Is a pipeline inspection company's charge for running a robotic 'smart pig' through a customer's pipeline subject to New York sales tax?

Plain-English summary

A company that inspects pipelines using a robotic device known as a "smart pig" -- launched into the pipeline to record data as it travels, then retrieved and analyzed at an out-of-state facility to produce a condition report -- asked whether its service fee is subject to New York sales tax. The company performs no repairs itself; its only output is a report on the pipeline's condition, and it bills a single fee that doesn't break out data collection from analysis or by location.

The Department held this is a taxable "diagnostic" service -- even though nothing is actually repaired, the inspection keeps the customer informed of the pipeline's condition so it can be maintained at its normal standard of fitness and readiness, which is exactly the kind of activity New York's "maintaining, servicing, or repairing" tax reaches (following a 1985 ruling that inspections at a nuclear plant were taxable on the same theory). Because the pig sometimes travels partly inside and partly outside New York, the company must allocate its single fee between the in-state and out-of-state segments -- tax applies only to the portion of the service performed on pipeline actually located in New York, regardless of where the customer is billed or where the company's own data analysis happens.

What this means for you

Pipeline, infrastructure, and equipment inspection/diagnostic companies

A "we only inspect, we never repair" business model doesn't avoid New York sales tax -- diagnostic and condition-monitoring services are taxable in their own right if they help keep property in a state of readiness and fitness, following the same rule applied to nuclear plant inspections and (per the ruling's own citations) elevator inspections not mandated by government code. If your inspection crosses state lines, allocate your fee by the physical location of the property inspected, not by billing address or where you crunch the data.

Utility and pipeline operators buying inspection services

Ask your vendor to allocate a single fee across in-state/out-of-state segments if your pipeline crosses the New York border -- otherwise you may end up paying (or being charged) tax on the full fee rather than just the New York portion.

Accountants and tax professionals

Watch the one carve-out flagged in this ruling: inspection services mandated by a governmental entity to demonstrate code compliance are not taxable (per the cited elevator-inspection rulings) -- a useful distinction from ordinary voluntary or contractual diagnostic services like this one.

Common questions

Q: Is a pipeline (or similar equipment) inspection service taxable even if no repair is performed?
A: Yes -- New York taxes diagnostic services that keep property in a condition of fitness, efficiency, or readiness, regardless of whether an actual repair happens.

Q: How is tax allocated when the inspected property crosses the New York border?
A: Based on the physical location of the property inspected -- the portion of the service performed on pipeline located in New York is taxable; the portion on out-of-state pipeline is not.

Q: Does it matter where the company bills from or analyzes the data?
A: No -- the customer's billing location and the location of the company's own analysis work are immaterial to the taxability determination.

Q: Are all inspection services taxable?
A: Not always -- inspections mandated by a governmental entity to demonstrate compliance with government codes are not subject to sales tax, unlike this voluntary/contractual condition inspection.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1105(c)(3), (c)(5) (installing/maintaining tangible personal property; maintaining real property)
• 20 NYCRR 527.5(a)(3) (diagnostic services example)
• 20 NYCRR 527.7(a), (b) (maintaining/servicing/repairing real property)
• TSB-H-85(84)S (Rochester Gas and Electric Corp., June 17, 1985)
• TSB-A-96(67)S (Elevator Service Companies, Oct. 7, 1996)
• TSB-A-99(53)S (Hall & Dettor, LLP, CPAs, Nov. 30, 1999)
• TSB-A-05(11)S (Elevator Service Companies, Apr. 15, 2005)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(21)S
Sales Tax
June 1, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S041112A

On November 12, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Tuboscope Pipeline Services, Inc., 2853 Holmes Road, P. O. Box 808,
Houston, Texas, 77001.
The issue raised by Petitioner, Tuboscope Pipeline Services, Inc., is whether its charges
for pipeline inspection and management services are subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner provides pipeline inspection and management services. Petitioner collects data
on the condition of a customer’s pipeline, analyzes the data at its home office in Texas and
prepares a report that is later delivered to its customer. Data is collected by a mechanized robotic
device known as a “smart pig” or “pig” owned by Petitioner. Petitioner launches the pig into the
pipeline to be analyzed. The pig traverses the pipeline system, recording various types of data.
At the terminal point of its traverse the customer brings the pig into a trap and Petitioner
retrieves the pig. Each traverse takes between 2 days and a week depending on the length of the
pipeline and inspection results desired.
In some of the pipelines, the pig traverses its entire course within New York State. In
others, it traverses its course partly within New York and partly outside New York (in the case of
a transborder pipeline inspection). In the latter case, the pig is launched into a pipeline within
New York and retrieved outside the State or vice versa.
Once the pig is retrieved, it is taken to a facility outside New York State. At this facility,
Petitioner downloads the data recorded by the device and performs engineering analyses using
proprietary computer technology to determine the condition of the customer’s pipeline. This
analysis typically takes 2 to 3 weeks to complete. The results of the analysis are sent out in
reports that are delivered to the customer.
Petitioner then invoices the customer for its services. The service fee is a single fee that
is not broken down either geographically (i.e., by location of the segments of each traverse) or by
activity (e.g., data collection versus analysis).
Petitioner does not perform any repair services in conjunction with its inspection and
management services. The only result of Petitioner’s survey is to record the condition of the
pipeline. It is the responsibility of the customer to perform activities to remedy any deficiencies
noted in Petitioner’s report.

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TSB-A-05(21)S
Sales Tax
June 1, 2005

Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile home,
not held for sale in the regular course of business, whether or not the services are
performed directly or by means of coin-operated equipment or by any other means, and
whether or not any tangible personal property is transferred in conjunction therewith, . . .
*

*

*

(5) Maintaining, servicing or repairing real property, property or land, as such
terms are defined in the real property tax law, whether the services are performed in or
outside of a building, as distinguished from adding to or improving such real property,
property or land, by a capital improvement as such term capital improvement is defined
in paragraph nine of subdivision (b) of section eleven hundred one of this article. . . .
Section 527.5 of the Sales and Use Tax Regulations provides, in part:
Installing, repairing, servicing and maintaining tangible personal property.
(a) Imposition. (1) The tax is imposed on receipts from every sale of the services
of installing, maintaining, servicing or repairing tangible personal property, by any means
including coin-operated machines, whether or not any tangible personal property is
transferred in conjunction with the services.
*

*

*

(3) Maintaining, servicing and repairing are terms used to cover all activities that
relate to keeping tangible personal property in a condition of fitness, efficiency, readiness
or safety or restoring it to such condition.
*

*

*

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TSB-A-05(21)S
Sales Tax
June 1, 2005

Example 6: A company operates a diagnostic service in which it tests an
appliance for a set fee, but does not repair the appliance. The charge for the
diagnostic service is taxable.
Section 527.7 of the Sales and Use Tax Regulations provides, in part:
Maintaining, servicing or repairing real property.
(a) Definitions. (1) Maintaining, servicing and repairing are terms which are
used to cover all activities that relate to keeping real property in a condition of fitness,
efficiency, readiness or safety or restoring it to such condition. Among the services
included are services on a building itself such as painting; services to the grounds, such as
lawn services, tree removal and spraying; trash and garbage removal and sewerage
service and snow removal.
*

*

*

(b) Imposition. (1) The tax is imposed on receipts from every sale of the services
of maintaining, servicing or repairing real property, whether inside or outside of a
building.
Opinion
Petitioner uses a mechanized robotic device known as a “smart pig” to examine and
inspect the condition of its customer’s pipeline. Paragraphs (3) and (5) of section 1105(c) of the
Tax Law impose sales tax on the services of repairing, maintaining or servicing tangible personal
property or real property. Sections 527.5 and 527.7 of the Sales and Use Tax Regulations define
the terms repair, maintenance and service as all activities that relate to keeping property in a
condition of fitness, efficiency, readiness or safety. Furthermore, section 527.5(a)(3), Example
6, of the Sales and Use Tax Regulations provides that charges for diagnostic services are subject
to sales tax.
In Matter of Rochester Gas and Electric Corporation, Dec St Tx Comm., June 17, 1985,
TSB-H-85(84)S, various inspections performed at the petitioner's nuclear plant were determined
to be part of the normal activities that related to keeping real property in a condition of fitness,
efficiency, readiness or safety. It did not matter whether an actual repair was done, but that the
service rendered was an activity which was part of the process of keeping property in a state of
readiness and fitness. The inspections at issue accomplished that purpose by keeping the
petitioner's officials informed of the condition of the plant so as to assist them in maintaining the
plant at its standard level of efficiency and readiness. Therefore, the inspections were properly
subject to sales tax as maintaining, servicing or repairing real property within the meaning and
intent of section 1105(c)(5) of the Tax Law.

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TSB-A-05(21)S
Sales Tax
June 1, 2005

In the present case, when Petitioner performs the pipeline inspection service, it is
considered to be rendering a service that keeps its customer informed of the condition of the
pipeline so as to assist the customer in maintaining the pipeline at its standard level of efficiency
and readiness. Accordingly, Petitioner’s fees are considered to be charges for diagnostic services
and are subject to the sales tax imposed under paragraphs (3) and (5) of section 1105(c) of the
Tax Law. The fact that Petitioner furnishes the results of the pipeline inspection service in a
written report to its customer does not preclude Petitioner’s charges for the pipeline inspection
service from being subject to the taxes imposed under section 1105(c)(3), (5). It is noted that
inspection services which are mandated by a governmental entity to demonstrate compliance
with governmental codes are not subject to sales tax. See Elevator Service Companies, Adv Op
Comm T & F, October 7, 1996, TSB-A-96(67)S; Hall & Dettor, LLP, Certified Public
Accountants, Adv Op Comm T & F, November 30, 1999, TSB-A-99(53)S; Elevator Service
Companies, Adv Op Comm T & F, April 15, 2005, TSB-A-05(11)S.
Petitioner’s service performed with respect to pipelines located in New York State are
taxable. Petitioner’s charges for that portion of its service performed with respect to pipelines
located outside of New York State are not subject to New York State or local sales tax.
Petitioner must allocate its charges to its customer if its service is provided with respect to
pipelines located both in and outside of New York. The customer’s billing location and the
location where Petitioner performs the analysis of information obtained by the smart pig is
immaterial in determining the taxability of the inspection services provided by Petitioner.

DATED: June 1, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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