Does a fire-protection installation contractor owe sales tax on the labor portion of components fabricated for it by a commonly owned sister company?

Plain-English summary

A fire-protection-system installation contractor and its sister fabrication company are owned by the same two people, share the same officers, work at the same location, and even attend the same company events -- but each has its own employer ID number, sales tax registration, employees, payroll, and books. The fabricator buys pipe and materials and turns them into finished fire-protection components to the installer's specifications; it charges sales tax to the installer only on the cost of materials, not on the value of its own labor, and gets reimbursed for that labor through fund transfers from the installer.

The Department held the two companies must be treated as separate legal entities for sales tax purposes despite their close, informal relationship -- following a 1992 Tax Appeals Tribunal case involving a similarly intertwined pair of companies. Because they're legally separate, the installer's purchase from the fabricator is a genuine sale, and the "receipt" subject to tax includes all the consideration paid for the components -- labor included, not just the raw materials -- regardless of how the invoice happens to break it out. The installer, as a construction contractor, owes tax on its full purchase price for components that go into a capital improvement job; components that remain tangible personal property after installation can be bought tax-free for resale instead. The fabricator itself, as a manufacturer, separately qualifies for New York's production exemption on its own purchases of raw materials and production supplies.

What this means for you

Businesses using a commonly owned fabrication or supply affiliate

Sharing owners, officers, a location, or even payroll administration does NOT let you disregard the corporate line for sales tax purposes, as long as each entity keeps its own registration, employees, payroll, and books. That cuts both ways: you get the liability protection of separate entities, but you also can't avoid tax on the full value (including labor) of what one entity sells to the other.

Fabricators and subcontractors billing an affiliated company

If your invoice to an affiliate states only materials cost and shows no charge for labor, that doesn't make the labor nontaxable -- the taxable receipt includes everything paid, however it's structured, including reimbursements routed through fund transfers rather than a line-item invoice charge.

Accountants and tax professionals

This is a useful precedent for auditing related-party fabrication arrangements: look past informal commingling (shared meetings, shared vehicles, payroll processed by one company for the other) to the formal indicia of separateness (separate FEINs, Certificates of Authority, payroll, and books) -- those are what the Department and the Tax Appeals Tribunal actually look at.

Common questions

Q: Can two commonly owned companies be treated as one for sales tax purposes to avoid tax on labor?
A: No, not if each maintains its own employees, payroll, books, and sales tax registration -- they're treated as separate entities even with heavy informal overlap.

Q: Is the labor portion of a fabricated component taxable, or just the raw materials?
A: The entire amount paid for the fabricated component is taxable, including the labor value, regardless of how the invoice is broken out.

Q: Does the fabricator get any exemption on its own purchases?
A: Yes -- as a manufacturer producing tangible personal property for sale, it can qualify for the production exemption on its own raw material and supply purchases.

Q: What happens to the contractor's purchase if the fabricated component doesn't end up as a capital improvement?
A: If the component remains tangible personal property after installation, the contractor may purchase it tax-free for resale and instead collect tax on its own charge to the ultimate customer.

Citations and references

Statutes, regulations, and case law:

• Tax Law § 1101(b)(3) (receipt)
• Tax Law § 1101(b)(4)(i), (5), (9)(i) (retail sale; sale/selling/purchase; capital improvement)
• Tax Law § 1105-B, § 1115(a)(12) (production exemption)
• Tax Law § 1119(c) (refund/credit for materials)
• 20 NYCRR 541.2(a), (d), (e) (construction contract; construction contractor; contractor)
• 20 NYCRR 541.5(b) (capital improvement contracts)
• Matter of Hygrade Casket Corp. v Commissioner of Taxation and Finance, 212 AD2d 843 (3d Dept 1995)
• Matter of Motion Marketing Associates, Inc. T/A On Target, Dec Tax App Trib, July 23, 1992, DTA No. 805977

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_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(31)S
Sales Tax
August 16, 2005

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

PETITION NO. S050203A

On February 3, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Northeast Fire Protection Systems, Inc., 318 Charlton Road, Ballston,
New York, 12020. Petitioner, Northeast Fire Protection Systems, Inc., provided additional
information pertaining to the Petition on April 22, 2005.
The issue raised by Petitioner is whether it is liable for sales tax on the portion of the
charge for fire protection system components attributable to the value added by the seller, a
related corporation, that fabricates the components.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner and Burnt Hills Fabricators, Inc. (BHF) are two corporations. Both
corporations are owned by the same two shareholders, James Fantauzzi and Michael Phinney.
Both shareholders have the same percentage of ownership in each company. The same people
serve on the board of directors and as officers of both corporations. Mr. Fantauzzi is the
president, and Mr. Phinney is the vice president of both corporations. In his capacity as
president of both corporations, Mr. Fantauzzi hires, fires and directs the work of the employees
of both corporations. Each corporation has its own Federal employer’s identification number
and Certificate of Authority for New York State sales tax purposes. Each corporation has its own
employees and separate payrolls. Each corporation maintains its own set of books and records.
Petitioner contracts with its customers to install fire protection systems. BHF purchases
pipe and other materials, which it fabricates into fire protection system components pursuant to
the specifications provided by Petitioner. Petitioner uses the components provided and
fabricated by BHF in its installations of fire protection systems. Sales tax is charged by BHF to
Petitioner on materials used but not on the value of the labor supplied by BHF. BHF pays its
own employees, but does so with a transfer of funds from Petitioner. BHF does not perform
installations of fire protection systems.
BHF is operated so as to not make a profit. Petitioner provides payroll services for BHF
in the form of issuing BHF paychecks to BHF employees and other typical payroll services.
BHF employees may use vehicles owned by Petitioner to transport the fabricated materials to
Petitioner’s jobs.
Throughout the entire process, Mr. Fantauzzi directs both companies as if they were one
entity. Such entity’s primary function is the installation of fire protection systems for its
customers. Employees of Petitioner and BHF work at the same location. Company meetings and
social functions are attended by the employees of both companies.

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Applicable law and 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:
*

*

*

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article . . . valued in money, whether received in money or
otherwise, including any amount for which credit is allowed by the vendor to the
purchaser, without any deduction for expenses . . . .
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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. Notwithstanding the preceding provisions of this subparagraph, a
sale of any tangible personal property to a contractor, subcontractor or repairman for use
or consumption in erecting structures or buildings, or building on, or otherwise adding to,
altering, improving, maintaining, servicing or repairing real property, property or land, as
the terms real property, property or land are defined in the real property tax law, is
deemed to be a retail sale regardless of whether the tangible personal property is to be
resold as such before it is so used or consumed . . . .
*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession or both, exchange
or barter, rental, lease or license to use or consume . . . conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration or
any agreement therefor.
*

*

*

Section 1101(b)(9)(i) of the Tax Law defines the term capital improvement as:

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An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article
itself; and
(C) Is intended to become a permanent installation.
Section 1115 of the Tax Law provides, in part:
(a) Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating use
tax imposed under section eleven hundred ten:
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*

(12) Machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property, gas, electricity, refrigeration or steam for
sale, by manufacturing, processing, generating, assembling, refining, mining or
extracting. . . .
Section 1119(c) of the Tax Law provides:
(c) A refund or credit equal to the amount of sales or compensating use tax
imposed by this article and pursuant to the authority of article twenty-nine, and paid on
the sale or use of tangible personal property, shall be allowed the purchaser where such
property is later used by the purchaser in performing a service subject to tax under
paragraph (1), (2), (3), (5), (7) or (8) of subdivision (c) of section eleven hundred five or
under section eleven hundred ten and such property has become a physical component
part of the property upon which the service is performed or has been transferred to the
purchaser of the service in conjunction with the performance of the service subject to tax
or if a contractor, subcontractor or repairman purchases tangible personal property and
later makes a retail sale of such tangible personal property, the acquisition of which
would not have been a sale at retail to him but for the second to last sentence of
subparagraph (i) of paragraph (4) of subdivision (b) of section eleven hundred one. An
application for the refund or credit provided for herein must be filed with the
commissioner of taxation and finance within the time provided by subdivision (a) of
section eleven hundred thirty-nine. Such application shall be in such form as the
commissioner may prescribe. Where an application for credit has been filed, the applicant
may immediately take such credit on the return which is due coincident with or

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immediately subsequent to the time that he files his application for credit. However, the
taking of the credit on the return shall be deemed to be part of the application for credit.
The procedure for granting or denying such applications for refund or credit and review
of such determinations shall be as provided in subdivision (e) of section eleven hundred
thirty-nine.
Section 541.2 of the Sales and Use Tax Regulations provides, in part:
Definitions. The words, terms and phrases used in this Part have the following
definitions except when the context clearly indicates a different meaning:
(a) Construction contract. (1) A construction contract means a contract to erect,
construct, alter, repair or maintain any building or other structure, project, development
or other improvement on or to real property, property or land.
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*

*

(d) A construction contractor means any person who engages in erecting,
constructing, adding to, altering, improving, repairing, servicing, maintaining,
demolishing or excavating any building or other structure, property, development, or
other improvement on or to real property, property or land.
(e) Contractor means a construction contractor, subcontractor or repairman.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:
(1) Purchases. All purchases of tangible personal property (excluding qualifying
production machinery and equipment exempt under section 1115(a)(12) of the Tax Law)
which are incorporated into and become part of the realty or are used or consumed in
performing the contract are subject to tax at the time of purchase by the contractor or any
other purchaser. A certificate of capital improvement may not be validly given by any
person or accepted by a supplier to exempt the purchase of these materials.
*

*

*

(4)(iii) If a contract includes the sale of tangible personal property which remains
tangible personal property after installation, the contractor must collect the appropriate
New York State and local taxes from the customer on the selling price, including any
charge for installation, of the tangible personal property unless a properly completed
exemption certificate is issued by the customer. The contractor may apply for a credit or
refund of taxes he has paid on purchases of the tangible personal property that remain
tangible personal property after installation.

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Example 1: A contractor sells a building he has constructed and, as a part of the sale
agreement, installs free standing water fountains which remain tangible personal
property when installed. The contractor's billing to his customer must separately state all
charges for tangible personal property included in the sales agreement. The New York
State and applicable local tax rate must be collected on the total charges for the water
fountains including any installation charges. In this instance, the contractor may
purchase the water fountains tax-free using a contractor exempt purchase certificate. If
he pays the tax to his supplier, he is entitled to a refund or credit of the tax paid on the
purchase of the water fountains.
Opinion
Petitioner is in the business of installing fire protection systems and is therefore a
construction contractor for sales tax purposes. See section 541.2(d) and (e) of the Sales and Use
Tax Regulations. Petitioner’s sister corporation, BHF, purchases the raw materials and
fabricates the components of these systems.
BHF’s sole function is to fabricate parts for the fire protection systems installed by
Petitioner. Petitioner reimburses BHF for its cost of materials used in these fabrications and also
reimburses BHF for its labor costs by a transfer of funds. Such transfers constitute payments by
Petitioner to BHF for the labor portion of the fabricated components purchased by Petitioner
from BHF. See Matter of Hygrade Casket Corporation v Commissioner of Taxation and
Finance, et al, 212 AD2d 843 (3d Dept 1995).
Accordingly, Petitioner’s cost of materials which it incorporates into the real property of
its customers consists of all the consideration paid by Petitioner to BHF for the fabricated
materials, whether or not such consideration appears on any bill or invoice rendered by BHF to
Petitioner. Petitioner is liable for and BHF is required to collect sales tax computed on the total
amount of consideration paid for the fire protection system components, including the amount
attributable to labor provided by BHF. See section 1101(b)(3) of the Tax Law; Matter of
Hygrade Casket Corporation v Commissioner of Taxation and Finance, et al, supra. A
contractor’s purchases of tangible personal property for use or consumption in performing a
capital improvement contract are purchases at retail which are subject sales or use tax. See
section 1101(b)(4)(i) of the Tax Law and section 541.5(b) of the Sales and Use Tax Regulations.
The contractor performs a capital improvement to real property when all three conditions in
section 1101(b)(9)(i) of the Tax Law are met. The contractor’s purchase of components which,
when installed, do not constitute a capital improvement but remain tangible personal property
may be made without payment of sales tax. The contractor is eligible for a credit or refund of tax
paid on its purchases of the components used in taxable projects (i.e., other than capital
improvements) where it resells the components. See section 1119(c) of the Tax Law and section
541.5(b)(4)(iii), Example 1 of the Sales and Use Tax Regulations.

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It should be noted that BHF purchases the materials on which it performs fabrication
services and subsequently sells the fabricated components to Petitioner. BHF is, therefore, a
manufacturer as contemplated in section 1115(a)(12) of the Tax Law and, as such, is entitled to
the sales tax exemptions granted under sections 1115(a)(12) and 1105-B of the Tax Law. See
Publication 852 entitled Sales Tax Information For: Manufacturers, Processors, Generators,
Assemblers, Refiners, Miners and Extractors, and Other Producers of Goods and Merchandise
(12/97) for additional information.
Petitioner suggests that the employees of its sister corporation, BHF, should be treated as
if they were employees of Petitioner. In Matter of Motion Marketing Associates, Inc. T/A On
Target, Dec Tax App Trib, July 23, 1992, DTA No. 805977, the Tax Appeals Tribunal noted that
“notwithstanding the informal interaction and commingling of funds which occurred between the
two corporations on a regular basis” the companies were to be treated as two distinct legal
entities. Thus, in Motion Marketing the exclusion from the sales tax for taxable services
performed by employees in their capacity as employees did not apply to the services performed
for the one company by the employees of its related entity.
In the case at hand, each company had its own employees and separate payrolls; separate
books and records; and individual sales tax registrations and separate FEINs. The companies
made payments and reimbursements amongst themselves in exchange for the property and
services they each provided to the other. Thus, though there was informal interaction between
the companies, Petitioner may not disregard their distinct separate identities for sales tax
purposes.

DATED: August 16, 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.