BILL NUMBER:  S5586

 TITLE OF BILL :
An act to amend the tax law, in relation to sales and compensating use
taxes imposed by or pursuant to the authority of articles 28 and 29 of
such law with respect to modular homes


 PURPOSE OR GENERAL IDEA OF BILL :
To equalize the State and local sales and compensating use tax base on
the major component parts of a modular home with the base for building
materials of site-built homes.

 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
110l(b) to define "modular home," "modular home modules" and "new
modular 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 applicable 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
manufactured 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
delivered to the building site on a truck or other vehicle, installed
at the site on a permanent foundation, and not by itself suitable for
occupancy. 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 NYS
Department of State pursuant to the authority of Article Eighteen of
the Executive Law and regulations there under. 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 shingles, roof vent pipes, interior trim
pieces, paint, and interior doors, and supplies required and used to
install them, but only if that property (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, shipping or delivery of the module
to the building site, (iv) will be permanently 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 available 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 (0) 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 (0) 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 (0) 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 modular 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 Federal 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 similar 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 (0) 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 business or not.

Paragraph 4 of new subdivision (0) 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 (0) 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
without 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 homeowner 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 assemble 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 difference
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
is 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 modular 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 example, 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.