Two recent administrative law judge decisions regarding sales and use tax notices offer important lessons for businesses when it comes to their recordkeeping practices and the use of sales tax exemptions. Any time your business transfers tangible personal property (TPP) to another party, it should be a reason to pause and consider the sales tax ramifications of the transaction. Even if you know the transaction shouldn’t result in owed tax, you or your client may be overlooking important guidelines or procedural obligations necessary to protect yourself from otherwise avoidable sales tax liability. The following cases highlight that importance specifically in the context of bulk sale transactions and in the use of exemptions for capital improvement projects on real property.
Bulk Sale Transactions and Filing Notice with the NY Division of Taxation
In the Matter of Relax Auto Services, Inc., the New York Division of Taxation performed two audits on the taxpayer concerning its purchase of auto repair parts from a bulk sale transaction. The result was a surprise assessment of $83,526.51.
Bulk sales are transactions that fall outside the scope of your ordinary business activities. For example, the assets you acquire from the sale of a company. This type of transaction isn’t something that regularly happens in your business and differs from the standard purchases you might make from a vendor. See New York TB-ST-70.
Remittance of New York sales tax from a bulk sale transaction is usually the responsibility of the seller. However, buyers must follow special procedures to protect against the seller’s failure to pay sale tax. Namely, the filing of Form AU-196.10 to the NY Division of Taxation at least 10 days before paying for or taking possession of property from the bulk sale. Afterward, the Division should provide notice that either releases you of liability for the sales tax (Form 197.1) or informs you that the seller has unpaid sales tax/is under audit (Form 197.2). In the latter case, you may want to withhold payment on the bulk sale transaction and seek further guidance from a sales tax professional.
The Division of Tax Appeals upheld the assessment against the taxpayer In the Matter of Relax Auto Services, Inc. The administrative judge took this position because the taxpayer failed to give notice to the New York Division of Taxation through Form AU-196.10. Bulk sale transactions are difficult because you don’t do them every day, which makes it easy to overlook potential sales tax issues. Any time your business transfers property, it should be a reason to pause, consider your possible sales tax obligations, and consult a sales tax professional when you have questions
Are Car Lift Installations Capital Improvement Projects Exempt From New York Sales Tax?
The New York Division of Taxation In the Matter of American Car Lift Service LLCaudited the taxpayer and issued a $101,593 assessment against it. The assessment was for unpaid sales tax from the installation of car lifts in parking garages. The taxpayer appealed the assessment claiming its installation of car lifts qualified as capital improvement projects exempt from sales tax.
If you are a contractor who works on real property in New York, you may be aware of the exemption for capital improvement projects. These are the permanent fixtures you install that substantially increase the value of the real estate. You generally must timely complete and retain a Certificate of Capital Improvement (Form ST-124) to support your decision not to collect sales tax from the customer. As a contractor, you must receive the certificate within 90 days of providing service.
While using this certificate seems easy in theory, its application can be difficult for contractors. Remember, a capital improvement project must meet the following criteria:
- It must substantially add to the real property’s value or prolong its useful life.
- It’s permanently affixed, making it a part of the real property (i.e., removal would cause material damage to the real property).
- It’s intended as a permanent installation.
On appeal, the ALJ denied the taxpayer’s good faith use of the exemption because of the defects in its ST-124 certificates. Specifically, they lacked proper descriptions of the work provided and were not received on time. Additionally, the taxpayer’s witness testimony lacked the credibility necessary to establish the car lifts met the criteria for a capital improvement project. None of the testimony showed the car lifts substantially added to the real property’s value or prolonged its useful life.
Need Help Appealing a New York Sales Tax Assessment?
These recent appeals from the New York Division of Taxation show the value of complying with sales tax recordkeeping and other procedures. Taxpayers that don’t complete exemption certificates or submit other necessary forms to the tax division may risk unnecessary sales tax liability. If you have questions about your compliance, need help with an audit, or want to appeal an assessment, our sales tax professionals are here to serve as your trusted representative and advocate.
Schedule a consultation with Sales Tax Helper for audit defense or with other sales tax issues.