Is transferring tangible personal property to a new corporation, partnership, or single-member LLC as part of a corporate restructuring, in exchange for stock or a membership/partnership interest, a taxable retail sale in New York?

Plain-English summary

Deloitte and Touche asked on behalf of a corporation ("C") restructuring its multi-state operations. C's subsidiary ("B") owns tangible personal property located in New York, which would move to a newly formed entity under one of three scenarios: (1) B contributes the property to a brand-new corporation ("Newco") in exchange for Newco stock, and later transfers its Newco stock to another affiliated corporation; (2) B contributes the property to a brand-new partnership ("NewPart") in exchange for a partnership interest, and later transfers that interest to another affiliated corporation; or (3) B contributes the property to a brand-new single-member LLC it organizes, in exchange for the membership interest, and later sells that interest. The question was whether any of these transfers trigger New York sales or use tax.

The Department said no, across all three scenarios, for the same underlying reason: New York's sales tax law specifically carves transfers made purely as capital contributions out of the definition of a "retail sale." Contributing property to a corporation upon its organization, solely in exchange for stock, is excluded by statute -- so Scenario 1's transfer to Newco isn't taxable. Contributing property to a partnership in exchange for a partnership interest is excluded too -- so Scenario 2's transfer to NewPart isn't taxable either. And because New York's Tax Law specifically defines a limited liability company as a type of partnership for tax purposes, Scenario 3's transfer to the single-member LLC gets the exact same treatment as a partnership contribution, and also escapes tax.

The Department also addressed what happens next in each scenario: since stock, a partnership interest, and an LLC membership interest are all intangible personal property (not tangible personal property), any later sale of those interests -- B transferring its Newco stock, its NewPart interest, or selling its LLC interest -- is a sale of intangible property and isn't subject to sales or use tax at all, regardless of how the underlying tangible property got into the entity in the first place.

What this means for you

Companies restructuring multi-state operations by moving assets into new entities

Contributing tangible personal property located in New York to a newly formed corporation, partnership, or LLC, purely in exchange for an ownership interest in that entity, doesn't trigger New York sales or use tax -- regardless of which entity type you choose, including a single-member LLC. Just make sure the transfer is genuinely a capital contribution (in exchange for the ownership interest itself), not a disguised sale for other consideration.

Businesses planning to later sell or transfer their interest in a newly formed entity

A subsequent sale of your stock, partnership interest, or LLC membership interest is a sale of intangible property and isn't subject to New York sales tax, even though the entity itself holds taxable tangible personal property.

Accountants and tax professionals

This ruling confirms that Tax Law § 2(5)-(6)'s treatment of an LLC as a "partnership" for tax purposes extends the § 1101(b)(4)(iv)(E) partnership-contribution exclusion to single-member LLCs, closing what might otherwise look like a gap for the increasingly common LLC restructuring vehicle -- consistent with Nixon, Hargrave, Devans and Doyle, TSB-A-94(25)S on the intangible-property treatment of ownership-interest sales.

Common questions

Q: Is contributing property to a new corporation for stock a taxable sale in New York?
A: No -- Tax Law § 1101(b)(4)(iv)(D) specifically excludes this from the definition of a retail sale.

Q: Does forming a single-member LLC get the same tax-free treatment as a partnership contribution?
A: Yes -- New York's Tax Law treats an LLC as a type of partnership, so contributing property to a single-member LLC in exchange for the membership interest is excluded from tax the same way a partnership contribution is.

Q: Is selling your stock or partnership/LLC interest later on a taxable event?
A: No -- those interests are intangible personal property, and sales of intangible property aren't subject to New York sales or use tax.

Q: Does this ruling apply to my company's restructuring?
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. Whether your transfer genuinely qualifies as a capital contribution depends on your own facts.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(2)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971209E

On December 9, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Deloitte and Touche, LLP, Two World Financial
Center, South Tower, 8th Floor, New York, New York, 10281-1414.
The issue raised by Petitioner, Deloitte and Touche, LLP, is whether the
transactions described below constitute retail sales subject to sales and
compensating use tax.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
A corporation ("C") is restructuring its multi-state operations. C owns
a corporate subsidiary B, which currently owns tangible personal property located
in New York State. As part of the proposed restructuring, this property will be
transferred to a new entity, either a new corporation, partnership, or single
member limited liability company (LLC), as discussed in the three scenarios
below.
Scenario 1
As part of the proposed restructuring, B contributes tangible personal
property located in New York State to a new corporation ("Newco") upon its
organization in consideration for the issuance of Newco stock. B subsequently
transfers its interest in Newco to another affiliated corporation.
Scenario 2
As part of the proposed restructuring, B contributes tangible personal
property located in New York State to a new partnership ("NewPart") in
consideration for an interest in the partnership. B subsequently transfers its
interest in NewPart to another affiliated corporation.
Scenario 3
As part of the proposed restructuring, B contributes the tangible personal
property located in New York State to a new single member LLC organized by B in
consideration for the interest in the LLC. Subsequently, B sells its interest
in the LLC.

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TSB-A-98(2)S
Sales Tax

Applicable Law and Regulations
Subdivisions 5 and 6 of Section 2 of the Tax Law provide:
5.
The term "limited liability company" means a domestic
limited liability company or a foreign limited liability company, as
defined in section one hundred two of the limited liability company
law, a limited liability company formed pursuant to section five
hundred seven of the banking law, or a limited liability trust
company formed pursuant to section one hundred two-a of the banking
law.

6. "Partnership and partner," unless the context requires
   otherwise, shall include, but shall not be limited to, a limited
   liability company and a member thereof, respectively.
   Section 1101(b)(4)(iv) of the Tax Law provides, in part:
   The term "retail sale" does not include:
   *

*

*

(D) The transfer of property to a corporation upon its organization
in consideration for the issuance of its stock.
(E) The contribution of property to a partnership in consideration
for a partnership interest therein.
Section 1105(a) of the Tax Law imposes sales tax on the receipts of every
retail sale of tangible personal property, except as otherwise provided.
Section 526.6(d)(4)(i) of the Sales and Use Tax Regulations provides:
The purchase or surrender of a partnership interest for cash,
or the substitution of one partner for another, is the sale of
intangible personal property and is not subject to sales tax.
Section 526.8(c) of the Sales and Use Tax Regulations provides, in part:
Tangible personal property does not include:
(1) real property.
(2) intangible personal property.
Opinion
The proposed transfer of corporation B’s tangible personal property located
in New York State to a newly formed corporation upon its organization is not
subject to sales and use tax under the Tax Law. Section 1105(a) of the Tax Law
imposes sales tax on all retail sales of tangible personal property. Section
1110(a) of the Tax Law imposes a tax on the use of tangible personal property
purchased at retail, except to the extent that the property has already been or

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TSB-A-98(2)S
Sales Tax

will be subject to sales tax.
Transfers of tangible personal property to a
corporation solely in consideration for the issuance of its stock are
specifically excluded from the definition of a retail sale subject to sales and
use tax under Section 1101(b) of the Tax Law.
Therefore, as described in
Scenario 1, if corporation C restructures its multi-state operations and
transfers the property belonging to subsidiary B to Newco upon its organization
in exchange for the issuance of Newco stock, the transfer will not be considered
a retail sale subject to sales and compensating use tax.
As described in Scenario 2, the proposed transfer of corporation B’s
tangible personal property located in New York State to a partnership in exchange
for an interest in the same partnership is not taxable. Section 1101(b) of the
Tax Law specifically excludes from the definition of a retail sale the
contribution of property in exchange for an interest in a partnership.
Therefore, if corporation C restructures its multi-state operations and
subsidiary B contributes the tangible personal property located in New York to
NewPart in exchange for an interest in NewPart, the contribution will not be a
retail sale subject to sales and compensating use tax.
Section 2(6) of the Tax Law provides that, for purposes of the Tax Law, a
partnership includes, but shall not be limited to, a limited liability company.
In Section 2(5) of the Tax Law, a limited liability company is defined as "a
domestic limited liability company or a foreign limited liability company, as
defined in section one hundred two of the limited liability company law, a
limited liability investment company formed pursuant to section five hundred
seven of the banking law, or a limited liability trust company formed pursuant
to section one hundred two-a of the banking law." Therefore, when a company is
formed as a limited liability company in accordance with the Limited Liability
Company Law or Banking Law, it will be treated as a partnership under Section 2
of the Tax Law. Accordingly, if corporation C or corporation B reorganizes and
transfers tangible personal property to a limited liability company in exchange
for an interest in the company, as described in Scenario 3, the transfer of the
property will be treated the same as a transfer of assets in exchange for an
interest in a partnership. Therefore, the transfer of property will not
constitute a retail sale subject to sales and compensating use tax.
Any subsequent sale of any stock, partnership interest or interest in a
limited liability company is the sale of intangible personal property not subject
to sales and compensating use tax. (See Sections 526.6 and 526.8 of the Sales and
Use Tax Regulations, and Nixon, Hargrave, Devans and Doyle, Adv Op Comm T & F,
June 14, 1994, TSB-A-94(25)S)

DATED: January 30, 1998

NOTE:

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

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