NY TSB-A-14(23)S Sales Tax 2014-07-22

Is transferring tangible personal property to an LLC in exchange for a membership interest a taxable retail sale?

Short answer: No -- contributing property to a limited liability company in exchange for a pro rata membership interest is not a taxable retail sale, so no sales or use tax is due. The Tax Law specifically excludes from 'retail sale' a contribution of property in exchange for a partnership interest, and an LLC counts as a partnership for this purpose. Because no tax is due, the related question about reciprocity credits is moot.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A California joint venture plans to partially liquidate by distributing tangible personal property to its two 50/50 partners. Those partners will then transfer the property to a New York LLC in exchange for pro rata membership interests in the LLC (they won't use the property in between). The Petitioner asked whether that transfer is subject to New York sales or use tax -- and, if so, whether reciprocity credits would apply.

The Office of Counsel held the transfer is not taxable:

Capital contributions are excluded from "retail sale." The Tax Law specifically excludes from the definition of a retail sale a contribution of property in exchange for an interest in a partnership (Tax Law 1101(b)(4)(iv)(A)(V)).
An LLC is a partnership for this purpose. "Partnership" includes a limited liability company (Tax Law 2(6)). So contributing property to an LLC in exchange for a membership interest is treated the same as contributing it to a partnership for a partnership interest.
Result: the transfer of property to the LLC for a membership interest does not constitute a retail sale and is not subject to sales or compensating use tax.
Reciprocity moot. Because no tax is owed, the Petitioner's question about sales-tax reciprocity credits is moot.

What this means for you

Forming or capitalizing an LLC/partnership

Contributing equipment, inventory, or other tangible property to an LLC (or partnership) in exchange for an ownership interest is not a taxable sale. This lets owners move assets into a new entity at formation (or later capital contributions) without triggering sales or use tax.

The LLC-is-a-partnership rule is doing the work

The exclusion is written for partnerships, but New York's Tax Law treats an LLC as a partnership (section 2(6)), so the same tax-free treatment applies to LLC membership-interest contributions.

Watch the facts

The exclusion is for property contributed in exchange for an interest in the entity. A transfer dressed up as a contribution but that is really a sale for cash or other consideration could be treated differently. Here the partners received only pro rata membership interests and didn't use the property first.

Common questions

Q: We're putting equipment into a new LLC for membership interests. Is that a taxable sale?
A: No. Contributing property to an LLC in exchange for a membership interest is excluded from "retail sale," so no sales or use tax is due.

Q: Does it matter that it's an LLC and not a partnership?
A: No. The Tax Law treats an LLC as a partnership for this purpose, so the contribution exclusion applies.

Q: What about reciprocity credits for tax paid elsewhere?
A: That question is moot here because no New York sales or use tax is owed on the contribution.

Citations and references

Tax Law section 1101(b)(4)(iv)(A)(V) (contribution of property for a partnership interest excluded from retail sale)
Tax Law section 2(6) (partnership includes a limited liability company)

Source

Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-14(23)S
Sales Tax
July 22, 2014

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S130506A

The Department of Taxation and Finance received a Petition for Advisory Opinion
from REDACTED REDACTED REDACTED (Petitioner), REDACTED REDACTED
REDACTED REDACTED REDACTED. Petitioner asks whether the transfer of tangible
personal property to a New York limited liability company (LLC) in consideration for a
pro rata share of interest in the LLC is subject to New York sales and use tax. Petitioner
also inquiries whether sales tax reciprocity credits will be allowed if the transfer is subject
to sales and use tax.
We conclude that the transfer of tangible personal property to the LLC is not
subject to sales and use tax.
Facts
A joint venture operating in California plans to partially liquidate by distributing
tangible personal property to its 50/50 partners. The partners will transfer their interests in
the tangible personal property to a New York limited liability company (LLC) in
consideration for pro rata shares of interest in the LLC. The partners will not use the assets
received from the joint venture before transferring the property to the LLC.
Analysis
The Tax Law specifically excludes from the definition of a retail sale the
contribution of property in exchange for an interest in a partnership. See Tax Law
§ 1101(b)(4)(iv)(A)(V). For purposes of the Tax Law, a partnership includes a limited
liability company. See Tax Law § 2(6). Accordingly, a transfer of tangible personal
property to a limited liability company in exchange for an interest in the company is
treated the same as a transfer of assets in exchange for an interest in a partnership.
Therefore, the transfer of property to a limited liability company in exchange for an
interest in the company will not constitute a retail sale subject to sales and compensating
use tax.

-2-

TSB-A-14(23)S
Sales Tax
July 22, 2014

Because no sales and use tax will be owed on the transfer of tangible personal
property to a limited liability company in exchange for an interest in the company,
Petitioner’s questions about reciprocity tax credits are moot.

DATED: July 22, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to
the person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is
issued or for the specific time period at issue in the Opinion. The information
provided in this document does not cover every situation and is not intended to
replace the law or change its meaning.