There are times when two sales tax statutes are virtually identical but have different meanings due to the interpretations by the tax department charged with their administration. These opposing interpretations can lead to a sales tax transaction being taxed twice—or not at all. This is the case with the sale of storage services in New York and New Jersey.
Under New York tax law, a tax is imposed upon the service of “storing all tangible personal property not held for sale in the regular course of business and the rental of safe deposit boxes or similar space” [Tax Law section 1105(c)(4)]. [This does not include self-storage units, which New York considers the rental of real property and therefore not subject to New York’s sales tax; NYCRR section 527.6(b)(2).] The New York State Department of Taxation and Finance (DTF) has interpreted the situs of this tax as being the location where the storage services are delivered. The DTF has further explained that such services are considered delivered “where the storage service provider takes possession of the property to be stored, without regard to the location of the storage facility itself” (New York Sales Tax Bulletin TB-ST-340, 2/19/2015, emphasis added).
For example, if a box of files is picked up by a storage provider from a law firm’s office in New York City and stored in Westchester, the transaction would be subject to New York’s sales tax at the New York City rate. If the storage company instead picks up the files in New York City and stores them at its warehouse in New Jersey, the storage fee would also be subject to New York tax based on the New York City rate. Even if these files were continuously stored in New Jersey for an extensive period, such as 20 years, the annual storage charge to the law firm would still be taxed at a rate based on where the property was originally picked up (NYC).
Opposing interpretations can lead to a sales tax transaction being taxed twice—or not at all.
New Jersey’s sales tax law regarding storage services was taken virtually verbatim from New York’s tax law. New Jersey imposes a tax on the service of “storing all tangible personal property not held for sale in the regular course of business; the rental of safe deposit boxes or similar space; and the furnishing of space for storage of tangible personal property by a person engaged in the business of furnishing space for such storage” [N.J.S.A. 54:32B-3(b)(3)]. This statute and the New York statute on storage services, however, can result in double taxation because the New Jersey Department of Revenue (DOR) interprets situs of the New Jersey provision as the location where the storage is maintained (i.e., the location of the storage facility). Therefore, in the above example, New Jersey also taxes the storage of the property in New Jersey that was originally picked up by the storage provider in New York.
States generally allow a credit for taxes paid to another state to avoid double taxation. This credit mechanism only applies, however, in situations where both states’ taxation of the transaction is consistent.
States generally allow a credit for taxes paid to another state to avoid such double taxation. For example, if a New York resident purchases tangible personal property (e.g., a piece of art) in New Jersey and takes delivery in that state, the transaction is subject to New Jersey’s sales tax at a rate of 7%. The New Jersey vendor should collect New Jersey’s sales tax at the time of sale. When the taxpayer brings the art to his home in New York, he is also subject to New York’s use tax. Therefore, after applying the credit for the tax paid to New Jersey, the New York resident is only obligated to pay the difference between New York and New Jersey’s tax on the transaction.
This credit mechanism only applies, however, in situations where both states’ taxation of the transaction is consistent, such as in the above example. Due to the polar opposite sales tax treatment of the taxation of storage services by New York and New Jersey, neither state will provide a credit for the taxes paid to the other state. Therefore, in the first example, the law firm could be subject to double taxation. Furthermore, if the law firm was instead located in New Jersey and hired a vendor of storage services that picked up the property in New Jersey and stored it in New York, sales tax might not be due in either state. The situation could become even more complicated if, after one month of storing its files in New Jersey, a New York law firm had its files picked up from the warehouse in New Jersey and stored at a facility in New York.
This inconsistency can also affect vendors of storage services. As a vendor, the storage provider is required to collect any applicable state sales tax, based in part upon nexus. A vendor will generally have nexus in a state where it operates a warehouse and where it regularly picks up property from its customers. Therefore, the vendor in the first example is also subject to double taxation by both New York and New Jersey as a party required to collect sales tax. The vendor’s potential double exposure may even be greater than any single customer’s potential liability because this obligation may apply to all of its sales.
Taxpayers can sometimes take steps to eliminate double taxation. For example, in sales tax situations, form is generally respected over substance. Therefore, the New York law firm could avoid double taxation by, for example, hiring a third party to transport its property from New York to New Jersey. The transportation company’s bill to pick up the files and transport them to New Jersey is not a taxable transaction under New York law. In addition, the charge by the storage company for the storage in New Jersey would also not be subject to tax in New York because, as mentioned above, New York taxes the storage services based on where the vendor of the storage services takes possession of the property (i.e., New Jersey). Only the storage charge by the New Jersey storage provider would still be subject to sales tax, based on New Jersey’s tax law. This approach also applies to related entities (e.g., a trucking company related to the storage company) unless “the affairs of one entity are so dominated or controlled by its affiliate that such entity is the instrumentality of the affiliate,” in which case one legal entity may be treated as the alter ego of another [TSB-A-01(12)S, 4/17/01].
The continuous taxation of storage in New Jersey by New York does not seem equitable; however, a state can generally subject a transaction to taxation simply by enacting legislation, regardless of whether it seems equitable, as long as it is constitutional. The state tax department’s interpretation must be consistent with the statute’s plain meaning and the legislature’s intent.
When a taxpayer believes an administrative agency’s interpretation of a statute is inconsistent with the plain meaning of a statute or the legislature’s intent, there are generally two means of addressing the matter. A taxpayer can litigate the taxation of a transaction through the administrative appeal process (e.g., New York’s Division of Tax Appeals), and, ultimately, through the courts. If the determination is that the agency’s interpretation of the law is contrary to the law itself, the tax department cannot continue to apply its interpretation. The other recourse is for a taxpayer or a trade association to bring the tax department’s interpretation to the attention of the legislature, which can enact legislation that clarifies its original intent.
As of this writing, no challenge has been made to either New York or New Jersey’s interpretation of their respective storage service tax provisions. Until such time as a challenge is brought, both purchasers and vendors of storage services in New York and New Jersey, and their tax preparers and planners, should take care to structure their affairs so as to avoid double taxation.
Roger Blane, JD is a state and local tax partner at the law firm of Hutton & Solomon LLP, New York, N.Y.