Based on the facts found, it appears that Petitioner intended to purchase the equity of a single-member LLC. Equity or ownership interests of an entity are considered to be intangible property and sales of intangible property are not taxable under New York’s sales tax law. So how did this entity purchase end up incurring tax? Well, the short answer is that some evidence in the record seemed to indicate that the form of the transaction was that of an asset purchase, taxable to the extent the underlying assets were not exempt. For example, a payoff letter issued in connection with the transaction indicated that all equity interests in the target were to be purchased on the purchase date and “in connection therewith, all such equity interest and all assets of [the target] are to be transferred . . . .” This doesn’t strike me as particularly damaging – it seems more like overly verbose (and perhaps imprecise) legalese to me.
What’s tougher to reconcile is that, while the purchase agreement and some other documentation seem to indicate that Petitioner intended to purchase the equity of the target LLC, some of the assets that were transferred were listed on Petitioner’s general ledger and were commingled with those of Petitioner and other subsidiaries. Perhaps we could simply chalk this up to sloppy bookkeeping. But then Petitioner, a publicly-traded entity, also issued a Form 8-K/A that included a table summarizing “the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.” Now the contradictions are starting to add up. A pattern of inconsistent treatment is tougher to explain away than one isolated inconsistency. The last nail in the coffin: the balance sheet of the target LLC’s final federal partnership return showed the elimination of tangible personal property on the date of the acquisition.
So the bottom line is that while there was certainly evidence in the record to support the conclusion that the transaction was a nontaxable purchase of intangible ownership rights, there was contradictory evidence in the record that created doubt as to the form of the transaction. And because Petitioner had the burden to prove by clear and convincing evidence that the Division’s assessment was erroneous, this ambiguous evidence proved fatal to Petitioner’s efforts. Still, the language contained in the main purchase agreement and some ancillary documents provided pretty strong evidence that this was intended to be equity sale. It will be interesting to see if Petitioner appeals. The good news for Petitioner is that the ALJ cancelled more than half of the assessment because she found that many of the assets were exempt from tax for other reasons.
This case reminds us that sales tax is a “form over substance” tax. But perhaps we should add a corollary to that proposition: sales tax is a form over substance tax, and the form used should be respected by the taxpayer if the taxpayer intends for the form to be respected by the Tax Department.
