January 2003

Simple Sales Tax Planning

By Stewart Buxbaum, CPA, Buxbaum & Company P.C.

In the Matter of Robert Weichbrodt (DTA #817950 and DTA# 817951), the issue was whether the transfer of assets from a sole proprietor to an existing corporation in exchange for its stock was a retail sale subject to sales tax. In addition, if the transaction was taxable, what amount is due? The petitioner argued that the transfer of assets did not constitute a retail sale because Weichbrodt did not receive material consideration for the transfer of assets to the corporation and the stock he received was of no financial or economic value to him, because the buyer and the seller are one and the same. The sales tax law, however, has a simple logic that looks at each piece in a transaction separately.

In this matter, the sole proprietor transferred its four restaurants to an existing corporation for 10 additional shares of stock. The New York State Department of Taxation and Finance (DTF) became aware of this transfer because the corporation filed a “Notification of Sale, Transfer or Assignment in Bulk,” which listed the value of assets as zero. The DTF estimated the tax due based on the value of the assets as listed on the balance sheet of the sole proprietorship and assessed sales tax against both the individual and the corporation, along with penalties and interest.

The taxpayer presented two arguments in defense of the original filing:

The administrative law judge rejected both arguments, relying on earlier cases where the transfer of assets from a sole proprietor to a corporation in exchange for stock, owned wholly by the same individual, was a sale subject to sales tax. The law simply explains that every sale of tangible personal property is subject to sales tax unless specifically exempted.

The judge rejected as “meritless” the taxpayer’s argument that the transaction was not a sale because the taxpayer owned 100% of the corporate stock both before and after the transfer. In order for the transaction to be exempt the transfer must be made at the time of incorporation. Sales tax exemptions for a corporate transfer include—

Additionally, sales tax exemptions are primarily for sales for resale, for sales to tax-exempt entities, or for specific exemptions outlined in the law.

The judge dismissed the second argument: that the sales tax as assessed was too much, based on the sales tax law which explicitly states that sales tax is to be calculated on the “receipts from every retail sale.” Because cash was not transferred for the assets, the value of the assets was determined from the fixed assets on the federal income tax return of the sole proprietorship. When there is no direct evidence of the sale price, the value of the assets may be estimated by fair market value. The DTF deemed the fair market value to be the depreciable value of the assets as shown on the balance sheet of the sole proprietorship just prior to the transfer.

This case highlights the circumstances and reasons for filing a bulk sales notification. The purchaser must file notice whenever a registered sales tax vendor makes a sale, transfer, or assignment in bulk of any part or the whole of the business assets outside of the ordinary course of business. If this procedure is not followed, the purchaser can be held liable for the sales taxes due on the transfer of the assets and any previous sales tax liabilities of past operations up to the extent of the purchase price.

A simple transfer to an existing corporation owned entirely by an individual would normally be a simple matter, but in the context of New York State Sales Tax Law it is a complex, taxable transaction. The taxpayer could have completely eliminated any tax liability and achieved the same results by structuring the transaction differently. For example, the taxpayer could have issued additional paid-in capital for the transfer of the assets.

Even when structuring simple transactions, it is important to consider the complex sales tax ramifications.

State and Local Editor:
Mark H. Levin, CPA
H.J. Behrman & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co LLP

Neil H. Tipograph
Imowitz Koenig & Co., LLP

Warren Weinstock, CPA
Marks Paneth & Shron, LLP

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