New Legislation Sends Mixed Messages on Trusts’ New York Use Tax Liability

September 2017

New legislation, effective as of April 2017, dramatically increases the likelihood that entity-owned, personal property will become subject to New York’s use tax once used in the state[1]. While a subsequent Technical Memorandum, issued by the New York State Department of Taxation and Finance, implies that trusts are not the legislation’s intended targets, it does not override the legislation’s failure to exclude trusts from its crosshairs. Accordingly, regardless of whether the new rules are intended for trusts, a prudent trustee must take its obligation to comply with such rules seriously, if the trust corpus includes personal property that may be used within the state.

Background on New York State Sales and Use Taxes

Two separate state taxes, the sales and use taxes, apply to personal property that is purchased or used in the state. Sales tax is collected by retailers on their transfer of personal property within the state. Use tax is due from buyers on their use of personal property in the state if, for any reason, New York sales tax was not collected on the initial purchase. The use tax regime is designed to ensure that New York residents cannot evade sales tax by arranging for property to be delivered out-of-state for subsequent delivery within the state. 

To illustrate that point, suppose two people buy paintings from a New York art gallery. The first person takes the painting from the gallery, and the second arranges for the painting to be delivered to her home in another state. The gallery should collect sales tax on the first sale (because possession of the painting is transferred within the state) but not the second (because possession is transferred outside of the state). However, if the out-of-state buyer later moves the painting to her New York apartment, she would then become liable for New York’s use tax, except to the extent that an exception to the tax applies.

Use Tax Exceptions

The leading use tax exception applies in the case of personal property purchased while the owner was a nonresident of New York (the “Nonresident Exception”).[2] This exception is intended to ensure that personal property owned by a bona fide nonresident does not inadvertently become taxable when the owner relocates to New York. Since residency is the key determinant of use tax liability, it is essential that a taxpayer understands the circumstances under which it will be considered a resident.[3]  

While it might be relatively straightforward to determine an individual’s residency, this determination can be more challenging for an entity. Deferring to only the entity’s place of formation or governing law could invite gamesmanship. As a result, New York regulations also look to where an entity does business.[4] For example, a Delaware company that does business in New York is a resident for use tax purposes, notwithstanding its formation in Delaware. 

In determining whether an entity is a resident for use tax purposes, disagreements between the state and taxpayers have centered on the amount of activity that an entity may undertake in New York before it is deemed to be doing business in the state. The state has long argued for a low threshold, such that a company or trust with any activities in New York should be deemed to be a resident for purposes of use tax. Conversely, taxpayers have argued that an entity formed only to hold personal property (for example, boats or paintings) for its owners’ pleasure is not engaged in business anywhere, and therefore, cannot be classified as a resident. Under the taxpayers’ theory, the Nonresident Exception should prevent the imposition of use tax when the entity’s personal property is subsequently brought into the state.

Historic Tax Strategy

To the state’s chagrin, courts have generally favored taxpayers when refereeing these disagreements.[5] Consequently, New Yorkers have been able to avoid the imposition of use tax by using a Delaware company to purchase goods out-of-state and subsequently relocate them to New York.

Recent Statutory Changes and Administrative Guidance

Per the statutory change made effective in April 2017, an entity now qualifies for the Nonresident Exception only if it has been engaged in business outside of New York for six or more months before bringing property into the state.[6] As a result, individuals can no longer structure around the state’s use tax by purchasing goods through a Delaware holding company.

An inadvertent consequence of this statutory change is that personal property purchased by a trust appears to become subject to tax when the property is moved into the state, because the trust is unlikely to be characterized as ever having engaged in business outside of New York. (Business undertaken by trust subsidiaries isn’t counted for this purpose.) Ironically, a trust is unlikely to be able to make this showing due to taxpayers’ historic victories in defining the phrase doing business, which have become part of New York’s common law.[7]

Trustees need firm confirmation that, notwithstanding the statutory change, use tax will not be imposed on a trust due to its beneficiaries’ use of trust-owned personal property within the state. The New York State Department of Taxation and Finance’s Technical Memorandum implies that this is the case, as it describes the statutory changes as narrowing the Nonresident Exception for business entities, a term that arguably includes companies, but not trusts.

Nonetheless, unless and until the state issues further guidance on the recent statutory change, trustees should proceed with caution when trust-owned personal property is brought into New York.


For more information:

Jason Kleinman at +1 212 592 5919 or [email protected]
Barbara J. Lawrence at +1 212 592 1692 or [email protected]
Katy H. Donlan at +1 212 592 1522 or [email protected]

© 2017 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.


[1] All references to “state” and “tax” in this alert refer to New York State and its use tax, respectively.

[2] New York Tax Law § 1118(2)(a).

[3] The state has a discrete set of rules for determining residency for use tax purposes. These rules are distinguishable from the state’s rules for determining residency for income tax purposes. 

[4] N.Y. Comp. Codes R. & Regs. tit. 20, § 526.15(b).

[5] See Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135 (1993) and In the Matter of the Petition of Rochester Amphibian Airways, Inc., NYS Tax Appeals Tribunal, Dkt. No. 821342 (2009).

[6] New York Tax Law § 1118(2)(b).

[7] See the cases referred to at note 5.

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