Are a commercial landlord's charges to a tenant for 'condenser water' used to cool the tenant's leased space subject to NY sales tax?

Plain-English summary

The petitioner is the landlord of a commercial office building. Some tenants -- for example, one running a data center -- need extra cooling beyond the building's basic heating and cooling, so they install their own air-conditioning equipment and the landlord supplies "condenser water" to feed it. The landlord pipes up to a set number of "tons" of this chilled water to the tenant's system, billing a monthly Water Charge based on the tenant's connected cooling capacity. The landlord had been treating these charges as a taxable sale of utilities and collecting sales tax, and asked whether that was correct.

The Office of Counsel concluded the charges are not taxable:

• The water itself is exempt. Water is tangible personal property, but Tax Law 1115(a)(2) exempts water delivered to the consumer through mains or pipes. The landlord transfers the condenser water through pipes, so that transfer is exempt from the sales tax on tangible personal property.
• It isn't a taxable refrigeration service either. Providing chilled water to cool space could look like a taxable "refrigeration service" under Tax Law 1105(b). But in Matter of British Airways / Terminal One Group Associates (Tax Appeals Tribunal, 2004) the Tribunal held that a landlord's sale of heated and chilled water to tenants to cool (or heat) their rented premises is not a purchase of refrigeration or steam service, because it isn't among the enumerated taxable services in 1105(b). So the landlord's condenser-water charges aren't taxable under 1105(b).
• Refunds. Tax the landlord already collected must be paid over with its returns as money collected as tax (1137(a)(iii)). If the landlord refunds those amounts to its tenants, it can apply for a refund or credit under 1139(a) (if timely); alternatively, the tenant that paid the tax can file its own refund claim.

What this means for you

Commercial landlords supplying chilled/condenser water

If you pipe condenser or chilled water to tenants to run their own A/C equipment, those charges are generally not taxable -- the piped water is exempt, and supplying chilled water to cool a tenant's space isn't a taxable refrigeration service. If you've been collecting tax on these charges, you (or your tenants) may be able to recover it: you must first refund the tax to the tenants, then claim a refund or credit, and the claim must be timely.

Tenants

If your landlord charged you sales tax on condenser-water or chilled-water charges, that tax likely wasn't due. You can either have the landlord refund it and claim it back, or file your own refund claim under section 1139(a) for what you paid.

Common questions

Q: Our landlord bills us for "condenser water" to run our server-room A/C -- is that taxable?
A: No. Water delivered through pipes is exempt, and supplying chilled water to cool your leased space isn't a taxable refrigeration service.

Q: Isn't chilled water a taxable "refrigeration service"?
A: No. The Tax Appeals Tribunal held in British Airways/Terminal One that a landlord's sale of chilled water to tenants to cool their premises isn't an enumerated taxable refrigeration service.

Q: We already paid sales tax on these charges -- can we get it back?
A: Yes. The landlord can refund it to you and claim a refund/credit, or you can file your own timely refund claim under section 1139(a).

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1105(b) (refrigeration and steam service)
• Tax Law section 1110(a) (compensating use tax)
• Tax Law section 1115(a)(2) (exemption for water delivered through mains or pipes)
• Tax Law section 1137(a)(iii) (amounts collected as tax)
• Tax Law section 1139(a) (refund or credit)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-11(28)S
Sales Tax
October 17, 2011

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110516B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and addess redacted. Petitioner asks whether “condenser water” charges billed and
collected by a landlord from a tenant in a commercial office building are subject to New York
State sales tax.
We conclude that the condenser water that Petitioner describes is chilled water used to
cool the interior space of premises that the tenant leases from Petitioner and that Petitioner’s
charges to its tenant for this condenser water are not subject to State or local sales or
compensating use tax.
Facts
Petitioner is the landlord of a commercial office building at name redacted. Petitioner
has always considered the condenser water charges subject to State sales tax as a sale of utilities
and thus has collected sales tax on its condenser water charges to its tenants. As part of its
petition, Petitioner attached a relevant provision in its lease with name redacted, a tenant in the
building, designated as Section 20(g)(i) - Water Charge, that reads as follows:
“(g)(i) Landlord hereby agrees to provide Tenant with up to 60 tons of
condenser water for Tenant's air-conditioning system in the portions of the
Premises above the eighteenth (18th) floor of the Building (the "System") twentyfour (24) hours per day, seven (7) days per week, for which service Tenant shall
pay to Landlord, as Additional Charges, an amount equal to six cents (6¢) per
hour per ton of connected air-conditioning capacity (such amount, as increased
pursuant to Section 20(g)(iii) below is hereinafter referred to as the "Water
Charge"). The Water Charge shall be payable by Tenant to Landlord monthly, as
Additional Charges, within ten (10) days after rendition by Landlord to Tenant of
a statement (the "Water Charge Statement") setting forth (i) Tenant's hourly use of
the System, as determined by Landlord, during the preceding calendar month, and
(ii) the amount of the Water Charge payable as a result thereof. Landlord's failure
to render a Water Charge Statement with respect to any calendar month shall not
prejudice Landlord's right to thereafter render a Water Charge Statement setting
forth the amount of the Water Charge payable by Tenant since the date of the last
such Water Charge Statement (or, if no Water Charge Statement shall have been
rendered hereunder, since the Effective Date). The Water Charge shall be deemed
an Additional Charge under this Lease.”

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TSB-A-11(28)S
Sales Tax
October 17, 2011

Petitioner provides basic heating and cooling to all floors in the subject building. Some
tenants in the building use the rented space for activities that require additional cooling. For
example, one tenant uses some floors in the building for its data center. The equipment in the
data center generates considerable heat and requires additional cooling to protect the computer
servers and other equipment from overheating. This tenant purchased and installed its own air
conditioning (AC) equipment in its leased premises, as could any other tenant that had additional
cooling needs. At the time of entering into the lease, and before it could know the precise size
and capacity of AC equipment the tenant would need, Petitioner assured tenant that Petitioner
would provide up to 70 tons of AC per hour per floor. The lease also provides that, once tenant
took possession of the premises and installed its own AC equipment, the actual amount of AC
capacity it would use, based on the equipment installed, could be determined. At that point,
Petitioner would determine the number of tons of cooling capacity the tenant would need and
would charge tenant a monthly charge based on that amount. If the tenant later installed
additional AC equipment, Petitioner would adjust the charge going forward to reflect that
additional equipment. But no tenant could exceed the original 70 tons per floor. Conversely, if,
for example, a tenant suffered some major computer equipment failure and turned off its AC
equipment because it did not need the cooling capacity and demonstrated that to Petitioner, then
Petitioner would adjust downward the monthly charge to that tenant to reflect the decreased
usage.
Petitioner also indicated that it does not meter the flow of water from Petitioner’s system
to the tenant’s own system. Nor does Petitioner measure the temperature of its water as it goes
into the tenant’s system or the temperature of its water as it returns from the tenant’s system to
its own system.
Analysis
Section 1105(a) of the Tax Law imposes sales tax on retail sales of tangible personal
property. Section 1110(a)(A) imposes compensating use tax on the use of tangible personal
property purchased at retail. Water is tangible personal property. Section 1115(a)(2) exempts
water, when delivered to the consumer through mains or pipes, from sales and compensating use
taxes. Petitoner transfers the condenser water, through pipes, to the tenant’s possession for the
time that the water is in the tenant’s cooling system. Since Petitioner transfers the water through
pipes, the exemption in section 1115(a)(2) would exempt that transaction from the sales tax
imposed on the retail sale of tangible personal property.
Section 1105(b) of the Tax Law, as relevant here, imposes the State’s sales tax on sales,
other than for resale, of refrigeration and steam, and refrigeration and steam service of whatever
nature. There is no use tax on the use of refrigeration or refrigeration service. The condenser
water that Petitioner provides to its tenant, and for which the tenant pays charges to Petitioner, is
used in tenant’s own air-conditioning system to cool certain areas that the tenant occupies under
its lease with Petitioner. This condenser water cools down the tenant’s rented premises. As
such, the condenser water amounts to “chilled water” and Petitioner’s providing of this chilled
water for consideration could be construed as the sale of the service of refrigeration.

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TSB-A-11(28)S
Sales Tax
October 17, 2011

However, the State Tax Appeals Tribunal, in its joint decision in Matter of the Petition of
British Airways, PLC and Matter of the Petition of Terminal One Group Associates, LLP, DTA
Nos. 818259 and 818429 (June 3, 2004), decided that the sale of chilled water by the landlord
Port Authority to its tenants for use in cooling their rented premises was not a service subject to
sales tax. The Tribunal said, “We agree with the determination of the Administrative Law Judge
that petitioners' purchases of heated and chilled water from the Port Authority were not
purchases of refrigeration and steam services. As a result, the services are not subject to tax
because they are not included among the enumerated taxable services in Tax Law § 1105(b)(1).”
Thus, Petitioner’s charges for the condenser water it provides to its tenant is not for the sale of
refrigeration service and Petitioner’s charges for that chilled water are not subject to sales tax
imposed by section 1105(b).
To the extent that Petitioner collected sales tax on its charges to its tenants for such
condenser water, Petitioner was required to pay any amounts it collected from its tenants with its
sales tax returns as money collected purportedly as tax under section 1137(a)(iii) of the Tax Law.
If Petitioner refunds those amounts to its tenants, Petitioner can apply for a refund or credit under
section 1139(a) of the Tax Law for those amounts it can demonstrate it refunded to its tenants,
provided the application for refund or credit is timely made. Or, the tenant that paid the money
can instead file a refund or credit for amounts it paid to Petitioner by filing an application for
refund or credit under section 1139(a).

DATED: October 17, 2011

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the person
or entity to whom it is issued and only if the person or entity fully and accurately
describes all relevant facts. An Advisory Opinion is based on the law, regulations, and
Department policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.