Are materials a developer buys to rehabilitate New York City Housing Authority buildings exempt from sales tax if the Authority takes immediate ownership under a long-term lease?

Plain-English summary

Michaels Prospect Plaza, LLC is rehabilitating three high-rise buildings (about 450 low-income apartments plus a community center) that are owned by the New York City Housing Authority (NYCHA), a state public corporation. NYCHA leases the land and buildings to Michaels Prospect Plaza for 50-plus years, but under that lease, title to every improvement the developer, its contractors, and its subcontractors install vests in NYCHA immediately upon installation — the materials become integral, permanently affixed components of NYCHA's real property.

Ordinarily, a contractor's purchase of material it installs into real property is a taxable retail purchase by the contractor, not a tax-free purchase for resale. But New York carves out an exception for materials incorporated into real property owned by a governmental entity or other organization exempt under § 1116(a) — and NYCHA, as a public corporation created by the Public Housing Law, is exactly that kind of exempt entity. Because the rehab materials become NYCHA's property the moment they're installed, the Department ruled that the developer's (and its contractors' and subcontractors') purchases of those materials are exempt from sales and use tax, as long as each buyer provides suppliers with a properly completed Contractor Exempt Purchase Certificate (Form ST-120.1) and keeps supporting documentation (the lease, and contracts identifying the project, location, and exempt owner) on file.

The exemption is limited to materials that actually become part of the building, though — separate charges for installing tangible personal property or for maintaining/repairing real property that don't themselves rise to the level of a capital improvement remain taxable services under the ordinary installation/maintenance tax provisions.

What this means for you

Developers and contractors working on government-owned property

If your construction contract vests title to installed materials immediately in a governmental entity or another § 1116(a)-exempt organization, your material purchases for that job can be tax-exempt — but you need the paperwork: a Contractor Exempt Purchase Certificate to each supplier, plus your lease/contract documentation identifying the project and the exempt owner, to substantiate the exemption if audited.

Subcontractors on public-housing or government rehab jobs

The exemption flows down to subcontractors too, as long as a signed document between the prime contractor and subcontractor identifies the project, location, and exempt owner — get that paperwork in place before purchasing materials.

Accountants and tax professionals

Watch the distinction this opinion draws: exempt materials-purchase treatment doesn't automatically exempt every service charge on the job — installation or repair labor that doesn't qualify as (or contribute to) a capital improvement is separately taxable under § 1105(c)(3)/(c)(5), even on an otherwise exempt government project.

Common questions

Q: Do contractors on public-housing rehab jobs get an automatic sales tax exemption on materials?
A: Only if the materials become an integral, permanently affixed component of real property owned by a governmental entity or another exempt organization, and only with a properly completed Contractor Exempt Purchase Certificate on file.

Q: What paperwork do I need to claim the exemption?
A: Form ST-120.1 (Contractor Exempt Purchase Certificate) to each supplier, plus a copy of the lease or contract identifying the project, location, and exempt owner.

Q: Are all my labor charges on this project tax-exempt too?
A: No. Installation or maintenance/repair services that don't result in a capital improvement remain taxable, separate from the materials-purchase exemption.

Q: Can another developer rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and facts described; another developer's lease and project structure would need to match to rely on the same reasoning.

Citations and references

Statutes and regulations:

• Tax Law §§ 1101(b)(4), 1105(a), (c)(3), (c)(5) (retail sale; installation/maintenance services)
• Tax Law § 1115(a)(15), (16) (contractor purchases for exempt organizations)
• Tax Law § 1116(a)(1) (governmental-entity exemption)
• Tax Law § 1132(c)(1) (exemption certificates)
• New York Public Housing Law § 401
• 20 NYCRR 529.2(a), 541.1(b)/(e), 541.3(d)

Prior rulings referenced:

• 450 Lexington Venture, TSB-A-89(8)S
• Insurance Services Office, Inc., TSB-A-91(23)S
• E. E. Root & Sons, Inc., TSB-A-05(30)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(4)S
Sales Tax
February 8, 2007

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

PETITION NO. S060925A

On September 25, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Michaels Prospect Plaza, LLC, c/o Arthur Brown, Esq., Levine, Staller,
Sklar, Chan, Brown & Donnelly, P. A., 3030 Atlantic Avenue, Atlantic City, New Jersey 08401.
Petitioner, Michaels Prospect Plaza, LLC, provided additional information pertaining to the
Petition on October 17, 2006, and December 26, 2006.
The issue raised by Petitioner is whether tangible personal property purchased by
Petitioner, its contractors and its subcontractors that becomes an integral component part of the
premises leased by Petitioner from the New York City Housing Authority is subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a developer and a contractor engaged in the complete rehabilitation of three
high-rise buildings containing approximately 450 apartment units and a community center. The
rehabilitated apartments and community center (Project) will be rented to low-income
households. The land and buildings to be rehabilitated are owned by the New York City Housing
Authority (Authority). The Authority has legal title to all buildings and other real property
improvements constructed on or under the land. Pursuant to section 401 of the New York Public
Housing Law, the Authority is a public corporation of New York State.
The Authority, as lessor, will lease the land, buildings and improvements to
Petitioner, as lessee, pursuant to a long-term (50 years or more) lease. Pursuant to the
lease, title to all improvements installed by Petitioner, its contractors and its
subcontractors will vest in the Authority immediately upon installation.
All tangible personal property incorporated or installed in the Project will be permanently
affixed to the real property. It is presumed for purposes of this Opinion that such tangible
personal property becomes an integral component part of the real property.
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:
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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 . . . .
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
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(c) The receipts from every sale, except for resale, of the following services:
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(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,
except:
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(iii) for installing property which, when installed, will constitute an
addition or capital improvement to real property, property or land, as the terms
real property, property or land are defined in the real property tax law as such
term capital improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this chapter; . . . .

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(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 ….
Section 1115(a) of the Tax Law provides, in part:
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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(15) Tangible personal property sold to a contractor, subcontractor or repairman
for use in (i) erecting a structure or building (A) of an organization described in
subdivision (a) of section eleven hundred sixteen . . . or (ii) adding to, altering or
improving real property, property or land (A) of such an organization . . . as the terms
real property, property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such tangible personal
property is to become an integral component part of such structure, building or real
property.
(16) Tangible personal property sold to a contractor, subcontractor or repairman
for use in maintaining, servicing or repairing real property, property or land (i) of an
organization described in subdivision (a) of section eleven hundred sixteen . . . as the
terms real property, property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such tangible personal
property is to become an integral component part of such structure, building or real
property.
Section 1116(a) of the Tax Law provides, in part:
Except as otherwise provided in this section, any sale . . . to any of the following
or any use or occupancy by any of the following shall not be subject to the sales and
compensating use taxes imposed under this article:
(1) The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement or compact
with another state or Canada) or political subdivisions where it is the purchaser, user or
consumer . . . ;

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Section 1132(c)(1) of the Tax Law provides, in part:
For the purpose of the proper administration of this article and to prevent evasion
of the tax hereby imposed, it shall be presumed that all receipts for property or services of
any type mentioned in subdivisions (a), (b), (c) and (d) of section eleven hundred five . . .
are subject to tax until the contrary is established, and the burden of proving that any
receipt . . . is not taxable hereunder shall be upon the person required to collect tax or the
customer. . . . unless (i) a vendor, not later than ninety days after delivery of the property
or the rendition of the service, shall have taken from the purchaser a resale or exemption
certificate in such form as the commissioner may prescribe, signed by the purchaser and
setting forth the purchaser's name and address and, except as otherwise provided by
regulation of the commissioner, the number of the purchaser's certificate of authority,
together with such other information as the commissioner may require, to the effect that
the property or service was purchased for resale or for some use by reason of which the
sale is exempt from tax under the provisions of section eleven hundred fifteen, and,
where such resale or exemption certificate requires the inclusion of the purchaser's
certificate of authority number or other identification number required by regulations of
the commissioner, that the purchaser's certificate of authority has not been suspended or
revoked and has not expired as provided in section eleven hundred thirty-four, or (ii) the
purchaser, not later than ninety days after delivery of the property or the rendition of the
service, furnishes to the vendor: any affidavit, statement or additional evidence,
documentary or otherwise, which the commissioner may require demonstrating that the
purchaser is an exempt organization described in section eleven hundred sixteen, the sale
shall be deemed a taxable sale at retail. . . .
Section 529.2(a) of the Sales and Use Tax Regulations provides:
Governmental entities. (1) Agencies and instrumentalities of the State as used in
this section means any authority, commission or independent board created by an act of
the Legislature for a public purpose.
(2) A public corporation as used in this section means any corporation created by
an act of the Legislature for a public purpose or pursuant to an agreement or compact
with another state or Canada.
Example: Urban Development Corporations and Industrial Development
Agencies are public corporations and may purchase tangible personal
property exempt from the sales and use taxes.
Section 541.1 of the Sales and Use Tax Regulations provides, in part:

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(b) The principal distinguishing feature of a sale to a contractor, as compared to a
sale to other vendors who purchase tangible personal property for resale, is that the sale
of tangible personal property to a contractor for use or consumption in construction is a
retail sale and subject to sales and use tax, regardless of whether tangible personal
property is to be resold as such or incorporated into real property as a capital
improvement or repair. Whenever a contractor uses materials, on which the contractor
has paid sales tax, in a repair or maintenance contract . . . subject to the sales tax on
services under section 1105(c) of the Tax Law, the contractor may be entitled to a refund
or credit of the portion of the tax he paid attributable to the materials transferred to the
customer.
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(e) Tangible personal property purchased by a contractor that is to become an
integral component part of real property owned by an organization described in section
1116(a) of the Tax Law is exempt from the New York State and local sales tax. . . .
Section 541.3(d) of the Sales and Use Tax Regulations provides, in part:
Contracts with exempt organizations. (1) Tangible personal property incorporated
into real property owned by a governmental entity or by an exempt organization is
exempt, whether the contract is on a lump sum, time and material, cost-plus, or other
basis.
(2) Purchase for contracts (other than agency contracts).
(i) Tangible personal property sold to a contractor, subcontractor, or repairman for
use in erecting, repairing, adding to, or altering a structure or building owned by an
exempt organization, described in section 1116(a) of the Tax Law, is exempt when it is to
become an integral component part of such structure or building.
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(iv) Except for agency contracts, contractors’ purchases of construction supplies
which do not become part of an exempt organization’s real property and are used or
consumed by the contractor, as well as purchases of taxable services, such as electricity
used by the contractor, are subject to the tax.
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(v) Documents. (a) If the customer is a governmental entity, copies of signed
contracts and government purchase orders are sufficient evidence to establish the exempt
status of the job between the governmental entity and the prime contractor. With respect

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to the documents required between a prime contractor and the subcontractors, a signed
document between them which identifies the project, location, and exempt owner, will
form the basis for tax exemption of tangible personal property purchased for
incorporation into the exempt project. When purchasing such tangible personal property
for the exempt project, the contractor or subcontractor will issue a properly completed
contractor exempt purchase certificate to the supplier.
Opinion
In general, a purchase by a contractor or subcontractor of any material that is actually
incorporated into and becomes an integral component part of real property is subject to sales tax
as a retail purchase by such contractor or subcontractor. See section 1101(b)(4) of the Tax Law.
Such material is considered to be used or consumed by the contractor or subcontractor in the
performance of its contract. See section 541.1(b) of the Sales and Use Tax Regulations.
However, a contractor or subcontractor may purchase materials exempt from tax when the
material becomes an integral component part of real property of an entity or organization that is
exempt from sales tax pursuant to section 1116(a) of the Tax Law. See sections 1115(a)(15) and
(16) of the Tax Law.
In the present case, Petitioner is a developer and a contractor engaged in the complete
rehabilitation of three high-rise buildings owned by the New York City Housing Authority
(Authority). The Authority, as lessor, will lease the land, buildings, and improvements to
Petitioner pursuant to a long-term lease. Pursuant to the lease, title to all improvements made by
Petitioner, its contractors and its subcontractors will vest in the Authority immediately when
such items are installed and become part of the premises.
The Authority is a governmental entity exempt from sales tax under section 1116(a)(1) of
the Tax Law. See section 401 of the New York Public Housing Law and section 529.2 of the
Sales and Use Tax Regulations. Section 1115(a)(15) of the Tax Law provides that tangible
personal property sold to a contractor, subcontractor, or repairman for use in adding to, altering,
or improving real property, property, or land of an organization described in section 1116(a) of
the Tax Law can be purchased by the contractor, subcontractor, or repairman without the
payment of sales tax, provided such tangible personal property becomes an integral component
part of the structure, building, or real property. See section 541.1(e) of the Sales and Use Tax
Regulations.
Materials purchased for installation by Petitioner, its contractors or its subcontractors
become integral component parts of the real property owned by the Authority. The Authority
takes immediate title to and possession of such materials upon installation. Therefore, the
purchase of such materials by Petitioner, its contractors or its subcontractors is exempt from
sales and use tax as provided under section 1115(a)(15) of the Tax Law. See 450 Lexington
Venture, Adv Op Comm T & F, March 7, 1989, TSB-A-89(8)S; Insurance Services Office, Inc.,
Adv Op Comm T & F, February 22, 1991, TSB-A-91(23)S. It is noted that charges to Petitioner

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for the services of installing tangible personal property or maintaining or repairing real property
when such services do not result in a capital improvement to real property are subject to sales tax
under section 1105(c)(3) or 1105(c)(5) of the Tax Law. See E. E. Root & Sons, Inc., Adv Op
Comm T & F, August 1, 2005, TSB-A-05(30)S.
Petitioner, its contractors, and its subcontractors should furnish each supplier with a
properly completed Contractor Exempt Purchase Certificate (Form ST-120.1) when purchasing
tangible personal property to be incorporated as integral component parts of the real property
owned by the Authority in order to purchase such tangible personal property exempt from sales
tax. See section 1132(c)(1) of the Tax Law. Petitioner should maintain in its records a copy of
the lease between Petitioner and the Authority to substantiate the exempt nature of the
transactions. See 450 Lexington Venture, supra. Petitioner’s contracts with its contractors and
its subcontractors identifying the project, location, and exempt owner will form the basis for the
sales tax exemption for tangible personal property purchased by Petitioner’s contractors and
subcontractors for incorporation into the Project. See section 541.3(d)(2)(v) of the Sales and Use
Tax Regulations.

DATED: February 8, 2007

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.