When two construction companies form a joint venture and each contributes equipment plus an operator under a subcontract arrangement, is that a taxable equipment rental to the joint venture, or a non-taxable service, and how does 'dominion and control' over the equipment decide which?

Plain-English summary

Two unrelated New York construction companies, J. D. Posillico and Peter Scalamandre & Sons, planned to bid jointly on a construction contract through a joint venture that would dissolve once the project was finished. Under the proposed joint venture agreement, each company would supply equipment and an operator/driver to the venture, billed at prescribed equipment-use rates, with profits split equally. The agreement specified that each company's own supervisory personnel -- not the joint venture -- would instruct operators where and when to work, which equipment to use, and would retain the right to hire and fire them; the contract also explicitly stated that neither the joint venture's managing party nor project manager would be deemed to assume "dominion and control" over a partner's equipment. Posillico asked whether these equipment/operator transactions between a partner and the joint venture trigger sales or use tax.

A joint venture is treated as a separate legal entity from its corporate partners for sales tax purposes, so transactions between the venture and a partner-subcontractor are genuine transactions between two distinct parties that can be taxable. The threshold question is whether furnishing equipment along with an operator amounts to a taxable "rental" of the equipment, or instead an integrated, non-taxable service -- and that turns on who has "dominion and control" over the equipment: does the party furnishing it keep the right to direct how it's used, hire/fire the operator, and pay the operating costs (fuel, insurance, wages)? If so, it's a service, not a rental. Contract language stating that control stays with the supplying partner is relevant but not conclusive -- what actually happens in practice controls.

Based on the facts described (the supplying partner's own personnel direct the operator's work schedule, assignments, and equipment use, and retain hire/fire authority), the Department found these facts support treating the arrangement as the partner performing a service for the joint venture rather than renting equipment to it. If the service amounts to a capital improvement (e.g., excavation for a foundation), no tax is due; if it's instead a repair or maintenance service, tax applies to the full charge. But if a transaction instead shows dominion and control passing to the joint venture, it would be a taxable equipment rental, with the operator's wages excludable from the taxable charge only if separately stated and reasonable.

What this means for you

Construction joint ventures allocating equipment and operators between partners

Structure and actually operate your joint venture agreement so the partner supplying equipment genuinely retains "dominion and control" -- real hire/fire authority, direction of the work, and payment of operating costs -- if you want the arrangement treated as a non-taxable service rather than a taxable equipment rental. Contract language alone won't control if your actual practices differ.

Contractors negotiating joint venture terms

Because the ultimate tax treatment depends on the type of service performed (capital improvement vs. repair/maintenance) once dominion and control is established, plan for that downstream question too -- a service that's a capital improvement escapes tax even where an equipment-with-operator "service" analysis clearly applies.

Accountants and tax professionals

The core regulatory test is 20 NYCRR § 541.2(p)(2)'s five dominion-and-control factors (no transfer of possession/control, right to hire/fire, discretion in performing the work, responsibility for equipment operation, and payment of all operating expenses). Note that whose payroll the operator sits on is only one factor among several, not independently determinative.

Common questions

Q: Does putting the equipment operator on the joint venture's payroll automatically make this a taxable rental?
A: No -- payroll placement is only one factor in the dominion-and-control analysis, not determinative by itself, especially where the supplying partner's personnel still direct and supervise the operator.

Q: If this is found to be a taxable rental, is the whole charge taxed?
A: The operator's wages can be excluded from the taxable receipt if separately stated and reasonable relative to prevailing wage rates; otherwise the full charge is taxable.

Q: Can another joint venture rely on this ruling?
A: No. It binds the Department only as to this petitioner's proposed agreement and facts. The Department noted that the ultimate determination "can only be made in a particular case after review of all the facts and circumstances," so actual practice under the agreement matters as much as its language.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (definition of "retail sale")
• 20 NYCRR § 541.2(p) (rental, lease, and license to use; dominion and control test)
• 20 NYCRR § 541.5(d)(1) (taxable repair/service/maintenance/installation charges)
• 20 NYCRR § 541.9(c)(1) (tax treatment of equipment supplied with an operator/driver)

Prior rulings and cases referenced:

• Aberthaw-Cowper - Joint Venture, Det St Tx Comm, July 18, 1980, TSB-H-80(161)S
• Matter of Great Lakes Dunbar-Rochester, A Joint Venture v. State Tax Commission, 65 NY2d 339

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_16s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(16)S
Sales Tax
March 29, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990927A

On September 27, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from J. D. Posillico, Inc., 1200 Veterans Memorial Highway, Suite 350,
Hauppauge, New York 11788.
The issue raised by Petitioner, J. D. Posillico, Inc., is whether, under the terms of a joint­
venture agreement, the transfer of certain tangible personal property is subject to sales and
compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner and Peter Scalamandre & Sons, Inc. are New York corporations that have unrelated
shareholders. The corporations are contemplating bidding on a contract as a joint venture. If they
are successful bidders, they plan to enter into a written agreement confirming the establishment of
a joint venture. The joint venture agreement will require each corporation to provide equipment and
labor which will be assessed to the joint venture based upon prescribed rates. Profits will be shared
equally by each corporation. The joint venture will dissolve upon completion of the contract.
The joint venture agreement will require each corporation to provide an operator/driver with
the equipment. The equipment operator will be under the supervision of employees of the
corporation which furnished the equipment to the joint venture. The equipment operator will be
instructed by the respective corporation’s personnel when and where to report to work, what hours
to work, and which equipment is to be used and how it is to be used. Each corporation through its
supervising personnel would have the right to hire and fire the equipment operators it furnishes at
any time. In some cases, the equipment operator will remain on the corporation’s payroll. In other
cases, the equipment operator will be transferred to the joint venture’s payroll and returned to the
corporation’s payroll upon completion of the joint-venture. In either case, the equipment operator
will remain under the direct supervision of the respective corporation’s employees.
Petitioner submitted a copy of the proposed joint venture agreement and attachments. The
pertinent part of Petitioner’s proposed contract follows:
WHEREAS, the Joint Venturers have agreed to prepare and submit a bid or
proposal to the
(hereinafter the "G.C./Owner") for the construction
of
, in an amount and upon terms to be mutually
agreed upon by the Joint Venturers prior to the submission thereof.

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*

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*

NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereby agree to constitute themselves as Joint Venturers for the
purposes of (1) preparing and submitting a bid and (2) performing and completing
the Principal Contract, upon the following terms and subject to the following
conditions:

1. SCOPE OF AGREEMENT. The parties hereto constitute themselves as
   Joint Venturers solely for the purpose of preparing and submitting a bid and
   performing and completing the Principal Contract, but for no other purpose, it being
   understood that as Joint Venturers the parties are not making any arrangement to
   perform any work jointly except that specifically encompassed within this Agreement
   and that each party may carry on its separate business for its sole benefit.
   *

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9. MANAGING PARTY. One of the parties shall be designated the
   Managing Party and, under the overall control and direction of the Joint Venturers,
   shall have general charge and supervision over the timely and satisfactory
   performance of the Principal Contract but shall be without liability to the other party
   for losses caused or sustained as a result of good faith errors of judgment or mistakes
   in its actions as Managing Party. The Managing Party shall have the power, which
   it may delegate in the name of the Joint Venture, to execute and deliver purchase
   orders, rental agreements, subcontracts and such other agreements as are necessary
   and appropriate to carry out the Principal Contract. The Managing Party, for this
   Joint Venture shall be:
   J. D. POSILLICO, INC.
   *

*

*

11. PROJECT MANAGER. The Managing Party with the agreement of the
    other Joint Venturers shall designate a Project Manager, who shall serve at its
    pleasure and be subject only to its control. The Project Manager shall manage and
    supervise the work called for by the Principal Contract and he shall have such
    specific powers as the Managing Party may, from time to time, delegate. Each party
    shall execute such documents as are required by the Managing Party to evidence the
    authority of the Managing Party and the Project Manager.
    *

*

*

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19. DISPOSAL OF EQUIPMENT. When appropriate, the Project Manager
    shall determine what part of the plant, equipment, tools and salvageable materials
    belonging to the Joint Venture are no longer needed. This surplus shall be disposed
    of as the parties shall agree. In the event the parties are unable to agree, this surplus
    shall be disposed of as follows:
    *

*

*

34. The following Attachments are attached hereto and made a part hereof:
    A) Transactions between Joint Venture and Joint Venturers.
    Attachment "A" to the joint venture agreement provides, in part:
    TRANSACTIONS
    VENTURERS

BETWEEN

JOINT

VENTURE

AND

JOINT

1. PARTY-FURNISHED EQUIPMENT, TRUCKS & SUPERVISORY
   PERSONNEL
   A.) The Managing Party shall notify the parties of the Joint Venture’s need
   for equipment (including trucks, hereinafter referred to only as equipment) and shall
   allow all parties an equal opportunity to furnish such equipment to the Joint Venture
   on a subcontract basis.
   Without, in any way, altering or diminishing the subcontractor relationship
   between the party-subcontractor and the Joint Venture, such equipment may be
   furnished to the Joint Venture either:
   a) with an operator/driver paid by the party-subcontractor, or
   b) with an operator/driver who will be transferred to the Joint Venture payroll
   for accounting and administrative ease, while in control of the party-subcontractor
   furnished equipment.
   The party-subcontractor shall supervise its own equipment, insure its own
   equipment at no cost to the Joint Venture, and maintain its own equipment in good
   operating condition.
   The party-subcontractor shall have the explicit right to deploy from the Joint
   Venture Project, as it sees fit, any of its own equipment at any time it deems

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necessary, and in this particular context, the party-subcontractor’s primary obligation
to the Joint Venture is to perform the subcontracted work necessary for the successful
completion of the Joint Venture project.
In order to quantify the value of the subcontracted equipment, a Schedule of
Equipment Use Rates will be established whereby like equipment will be credited at
the same rate for each party-subcontractor. Such Schedule of Equipment Use Rates
shall be attached hereto and become a part hereof. Rates for equipment not listed
thereon shall be agreed upon, as necessary. Regardless of how the rate is
denominated, (i.e. rate per hour, per day, per week, etc.), it shall be considered a basis
for determining each party-subcontractor’s total value of equipment subcontracted
to the Joint Venture.
B.) For purposes of complying with existing New York State Sales and Use
Tax regulations as respects equipment and truck use transactions between the Joint
Venturing parties and the Joint Venture, the parties hereby agree as follows:
Notwithstanding any authority granted to the Managing Party or Project
Manager by any other provision of this Joint Venture Agreement, neither the
Managing Party, nor the Project Manager will be deemed to have assumed
"Dominion and Control" of any equipment owned by a Joint Venturing party while
in use on the Joint Venture project in the prosecution of that party’s portion of the
assigned work. At no time, shall "Dominion and Control" (as defined by current
New York State Sales and Use Tax regulation) be deemed to have passed from the
party-subcontractor to the Joint Venture.
All payments received by the party-subcontractors from the Joint Venture in
consideration for equipment used on the Joint Venture Project, shall be considered
"subcontract" payments.
C.) Each party may similarly be called upon by the Managing Party to assign
supervisory personnel to the Joint Venture on a subcontract basis.
Applicable Law & Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:

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(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 sold 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. . . .
Section 541.2(p) of the Sales and Use Tax Regulations provides, in part:
Rental, lease and license to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer of possession of tangible personal
property without a transfer of title to the property.
(2) For the purposes of this Part, when a rental, lease or license to use a
vehicle or equipment includes the services of a driver or operator, such transaction
is presumptively the sale of a service, rather than the rental of tangible personal
property, where dominion and control over the vehicle or equipment remain with the
owner or lessor of the vehicle or equipment. Dominion and control remain with the
owner or lessor of the vehicle or equipment when pursuant to an agreement or
contract the lessor:
(i) does not transfer possession, control and/or use of the equipment or
vehicle to the lessee during the term of the agreement or contract;
(ii) maintains the right to hire and fire the drivers and operators;
(iii) uses his own discretion in performing the work (even though the lessee
may designate the area where material is to be picked up and delivered) and generally
selects his own routes;
(iv) retains responsibility for the operation of the equipment or vehicle; and
(v) directs the work, pays all operating expenses, including drivers’ and/or
operators’ wages, insurance, tolls and fuels.
Whether a transaction is a sale (license to use, rental or lease) of a vehicle or equipment or
is the sale of a service, such as a transportation service, must be determined in accordance with the

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facts and circumstances of the particular transaction and provisions of the agreement between the
contractor and his customer.
Section 541.5(d)(1) of the Sales and Use Tax Regulations provides, in part:
(i) Charges for repair, service, maintenance, and installation of tangible
personal property which retains its identity as tangible personal property are taxable
to the customer based on the full invoice price.
*

*

*

(iii) A subcontractor must collect tax on all his charges to a prime contractor
for repair, service, maintenance, and installation of tangible personal property unless
the prime contractor issues a properly completed exemption certificate or a capital
improvement certificate to the subcontractor.
Section 541.9 (c)(1) of the Sales and Use Tax Regulations provides, in part:
(ii) When dominion and control of equipment supplied with an operator or
driver remains with the lessor, there is no rental or lease of equipment to the
contractor, but the service performed may be subject to the tax pursuant to section
1105(c)(3) and (5) of the Tax Law. The method of payment (for example, a rate per
hour, day, week, month, or job or trip) is not relevant in determining whether the
transaction is a service or a taxable rental or lease of equipment.
(a) If the service performed constitutes a capital improvement to real
property, for example, a foundation excavation, the charge for such service is not
taxable.
(b) If the service performed constitutes a repair, maintenance or service to
tangible personal property or to real property, the service is subject to the tax.
(c) However, the owner-operator of the equipment must pay tax on the
equipment used to perform the forgoing services.
(iii) When dominion and control of equipment supplied with an operator or
driver transfers to the contractor, there is a rental or lease of tangible personal
property and the charge is subject to the tax. If the operator’s or driver’s wages are
separately stated and reasonable in relation to prevailing wage rates, such wages may
be excluded from the receipts subject to the tax. If the operator’s or driver’s wages
are not separately stated the total charge is subject to the tax. If the operator’s or

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driver’s wages are not reasonable in relation to prevailing wage rates, the "wages"
must be included in the receipts subject to the tax until the contractor satisfies his
burden, under section1132(c) of the Tax Law, of proving that the taxable receipts are
less than the total charge.
(iv) All expenses incurred by a lessor in determining the amount charged for
rental of tangible personal property to a contractor, such as: setting up, assembling,
installing and/or dismantling, are elements of the total receipt subject to tax,
regardless of their taxable status and whether they are separately billed to the lessee.
Opinion
A joint venture is considered to be a partnership for sales and use tax purposes. AberthawCowper - Joint Venture, Det St Tx Comm, July 18, 1980, TSB-H-80(161)S. A partnership may be
treated as an entity separate and distinct from its members for sales and compensating use tax
purposes and, as such, transactions occurring between the partnership and its members may or may
not be subject to sales tax depending upon the facts surrounding the transactions. See Matter of
Great Lakes Dunbar-Rochester, A Joint Venture v. State Tax Commission, 65 NY2d 339.
Where a joint venture enters into a transaction with a corporate partner of the joint venture
(hereafter "partner") as a subcontractor and the partner provides equipment and an operator to the
joint venture, the transactions are between two separate and distinct entities for purposes of sales and
use taxes; and any payments made by the joint venture to the partner for services or property
provided by the partner may be subject to sales and use tax. The taxation of any transaction between
them depends upon the nature of the services performed or the property provided.
A threshold question in regard to the application of the sales and use tax to the transaction
between the joint venture and one of the partners is whether the transaction amounts to a lease or a
license to use the equipment provided along with the provision of a service, or whether the
transaction is properly viewed as an integrated service with no lease of equipment.
Whether a transaction where both equipment, such as construction vehicles, and an operator
of the equipment is furnished constitutes the rental of tangible personal property or a sale of a service
(such as the creation of a capital improvement or a repair to real property) is a question of fact that
can only be decided after the review of all the facts and circumstances. See Section 541.2(p)(2) of
the Sales and Use Tax Regulations. The key issue is whether the partner providing the equipment
and the operator is maintaining dominion and control over the equipment.
The proposed joint venture agreement submitted by Petitioner contains language that suggests
each partner supplying equipment maintains dominion and control over the equipment. However,
while the language of the joint venture agreement is relevant to the inquiry, it is not conclusive on

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the issue of whether the partner supplying the equipment transfers dominion and control of the
equipment to the joint venture. The determinative factor in that regard is whether the partner
supplying the equipment actually controls the use of the equipment supplied to the joint venture,
maintains the right to hire and fire the operators of the equipment, and pays all operating expenses,
including tolls, insurance, fuel costs, and the wages of the operators of the equipment. See Section
541.2(p) of the Sales and Use Tax Regulations. Whether the operators of the equipment are on the
payroll of the joint venture or the partner supplying the equipment is only one factor to be considered
in determining who has dominion and control over the transferred equipment. This factor is not, by
itself, determinative of that issue.
To the extent that the transaction between the partner and the joint venture constitutes the
lease or rental of tangible personal property, then such lease or rental of the equipment would be
subject to sales and use tax. The operator’s wages may be excluded from the taxable receipts if
separately stated and reasonable in relation to prevailing wage rates. See Section 541.9(c)(1)(iii) of
the Sales and Use Tax Regulations.
In the present case, the equipment operators will be instructed by the partner’s employees
when and where to report to work, what hours to work, which equipment is to be used and how it
is to be used, and the partner, through its supervisory personnel, has the right to hire and fire the
equipment operators at any time. These facts and the proposed agreement submitted by Petitioner
appear to support a conclusion that the partner maintains dominion and control of the equipment,
and is performing a service for the joint venture rather than renting equipment to the joint venture.
As noted above, however, this determination can only be made in a particular case after review of
all the facts and circumstances. To the extent that the partner is performing a service for the joint
venture, the taxation of the transaction depends upon the service performed. That is, if the service
constitutes a capital improvement, no tax is due. However, if the service is a repair, sales tax is due
on the entire charge to the joint venture as stated above, unless the repair service is performed for
resale, or is otherwise exempt.

DATED: March 29, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

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