NEW YORK STATE BAR ASSOCIATION PUBLISHES CUNNINGHAM & CUNNINGHAM, LLP'S "SALES AND USE TAX AND THE NEW YORK CONSTRUCTION INDUSTRY":

Big news! Hot off the press! The New York State Bar Association has published Brian G. Cunningham's book, Sales and Use Tax and the New York Construction Industry. For more information, go to www.nysba.org/pubs.

SALES AND USE TAX EXEMPTIONS ON PURCHASES FOR LEASED COMMERCIAL SPACE IN LOWER MANHATTAN:

Governor Pataki recently signed legislation into law that includes exemptions from sales tax for certain purchases of property and services related to commercial space leased in lower Manhattan. The legislation was enacted to provide incentives for businesses to remain in relocate to lower Manhattan.

The tax exemptions apply only to new space leases of 10 years or more commencing on or after September 1, 2005. The leased premises must be located within areas designated as Eligible Area A or Eligible Area B. The law applies only to state and local sales and use taxes imposed within the City of New York.

Eligible Area A is that area generally located below City Hall. In order to qualify, a new lease must commence on or after September 1, 2005, but not later than September 1, 2009. Businesses with existing leases are not eligible unless the lease expires by its own terms on or before September 1, 2009 and a new lease is entered into for 10 years or more commencing no later than September 1, 2009. The exemptions apply only to purchases made during the first year of the tenant's lease.

Eligible Area A exemptions include:

Property purchased by a tenant for use in furnishing and equipping the leased premises as commercial office space so long as the property becomes an integral component part of the building;

Property purchases by a tenant or landlord for use to adding to, altering or improving the tenant's leased premises as commercial office space so long as the property becomes an integral component part of the building;

Property purchases by contractors for use in adding to, altering or improving the tenant's leased premises as commercial office space so long as the property becomes an integral component part of the building; and

Purchases of services to install the exempt property.
Eligible Area B consists specifically of the World Trade Center site, the World Financial
Center and Battery Park City areas. The same lease commencement restrictions apply to Eligible Area B except that leases must commence no later than September 1, 2011.

Eligible Area B exemptions include:

Property purchased by a tenant for use in furnishing and equipping the leased premises as commercial office space. Unlike Eligible Area A, however, the property does not have to become an integral component part of the building. As such, the exemption applies to items like desks, chairs and computer equipment. The Department does not extend the exemption to consumables such as paper, pens and toner;

Property purchases by a tenant or landlord for use to adding to, altering or improving the tenant's leased premises as commercial office space. Again, unlike Eligible Area A, the property does not have to become an integral component part of the building;

Property purchases by contractors for use in adding to, altering or improving the tenant's leased premises as commercial office space so long as the property becomes an integral component part of the building; and

Purchases of services to install the exempt property.
For more information and details on this exemption package, contact Cunningham &
Cunningham, LLP.

SALES BETWEEN RELATED CORPORATE ENTITIES:

It is not uncommon for two or more companies to operate out of one office, do business with one another and share common ownership and management. Whatever the reasons and whatever the lines of demarcation, sales tax obligations loom.

In a recent Advisory Opinion, the Department reviewed the business operations of two related companies. The companies have common ownership and officers, but have separate employees, payrolls, books and records. One company installs materials while the other fabricates. The installation company ?reimburses? the fabrication company for both the cost of the raw materials and the labor costs incurred in the fabrication process. This reimbursement is achieved by a transfer of funds between the companies. Sales tax is paid only on the materials portion of the reimbursement.

The installation contractor?s typical contract with its customers includes the price of the fabricated materials. That price consists of the costs of the raw materials and labor. The Department advised the installation company that it was not correct in paying sales tax only on the raw material portion of the total cost. Sales tax must be paid on all the consideration paid to the fabrication company. Since the reimbursements made by the installation company were essentially payments to the fabricator, sales tax is due on the total cost. This advice is consistent with the policy that all contractors must pay sales tax on their material purchases.

The Department rejected the argument that the employees of both companies were essentially the same and therefore no sales tax need be paid on the labor costs. The Department found enough evidence of distinct corporate identities to overlook the ?informal interaction and commingling of funds between the two companies. Those distinctions could not be disregarded for sales tax purposes.

LET THE SUN SHINE:

Effective September 1, 2005, receipts from the retail sale and installation of residential solar energy systems are exempt from the 4% state sales tax and, where applicable, the 3/8% Metropolitan Commuter Transportation District sales tax. The law granting this exemption provides that counties and cities are also authorized to pass similar exemption legislation. Although limited to residential systems, the definition of residence includes multi-family buildings, including apartment, condominium or cooperative developments. Contractors purchasing these systems must provide their suppliers with a properly completed ST-120.1, Contractor Exempt Purchase Certificate.

THE CONTINUING TALES OF THE RESPONSIBLE CORPORATE OFFICER:
Or How I Went Into Business and All I Ended Up With Was a Lousy Sales Tax Liability

This e-mail update service has periodically provided analysis of responsible corporate officer decisions. The reason is that many of the subscribers to this service occupy positions of responsibility with their respective companies and could one day find themselves in the crosshairs of a sales tax audit. Recognizing this fact, we have made the responsible corporate officer a recurring theme. Hopefully if we tell enough horror stories, our readers will take steps to protect both themselves and their companies.

This most recent chapter in our tale begins with two individuals buying an existing and successful equipment supply business as 50-50 partners. The investment cost each partner $500,000. The partners formed a corporation, became the only shareholders and assumed their respective corporate titles and responsibilities. The individual with whom we are concerned was the president and treasurer of the corporation. His responsibilities included tending to the financial obligations of the business, including preparing and filing income and corporate tax returns.

Unfortunately, a few years after being purchased, the business began to suffer as a result of changes in the market place. Sales began to fall and although the company collected sales tax on its sales, it stopped filing sales tax returns and paying the collected sales tax over to the State. Tensions began to mount between the two partners as a result of disagreements over business practices. Even though our individual had authority to sign checks, he reached a point of frustration and refused to sign any additional checks. The other partner assumed all responsibility for the financial obligations of the company.

For several years the business continued to slip and the partners relationship continued to sour. Because of ongoing financial difficulties, neither partner drew a salary for almost three years. Finally, our partner resigned from the corporation and had no further contact with his former partner. From that point forward, our individual had no access to the business offices or its books and records. Several years later, the business was audited. The audit period reaches back to the time prior to our individual?s resignation. Since his name is in the business files, he received a letter from the Department asking for any records he may have as well as a description of his involvement with the company.

Neither the company nor the individual were able to produce adequate sales records. A sales tax determination was issued in the amount of almost $140,000, plus interest and penalties, and our individual was assessed as a responsible corporate officer.

Having lost his $500,000 investment and facing a large sale tax liability, our individual filed for bankruptcy protection and was granted a discharge under Chapter 7. Unfortunately, sales tax obligations are not dischargeable in bankruptcy so he attempted to fight the assessment with the Department. As you can probably guess, this did not go well.

The Tax Law states that personal liability can be imposed on those persons required to collect sales tax. Person is defined to include, among others, corporate officers and employees ?under a duty to act? for the corporation in complying with the sales tax laws. Once a responsible person assessment is issued, it is that individual?s burden to prove that he or she was not such a person.

Although our individual would certainly be a responsible person while he was actively involved with the company, what about after that active involvement had ceased? The Department found that he had ?consented? to an arrangement with his partner whereby he refused to actively participate while his partner assumed all active roles. This arrangement did not excuse him from his responsibility because the tax periods involved preceded his ultimate resignation. The sales tax assessment was affirmed in its entirety. The decision did not explore the issue of whether or not he would bear any responsibility after he formally resigned since the audit period did not include that period of time.

SALES TAX SEMINARS:

Interested in learning more about sales tax and the New York Construction Industry? Cunningham & Cunningham, LLP has prepared an instructive seminar course on this topic geared primarily for contractors. Lasting about two hours, including time for questions and answers, the course can be given in the convenience of your own office. Contact us by e-mail or telephone to schedule an appointment.