If a commercial lender that finances a retailer's inventory later seizes a blocked lockbox bank account that happens to contain sales tax the retailer collected from customers, does the lender become liable to New York for that sales tax money?

Plain-English summary

An attorney posed a hypothetical to the Department involving a New York retailer ("Vendor") that finances its inventory through a national wholesale lender ("Credit Company"). As part of the financing arrangement, Vendor grants Credit Company a security interest in its accounts receivable and requires customer payments to flow through a bank "Lockbox" into a "Special Account." Under the agreement, Credit Company can, at its sole discretion, instruct the bank to "block" the Special Account and redirect all future disbursements to itself. For months, Vendor operates normally -- customers pay into the Lockbox (their payments covering both the merchandise price and separately stated sales tax), Vendor draws on the account for daily operations, and Vendor remits the sales tax portion to New York with its periodic returns. Then Credit Company, aware of Vendor's business and that its receipts include collected sales tax, exercises its right to block the account and seize its contents -- including the sales tax portion -- converting all of it to its own use rather than remitting the tax to New York.

Ordinarily, only a "vendor" (the retailer making taxable sales) has the statutory duty to collect and remit sales tax, and Credit Company is not a vendor. But New York's courts and the Department have long held that when someone else comes into possession of money that is actually sales tax collected from customers -- money that in trust-fund terms already belongs to the state -- that person takes on an independent legal obligation to hand it over, separate from any vendor-collection duty. This principle traces back to a 1952 case holding a factoring company liable for New York City sales tax it received via an assignment of a retail dealer's receivables, and the Department's own 1981 Tilden Commercial Alliance ruling applying the same rule to a commercial finance business.

Applying that rule here, once Credit Company blocks the Special Account (which it knows contains sales tax revenue) and takes control away from Vendor, it acquires the same obligation to remit that money to the state -- and by converting it to its own use instead, both Credit Company and Vendor become jointly and severally liable for that tax.

What this means for you

Asset-based lenders, factoring companies, and lockbox/cash-management providers

If your financing or lockbox arrangement gives you the right to seize control of an account you know contains a borrower's collected sales tax, exercising that right and keeping the sales tax portion for yourself can make you personally, and jointly, liable to the state for that tax -- being a lender rather than a vendor doesn't shield you once you've actually taken possession of state trust-fund money.

Retailers using asset-based financing with a lockbox arrangement

Consider structuring lockbox/blocked-account arrangements to carve out or separately account for the sales tax portion of collections, since a lender's seizure of the whole account can create liability exposure for both you and your lender if sales tax ends up in the lender's hands.

Accountants and tax professionals

The controlling principle here isn't a vendor-collection duty but a broader trust-fund/unjust-enrichment theory: anyone who comes into possession of money that is, in substance, state sales tax revenue owes an obligation to remit it, regardless of their formal relationship to the underlying sale. This is worth flagging in any factoring, invoice-financing, or cash-dominion arrangement involving a retail client.

Common questions

Q: Does a lender have to be registered as a sales tax vendor to become liable for sales tax?
A: No. Liability here doesn't depend on vendor status -- it arises simply from taking possession and control of money that is, in fact, collected sales tax, and then failing to remit it.

Q: Is the retailer still liable too, even after the lender seizes the account?
A: Yes -- the ruling describes both the Credit Company and the Vendor as becoming jointly and severally liable for the tax.

Q: Can another lender or retailer rely on this ruling?
A: No. It binds the Department only as to this petitioner's hypothetical facts, though it applies well-established case law and a prior Department ruling (Tilden Commercial Alliance) on the same trust-fund liability principle.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(8) (definition of "vendor")
• Tax Law § 1131(1) (persons required to collect tax)
• Tax Law § 1132(a)(1) (tax collected held in trust for the state)
• Tax Law § 1133(a) (personal liability for tax collected or required to be collected)

Prior rulings and cases referenced:

• Tilden Commercial Alliance, Inc., Adv Op St Tx Comm, May 11, 1981, TSB-H-81(105)S
• City of New York v. Advance Trading Corp., 202 Misc 208 (1952)
• Rolston Woltin, Adv Op Comm T&F, Oct. 2, 1996, TSB-A-96(65)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(13)S
Sales Tax
February 29, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S991208A

On December 8, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from E. Parker Brown, II, Attorney at Law, 910 State Tower Building, Syracuse,
New York 13202.
The issue raised by Petitioner, E. Parker Brown, II, is whether Credit Company may be liable
for sales tax under the hypothetical facts set forth below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Vendor is a New York retail merchant engaged in selling tangible personal property, the
receipts from which are subject to New York sales tax (except in isolated instances when an
exemption applies or delivery is made outside New York). Credit Company is a large national firm
in the business of wholesale financing which contracts with Vendor to finance Vendor’s inventory.
As part of the financing agreement between Vendor and Credit Company (the "Financing
Agreement"), Vendor grants to Credit Company a security interest in all of its accounts receivable
and deposit accounts, as well as in a long list of other items. An additional requirement of the
Financing Agreement is the use of a Lockbox at a Bank for the receipt of payments by Vendor’s
customers for merchandise purchased from Vendor. Under this agreement the Bank is to process
payments flowing into the Lockbox and deposit them into a Special Account.
Vendor and Credit Company notify the Bank that Vendor has granted Credit Company all
right, title and security interest in remittances sent to the Lockbox and deposited into the Special
Account (including checks, drafts, notes, money, acceptances, cash and any other evidence of
indebtedness) as proceeds of accounts receivable in which Credit Company has a perfected security
interest. Additionally, they notify the Bank that Credit Company has a security interest in the Special
Account itself. Under further terms of the Lockbox agreement between Vendor and Credit
Company, Vendor agrees that Credit Company may, at any time, in its sole discretion, send the Bank
a written notification that control over withdrawals from the Special Account is transferred from
Vendor to Credit Company. Upon such notification, the Special Account is to be “blocked” in favor
of Credit Company so that the only disbursements made against the Special Account are to be in
favor of Credit Company.
After entering into the agreements summarized above, Credit Company finances Vendor’s
inventory, Vendor makes sales to customers, customers’ remittances flow in the Lockbox at the
Bank, and the Bank deposits such funds into the Special Account. Vendor separately states sales tax
on its invoices to customers. Remittances from these customers flowing into the Lockbox and the
Special Account consist of payment for both merchandise and sales tax.

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TSB-A-00(13)S
Sales Tax
February 29, 2000

Credit Company is aware of Vendor’s business operations, of the fact that merchandise sold
by Vendor is subject to sales tax, and of the fact that Vendor charges sales tax (except in isolated
instances when an exemption applies or delivery is made out of state). Vendor provides Credit
Company with a monthly sales summary itemizing sales tax by day. Vendor draws freely on receipts
from sales in the Special Account for daily operations and remits sales tax revenue to New York with
periodic returns.
After months of operation in the fashion described above, Credit Company notifies the Bank
to block the Special Account in its favor and transfer control of the account from the hands of the
Vendor, which the Bank proceeds to do. When the Special Account is blocked it contains receipts
both from the sale of merchandise and sales tax. Credit Company seizes both, maintaining that it
has a security interest in the entire account. Credit Company converts the sales tax revenue it seizes
to its own use and does not remit it to New York. Credit Company continues to convert sales tax
revenue to its own use as remittances flow into the Lockbox and the Special Account.
Applicable Law
Section 1101(b)(8) of the Tax Law provides, in part:
Vendor. (i) The term "vendor" includes: (A) A person making sales of
tangible personal property or services, the receipts which are taxed by this article. . . .
Section 1131(1) of the Tax Law provides, in part:
"Persons required to collect tax" or "person required to collect any tax
imposed by this article" shall include: every vendor of tangible personal property or
services....
Section 1132(a)(1) of the Tax Law provides, in part:
Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies. .
. The tax shall be paid to the person required to collect it as trustee for and on account
of the state.
Section 1133(a) of the Tax Law provides, in part:
Except as otherwise provided in section eleven hundred thirty-seven, every
person required to collect any tax imposed by this article shall be personally liable
for the tax imposed, collected or required to be collected under this article. . . .

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TSB-A-00(13)S
Sales Tax
February 29, 2000
Opinion
Tilden Commercial Alliance, Inc., Adv Op St Tx Comm, May 11, 1981, TSB-H-81(105)S
concluded that the petitioner, a commercial finance business, while it did not have the responsibility
of a vendor to collect taxes, once having come into possession of money constituting State sales tax,
acquires an obligation to remit such money, and is thus liable to the State for such amount.
In making its opinion in Tilden Commercial Alliance, Inc., supra, the Tax Commission relied
upon the decision made in City of New York v. Advance Trading Corp., 202 Misc 208 (1952). In
that case, the court held that a factoring corporation was liable for New York City sales taxes it had
collected as a result of an assignment to it of accounts receivable by one of its debtors, a retail coal
dealer. Although such case involved the New York City sales tax, the same result applies with
respect to State sales tax. In making its decision, the court stated:
“Such moneys (the portion of payments received by the factor representing
City sales tax payments) were the property of the plaintiff, the City of New York, and
the defendant was under a legal obligation to pay the same to the city. It is settled
law that where one receives money that rightfully belongs to another the law creates
a debt and implies a promise on the part of the person who has received the money
to pay it over to the rightful owner (Cohen v. City of New York, 283 NY 112-115)."
In the instant case, Credit Company blocks the Special Account, which contains sales tax
revenue, in its favor and transfers control of the account from the Vendor. Accordingly, while the
Credit Company did not have the responsibility of a vendor to collect taxes, once having come into
possession of money constituting State sales tax, Credit Company acquires an obligation to remit
such money. Both the Credit Company and Vendor become jointly and severally liable for the taxes
collected by the Vendor and deposited in the Special Account now controlled by the Credit
Company. See Tilden Commercial Alliance, Inc., supra, and Rolston Woltin, Adv Op Comm T&F,
October 2, 1996, TSB-A-96(65)S.

DATED: February 29, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.