SALT Report 2441 – The New York Department of Taxation issued an advisory opinion regarding whether a Taxpayer is a required to collect tax for purchases that he finances as part of a new business venture. The Taxpayer is registered as a vendor and is required to collect sales and use taxes because he makes taxable sales as part of his computer consulting business. However, the issue in this case is the Taxpayer’s investment and financial support for another business located in New York.
The new business is a start-up and must purchase machinery, equipment and office supplies that are necessary to either make the products it will sale, or to run the day to day business operations. Instead of lending money to the new business, the Taxpayer has entered into an agreement that will allow the new business to use the Taxpayer’s credit card to make these purchases.
After making an approved purchase, the new business will provide a promissory note to the Taxpayer for each transaction purchased with the Taxpayer’s credit. The Taxpayer does not take a security interest in the items purchased with his credit, and he never uses, takes possession of, or has title to the items purchased.
In its response, the Department determined that the Taxpayer is simply loaning funds to the new business through the use of his credit card. Because the Taxpayer never takes possession of, or title to, the items in question there is no sale between the Taxpayer and the new business. As a result, the Taxpayer is not required to collect and remit tax on these purchases.
In this case, the vendor is obligated to collect any sales tax due on the purchase and remit the tax to the Department unless the new business provides the vendor with an exemption certificate, Form ST-121. The exemption certificate would apply to any machinery or equipment that will be used or consumed directly and predominantly in the production of tangible personal property for sale.
However, the Taxpayer must be able to clearly establish this financing arrangement in the event that his business is audited. Therefore, the Department advises that the Taxpayer maintain adequate books and records that will identify the charges that were made with the Taxpayer’s credit card pursuant to a financial agreement with the new business, and that they were not for the Taxpayer’s own use.
Further, because the Taxpayer is acting as a lender, and not as the purchaser, he will have no right to request a refund or credit of the sales tax paid if a refund or credit is warranted. Furthermore, in the event that the new business fails to make payment to him on any item that he finances, the Taxpayer would not be eligible to request a bad debt refund or credit for any amount of tax paid.
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