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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Ariele Doolittle
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New Sales Tax Case Highlights “Form over Substance”

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Matter of CLM Enterprises illustrates the long-established rule that form always wins over substance in the sales tax area. The taxpayer was a holding company that owned several car dealerships, all as single member LLCs, which are disregarded for income tax purposes but NOT sales tax purposes. The issue in the case concerned how it was treating loaner cars. For several administrative and liability reasons, the group decided that all loaner cars should be titled to the taxpayer. The loaner cars initially were acquired by the dealerships, but then were transferred by the dealerships to the taxpayer. No cash changed hands, however. This was not a “sale” in the ordinary context. Whatever the case, when customers used the loaner cars, expenses associated with this were allocated to the respective dealership.

So was the transfer of the cars to the taxpayer by the dealerships, for arguably no consideration, a taxable sale? The ALJ who decided the case thought so. And in doing so, he rejected the taxpayer’s argument that there was no consideration. Under the Judge’s view, and that of the Tax Department, there was consideration. In particular, he notes that under the applicable regulations, “[t]he term consideration includes monetary consideration, exchange, barter, the rendering of any service, or any agreement therefor. Monetary consideration includes assumption of liabilities, fees, rentals, royalties or any other charge that a purchaser, lessee or licensee is required to pay.”

And here, though no cash changed hands, the Judge found consideration included: (i) benefit to dealerships to assumption of liability by the taxpayer and (ii) better administration/management of loaner program by consolidated those functions through the taxpayer. The Judge also found that “accounting entries” also supported his ruling, since the cars went into the taxpayer’s inventory and a payable was entered on its ledger.

But, geez, what a harsh result. The tax liability was more than $1 million. And keep in mind that all these cars were eventually sold by the underlying dealerships. Thus, the Tax Department got the tax again when the car was sold!

So this is a good lesson for everybody. Watch out for “form over substance” in the sales tax area. It can often be planned around. Indeed, and perhaps telling, the Judge noted in his decision that after the audit period, the taxpayer changed its business model, and the taxpayer no longer took title to the cars. That easy modification fixed the issue altogether.

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