Relates to computation of sales and compensating use taxes on modular home modules

Summary of specific provisions

Section 1 would amend the definition of "tangible personal property" in Tax Law section 1101 (b)(6) to provide that such term will not include a "modular home" that is permanently affixed to real property. But if a modular home is to be removed from the realty, then the home and its component parts would be tangible personal property whether sold as a whole or as pieces.

Section 2 would add new paragraphs 33, 34 and 35 to Tax Law section 1101(b) to define "modular home," "modular home modules" and "new modu- lar home module" for purposes of State and local sales and compensating use taxes. "Modular home" would mean a one-to-three family residential structure constructed at the building site from modular home modules, where the modules are connected and the structure is finished using building materials or other tangible personal property at the site. The modular home must conform to the same building and other codes applica- ble to one-to-three family site-built homes in the jurisdiction where the modular home building site is located and the finished home must constitute a capital improvement. The term would not include a structure or portion of a structure built on-site, whether by the modular home installer or another person, using building materials delivered to the site (that is, what is commonly called "stick-built"), even if some of the building materials themselves used in a stick-built house were manu- factured off-site, such as windows, doors, wall or roof panels, trusses or dormers. The term would also not include a mobile home or a shed, gazebo, unattached garage (even if made or built by a modular home modules manufacturer) or the like.

"Modular home modules" would mean the component sections that are installed at the building site to make a modular home, where such sections are engineered and manufactured in a factory, shipped or deliv- ered to the building site on a truck or other vehicle, installed at the site on a permanent foundation, and not by itself suitable for occupan- cy. Every group of modules that will be installed in this state as a modular home, or, if a modular home is to be built from a single module, that single module, must, prior to shipment from the place where it is made, bear the insignia of approval issued by the NNYS Department of State pursuant to the authority of Article Eighteen of the Executive Law and regulations thereunder. The Department of State will cooperate with the Tax Commissioner and furnish such information as the Commissioner requests to carry out this article and its purposes. A modular home module would include tangible personal property shipped or delivered with the module from the factory by the manufacturer at the same time

the module is shipped or delivered, such as exterior siding, roof shin- gles, roof vent pipes, interior trim pieces, paint, and interior doors, and supplies required and used to install them, but only if that proper- ty (i) was engineered or designed to be an integral component part of the module, (ii) matches, or is essential to the functioning of, the module, (iii) was not installed in the module at the time the module was made only because it would be damaged during, or interfere with, ship- ping or delivery of the module to the building site, (iv) will be perma- nently installed in the module at the building site by the manufacturer or by the purchaser of the module or by the contractor of either of them, (v) is listed in full on the contract, bill of sale, invoice or other memorandum of piece given to the purchaser or buyer, or in an addendum thereto, true copies of which the manufacturer shall retain as part of the records required to be kept by this article and make avail- able on request, and (vi) is included in the sale price of the module, without any additional charge. A modular home module would not include furniture, fixtures, furnishings, appliances, attachments or similar property that is not incorporated as component parts of the module at the time it is manufactured. Nor would a module include the building materials or other tangible personal property used to connect the modules or finish the modular home at the building site. "New modular home module" would mean a modular home module sold for the first time at retail.

Section 3 would make a conforming amendment to Tax Law section IIII (a) to reference other provisions in section IIII, which provides special rules for determining the amount of receipts and consideration subject to sales and use taxes.

Section 4 would add new subdivision (o) to Tax Law section IIII setting forth new rules how receipts subject to sales tax and consideration subject to compensating use tax would be calculated when new modular home modules are sold or used. It would also provide a new rule for how the use tax is calculated when a manufacturer uses modules it made, by installing them itself or having a contractor install them on its behalf.

Paragraph 1 of new subdivision (o) provides that, if a vendor makes a retail sale of new modular home modules (that is, sells the modules as items of tangible personal property, uninstalled), then 60% of the vendor's receipts from the sale (not including any shipping or delivery charge by the seller), plus 100% of the seller's shipping or delivery charge, would be subject to sales tax. Paragraph one would cover, for example, a manufacturer's retail sale of modules to a consumer, who will hire its own contractor to install them (that is, to build the home). It would also cover the manufacturer's retail sale of modules to a dealer/builder who will install them (build the house) for a homebuyer, in which case the dealer/builder would have to pay the tax to the manufacturer. Currently, 100% of such receipts, including 100% of any delivery charge made by the seller to the purchaser, are subject to sales tax.

Paragraph 2 of new subdivision (o) provides that, if a New York resident (which could be the homeowner or the dealer/builder, depending on the circumstances) buys new modular home modules at retail outside the state, and then brings them into the state to be assembled into a modu- lar home here, then 60% of the consideration given for the modules, less any trade-in credit, plus 100% of the seller's delivery charge, would be subject to use tax. Currently, 100% of such consideration, including 100% of any shipping or delivery charge made by the seller to the purchaser, is subject to use tax. This compensating use tax rule must mirror the sales tax rule in paragraph 1, in order to comply with Feder- al Constitutional principles.

In addition to the compensating use tax described in the prior paragraph that complements the sales tax, the state also imposes a use tax on a manufacturer's use in the state of things that it manufactured. The current base for this manufacturer's use tax depends on whether the manufacturer also sells things in the ordinary course of business simi- lar to the ones it uses. If it does, then this use tax base would be the price at which it sells similar things. For purposes of this use tax, selling in the ordinary course of business generally means that the manufacturer sells more than 10% of the modular home modules it makes (20 NYCRR section 531.3 (b)). If it does not, then the base would be the cost to the manufacturer of the raw materials it purchased to make the thing it used, plus any charge by the seller of the raw materials to ship or deliver them to the manufacturer. Under New York law, if a manufacturer of modular home modules contracts to sell a modular home on an installed basis in this state (that is, it or its contractor will install them at the building site), then the manufacturer is considered to use the modules it made when it, or its contractor, installs them at the site to build the modular home. Paragraph 3 of new subdivision (o) provides that the manufacturer of the modules would owe use tax on 60% of the price it charged the homebuyer for the modules on an uninstalled basis (that is, not including the module installation charge if it is reasonable and stated separately from every other charge), plus 100% of any charge it makes to ship or deliver the modules to the site. This rule will apply in both cases for this manufacturer's use tax, that is whether the manufacturer sells modules in the ordinary course of busi- ness or not.

Paragraph 4 of new subdivision (o) provides that paragraphs one, two and three of this subdivision would not apply to a sale or use of modular home modules unless the vendor or user of the modules separately states the price or consideration for which it sells or conveys the modules from every other charge it makes to, or consideration it is to receive from, the person to whom it sells or conveys the modules, and such other charges or consideration is reasonable.

Paragraph 5 of new subdivision (o) provides that the sale or use of a modular home module other than as described in paragraphs 1, 2 or 3 of the subdivision would be subject to sales or compensating use tax with- out regard to those paragraphs. For example, if a manufacturer sells its modules to a dealer in the state for use as a demonstration model on the

dealer's lot that sale would not be covered in paragraphs 1 through 3. In that case, the dealer would be required to pay state and local sales tax on the full price of its purchase of the modules, plus any charge made by the seller to deliver the modules to the dealer. Section 5 provides the bill would take effect on the first day of a sales tax quarterly period (March, June, September or December first) next commencing at least 90 days after the bill is enacted, in accordance with the usual transitional provisions in sections 1106 and 1217 of the Tax Law. For example, if the bill were enacted in May, 2009, it would take effect September 1, 2009. Thus, the new rules will apply on sales or uses occurring after the effective date. Sales and uses occurring prior to that will be taxable (or not) under the old rules.

Existing law and statement in support

Building materials are subject to sales or use taxes at 100% of their cost, regardless of whether a home- owner buys them or a contractor buys them. If the materials, when installed, constitute a capital improvement, then the contractor's charge to install the materials (that is, the labor to build the house or an addition to a house) is not subject to sales tax. It is thought that a contractor's labor charge to build a stick-built house typically amounts to about 40% of the final price of the house. In the case of a modular home, however, the proportion of the labor at the site to assem- ble and finish the modular home modules is far less than that. This is principally because nearly all the labor to construct the modular home modules took place in the factory. Because the modular home modules constitute tangible personal property when the manufacturer sells new modules on an uninstalled basis (whether to a dealer/builder or to a consumer), 100% of their price is currently subject to sales tax, including the portion of the price attributable to the labor performed in the factory. Thus this labor component, not subject to tax when performed at the site of a stick-built house, is taxed under current law when performed in the factory. This bill seeks to equalize that differ- ence by reducing the amount of the modules' sales price subject to tax by the approximate 40% portion attributable to labor. This proposed treatment would be similar to that of mobile homes. When a new mobile home is sold, only 70% of the sales price is subject to sales tax, for the same reason - that the labor component of building a mobile home in a factory should not be subject to tax, since a mobile home is another form of housing.

In many cases, manufacturers of modular home modules sell them on an installed basis, which means that the manufacturer itself installs them or it hires a contractor to install them on its behalf. In such cases, the manufacturer uses the modules itself, in the Tax Law sense, when it installs them (or has its contractor do so) at the building site. Since the manufacturer did not buy the modules, the Tax Law imposes a use tax on the manufacturer's use of its modules, so that a manufacturer that installs or arranges installation does not have an unfair advantage over a dealer/contractor who has to pay sales tax on its purchase of the modules it will install for its customer. The Tax Law has two methods to determine the base on which the manufacturer/user pays use tax. If the manufacturer sells similar modules in the ordinary course of business,

then there is an objective basis to determine its use tax base; and, since the manufacturer sells similar items to competing installation contractors, that base is the price at which it ordinarily sells similar modules. Since the goal of this bill is essentially to treat the factory labor cost as not taxable, the basis on which such a manufacturer would pay use tax under the bill when it uses the modules by installing them as a capital improvement is likewise reduced to the same 60% that would apply if the modules were sold to the individual or to a contractor who will install them for the homeowner. In the case where the manufacturer does not sell similar modules in the ordinary course of business, the Tax Law currently requires the manufacturer who uses modules it makes but does not sell in the ordinary course of business to pay tax on 100% of the cost of the materials it uses to make them; that is, on its cost to purchase its raw materials used to make the modules, plus any charges the seller of the raw materials made to deliver the raw materials to the manufacturer.

Section 1105(c)(3) of the Tax Law imposes sales tax on the charge for installing tangible personal property (other than a mobile home). But if the property, when installed, constitutes a capital improvement, then the installation charge is not subject to tax. Thus, if a contractor installs building materials and thereby makes a house or assembles modu- lar home modules to make a modular home, and in each case the home constitutes a capital improvement, the contractor's labor/installation charge at the site is not subject to sales tax. But if the installation of either a stick-built or modular home does not constitute a capital improvement, the contractor's labor charge is subject to tax. For exam- ple, if a person leases a plot of land and has a home built on the land, but the land lease requires the tenant to remove the improvements at the end of the lease term, then the home would not constitute a capital improvement.

Rental payments for the rental of real estate, such as a house, are not subject to sales tax. Likewise, rental payments for a used mobile home are not subject to sales tax. To achieve parity with house and mobile home rentals, the bill provides that a modular home is not tangible personal property if it is permanently affixed to real property. Thus, rental payments for such a modular home would not be subject to sales tax. But if that modular home were then removed from the realty and sold, 100% of the receipts from its sale after it was removed would be subject to tax, just as used building materials are subject to sales tax. This follows current law as regards the dismantling of a stick- built house. For example, if a building owner sells the building to someone who will use the pieces to construct something else, the pieces, once removed, would constitute tangible personal property and the sale of the pieces of the dismantled building would be subject to sales tax. Also, if a modular home can be removed as a single piece, or taken apart as the modules that were originally assembled and installed, then, if the single unit or pieces are removed from the land and sold, the sale of those pieces would be 100% taxable, just as used building materials are.

Prior legislative history

This is a new bill.

Fiscal implications

Minimal to State.

Effective date

This bill would take effect on the first day of a sales tax quarterly period (March, June, September or December first) next commencing at least 90 days after the bill is enacted, in accordance with the usual transitional provisions in sections 1106 and 1217 of the Tax Law.