Can a parent company take over its wholly owned subsidiary's assets without owing sales tax on the transfer?

Plain-English summary

Felix Industries, Inc. owns 100% of C. & F. Equipment Company, which holds title to construction equipment that only Felix uses. Felix wanted to absorb C. & F.'s assets without triggering sales or use tax. Can it?

The Department said yes — through a liquidating dividend.

• A liquidating dividend isn't a retail sale. Tax Law § 1101(b)(4)(iii)(B) and 20 NYCRR § 526.6(d)(9) exclude from "retail sale" the distribution of property by a corporation to its stockholders as a liquidating dividend. The rationale: the form of ownership changes, but there's a continuity of interest in the property. So the transfer is not subject to sales tax.
• Three conditions. The exclusion applies provided the assets are transferred (1) as a liquidating dividend, (2) resulting from a partial or complete liquidation of C. & F., and (3) declared in accordance with the laws of C. & F.'s state of incorporation.
• It's still a bulk sale. The transfer is a bulk sale under 20 NYCRR § 537.1, so Felix may need to file a notice of bulk sale with the Department (and can contact the Central Office Audit Bureau, Bulk Sales Unit, for help).

What this means for you

Pulling a subsidiary's assets up to the parent can be sales-tax-free — as a liquidation. When a subsidiary distributes its property to its parent-shareholder as a liquidating dividend, New York treats it as a change in the form of ownership with continuity of interest, not a taxable sale. (This is a different exclusion than transferring property into a new corporation for its stock; that one runs through § 1101(b)(4)(iii)(D).)

Follow the corporate formalities. To qualify, the distribution must be a genuine liquidating dividend from a partial or complete liquidation, and it must be declared under the corporate law of the subsidiary's state of incorporation. Sloppy paperwork can cost you the exclusion.

Don't skip the bulk-sale notice. Even a tax-free intercompany transfer is a bulk sale. File the required notice so you don't inherit successor liability for any unpaid sales tax.

Common questions

Q: We want to merge our wholly owned subsidiary's equipment into the parent. Is that a taxable sale?
A: Not if it's done as a liquidating dividend — that's excluded from "retail sale" under § 1101(b)(4)(iii)(B). It must be a partial or complete liquidation declared under the subsidiary's state-of-incorporation law.

Q: Is this the same rule as putting assets into a new corporation for stock?
A: No — that's a separate exclusion (§ 1101(b)(4)(iii)(D)). Here the assets flow up to the shareholder as a liquidating dividend, which has its own continuity-of-interest rationale.

Q: Do we have to file anything?
A: Likely yes. The transfer is a bulk sale under § 537.1, so file a notice of bulk sale with the Department.

Citations and references

Statute and regulation:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(4)(iii)(B) — the distribution of property by a corporation to its stockholders as a liquidating dividend is not a retail sale
• 20 NYCRR § 526.6(d) — exclusions for corporate/partnership transactions; corporate liquidations (§ 526.6(d)(9)): the liquidating dividend may be a partial or complete liquidation and must be declared under the state-of-incorporation law
• 20 NYCRR § 537.1 — defines "bulk sale," triggering the notice-of-bulk-sale requirement

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_52s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88 (52)S
Sales Tax
October 17, 1988

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
DEPARTMENT OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880811A

On August 11, 1988, a Petition for Advisory Opinion was received from Felix Industries,
Inc., Route 202 and Lovell Street, Lincolndale, New York 10540.
The issue raised is whether a parent corporation can absorb the assets of its subsidiary
without incurring a sales tax liability on the transfer.
Felix Industries, Inc. owns 100% of the stock of C. & F. Equipment Company. C & F
Equipment Company holds title to construction equipment used solely by Felix Industries. Felix
Industries wishes to absorb the assets of C & F Equipment Company without incurring a sales or use
tax liability on the transfer.
Section 1105(a) of the Tax Law imposes a sales tax upon "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4)(iii) states, in part: "The term retail sale does not include: ...(B) The
distribution of property by a corporation to its stockholders as a liquidating dividend."
Section 526.6 of the Sales Tax Regulations states, in part:
Retail sale. [Tax Law, § 1101(b)(4)] (a) The term "retail sale" or "sale at
retail" means the sale of tangible personal property to any person for any
purpose, except as specifically excluded.
(d)
Exclusions relating to corporate and partnership transactions.
(i) The following transfers of property are not retail sales:

• *
  *
  (ii) The distribution of property by a corporation to its stockholders as a liquidating
  dividend.
  *
  *
  *
  The transfers described in this paragraph between...corporations and stockholders,
  are excluded from the definition of "retail sale" because while the form of ownership
  of the property is changed, there is a continuity of interest in the property transferred.
  *
  *
  *
  (9) Corporate liquidations. (i) The distribution of tangible personal property by a
  corporation to its stockholders as a liquidating dividend is not a retail sale.
  TP-9 (9/88)

-2­
TSB-A-88 (52)S
Sales Tax
October 17, 1988
(ii) The liquidating dividend may be as a result of a partial or complete liquidation.
(iii) The liquidating dividend must be declared in accordance with the law of the state
of incorporation, to qualify for exclusion from the definition of "retail sale".
Accordingly, as Petitioner owns stock issued by its subsidiary, C & F Equipment Company,
the assets of C & F Equipment Company may be transferred to Petitioner without the incurrence of
a sales tax liability by Petitioner, provided that: such assets are transferred to Petitioner as a
liquidating dividend; the liquidating dividend results from either a partial or complete liquidation
of C & F Equipment Company; and the liquidating dividend is declared in accordance with the laws
of the state in which C & F Equipment Company was incorporated.
It is noted that even though a liquidating dividend may qualify for exclusion from sales tax,
the transfer of assets from a subsidiary to the parent corporation may constitute a bulk sale. Section
537.1 of the Sales Tax Regulations defines the term bulk sale as any sale, transfer, or assignment in
bulk of any part or the whole of business assets, other than in the ordinary course of business, by a
person required to collect tax and pay the same over to the Tax Commission.
Inasmuch as Petitioner may be liable for filing a notice of bulk sale with the Department of
Taxation and Finance, Petitioner may wish to contact the Central Office Audit Bureau, Bulk Sales
Unit, Department of Taxation and Finance, W. A. Harriman Campus, Albany, N.Y. 12227 for
assistance in complying with its bulk sales obligations.

DATED: October 17, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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