Must a general contractor pay sales tax on required security/guard monitoring services it buys as part of a capital improvement construction project?

Plain-English summary

The petitioner is a general contractor on commercial/nonresidential capital improvement projects. On certain jobs, the plans, building rules, or the building owner require that security and/or building-engineer monitoring services be in place while high-risk work (demolition, welding, hot roofing, sprinkler work) is performed overnight -- the contractor cannot do the work without a designated security monitor. The owner mandated that the contractor hire the owner's own security contractor, which billed the contractor sales tax. The contractor gave the security contractor a Certificate of Capital Improvement and asked whether it should have to pay that tax.

The Office of Counsel concluded the contractor must pay the tax. Tax Law 1105(c)(8) imposes sales tax on protective and detective services -- including guard, patrol, and watchman services of every nature -- whether or not tangible personal property is transferred with them. The Department followed Matter of MGK Constructors (a closely analogous case): a contractor required by its construction contract to provide security guard services, which it subcontracted out, was buying those services as "one of many expense items necessary to satisfy [its] contractual obligation" -- an item of overhead, not a purchase for resale to the project owner. Like MGK, this contractor has a construction contract with the owner and contracted for protective services; those services are taxable and the contractor must pay State and local sales tax on them.

The implication: a Certificate of Capital Improvement does not exempt these services. The capital-improvement framework can make a contractor's charge to the owner for the improvement non-taxable, but the contractor's own purchase of a separately taxable service (protective/detective services) remains taxable.

What this means for you

General contractors and construction managers

Security, guard, and monitoring services you must buy to perform a job are a taxable purchase for you -- they are overhead to meet your contract, not something you resell to the owner. Budget the sales tax. Giving (or holding) a Certificate of Capital Improvement does not make these services tax-free; the capital-improvement rules address your charge to the owner for the improvement, not your purchase of a separately taxable service.

Owners requiring contractors to use their security vendor

Mandating that the contractor hire the owner's security contractor does not turn the purchase into a non-taxable, resold-to-owner transaction -- it remains a taxable protective service to the contractor.

Common questions

Q: The security was required by the project -- isn't it part of the capital improvement?
A: No. Protective and detective services are taxable in their own right (1105(c)(8)). You buy them as overhead to meet your contract, not for resale to the owner.

Q: We gave a Certificate of Capital Improvement -- doesn't that exempt it?
A: No. That certificate addresses your charge to the owner for the improvement, not your purchase of a separately taxable service like security monitoring.

Q: Can we treat it as a resale to the building owner?
A: No. Following MGK Constructors, the service is an item of overhead to satisfy your own contractual obligation, not a purchase for resale.

Citations and references

• Tax Law section 1105(c)(8) (protective and detective services)
• Administrative Code of City of New York section 11-2040[a][2] (NYC protective services tax)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(17)S
Sales Tax
July 15, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120828A

The Department of Taxation and Finance received a petition for Advisory Opinion from
name redacted. Petitioner asks whether security services it purchases as part of a capital
improvement project are exempt from sales and use tax. We conclude that Petitioner must pay
sales tax on the purchase of those security services.
Facts
Petitioner is a general contractor that performs commercial, retail and other nonresidential capital improvement projects. In certain instances, the plans and specifications,
building rules, and regulations and/or directives require that security and/or building engineer
monitoring services be contracted for to ensure the building owner that certain tasks will be
monitored while the Petitioner or its subcontractor is performing high risk work (i.e., demolition,
welding, hot roofing, sprinkler work), since this work is performed overnight. Petitioner
represents that, in these instances, security services are required, and the Petitioner would not be
permitted to perform the work without a designated security company monitor in place.
Specifically, Petitioner is mandated by the building owner to hire the building owner’s
security contractor to monitor the work during these phases of the construction. Petitioner
entered into a contract with the building owner’s security contractor to provide the necessary
security services at a fixed hourly rate. An executed Certificate of Capital Improvement was
provided to the security contractor with the contract. Petitioner was billed sales tax for the
security services provided by the security contractor.
Petitioner asks whether it should be required to pay sales tax for the purchase of the
security services in this case.
Analysis
Section 1105(c)(8) imposes sales tax on the provision of
“[p]rotective and detective services, including, but not limited to, all services
provided by or through alarm or protective systems of every nature, including, but not
limited to, protection against burglary, theft, fire, water damage or any malfunction of
industrial processes or any other malfunction of or damage to property or injury to
persons, detective agencies, armored car services and guard, patrol and watchman
services of every nature other than the performance of such services by a port watchman

-2-

TSB-A-13(17)S
Sales Tax
July 15, 2013

licensed by the waterfront commission of New York harbor, whether or not tangible
personal property is transferred in conjunction therewith.”
The state and local sales tax on protective and detective services was enacted in 1990.
Prior to the enactment of section 1105(c)(8), New York City imposed sales tax on those same
services. See, Administrative Code of City of New York, § 11-2040[a][2]. The New York City
sales tax was at issue in the Tax Appeals Tribunal decision in Matter of MGK Constructors
(TSB-D-92(23)S, March 5, 1992).
The facts in that decision are similar to the facts in this petition. MGK Constructors
(MGK) had a contract with the New York City Department of Environmental Protection, for the
building of part of a tunnel under the East River. Under that contract, MGK was required to
provide security guard services. It subcontracted for those security guard services with another
firm. The Tribunal concluded that the provision of the guard services constituted taxable
services. The services were purchased by MGK and were essentially “one of many expense
items which were necessary to satisfy the contractual obligation of constructing a water tunnel.”
The Tribunal further decided that MGK was not purchasing the protective services for resale to
the New York City Department of Environmental Protection, finding that the services were in
the nature of an item of overhead, rather than a purchase for resale.
Like MGK, the Petitioner has a contract with a building owner to provide construction
services. Also, like MGK, the Petitioner has contracted with a company for the provision of
protective services. As the Tribunal concluded in Matter of MGK Constructors, those protective
services are subject to sales tax and Petitioner is required to pay State and local sales taxes on its
purchase of those services.

DATED: July 15, 2013

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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.