When a hotel leases both the building and its furniture from its landlord, is the portion of the rent allocated to the furniture subject to New York sales tax?

Plain-English summary

Smithtown Hotel Inc. is a subsidiary of the Mutual Life Insurance Company of New York (MONY), which had foreclosed on a mortgage secured by a Smithtown hotel property. MONY, as landlord, leased the building, its improvements, and all the personal property inside it -- to Smithtown Hotel Inc. as tenant. After signing the lease, MONY bought new furniture for the guest rooms (beds, dressers, etc.) and new tables and chairs for the lobby, lounge, and restaurant, paying sales tax itself on those purchases. But MONY didn't charge Smithtown Hotel sales tax on the lease of that property, and Smithtown Hotel didn't self-report use tax on it either. Smithtown Hotel argued its situation was like an earlier ruling where a recording studio wasn't taxed on equipment it leased and then re-rented to its own customers, and separately argued that leasing furniture bundled with the real property lease couldn't be pulled apart and taxed on its own.

The Department rejected both arguments. When a single lease covers both real property and tangible personal property, New York requires the lease payments to be allocated between the two -- the real property portion stays untaxed, but the portion attributable to the tangible personal property is taxable unless that property was purchased for resale as such. Citing a separate Appellate Division case involving the Helmsley hotel chain, the Department explained that a hotel's guest-room furniture, furnishings, and consumables aren't purchased "for resale as such" just because guests use them during their stay -- they're furnished to guests as part of the hotel's overall services, not resold to them. Because the recording-studio precedent Smithtown Hotel cited didn't involve a hotel at all, the Department found it wasn't controlling here. The upshot: tax should have been collected from Smithtown Hotel on the portion of its lease payments reasonably allocable to the furniture (including the additional pieces MONY bought after signing the lease). The Department also flagged, almost as an aside, that MONY's own furniture purchases might actually have qualified as purchases for resale -- though that question wasn't before it since MONY wasn't the petitioner.

What this means for you

Hotels leasing both a building and its furnishings from one landlord

Expect the lease payments to be split for tax purposes: the real property share stays untaxed, but the furniture/furnishings share is taxable, the same as if you'd bought or rented that furniture directly. Structuring it as one bundled lease payment for "the building and everything in it" doesn't avoid this allocation.

Landlords buying furniture to include in a commercial hotel lease

If you buy furniture intending to lease it (rather than sell it) to your hotel-operator tenant, look closely at whether your own purchase might qualify for the resale exclusion -- the Department flagged this as a live possibility here, even though it didn't resolve it for a non-petitioner.

Accountants reconciling old lease-tax positions

If tax wasn't collected on the personal-property share of a mixed real/personal property lease, that's a collection failure on the lessor's part going forward, not a permanent exemption -- allocate and start collecting (or self-assessing use tax) on the personal-property portion.

Common questions

Q: Is a lease of hotel furniture ever exempt just because it's real property?
A: No. Even when furniture is bundled into one lease with the building itself, the payments must be allocated, and the furniture share is taxable unless it genuinely qualifies for the resale exclusion.

Q: Does a "resale" argument work if the hotel's guests use the furniture?
A: Not for a hotel providing rooms as part of its own services -- guest-room furniture and furnishings are treated as being furnished to patrons as part of the hotel's services, not resold to them "as such."

Q: Can furniture purchased for a genuine equipment-rental business (like a recording studio) be treated the same way?
A: Not necessarily the same as a hotel -- the Department distinguished a prior recording-studio ruling because it didn't involve hotel operations, so it wasn't determinative here.

Q: Does this ruling apply to my hotel or leasing arrangement?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else.

Citations and references

• Tax Law § 1101(b)(4) (retail sale, resale exclusion)
• Tax Law § 1101(b)(5) (sale, selling, or purchase, including lease/rental)
• Tax Law § 1105(a) (sales tax on retail sales of tangible personal property)
• Northway Properties, State Tax Comm, July 31, 1984, TSB-H-84(107)S
• Matter of WEBR v. State Tax Comm, 58 AD2d 471
• Matter of Helmsley Enterprises v Tax Appeals Tribunal of the State of N.Y., 187 AD2d 64, lv to app den 81 NY2d 710
• Howard Swartz Recording, Inc., Adv Op Comm T&F, TSB-A-82(26)S (distinguished, not a hotel case)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(39)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960513A

On May 13, 1996,
the Department of Taxation and Finance received a
Petition for Advisory Opinion from Smithtown Hotel Inc., 110 Vanderbilt Motor
Parkway, Smithtown, New York 11788.
The issue raised by Petitioner, Smithtown Hotel Inc., is whether tangible
personal property which is included with the lease of real property is subject
to sales and use tax under the circumstances presented.
Petitioner submits the following facts as the basis for this Advisory
Opinion. Petitioner is incorporated as a wholly owned subsidiary of the Mutual
Life Insurance Company of New York ("MONY"). MONY foreclosed on a mortgage that
was secured by property located in Smithtown, New York, which was being operated
as a hotel.
MONY, as lessor, then entered into a lease agreement with
Petitioner, as lessee, to lease the building, building improvements and all
personal property located in the building.
After entering into the lease
agreement, MONY purchased new furniture for the guest rooms (new beds, dressers,
etc.) and new tables and chairs for the lobby, lounge and restaurant. Petitioner
indicates that, at the time MONY purchased these additions, MONY paid sales tax
on the purchases. MONY did not collect sales tax on the lease of this property
to Petitioner and Petitioner did not pay sales or use tax on the purchases when
it filed its sales and use tax returns.
Petitioner contends that its operation is similar to that described in
In that
Howard Swartz Recording, Inc. (Adv Opn Comm T&F, TSB-A-82(26)S).
opinion, it was held that since equipment that was leased by a recording studio
was subsequently rented to its customers, the operator of the recording studio
was not liable for sales tax on its acquisition of the recording equipment.
Petitioner also contends that the leasing of the personal property cannot
be separated from the lease of the real property, which is not a taxable
transaction for sales tax purposes.
Section 1105(a) imposes sales tax on " [t]he receipts from every retail
sale of tangible personal property, except as otherwise provided in this
article."
Section 1101(b)(4) defines the term "retail sale", in relevant part, as:
"A sale of tangible personal property to any person for any purpose, other than
(A) for resale as such or as a physical component part of tangible personal
property . . . ."

-2­
TSB-A-97(39)S
Sales Tax

Section 1101(b)(5) defines the terms "sale, selling or purchase", in
relevant part, as:
Any transfer of title or possession or both, exchange or barter,
rental, lease or license to use or consume, . . . conditional or
otherwise, in any manner or by any means whatsoever for a
consideration, or any agreement therefor, including the rendering of
any service, taxable under this article, for a consideration or any
agreement therefor.
Opinion
Where a transaction involves the lease of both tangible personal property
and real property, the lease payments are required to be allocated between the
tangible personal property and the real property (see, Northway Properties, State
Tax Comm, July 31, 1984, TSB-H-84(107)S and Matter of WEBR v. State Tax Comm, 58
AD2d 471). The portion of the lease payments attributable to tangible personal
property is subject to sales and use tax under section 1105(a) of the Tax Law,
unless the purchase of the tangible personal property is a purchase for resale
as such. The portion of the lease payments attributable to real property is not
subject to sales and use tax.
In Matter of Helmsley Enterprises v Tax Appeals Tribunal of the State of
N.Y. (187 AD2d 64 [Levine, J.] lv to app den 81 NY2d 710), the Court held that
the acquisition of guest room furniture, furnishings and guest consumables was
not a purchase for resale as such and that these items were therefore subject to
sales tax when purchased by a hotel. Here, the tangible
personal property
included in the lease (beds, dressers, tables, chairs, etc.) is purchased by
Petitioner at retail from
MONY. This property is not resold as such to
Petitioner’s patrons but rather is furnished
to its patrons as part of its
services. Howard Swartz Recording, Inc., cited by Petitioner, does not address
purchases by a hotel and is not determinative of the issues presented by this
petition. Consequently, Petitioner's lease of tangible personal property is not
a purchase of property for resale but is subject to sales and use tax.
Tax
should have been collected from Petitioner on the portion of the lease payments
reasonably allocable to the tangible personal property, including the additional
furniture purchased after the lease was executed. We note that, although MONY
is not a petitioner and the issue is not presented, the facts suggest the
possibility that MONY's purchases might qualify as purchases for resale.

DATED: July 7, 1997

NOTE:

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

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