisting you in challenging a tax decision. Contact our State and Local Tax group today for a consultation.