While it is not uncommon for certain goods and services to be taxable in one state and exempt in another, sometimes two states will impose sales tax on the same transaction. When the same transaction is subject to tax by different jurisdictions, a credit for taxes paid may be given, but not always. Taxpayers should understand not only whether their goods and services are taxable in a jurisdiction where they have nexus but also how the tax is imposed and administered. The sales tax treatment of storage service charges by New York and New Jersey illustrate this concer n.
The possibility of double taxation arises because New York and New Jersey define the situs of storage services differently and could each regard one taxable transaction as having occurred in their state. New York imposes sales tax on the storage of "all tangible personal property not held for sale in the regular course of business" (N.Y. Tax Law §1105(c)(4)), and this tax applies where the storage services are delivered, which the New York State Department of Taxation and Finance has determined to be "where the storage service provider takes possession of the property to be stored, without regard to the location of the storage facility itself" (N.Y. State Dep't of Tax. and Fin., "Household Movers and Warehousers," Tax Bulletin TB - ST - 340 (Feb. 19, 2015); see also N.Y. Comp. Codes R. & Regs. tit. 20, §§525.2(a)(3) and 526.7(e)).
New Jersey imposes its tax on the service of the storage of "all tangible personal property not held for sale in the regular course of business; . . . 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. Stat. §54: 32B - 3 (b)(3)). However, the New Jersey Division of Taxation views the taxable situs of the storage services as the location of the storage facility.
New York's and New Jersey's different interpretations of situs could result in double taxation since New York views the taxable transaction as occurring where the storage service provider takes possession and New Jersey views the taxable transaction as occurring where the storage service is maintained, with no reference to where possession is transferred. A recently filed court challenge to New York's interpretation (described below) could solve this dilemma, but in the meantime, sellers and purchasers of storage services with cross - border features between New York and New Jersey should be alert to the following scenario:
Example: A New York business seeks to store its property with a New Jersey storage provider in anticipation of an office move. The transaction should be subject to New York sales tax if the property was picked up by the storage provider in New York, as the storage services were deemed "delivered" where the storage provider took possession. However, if the property is then stored in New Jersey, the transaction should be subject to sales tax in New Jersey as well (where the storage is maintained).
As the underlying situs of the transaction is different in each state, their respective tax structures on storage services may be viewed as inconsistent with one another. Both states may therefore interpret that this situation does not require a credit to be awarded for the sales taxes paid in the other state on the transaction.
The double taxation may further affect both the storage provider and the business purchaser. The storage provider in the above example will likely collect sales tax in New York, as its in - state activity establishes New York sales tax nexus. However, New Jersey will still expect sales tax remitted on this transaction, based on the storage of the New York business's property in - state . The New York business, while charged the New York sales tax by the storage provider, nevertheless has its property present in New Jersey and, if not charged New Jersey sales tax on the transaction, is responsible for New Jersey use tax.
Alternatively, what if the New York business transported its property to the storage provider in New Jersey directly via its own truck or through a third - party logistics provider? In that case, possession would have transferred in New Jersey. Though the property would be stored in New Jersey, by changing the location where the service provider takes possession, New York sales tax issues are avoided for both parties, as the transaction no longer has New York situs.
Were the jurisdictions reversed (i.e., a New Jersey business and a New York storage provider) and the New York storage provider picked up or received the property in New Jersey for later storage in New York, the transaction may not be subject to any tax. The transfer of possession took place in New Jersey, negating the situs for New York sales tax purposes. The property's storage would then be maintained in New York, negating the situs for New Jersey sales tax purposes.
The chart, "Interplay of N.Y. and N.J. Rules" (below), summarizes this interplay between rules for a New Jersey-based service vendor and a New York-based customer.
There is no legal impediment to New York's and New Jersey's potential imposition of sales tax on the same services, no matter how inequitable, as long as each state has legislation imposing a tax on the services. If a state tax agency's regulation excessively expands or erroneously interprets the plain meaning of the statute, a taxpayer can either litigate the matter or ask the legislature to clarify language and the meaning of the original law. (For more on this issue, see Blane, "Avoiding Double Taxation of Storage Services," CPA Journal (October 2017)).
A case pending in a New York Supreme Court (the trial court level in New York) illustrates the challenges facing taxpayers. In January 2019, Vital Records Inc., a New Jersey-based records storage company, brought suit in the Supreme Court of the State of New York, County of Albany, against the state of New York challenging the burdensome effects of New York's storage taxation scheme (Vital Records, Inc. v. New York State Dep't of Tax. and Fin., No. 900088 - 19 (N.Y. App. Div. 1/2/19) (complaint filed)). In its audit of Vital Records, the New York Department of Taxation and Finance determined the taxpayer transferred possession of property in New York via its courier service, and the storage charges to its customers were subject to New York's sales and use tax.
Vital Records is claiming the New York State Department of Taxation and Finance's decision to source its services to where customers received their property — in New York rather than its New Jersey storage facilities — amounts to double taxation and violates the dormant Commerce Clause of the U.S. Constitution. Vital Records relies principally on an advisory opinion from 1996 in which the state determined that another taxpayer's storage of materials at its facility in New Jersey was not subject to New York sales tax since the storage did not occur in New York ( TSB - A - 96 (70)S (Nov. 25, 1996)). The department has responded that its more recent guidance, as set forth in TB - ST - 340 and TSB - A - 17 (10)S, "is consistent with regulation section 527.6(c), which sources storage services to the location where the property to be stored is accepted by the storage provider from the customer."
The department also countered that its regulations clarify that transactions occur where property possession is transferred to the provider rather than the location of the ultimate storage, and, therefore, Vital Records is not entitled to declaratory relief. Further, the department cited a 1998 New York Court of Appeals decision, Tamagni v. Tax Appeals Tribunal,695 N.E.2d 1125 (N.Y. 1998), which found that New York's statutory residency law did not apply to an interstate market and thus did not violate the Commerce Clause (citing Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983)). The department argued that the tax on Vital Records does not disadvantage any interstate market because the tax owed does not favor its competitors, whose sales would be sourced to New York if they had a warehouse in New York. As of this writing, the case is before the New York Supreme Court.
Though the outcome of Vital Records may provide equity to taxpayers in the treatment of storage services between New Jersey and New York, this case brings to light several important practical takeaways. First, taxpayers must proactively evaluate their revenue streams' taxability between the states in which they have sales tax nexus. Second, though nexus and taxability studies can tell where and whether a sale is subject to tax, understanding how those states make their determination is necessary for effective sales tax structuring and planning. Third, until a conclusive outcome is established to avoid dual sales taxation among the states, taxpayers can implement the following:
Lastly, taxpayers affected by the storage wars between New York and New Jersey, or similar taxing schemes, should work closely with their trusted tax advisers to ensure proper compliance and seek opportunities to minimize their total tax liability.
Editor Notes
Kevin D. Anderson, CPA, J.D., is a managing director, National Tax Office, with BDO USA LLP in Washington, D.C.
For additional information about these items, contact Mr. Anderson at 202-644-5413 or kdanderson@bdo.com.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.
