The New York State Department of Taxation and Finance (the "Department") provided an advisory opinion on January 29, 2014 to a New York resident taxpayer who retained the right under an irrevocable trust created by the taxpayer to substitute assets of the trust for assets of equal value. The taxpayer proposed to exercise the power of substitution by transferring tangible personal property to the trust in exchange for intangible assets of the trust. The trust and the taxpayer were considered the same taxpayer for federal and New York income tax purposes.

The Department concluded that although the grantor and the trust may be considered the same taxpayers for income tax purposes, the transfer would nonetheless be considered a sale for state sales tax purposes if the assets transferred would be subject to sales tax for any unrelated taxpayers.

Section 1105(a) of the New York Tax Law imposes sales tax on the receipts from every sale of tangible personal property unless the sale is exempt. The term "sale" is any transfer of title or possession or both in exchange for consideration. The Department states that "[w]hen an individual transfers title or possession of property to a trust, a transfer has been made to a separate entity….This is true even in the case of a grantor trust or a revocable living trust. If there is consideration given in any form in connection with the transfer, a retail sale of tangible personal property occurs and sales tax is imposed…."

While there may be exceptions to the application of New York sales tax in situations where an irrevocable trust and its settlor exchange tangible personal property, it is imperative that an analysis of not only the income tax but also the state sales tax is made prior to such an exchange.