Is the payroll a managing agent passes through for cleaning and maintenance workers subject to NY sales tax?

Plain-English summary

Two managing agents -- one for interior cleaning/janitorial work, one for building maintenance/engineering -- hire and supervise workers for commercial building owners under a Management Agreement, a Control Agreement, and a Payroll Services Agreement. The agreements make each agent act solely as the owner's agent: the owner is the employer for all fundamental purposes, prescribes the work rules, and the workers are under the owner's ultimate direction and control. The agents asked whether the compensation they pass through to those workers is subject to sales tax.

The Office of Counsel concluded the compensation is not taxable. Building cleaning and maintenance services are generally taxable (Tax Law 1105(c)(5); 107 Delaware Associates), but wages, salaries, and other compensation an employer pays its employees for those services are excluded from tax under 1105(c). The question is whether the workers are the owner's employees -- and the Department applies the factors from TSB-A-93(52)S:
- the owner (as principal) approves the work rules and sets staffing/hours;
- the contracts expressly make the employees the owner's, not the agent's;
- the agent issues W-2s as the owner's agent;
- payroll runs through an account in the owner's name (held for the owner), funded by the owner;
- the owner is liable for unemployment insurance, Social Security, workers' compensation; and
- the owner bears tort liability for the workers' acts (and indemnifies the agent; carries the insurance).

Here every factor points to a genuine principal-agent relationship, with no provision making the agents independent contractors. So the workers are the owner's employees, and the wages the agents disburse to them are excluded from sales tax (TSB-A-02(44)S; 98(22)S; 95(17)S; 93(52)S).

What this means for you

Managing agents and building owners

You can structure cleaning/maintenance staffing so the payroll is a non-taxable employer-employee wage, not a taxable service charge -- but only if the workers are genuinely the owner's employees. The documents must put the owner in the employer's role: owner sets work rules and controls the work, owner bears unemployment/SS/workers'-comp and tort liability, payroll flows through an owner-named account the owner funds, and the agent issues W-2s as agent. If instead the agent is an independent contractor selling a cleaning/maintenance service, the charge is taxable.

Don't undercut the agency

A single clause making the agent an independent contractor (or taking on employer liabilities) can flip the result. Keep the agreements internally consistent with agency.

Common questions

Q: Aren't cleaning and maintenance services taxable in NY?
A: Yes, generally (1105(c)(5)). But wages an employer pays its own employees to perform them are excluded from tax.

Q: The agent hires and pays the workers -- how are they the owner's employees?
A: Because the owner is the employer for all fundamental purposes: it sets the work rules, has ultimate control, bears the employment and tort liabilities, and funds the payroll; the agent acts only as the owner's agent.

Q: What makes this non-taxable rather than a taxable service?
A: The genuine principal-agent relationship and the owner's status as employer. If the provider were an independent contractor selling the service, the charge would be taxable.

Citations and references

• Tax Law section 1105(c)(5) (sales tax on maintaining/servicing real property; employee-wage exclusion)

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_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(2)S
Sales Tax
January 8, 2013

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110603B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name redacted. Petitioners ask if the compensation they pay to certain workers under their
contract agreements is subject to sales tax under New York Tax Law Section 1105(c).
We conclude that the exclusion from sales tax provided by Section 1105(c) of the Tax
Law for compensation paid by an employer to an employee for otherwise taxable building
cleaning and maintenance services is applicable to the facts as described by Petitioners.
Facts
Each Petitioner manages the performance of certain services. One Petitioner manages the
performance of interior cleaning and janitorial services (e.g., ordinary janitorial services such as
dusting, cleaning and waxing walls and floors of a building, oiling of door hinges, replacing light
bulbs, etc.) for third party owners and operators of large commercial buildings ("owners").
Similarly, the other Petitioner manages the performance of maintenance, engineering and related
services (e.g., mechanical equipment, electrical equipment, HVAC equipment, plumbing
systems, and fire protection systems) on behalf of the owners.
Both Petitioners intend to enter into a Management Agreement specific to their
management expertise, as well as a Control Agreement, and a Payroll Services Agreement, with
building owners. Pursuant to these agreements, Petitioners, acting as the owners’ agents, will
hire and supervise workers on behalf of the owner to perform the services. The agreements
provide that all these workers will be subject to the owner's ultimate direction and control, and
that the workers will perform the services in accordance with work rules and practices prescribed
by the owners.
The agreements clearly state that the Petitioners are not liable for the compensation of the
workers or for the workers' acts or omissions, other than those that occur as a result of
Petitioners’ gross negligence or willful misconduct.
The relevant provisions of the various contract agreements are similar for each Petitioner
and provide as follows:

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The Management Agreement provides in part:
“1.1. Exclusive Agency/Scope of Service. Owner hereby appoints Agent as its sole and
exclusive agent to manage the performance of services described in Exhibit B … and
Agent hereby accepts such appointment. Agent and owner agree that for purposes of all
Services performed under this management agreement, Agent shall act for and in the
name of owner, as owner's agent. All persons providing the Services on behalf of owner
shall be under owner's ultimate direction and control, subject to the supervision of Agent
as the representative of owner. Although such persons may be hired by Agent for and on
behalf of owner, the persons shall perform the Services in accordance with work rules
and practices prescribed by owner pursuant to this Management Agreement or otherwise,
subject to and within the limitations of any applicable collective bargaining agreements.
Agent agrees to execute on behalf of and as Agent of owner any such applicable
Collective Bargaining Agreement. Agent and owner agree to comply with the terms and
conditions of any such Collective Bargaining Agreement.”
“2.1. Term. Upon termination, owner shall remain bound by the obligations of any and
all contracts for services and supplies Agent has entered into on owner's behalf as its
agent in connection with the performance of its obligations hereunder.”
“3.3 Employees. Owner agrees that for all fundamental employment purposes, owner or
a legal entity owned or controlled by owner shall be the employer of such persons. Agent,
as agent of owner, shall make disbursements and deposits for all compensation and other
amounts payable with respect to persons who are employed in the operation of the
Property, including, but not limited to, unemployment insurance, social security,
workmen's compensation and other charges imposed by a governmental authority or
provided for in a union agreement out of an account or accounts of or out of funds
provided by, owner. Agent shall maintain complete payroll records. All payroll costs,
including but not limited to, those enumerated herein, are operating expenses to be paid
by Agent, as agent for owner, from funds paid to Agent by owner. As a matter of
convenience and administrative efficiency, Forms W-2 may be issued to owner's
employees by Agent with all parties reporting any compensation reported on such Forms
W-2 as compensation paid directly by owner to such employees.”
The Control Agreement and Payroll Services Agreement each provide in part:
“1. Relationship of Parties a. Agent and owner agree that for purposes of all Services
performed under the Management Agreement, Agent shall act for and in the name of
owner, as owner's Agent. All persons providing the Services described in the
Management Agreement shall perform such Services on behalf of owner and under
owner's ultimate direction and control, subject to the supervision of Agent as the
representative of owner. Owner agrees that for all fundamental employment purposes,
owner or a legal entity owned or controlled by owner shall be the employer of such
persons. Although such persons may be hired by Agent for and on behalf of owner, the

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persons shall perform the Services in accordance with work rules and practices prescribed
by owner pursuant to the Management Agreement or otherwise, subject to and within the
limitations of any applicable Collective Bargaining Agreements. Agent agrees to execute
on behalf of and as Agent of owner any such applicable Collective Bargaining
Agreement. Agent and owner agree to comply with the terms and conditions of any such
Collective Bargaining Agreement. b. As a matter of convenience and administrative
efficiency, Forms W-2 may be issued to owner's employees by Agent with all parties
reporting any compensation reported on such Forms W-2 as compensation paid directly
by owner to such employees. Agent and owner agree that all persons performing the
Services under the Management Agreement shall be in the employ of the owner and not
in the employ of Agent and that Agent is in no way liable for the compensation of such
persons or their actions or omissions, other than as a result of Agent's own gross
negligence or willful misconduct. Agent and owner agree that as a matter of convenience
and administrative efficiency Agent may, subject to owner's specific written
authorization, which shall be revocable at any time in owner's sole discretion, establish a
bank account in owner's name, with Agent as signatory, for the sole purposes of
processing the payroll of the persons providing services under the Management
Agreement.
In addition, the agreements contain provisions stating that: (1) the owner will indemnify
and hold the Petitioners harmless from any claims made by or related to the workers, and will
reimburse the Petitioners for any costs incurred in the defense of such claims; and (2) the owner
will be obligated to carry adequate insurance to cover the workers, including but not limited to
public liability, contractual liability, and workers' compensation policies. The agreements also
provide that, in some cases, as a matter of administrative convenience to the owner, the parties
may agree that a Petitioner obtain such insurance policies in its own name, but as agent and for
the benefit of the owner.
There is no provision in the sample Management Agreement, Control Agreement or
Payroll Services Agreement provided to the Department that is inconsistent with the provisions
that create a Principal/Agent relationship between the Petitioners and the owner.
Analysis
Generally, receipts from the sale of building cleaning and maintenance services are
subject to sales tax pursuant to section 1105(c)(5) of the Tax Law. See Matter of 107 Delaware
Associates et al v. New York State Tax Commn., 99 A.D.2d 29 (3d Dep’t 1984), rev’d 64 N.Y.2d
935 (1985). However, wages, salaries and other compensation paid by an employer to an
employee for performing the services described in Section 1105(c)(5) are excluded from tax.
In TSB-A-93(52)S, the Department provided guidance to the Building Owners and
Managers Association of Greater New York and The Real Estate Board of New York about
general factors used to determine whether maintenance workers are the employees of the
building owner for purposes of the wage exclusion. The factors included: (1) even though the

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workers were typically hired by the agent, the owner (as principal) approved the prescribed work
rules and practices for the workers, and the owner determined the number of employees, their
work hours and shifts, etc.; (2) the contracts between the owner and agent expressly provided
that the employees were solely employed by the owners and not the agent; (3) the agent issued
W-2 forms to the employees as agent of the owner; (4) the agent used a special payroll account
into which payments from the owner for payroll expenses were placed, and that account was held
in trust for the owner; (5) the owner was liable for payment of unemployment insurance, social
security, workmen's compensation, and disability benefits; and (6) the owner was liable for the
actions of the employees for tort liability purposes.
In this instance, each Petitioner enters into a Control Agreement, Payroll Service
Agreement, and Management Agreement with a building owner specific to their management
expertise. Each of these agreements expressly provides that the Petitioner acts as the agent of the
owner, and that the workers are the employees of the owner. Under the Management
Agreement, the owner agrees that for all fundamental employment purposes, the owner, or a
legal entity owned or controlled by the owner, is the employer of such persons. The
Management Agreement specifies that the owner prescribes the work rules and practices for the
employees, and the Control and Payroll Agreements specify that the employees perform their
work on behalf of the owner (as principal) under the owner’s ultimate direction and control.
The employees are paid by the agent through an account opened in the building owner’s
name, for which the owner provides a written authorization to Petitioners (acting as the owner’s
agent). The owner, as principal, reserves the right to revoke this authorization at any time.
While the Petitioner may issue W-2 forms to the employees, it does so strictly on the owner’s
behalf as its agent. In every instance, the building owner remains liable for the payment of any
required expense (such as Social Security and Workers’ Compensation payments, and
unemployment insurance). While the agent may make certain payments on the owner’s behalf, it
is never responsible for making compensation payments, or any other payment which is the
owner’s responsibility. The owner indemnifies and holds Petitioners harmless for any tort claims
made by or related to the workers, and must reimburse the Petitioners for any costs incurred in
the defense of such claims. The owner is also obligated to carry adequate insurance to cover the
workers, including but not limited to public liability, contractual liability, and workers'
compensation policies. In some cases, as a matter of administrative convenience to the owner,
the parties may agree that a Petitioner obtain such insurance policies in its own name, but
Petitioners purchase the insurance only as disclosed agent of the owner.
The contracts provided to the Department do not contain any provisions inconsistent with
the Petitioner’s appointment as the owner’s agent. For example, there is no contrary provision
that states the Petitioners are operating as independent contractors instead of as the owner’s
agents. In fact, the additional terms of the agreements, such as the Statement in the Management
Agreement that the owner is bound by the obligations or contracts the Petitioners enter into on its
behalf, are all consistent with the creation of an agency relationship between the parties.

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January 8, 2013

Based on these facts, and absent any indications that the employees at issue are not, in
fact, the employees of the owner, the wages and salaries provided to the Petitioners to be used as
compensation to the owner’s employees for the performance of their services are not receipts
subject to tax. See TSB-A-02(44)S; TSB-A-98(22)S; TSB-A-95(17)S; TSB-A-93(52)S.

DATED: January 8, 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.