If a New Yorker buys a boat through an out-of-state corporation and leases it back, does New York tax apply — and what happens if the corporation is a sham?

Plain-English summary

Ameire Ltd. is a Delaware corporation whose sole shareholder and officer is Marvin Arnold Pollack, a New York resident. Ameire bought a $227,574 boat in Florida (delivered in Delaware, with no sales/use tax paid anywhere), and planned to lease it to Pollack on an annual basis while the boat cruised the East Coast — spending July and August in New York. They asked whether New York sales or use tax applies (and how it's computed), whether Ameire must register, and whether franchise and personal income taxes apply.

The Department answered in the alternative, because it couldn't tell from the facts whether Ameire is a sham. It noted that New Yorkers have used sham Delaware corporations to evade boat tax.

• If Ameire is a sham corporation (no economic substance, formed solely to evade tax), it is disregarded and the boat is deemed owned by Pollack. When Pollack uses it in New York, he owes compensating use tax under § 1110, computed under § 1111(b) on the full purchase price — or on current market value (not exceeding cost) if the boat was used outside New York for more than six months first.
• If Ameire is not a sham, the boat's use is not use-taxable if the rent Pollack pays is reasonable versus market rates — but the rentals themselves are taxable under § 1105(a) (rentals of tangible personal property). Ameire must register as a vendor under § 1134 and collect and remit sales tax on the rentals.
• Franchise and income tax follow. As a corporation owning and leasing property in New York, Ameire is subject to the Article 9-A corporate franchise tax. And Pollack, a New York resident, is subject to Article 22 personal income tax to the extent his use of the boat is a constructive dividend or additional wages from Ameire.
• No help evading the tax. The petitioners also asked the Department to help design a plan to avoid boat tax. The Department declined — suggesting tax-avoidance methods is outside the scope of advisory opinions.

What this means for you

Putting a boat in an out-of-state corporation doesn't automatically dodge New York tax. If the corporation is a sham with no real business substance, New York disregards it and taxes the individual's in-state use directly.

A "real" leasing structure still generates New York sales tax — on the rent. Even a bona fide corporate owner leasing to its shareholder must charge sales tax on the lease payments, register as a vendor, and remit the tax. And the lease has to be at a reasonable market rent to keep the underlying use from being taxed to the individual.

Expect franchise and income tax too. A corporation that owns and leases property in New York owes Article 9-A franchise tax, and an owner's personal use of company property can be taxed as a constructive dividend or wages under the personal income tax.

The Department won't design your avoidance plan. Advisory opinions explain how the law applies to your facts; they won't map out schemes to avoid tax.

Common questions

Q: I bought my boat through a Delaware corporation. Is it free of New York tax?
A: Not necessarily. If the corporation is a sham, New York disregards it and taxes your in-state use of the boat directly under the compensating use tax.

Q: What if the corporation is legitimate and leases the boat to me?
A: Then your use isn't separately use-taxed if the rent is reasonable, but the lease payments are subject to sales tax, and the corporation must register and collect it.

Q: Are there other New York taxes?
A: Yes. The corporation owes Article 9-A franchise tax for owning and leasing property here, and your personal use may be taxed as a constructive dividend or wages under the personal income tax.

Q: Can the Department tell me how to structure this to avoid tax?
A: No. It declined that request — advisory opinions don't suggest tax-avoidance methods.

Citations and references

Statute and regulation:

• Tax Law § 1110 — compensating use tax on property used in the state (applies to the owner if the corporation is a sham)
• Tax Law § 1111(b) — use-tax base (purchase price, or current market value up to cost after more than six months' prior out-of-state use)
• Tax Law § 1105(a) — taxes rentals of tangible personal property (the lease payments)
• Tax Law § 1134 — requires a vendor of taxable rentals to register
• Tax Law Article 9-A (corporate franchise tax) and Article 22 (personal income tax; constructive dividend/wages)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_35s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(35)S
Sales Tax
September 25, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870605A

On June 5, 1987, a Petition for Advisory Opinion was received from Ameire Ltd., 134
Market Street, Lewes, Delaware and Marvin Arnold Pollack, 24 West Wood Road, Great Neck, New
York 11020.
Petitioner Ameire Ltd. (Ameire) was incorporated in the State of Delaware and maintains its
principal business address at Lewes, Delaware. Petitioner Marvin Arnold Pollack (Pollack) is a
resident of New York State and the sole shareholder and officer of Ameire.
Ameire purchased a boat in Florida at a cost of $227,574. The boat was delivered by the
seller to Ameire in Lewes, Delaware. No sales or compensating use tax was paid to the State of
Florida. The State of Delaware does not have a sales or compensating use tax. Ameire intends to
lease the boat to its sole shareholder on an annual renewable lease basis with a twelve month
navigation period.
It is the intention of the parties that the boat navigate the eastern seacoast of the United States
between Florida and Massachusetts spending the substantial parts of the months of April and May
at Lewes, Delaware; May and June in New Jersey; July and August in New York; September and
October in New Jersey; October, November and December in Delaware and January through March
in Florida waters on a cruising permit (passing through the waters of the various states on its trips
up and down the eastern seacoast).
The issues raised are (I) whether New York sales or compensating use tax will be imposed
on the boat; (II) on what basis the tax would be computed; (III) whether Ameire must qualify in New
York State in order to collect and pay the appropriate tax; (IV) whether Ameire would be subject to
franchise tax in New York State and (V) whether Pollack would be subject to personal income tax
in New York State.
Initially, it is noted that a number of New York State residents have attempted to evade
payment of New York State sales or compensating use tax on their purchases of boats by forming
sham Delaware corporations. It is not possible to determine from the information supplied by
Petitioners whether Ameire is such a sham corporation. Accordingly the issues raised in the petition
for advisory opinion will be addressed in the alternative and Petitioners' tax liability will be
ultimately determined by the actual facts of this case.
If it is ultimately determined that Ameire is a sham corporation without economic substance,
formed solely for purposes of tax evasion, the existence of the sham will be disregarded and the boat
will be deemed owned by Pollack. When the boat is used within New York State by Pollack, he will
become subject to the compensating use tax imposed by section 1110 of the Tax Law. Section 1110
of the Tax Law imposes a use tax upon any tangible personal property used within this state, except
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87(35)S
Sales Tax
September 25, 1987

to the extent that such property has already been subject to sales tax under Article 28 of the Tax Law.
Section 1111(b) of the Tax Law provides that "[t]angible 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 " However, if a taxpayer shows that the
property was used outside of New York for more than six months prior to its use within New York,
the property is taxable based upon its current market value at the time of first use in the state, not to
exceed its cost.
Accordingly, under such circumstances, Pollack would be subject to the compensating use
tax when he uses the boat within New York State. The tax would be computed based upon the full
purchase price of the boat or upon the current market value of the boat depending on the length of
time of prior use outside of the state.
On the otherhand, if it is ultimately determined that Ameire is not a sham corporation, the
use of the boat within New York State would not be subject to the use tax if Petitioners can establish
that the rental paid to Ameire by Pollack is reasonable in view of prevailing market rental prices.
However, the rentals paid to Ameire by Pollack for lease of the boat within New York State would
be subject to the sales tax imposed by section l105(a) of the Tax Law upon rentals of tangible
personal property. As a vendor of tangible personal property, Ameire is required by section 1134 of
the Tax Law to register for sales tax purposes and to collect and remit sales tax on its taxable rentals.
In addition as a corporation owning property within the state and leasing it to others, Ameire
would be subject to the corporate franchise tax imposed upon business corporations under Article
9-A of the Tax Law.
Furthermore, it is noted that as a resident of New York State, Pollack would be subject to the
personal income tax imposed under Article 22 of the Tax Law to the extent that his use of the boat
(within and without New York State) is deemed either a constructive dividend or additional wages
from Ameire.
Finally, it is noted that Petitioners have requested the Tax Commission to provide guidance
and advice regarding how to draft a plan which will enable Petitioners to avoid paying sales tax on
the value of the boat. It is not within the scope of advisory opinions to suggest methods of tax
avoidance. Accordingly, this portion of Petitioners' request is denied.

DATED: September 25, 1987

FRANK J. PUCCIA
Director
Technical Services Bureau

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