How does a New York resident compute the use tax owed when bringing a custom-built vessel, constructed and outfitted out of state, into New York for use?

Plain-English summary

A New York limited partnership is having a vessel custom-built and outfitted in New Jersey by various contractors, for eventual registration and business use (entertaining and catering for special events) in New York. Its accountant asked how to compute the New York use tax owed when the vessel is brought into the state.

The Department confirmed that a New York resident who buys tangible personal property and taxable services out of state owes New York's compensating use tax when the property is brought into the state for use, to the extent New York sales tax wasn't already paid. The tax base is broad: it includes the purchase price of the vessel itself, the cost of all materials used to outfit it, and the cost of any taxable services performed on it or on the outfitting materials (like fabrication, installation, or interior decorating), plus any shipping or transportation charges billed as part of those purchases. There's an important exception: if the vessel was actually used outside New York for more than six months before its first use in the state, the tax is instead based on the vessel's current market value at that first-use date (capped at its cost, so this exception can only help, never hurt, the taxpayer). Finally, the partnership can claim a dollar-for-dollar credit against its New York use tax for any sales tax it actually paid (without a right to a refund) to New Jersey on the same property or services -- but the credit can never exceed the New York tax due, and if New Jersey's rate happens to be lower than New York's, the difference is still owed.

What this means for you

New York residents and businesses commissioning vessels, aircraft, or other property built out of state

Budget for New York use tax on the full cost of construction and outfitting -- not just the base purchase price -- including fabrication, installation, and interior-decorating charges and any shipping costs billed along the way. If your property will sit outside New York for more than six months before its first in-state use, ask whether the market-value basis (rather than cost) works in your favor.

Contractors and fabricators working on out-of-state vessel or vehicle builds for New York clients

Make sure your client understands that sales tax paid to your state (e.g., New Jersey) can offset, but not eliminate, their eventual New York use tax liability -- the reciprocal credit is capped at the New York tax otherwise due and requires the other state to allow a similar credit in return.

Accountants and tax professionals

This is a clean walkthrough of the compensating use tax basis rules (§ 1110(a), (b), (f)) plus the six-month "used elsewhere" market-value exception (§ 1111(b)(1)) and the reciprocal credit mechanism (§ 1118(7)(a), Publication 39) -- useful as a template for any out-of-state custom-build scenario (boats, planes, RVs) brought into New York for in-state use.

Common questions

Q: What's included in the use tax base for a vessel built and outfitted out of state?
A: The vessel's purchase price, all materials used to outfit it, and any taxable fabrication, installation, or interior-decorating services performed on it, plus related shipping/transportation charges.

Q: Does it matter if the vessel was used outside New York before coming into the state?
A: Yes -- if it was used outside New York for more than six months first, the tax is based on the vessel's current market value at first New York use instead of its cost (but never more than cost).

Q: Can sales tax paid to another state reduce the New York use tax owed?
A: Yes, via a reciprocal credit, but only up to the amount of New York tax otherwise due, and only if the other state allows an equivalent credit back to New York taxpayers.

Q: Who owes this use tax -- the individual partners or the partnership?
A: The partnership itself is a "person" for sales and use tax purposes and is the one liable for the use tax on its own purchases.

Citations and references

Statutes and guidance:

• Tax Law § 1101(a), (b)(1), (3), (4)(i) (person; purchase at retail; receipt; retail sale)
• Tax Law § 1105(a), (c)(2), (c)(3), (c)(7) (retail sales; processing; installing/maintaining; interior decorating)
• Tax Law § 1110(a), (b), (f) (compensating use tax imposition and rate basis)
• Tax Law § 1111(b)(1) (used-out-of-state property; current market value basis)
• Tax Law § 1118(7)(a) (reciprocal credit for tax paid to another state)
• Publication 39, A Guide to New York State Reciprocal Credits for Sales Taxes Paid to Other States

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(26)S
Sales Tax
June 22, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S041228A

On December 28, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Karen Fredrickson, 1000 Woodbury Road, Suite 206, Woodbury,
New York, 11797. Petitioner, Karen Fredrickson, provided additional information pertaining to
the Petition on March 15, 2005.
The issue raised by Petitioner is how Petitioner’s client determines the basis on which use
tax is to be computed on the client’s use of a vessel as described below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner’s client, a New York limited partnership (Partnership), is having a vessel
custom built for it and outfitted at a location in New Jersey. Partnership will contract various
aspects of the vessel’s construction and outfitting to a number of persons. Partnership will take
delivery of the vessel in New Jersey. The vessel will be registered and used by Partnership in
New York State in the business of entertaining and catering for special events.
Partnership anticipates remitting the applicable New York State sales or use tax at the
time the vessel is registered in New York State. Petitioner asserts that, at the time of registration,
the fair market value of the vessel will be approximately $1,500,000.
Applicable law and regulations
Section 1101 of the Tax Law provides, in part:
Definitions (a) When used in this article the term "person" includes an
individual, partnership, limited liability company, society, association, joint stock
company, corporation, estate, receiver, trustee, assignee, referee, and any other person
acting in a fiduciary or representative capacity, whether appointed by a court or
otherwise, and any combination of the foregoing.
(b) When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
(1) Purchase at retail. A purchase by any person for any purpose other than those
set forth in clauses (A) and (B) of subparagraph (i) of paragraph (4) of this subdivision.
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June 22, 2005

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article . . . valued in money, whether received in money or
otherwise, including any amount for which credit is allowed by the vendor to the
purchaser, without any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or delivery . . .
regardless of whether such charges are separately stated in the written contract, if any, or
on the bill rendered to such purchaser and regardless of whether such shipping or delivery
or transportation . . . is provided by such vendor or a third party, but excluding any credit
for tangible personal property accepted in part payment and intended for resale. . . .
(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property, or (B) for use by that person in performing the services subject to tax
under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven hundred
five where the property so sold becomes a physical component part of the property upon
which the services are performed or where the property so sold is later actually
transferred to the purchaser of the service in conjunction with the performance of the
service subject to tax. . . .
Section 1105 of the Tax Law provides in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
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(c) The receipts from every sale, except for resale, of the following services:
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(2) Producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the tangible
personal property, not purchased by him for resale, upon which services are performed.
(3) Installing tangible personal property . . . or maintaining, servicing or repairing
tangible personal property. . . .
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Sales Tax
June 22, 2005

(7) Interior decorating and designing services, (whether or not in conjunction with
the sale of tangible personal property), by whomsoever performed, including interior
decorators and designers, architects or engineers; notwithstanding the foregoing, such
services shall not include services which consist of the practice of architecture, as defined
in section seventy-three hundred one of the education law, or the practice of engineering,
as defined in section seventy-two hundred one of the education law, if the services are
performed by an architect or engineer having a license or permit under the education law.
Section 1110 of the Tax Law provides, in part:
Imposition of compensating use tax (a) Except to the extent that property or
services have already been or will be subject to the sales tax under this article, there is
hereby imposed on every person a use tax for the use within this state on and after June
first, nineteen hundred seventy-one except as otherwise exempted under this article, (A)
of any tangible personal property purchased at retail . . . (C) of any of the services
described in paragraphs (1), (7), and (8) of subdivision (c) of section eleven hundred five
of this part, (D) of any tangible personal property, however acquired, where not acquired
for purposes of resale, upon which any of the services described in paragraphs (2), (3)
and (7) of subdivision (c) of section eleven hundred five of this part have been
performed. . . .
(b) For purposes of clause (A) of subdivision (a) of this section, the tax shall be at
the rate of . . . percent of the consideration given or contracted to be given for such
property, or for the use of such property, including any charges for shipping or delivery
as described in paragraph three of subdivision (b) of section eleven hundred one, . . .
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(f) For purposes of clauses (C), (D), and (E) of subdivision (a) of this section, the
tax shall be at the rate of . . . percent of the consideration given or contracted to be given
for the service, including the consideration for any tangible personal property transferred
in conjunction with the performance of the service and also including any charges for
shipping and delivery of the property so transferred and of the tangible personal property
upon which the service was performed as such charges are described in paragraph three
of subdivision (b) of section eleven hundred one.
Section 1111 of the Tax Law provides, in part:
Special rules for computing receipts and consideration
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June 22, 2005

(b) Tangible personal property, which has been purchased by a resident of
New York state outside of this state for use outside of this state and subsequently
becomes subject to the compensating use tax imposed under this article, shall be taxed on
the basis of the purchase price of such property, provided, however:
(1) That where a taxpayer affirmatively shows that the property was used outside
such state by him for more than six months prior to its use within this state, such property
shall be taxed on the basis of current market value of the property at the time of its first
use within this state. The value of such property, for compensating use tax purposes, may
not exceed its cost.
Section 1118 of the Tax Law provides, in part:
Exemptions from use tax The following uses of property and services shall not
be subject to the compensating use tax imposed under this article:
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(7)(a) In respect to the use of property or services to the extent that a retail sales
or use tax was legally due and paid thereon, without any right to a refund or credit
thereof, to any other state or jurisdiction within any other state but only when it is shown
that such other state or jurisdiction allows a corresponding exemption with respect to the
sale or use of tangible personal property or services upon which such a sales tax or
compensating use tax was paid to this state. To the extent that the tax imposed by this
article is at a higher rate than the rate of tax in the first taxing jurisdiction, this exemption
shall be inapplicable and the tax imposed by section eleven hundred ten of this chapter
shall apply to the extent of the difference in such rates, except as provided in paragraph
(b) of this subdivision.
Opinion
Partnership is a person for sales tax purposes. See section 1101(a) of the Tax Law.
Partnership appears to be a resident of New York State for sales tax purposes who is having a
vessel built and outfitted in New Jersey by third party contractors. Once built, the vessel will be
brought to New York State for use by Partnership in a business or trade in the State. Partnership
is, in effect, purchasing tangible personal property and services in connection with the
construction and outfitting of a vessel which will be used in the State.
If a resident of New York State purchases tangible personal property outside of the State,
such resident will owe a compensating use tax upon bringing the tangible personal property into
the State for use. Accordingly, upon bringing the vessel into New York State, Partnership is
liable for compensating use tax. The basis on which the use tax will be computed is the total cost
of the vessel and tangible personal property used to outfit the vessel. Such cost consists of

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Sales Tax
June 22, 2005

Partnership’s purchase price of the vessel and of all tangible personal property which becomes
part of or is used to outfit such vessel, as well as the purchase price of any services taxable under
section 1105(c)(2), (3) and (7) of the Tax Law performed on the vessel or related tangible
personal property. See section 1110(a)(A), (C) and (D) of the Tax Law. Such amounts shall
include any transportation costs or expenses included on invoices for tangible personal property
or those services enumerated in section 1105(c)(2), (3) and (7) of the Tax Law. See sections
1101(b)(3) and 1110(b), (f) of the Tax Law.
It is noted that if the property was used outside New York State for more than 6 months
prior to its use within this State, the use tax is based on the current market value of the property
at the time of its first use within this State. The value of such property, for compensating use tax
purposes, may not exceed its cost. See section 1111(b)(1) of the Tax Law.
Partnership may apply for a credit for the amount of any New Jersey sales tax paid
(without any right to a refund or credit) on tangible personal property or the above enumerated
services against the amount of New York State use tax owed or paid on the use of such property
or services. Under no circumstances can the credit exceed the amount of tax due and result in a
refund. See section 1118(7) of the Tax Law and Publication 39, entitled A Guide to New York
State Reciprocal Credits for Sales Taxes Paid to Other States (8/04) for information on the
calculation of this reciprocal credit.

DATED: June 22, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.