For New York sales tax, is a single-member LLC treated as a separate entity from its sole corporate owner, so that property passed through the LLC and leased back to the owner can qualify for a resale exemption?

Plain-English summary

Arthur Andersen LLP asked about a hotel-development client's plan to acquire furniture, fixtures, beds, linens, and similar hotel-room property through a multi-entity structure built around a federal tax-free like-kind exchange under Internal Revenue Code § 1031. In the plan, an unrelated intermediary company ("PropCo") would buy the property from a vendor using a resale certificate, then transfer it to a single-member LLC ("SMLLC") -- whose sole member is the client -- as part of a like-kind exchange. The SMLLC would give PropCo its own resale certificate, and would then lease the property to the client, who would actually use it in the client's hotels.

The Department confirmed that each step in the chain works as intended for sales tax purposes. PropCo's purchase from the vendor qualifies as tax-free for resale because it's buying exclusively to transfer the property to the SMLLC. The transfer from PropCo to the SMLLC is itself a "sale" (a transfer of title, even via exchange), and it too qualifies as tax-free for resale, because the SMLLC is buying exclusively to lease the property onward to the client. The key move: New York's Tax Law treats a limited liability company as a type of partnership, and a member of a partnership is legally distinct from the partnership itself for sales tax purposes -- so even though the SMLLC might be a "disregarded entity" for federal income tax purposes, it's a real, separate taxpayer here. That means the SMLLC's lease of the property to its own sole member (the client) is a genuine taxable retail sale, and the client -- as the actual end user of the furniture and fixtures -- is the one who owes sales tax on its lease payments to the SMLLC.

What this means for you

Real estate and hospitality businesses using SMLLC or like-kind-exchange structures

Don't assume that because your single-member LLC is "invisible" for federal income tax, it's also invisible for New York sales tax. New York looks through to the LLC as a genuine, separate legal person, which is what makes the resale-exemption chain in this structure work -- but it also means the LLC's own lease back to its owner is a real, taxable transaction that requires the owner to pay sales tax on the lease payments.

Businesses structuring multi-entity property acquisitions

Each transfer in a chain (vendor to intermediary, intermediary to SMLLC, SMLLC to end user) needs its own valid resale certificate from the buyer to the seller within the required time frame in order for the earlier transfers to stay tax-free; only the final transfer to the actual end user is where sales tax attaches.

Accountants and tax professionals

This opinion is a clean, standalone illustration that New York's sales tax "person" and "partnership" definitions (Tax Law § 2(6), treating an LLC as a partnership, and a member as separate from the partnership) operate independently of federal income tax entity classification -- the same disregarded-entity structure that simplifies federal tax reporting does not simplify away the sales tax analysis.

Common questions

Q: Does a single-member LLC that's disregarded for federal income tax also get disregarded for New York sales tax?
A: No -- New York treats the SMLLC as a distinct "person," separate from its sole member, specifically because Tax Law § 2(6) classifies an LLC as a type of partnership and a partnership's member is a separate entity from the partnership.

Q: Who ultimately owes sales tax in this structure?
A: The client, as the end user leasing and actually using the tangible personal property from the SMLLC, owes sales tax on its lease payments; the earlier transfers (vendor to PropCo, PropCo to the SMLLC) stay exempt as sales for resale.

Q: What paperwork keeps each transfer in the chain tax-free?
A: Each buyer in the chain -- PropCo, then the SMLLC -- must give its seller a properly completed resale certificate (Form ST-120) within 90 days of the date of delivery.

Citations and references

Statutes and regulations:

• Tax Law § 2(5), (6) (definitions of "limited liability company"; "partnership and partner")
• Tax Law § 1101(a) (definition of "person")
• Tax Law § 1101(b)(4)(i), (5) (definitions of "retail sale"; "sale, selling or purchase")
• Tax Law § 1105(a) (imposition of sales tax)
• Tax Law § 1132(c) (resale certificate requirement)
• 20 NYCRR § 532.4(d) (resale certificates)
• Internal Revenue Code § 1031 (like-kind exchange)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(7)S
Sales Tax
January 28, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980713D

On July 13, 1998, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Arthur Andersen LLP, 101 Eisenhower Parkway, Roseland, New Jersey 07068.
Petitioner, Arthur Andersen LLP, provided additional information pertaining to the Petition on
August 13, 1998.
The issues raised by Petitioner are:

1. Whether, under the circumstances described below, a single member limited liability
   company ("SMLLC"), and the supplier of the SMLLC, may purchase tangible personal property for
   resale.
2. Whether a lease transaction between a client and a SMLLC is subject to sales or use tax.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner’s client (hereafter "Client") is primarily engaged in the business of acquiring and
   developing real estate for purposes of constructing and operating hotels. Client has business
   operations in thirty-two states and currently owns or leases hotels in New York. Client is organized
   as a "C" corporation for federal income tax purposes and is incorporated under the laws of Delaware.
   In order to develop additional hotels, Client acquires development property in transactions
   that qualify as nonrecognition events for federal income tax purposes pursuant to Internal Revenue
   Code Section 1031. Specifically, Client identifies a particular property it wishes to acquire, and
   makes arrangements with the property owner to purchase that property. Client then assigns the
   purchase contract for the property to an unrelated company ("PropCo"), which has been created by
   a third party qualified intermediary to specifically represent Client in these transactions. Client does
   not have an ownership interest in PropCo or the third party qualified intermediary, and PropCo will
   not act as agent for the Client. PropCo is a wholly owned corporation created by the qualified
   intermediary to facilitate the IRC Section 1031 transactions between Client and the qualified
   intermediary.
   At all times relevant to this transaction, Client provides PropCo with all funds necessary to
   purchase acquired properties, and in the case of raw land purchases, funds necessary for the
   subsequent development of the parcel.

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Sales Tax
January 28, 1999

Once construction of Client’s hotel property has commenced, Client will acquire large
quantities of tangible personal property, including furniture, fixtures, beds, linens and other property
commonly used in hotel rooms. Since Client has in place the structure described above to acquire
real property, it proposes to acquire tangible personal property in a similar manner. Under a contract
separate from the real property contract, PropCo will purchase tangible personal property from a
vendor, either based in New York, or who ships such property into New York by common carrier.
At the time of purchase, PropCo will provide the vendor with a duly completed resale certificate.
PropCo, in turn, will transfer this tangible personal property to a single member limited liability
company, SMLLC, in which the Client is the single member, in an exchange which qualifies for
nonrecognition of gain or loss pursuant to Section 1031 of the Internal Revenue Code. SMLLC will
provide PropCo with a duly completed resale certificate, and will lease the tangible personal property
to Client. SMLLC will not be leasing real property to Client. SMLLC will be a registered New
York State vendor.
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 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.
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 of the Tax Law provides, in part:
   (a) When used in this article the term "person" includes an individual,
   partnership, limited liability company, society, association, joint stock company,
   corporation, estate receiver, trustee, assignee, referee, and any other person acting in
   a fiduciary or representative capacity, whether appointed by a court or otherwise, and
   any combination of the foregoing.
   (b) When used in this article for the purposes of the taxes imposed by
   subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
   hundred ten, the following terms shall mean:
   *

*

*

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TSB-A-99(7)S
Sales Tax
January 28, 1999

(4) Retail sale. (i) 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, or (B) for use by that person in performing the services subject to
tax under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five where the property so sold becomes a physical component part of the
property upon which the services are performed or where the property so sold is later
actually transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax.
*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), 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.
Section 1105 of the Tax Law imposes a sales tax on the following:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
Opinion
Client is primarily engaged in the business of acquiring and developing real estate for use
in constructing and operating hotels. Client is proposing to acquire tangible personal property for
use in its hotels in a transaction that qualifies for nonrecognition of gain or loss under Internal
Revenue Code Section 1031. Specifically, PropCo will purchase tangible personal property and
transfer the property in a like-kind exchange to a SMLLC in which Client is the single member.
This property will be leased by the SMLLC to the Client. The SMLLC will only be leasing tangible
personalty, not real property. Petitioner inquires whether Client is the ultimate consumer and
responsible for payment of sales tax on the lease payments, and whether the initial purchase and
subsequent transfer of the tangible personal property qualify as sales for resale.
PropCo’s initial purchase of the tangible personal property from the vendor is a sale under
Section 1101(b)(5) of the Tax Law. However, PropCo may purchase the tangible personal property
exempt from tax if the purchase qualifies as a purchase for resale. Section 1101(b)(5) of the Tax
Law defines a sale as any "transfer of title or possession or both, barter or exchange..." Propco’s
subsequent exchange of this tangible personal property for like property to the SMLLC qualifies as
a sale under this definition. Therefore, PropCo’s purchase of this property from the vendor will not

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Sales Tax
January 28, 1999

be subject to sales tax, if the property is purchased exclusively for resale to the SMLLC. PropCo
should supply the vendor with a properly completed resale certificate (Form ST-120) within ninety
days of the date of delivery. See Section 1132(c) of the Tax Law and Section 532.4(d) of the Sales
and Use Tax Regulations.
Since the exchange of this tangible personal property between PropCo and the SMLLC
qualifies as a sale, this transaction is also subject to sales tax unless it qualifies as a purchase for
resale by the SMLLC to the Client. 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. (See
Deloitte and Touche, LLP, Adv Op Comm T & F, January 30, 1998, TSB-A-98(2)S.) A member
of a partnership is a separate and distinct entity from the partnership for purposes of Article 28 of
the Tax Law. Accordingly, the subsequent lease of tangible personal property by the SMLLC to the
Client is a sale as defined in Section 1101(b)(5) of the Tax Law. Therefore, the exchange of this
tangible personal property between PropCo and the SMLLC constitutes a purchase for resale, if the
property is purchased by the SMLLC exclusively for lease to the Client. The SMLLC is not required
to pay sales tax on this exchange of property. The SMLLC should furnish PropCo with a properly
completed resale certificate (Form ST-120) as described above.
The lease of the tangible personal property by the SMLLC to the Client constitutes a retail
sale subject to tax under Section 1105(a) of the Tax Law. Client is responsible for the payment of
sales tax on the lease payments made to the SMLLC.

DATED: January 28, 1999

NOTE:

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

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