United States: Investment Entities Owning Property Purchased Outside The United States Face Double Taxation Under Amended New York Law

This article was originally published by Bloomberg BNA Daily Tax Report.

Tax policy

Works of art, like other tangible property, may be subject to state sales or use tax unless an exemption applies. New York has a non-resident use tax exemption. In this article, Withers Bergman's Diana Wierbicki and Amanda A. Rottermund discuss how a recent narrowing of New York's non-resident use tax exemption could lead to double taxation for some taxpayers. 

Under New York State's 2017-2018 budget, the State narrowed Tax Law §1118(2)'s nonresident exemption to its use tax. The use of property in New York by nonresident investment entities is no longer exempt from use tax, and whereas the Tax Law provides a credit against the use tax for sales tax paid to other states, the Tax Law does not provide such credit for VAT or non-US sales tax payments. Therefore, without the protection of the nonresident exemption, nonresident investment entities may be taxed twice if property purchased outside the United States is brought into New York. 

What is use tax?

New York State generally imposes a use tax, with certain exemptions, on the use within New York of property that would have been subject to New York State and local sales taxes if purchased in New York. The use tax complements the sales tax because it applies only to the extent that property has not already been subject to another state's sales tax. For example, if an individual purchased furniture in California for her New York apartment and paid California sales tax on the purchase she would not owe New York use tax when she later uses the furniture in her New York apartment. However, if that same individual purchased furniture in New Hampshire, a state which does not charge sales tax, she would owe New York use tax when she later uses the furniture in her New York apartment. 

What did the 2017-2018 budget change?

Previously, the New York State use tax did not apply to the use of property in New York if the user was not a New York "resident," as defined in the New York sales tax regulations, at the time the user purchased such property. This exemption was known as the "nonresident exemption." Effective April 10, 2017, the exemption no longer applies to the use within New York of property purchased outside of New York by a nonresident that is not an individual, unless such nonresident has been doing business outside of New York for at least six months prior to the date such nonresident brought such property into New York. The use tax statute does not define "doing business," but the New York courts have held that passive investment is generally insufficient for a finding of doing business. Therefore, generally speaking, investment entities no longer qualify for the nonresident exemption. 

The following fact pattern – a UK individual (not a NY resident for use tax purposes) purchases art in the UK through an investment entity (which is not doing business) and pays VAT on the purchase – illustrates how the use tax law, by eliminating the exemption for nonresident investment entities, could cause investment entities to be taxed twice on purchases. Prior to April 10, 2017, under the fact pattern above, if the art was subsequently brought into New York, the nonresident exemption would have applied and no New York use tax would have been due on the use of the art in New York. Post April 10, 2017, under the fact pattern above, if the art is subsequently brought into New York, the nonresident exemption would not apply and New York use tax would be due on the use of the art in New York. Under the new law, the investment entity would now be liable for both VAT and New York use tax. 

However, if the UK individual had purchased art in his individual name, under the new law, the nonresident exemption still applies, and New York use tax would not be due on the use of the art in New York. 

Conclusion

As illustrated in the examples above, the new use tax law presents an inconsistency in the treatment of property purchased outside of the United States. To avoid a possible double taxation, the ownership structures of property purchased outside of the United States should be carefully addressed prior to property being brought into New York. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.