Is a stock purchase followed by a corporate merger, where the acquired company's tangible personal property ends up owned by the acquirer, subject to New York State and local sales or use tax?

Subject

Issues raised by Petitioner, Nixon, Hargrave, Devans and Doyle, are whether the purchase of stock by Acquiring Company of a corporation which owns tangible personal property and the subsequent merger of such corporation into Acquiring Company is subject to State and local sales and use taxes.

What this means for you

A law firm asked about a planned two-step deal: "Acquiring Company" buys 100% of the stock of "Target," a New York service business that owns tangible personal property (equipment, supplies, etc.) and has liabilities of its own; within about 30 days, Target is then merged into Acquiring Company under New York corporate law, with Target's shareholders receiving nothing but Acquiring Company's own stock in the merger. Acquiring Company then uses Target's former assets in its New York business.

The opinion analyzes the deal in two separate pieces. First, the stock purchase itself: stock is intangible property, not "tangible personal property," and sales/use tax only reaches tangible personal property -- so buying the stock, by itself, isn't a taxable transaction no matter what tangible assets the acquired company happens to own. Second, the merger: New York's sales tax regulations specifically exclude from the definition of "retail sale" any transfer of property to a corporation solely in exchange for its own stock, done pursuant to a merger or consolidation under New York (or any other state's) law -- because even though legal ownership form changes, there's a "continuity of interest" in the underlying property. Since Target's assets pass to Acquiring Company solely in exchange for Acquiring Company stock, and the merger follows New York law, that transfer also escapes sales and use tax. Put together: acquiring a company by buying its stock and then formally merging it in is a tax-free route to gaining its physical assets, at least on this fact pattern.

Q&A

Q: If we buy 100% of a company's stock, does that trigger sales or use tax on the tangible personal property that company owns?
A: No, per this opinion -- stock is intangible property, and the purchase of stock alone (however much tangible property the target owns) isn't a sale of tangible personal property under Tax Law § 1105(a).

Q: We're planning to merge the acquired company into ours shortly after buying its stock, transferring only our own stock as consideration -- is that merger itself taxable?
A: Per this opinion, no -- a merger done under New York law where the only consideration exchanged is the surviving corporation's stock falls within the specific merger/consolidation exclusion from "retail sale" in 20 NYCRR § 526.6(d), so the transfer of the target's tangible personal property into the surviving corporation isn't a taxable sale.

Q: Would the answer be different if the acquirer paid cash or other property (not just its own stock) in the merger?
A: This opinion doesn't address that scenario -- its holding depends specifically on Target receiving "no securities or consideration other than the stock of Acquiring Company" in the merger.

Citations

• Tax Law § 1105(a) -- imposes sales tax on retail sales of tangible personal property.
• Tax Law § 1101(b)(4) -- defines "retail sale," excluding a transfer of property to a corporation solely for its stock pursuant to a merger or consolidation under New York or other law.
• 20 NYCRR § 526.6(d) -- excludes from "retail sale" transfers between corporations and stockholders under a merger, citing a "continuity of interest" rationale, with an illustrative example (Example 8) of a wholly-owned subsidiary merging into its parent.
• 20 NYCRR § 526.8(c) -- excludes real property and intangible personal property (including stock) from the definition of tangible personal property.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_25s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-94 (25)S
Sales Tax
June 14, 1994

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940414A

On April 14, 1994, a Petition for Advisory Opinion was received from Nixon, Hargrave,
Devans and Doyle, Clinton Square, Post Office Box 1051, Rochester, New York 14603.
The issues raised by Petitioner, Nixon, Hargrave, Devans and Doyle, are whether the
purchase of stock by Acquiring Company of a corporation which owns tangible personal property
and the subsequent merger of such corporation into Acquiring Company is subject to State and local
sales and use taxes.
Target Company (hereinafter the "Target) is engaged in a service business in New York State.
Target owns tangible personal property located in New York and owes certain liabilities. Acquiring
Company is interested in purchasing Target's business. Pursuant to a plan, Acquiring Company will
purchase all of the outstanding stock of Target and shortly thereafter (i.e., within 30 days) Target will
be merged into Acquiring Company. No securities or consideration other than the stock of
Acquiring Company will be issued or given to Target as a result of the merger. All of Target's assets
and liabilities will be merged into Acquiring Company in accordance will the laws of New York
State. Acquiring Company will use Target's assets in its business in New York State.
Section 1105(a) of the Tax Law imposes a sales tax on "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4) of the Tax Law provides, in pertinent part, as follows:
(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 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...
*

*

(iii) The term "retail sale" does not include:

*

-2­

TSB-A-94 (25)S
Sales Tax
June 14, 1994
(A)
The transfer of tangible personal property to a corporation, solely in
consideration for the issuance of its stock, pursuant to a merger or consolidation
effected under the law of New York or any other jurisdiction.
Section 526.6(d) of the Sales and Use Tax Regulations provides, in part, as follows:
(d)
Exclusions relating to corporate and partnership transactions. (1) The
following transfers of property are not retail sales:
(i)
The transfer of property to a corporation, solely in consideration for
the issuance of its stock, pursuant to a merger or consideration effected under the law
of New York or any other jurisdiction.
*

*

*

The transfers described in this paragraph between partners and partnerships,
and 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.
*

*

*

(6)
Mergers and consolidation. (i) A merger under the law of New York
is the procedure whereby two or more corporations merge into a single corporation
which is one of the participating corporations.
*

*

*

Example 8. Corporation A owns all the stock of Corporation B. Corporation
B is merged into Corporation A pursuant to the Business Corporation Law. Included
among the property transferred is machinery, office equipment and supplies. The
transfer of the tangible personal property to Corporation A, pursuant to the merger,
is not subject to sales tax.
Section 526.8(c) of the Sales and Use Tax Regulations provides, in part, as follows:
(c)

Tangible personal property does not include:

(i)

real property;

(2)

intangible personal property.

-3­

TSB-A-94 (25)S
Sales Tax
June 14, 1994
In the instant case, Acquiring Company is purchasing 100% of the stock of Target.
Moreover, within 30 days from such stock purchase, Target, pursuant to the laws of New York State,
will be merged into Acquiring Company. As a result of the merger, Target will receive no securities
or consideration other than the stock of Acquiring Company.
Stock is an intangible rather than tangible personal property. Accordingly, since Acquiring
Company is merely purchasing an intangible and not tangible personal property, pursuant to Sections
1101(b)(4) and 1105(a) of the Tax Law and Section 526.8(c) of the Sales and Use Tax Regulations
the purchase by Acquiring Company of 100% of the stock of Target is not subject to State and local
sales and use taxes. In addition, pursuant to Section 1101(b)(4) of the Tax Law and Section 526.6(d)
of the Sales and Use Tax Regulations the merger of Target into Acquiring Company solely in
exchange for the stock of Acquiring Company and in accordance with the laws of New York State
is not deemed to be a retail sale of tangible personal property. Therefore, pursuant to Section
1105(a) of the Tax Law and Section 526.6(d) of the Sales and Use Tax Regulations such merger is
not subject to State and local sales and use taxes.

DATED: June 14, 1994

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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