Recent Case Demonstrates Risk of Ignoring Sales Tax in a Real Estate Transaction

Sales tax may not be one of the foremost concerns in a major real estate transaction, but a recent decision by the New York State Division of Tax Appeals demonstrates the peril of ignoring the tax.  In the Matter of the Petition of Empire Holdings, LLC, the Empire Hotel was purchased for cash and the assumption of existing mortgages.  Per the contract, the property was to be delivered, inter alia, with “all furniture and supplies.”  Unfortunately, the initial contract allocated no portion of the consideration to the furniture and supplies.  A subsequent iteration of the contract listed the personal property value as de minimis with no portion of the purchase price allocable thereto.   

After the consummation of the transaction, the new owners of the property commenced renovation of the hotel and donated the furniture and supplies to a not-for-profit which appraised them for approximately $1 million and described them as “399 hotel rooms of furniture and decorations” consisting of “over 5,000 items.”  Naturally, the new owners sought a tax deduction for the donation based on the appraisal amount.  Upon a sales tax audit, the auditor discovered no consideration allocated to the tangible property, but discovered the underlying book value as over $5 million (albeit depreciation had not been properly recorded).

The petitioner maintained that no bulk sale occurred between the parties as only the real property had been a part of the transaction and both parties valued the tangible personal property as worthless.  Additionally, the petitioner argued that that any sales tax owed was offset by real estate transfer taxes remitted.   
Notwithstanding, the Division held that the value the parties placed on the property was not relevant in determining if a bulk sale had taken place.  Authority favorably cited by the Division consistently held that the contracted sales price of assets in a bulk sale would not be solely determinant in valuing transferred business assets for sales tax purposes. The Division cited several factors that demonstrated that the value of the hotel’s business assets was more than zero. One factor, as stated above, was that the assets’ book value was above $5 million at the time of sale.  Additionally, a future charitable donation of the property sought a deduction of over $1 million.  Ultimately, the Division deemed the value of the property to be the appraisal value of roughly $1 million.  The Division also rejected petitioner’s argument that any sales tax owed should be offset by real estate transfer taxes paid upon the transaction. 

Aninda Dhar is a Senior Tax Manager with extensive experience in federal and international tax matters. Aninda provides tax consulting services to entities in numerous industries and serves a diverse roster of clients.

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