New York Advisory Opinion TSB-H-80(104)S, (104)I: Does an employer awarding a compact car to an employee through a perfect-attendance drawing trigger New York withholding tax and sales tax, and when are they due?

Plain-English summary

New York Air Brake Co., which employed about 2,000 people, had been paying $50 quarterly bonuses to employees with perfect attendance to discourage absenteeism, processed through payroll and reported as wages. The company was considering a new incentive program: instead of (or in addition to) the cash bonus, employees with perfect attendance would be entered into a drawing to win a compact car. The company asked the Department two things: whether the winning employee would owe withholding tax and sales tax immediately, given the prize was property rather than cash.

On withholding: federal law (26 U.S.C. section 3401(a)) defines "wages" broadly to include "the cash value of all remuneration paid in any medium other than cash," and federal regulations require an employer paying wages in property to arrange for the withholding amount to be available in money. Since 1960, New York's Personal Income Tax Law has largely conformed to federal wage definitions absent a specific New York exception. The Department concluded that transferring a car to an employee for services performed is "wages" for New York withholding purposes to the same extent it's "wages" federally - so the employer needed to make arrangements to have the required withholding available in money, due when the vehicle is transferred and remitted for the year the compensation is reported on the employee's Wage and Tax Statement.

On sales tax: Tax Law sections 1101(b)(3)-(5) define a taxable "receipt," "retail sale," and "sale" broadly enough to include a transfer of property for consideration, even where the "consideration" is the employee's services rather than cash, and section 1105(a) imposes sales tax on the receipts from every retail sale of tangible personal property. Because New York's sales tax is a "transaction tax" that attaches at the moment of the transaction, the Department held that transferring the car to the employee as additional compensation is itself a retail sale, with tax due on the higher of the car's cost or fair market value, payable at the time the vehicle is actually transferred to the winner.

What this means for you

Employers considering non-cash prizes or incentive awards for employees

A vehicle (or other property) awarded to an employee as compensation - even through a drawing tied to an incentive program rather than a direct bonus - is treated as wages for withholding purposes and is ALSO a separate taxable retail sale for sales tax purposes; you need to plan for both tax obligations, not just one.

Payroll and tax departments handling in-kind employee awards

Since the employee likely won't have cash on hand to cover withholding on a property award, arrange in advance for the withholding amount to be funded in money (for example, by requiring supplemental cash withholding from other pay) at the time the property is transferred.

Companies budgeting for the true cost of a non-cash incentive program

Factor in both the withholding tax obligation on the award's value AND state/local sales tax on the higher of the item's cost or fair market value - a compact car "prize" costs the employer (or the arrangement between employer and employee) more than just the car's sticker price.

Common questions

Q: Is a car given to an employee as a bonus treated differently from a cash bonus for tax purposes?
A: For withholding purposes, no - both are "wages" to the extent federal law treats in-kind compensation as wages. But a property award additionally triggers a separate sales tax obligation on the transfer that a cash bonus wouldn't.

Q: When exactly is the sales tax due on an awarded vehicle?
A: At the time the vehicle is actually transferred to the winning employee - New York's sales tax is a transaction tax that attaches at the moment of transfer, not when the incentive program is announced or the winner is selected.

Q: Is sales tax based on what the car cost the employer, or its retail value?
A: The higher of the two - the ruling specifies that either the cost or fair market value of the vehicle, whichever is higher, is the amount subject to sales and use tax.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/h80_104s_104i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-80 (104) S
Sales Tax
TSB-H-80 (104) I
Income Tax
June 16, 1980

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

Petition #Z800331B

On March 31, 1980, a Petition for Advisory Opinion was received from the New York Air
Brake Co., Starbuck Ave., Watertown, N.Y. 13601.
The issues raised are whether the winner of a compact car awarded by an employer to an
employee has to pay the withholding tax and the sales tax immediately.
New York Air Brake Co., employs about 2,000 employees. In an effort to discourage
absenteeism, New York Air Brake Co. has been issuing $50.00 bonuses per quarter to all employees
with perfect attendance. Payment of such bonuses was processed through the Company's payroll
account and reported as income on the individuals' Wage and Tax Statement. The Company
anticipates implementing a new attendance incentive program whereby employees with perfect
attendance would be eligible in a drawing for a compact car.
Section 3401(a) of the Internal Revenue Code defines "wages" as ". . . all remuneration (other
than fees paid to a public official) for services performed by an employee for his employer, including
the cash value of all remuneration paid in any medium other than cash..." unless specifically
excepted under section 3401(a) or excepted under section 3402(e).
Section 3402 of the Internal Revenue Code provides for income tax collected at source.
Federal Regulation section 31.3402(a)-1(c) provides that if wages are paid in property other than
money, the employer should make necessary arrangements to insure that the amount of the tax
required to be withheld is available for payment in money.
In 1960, the New York State Personal Income Tax Law was conformed with the Federal
Internal Revenue Code by Article 22 of the Tax Law. Many definitions and instructions for New
York State are identical to those of the Federal definitions and instructions which are published in
the "Employers' Tax Guide", referred to as Federal Circular E.
Any compensation regarded as "wages" for Federal income tax withholding purposes are
"wages" for purposes of withholding for New York State income tax unless an allocation or
exception is specifically required for New York State purposes.
The transfer of a motor vehicle from an employer to an employee for services performed by
an employee for his employer constitutes "wages" for New York State withholding tax purposes to
the extent that they constitute "wages" for Federal withholding tax purposes. The employer should
make whatever arrangements are necessary to insure that the amount of the tax required to be
withheld is available for payment in money.

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-H-80 (104) S
Sales Tax
TSB-H-80 (104) I
Income Tax
June 16, 1980

Section 1101(b)(3) of the Tax Law refers to a receipt as "The amount of the sale price of any
property ... valued in money, whether received in money or otherwise .... "
Section1101(b)(4) defines a retail sale as "A sale of tangible personal property to any person
for any purpose, other than (A) for resale .... "
Section 1101(b)(5) defines a sale 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 .... "
Section 1105(a) imposes a sales tax on "The receipts from every retail sale of tangible
personal property, except as otherwise provided in this article."
The transfer of an automobile for a consideration is a sale of tangible personal property
within the meaning of the Statute. The Statute requires a tax on sales at retail of tangible personal
property. The amount subject to the tax is the receipt as defined in the Statute. The sales tax is a
"transaction tax", liability for the tax occurring at the time of the transaction. The tax therefore
becomes due at the time of transfer of property.
Accordingly, the transfer of a motor vehicle from an employer to an employee, as additional
compensation to the employee, is subject to withholding tax. The withholding tax is due from the
employee when the vehicle is transferred to the employee and is required to be remitted for the year
in which the compensation is reported on the employee's Wage and Tax Statement.
Further, the transfer of a motor vehicle from an employer to an employee as an additional
compensation to the employee, is a sale within the meaning and intent of Article 28 of the Tax Law,
and either the cost or fair market value (whichever is higher) of the vehicle is subject to the sales and
use tax and is due at the time the vehicle is transferred to the winner.

Dated: June 2, 1980

s/MICHAEL ALEXANDER
Deputy Director
Technical Services Bureau