Are a broker's fees and material reimbursements taxable when the broker buys building materials for a contractor?

Plain-English summary

A New York City construction company is considering hiring a broker to buy taxable building materials on its behalf, paying the broker a commission. Sometimes the seller invoices the contractor directly (broker just facilitates); other times the broker buys without disclosing the relationship and then invoices the contractor for the materials plus a broker fee. In both cases the materials are delivered directly to the contractor. It asked whether the broker fees and the material reimbursements are taxable.

The Office of Counsel concluded the answer turns on whether the broker is a true agent:

If the broker is the contractor's agent -- the sale is a retail sale directly from the vendor to the contractor (20 NYCRR 541.5(c)(2)). Sales tax is due on that underlying purchase, but:
- the broker's fee is for a nontaxable service, and
- the reimbursement the contractor pays the broker is not separately taxed.

To establish agency, all of these must be met (20 NYCRR 541.5(c)): the vendor bills the contractor directly (or the bill states the broker acts as agent); payment goes directly to the vendor (or from a special fund created for that purpose); and the goods are delivered directly to the contractor (Hooper Holmes; Swet).

If the broker is NOT an agent -- the broker is treated as buying for resale and reselling to the contractor:
- the broker can avoid tax on its purchase with a Form ST-120 resale certificate,
- the broker must register and collect tax from the contractor (Tax Law section 1134), and
- the entire amount the contractor pays -- including mark-ups or "broker fees" -- is taxable as part of the receipt (Tax Law section 1101(b)(3)).

Direct delivery from vendor to contractor does not, by itself, prevent two separate taxable transactions when there's no agency.

What this means for you

Contractors using a buying broker

If you want the broker's fee to be nontaxable, set up a real agency: have the vendor bill you (or state the agency on the bill), pay the vendor directly (or from a dedicated special fund), and take direct delivery. Miss any of these and the broker is a reseller -- and you'll pay tax on the whole bill, fee included.

Brokers / purchasing agents

Document the agency if that's the deal. If you're really reselling, you must register, give your supplier ST-120, and collect tax from your customer on the full price including your markup/fee.

Don't rely on "the goods shipped straight to my customer"

Direct delivery alone doesn't collapse a resale into a single sale. Without agency, there are two sales and the markup is taxable.

Common questions

Q: Is the broker's commission taxable?
A: Not if the broker is your true agent (it's a nontaxable service). If the broker is a reseller, the fee is part of the taxable receipt.

Q: What makes the broker an 'agent'?
A: The vendor bills you directly (or notes the agency), payment goes to the vendor directly or from a special fund, and goods are delivered directly to you -- all three.

Q: If the broker isn't an agent, what's taxed?
A: The entire amount you pay the broker, including any mark-up or broker fee. The broker registers, uses ST-120 to buy, and collects tax from you.

Q: The materials ship straight to my site -- doesn't that mean one sale?
A: No. Direct delivery alone doesn't prevent two taxable transactions when there's no agency relationship.

Citations and references

• Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(3) (receipt subject to tax; mark-ups and charges)
• Tax Law section 1134 (registration; person required to collect tax)
• 20 NYCRR 541.5(c) (agency relationship; purchasing agent requirements)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(37)S
Sales Tax
November 13, 2015

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120323B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTED. Petitioner asks whether fees paid to a broker for his services of
purchasing building materials on behalf of Petitioner are considered a taxable service.
Additionally, Petitioner asks whether reimbursements made by Petitioner to the broker for the
purchase of the building materials would be taxable.
We conclude that purchases made on behalf of Petitioner by a broker acting as an agent
are subject to sales tax as a sale directly from the vendor to the Petitioner. Compensable fees paid
to the broker for acting as Petitioner’s agent are not subject to sales tax because this is a
nontaxable service. Purchases made on behalf of Petitioner by a broker not acting as an agent are
subject to sales tax, but the broker may avoid paying sales tax on its purchases by providing a
resale certificate to the vendor. However, if the broker is not acting as an agent, sales tax is due
on the entire receipt charged to Petitioner, including any broker fees.
Facts
Petitioner is a construction company in New York City. Petitioner is considering hiring a
broker to purchase taxable building materials on its behalf from various sources; in return,
Petitioner would pay the broker a commission. In some cases, Petitioner would receive invoices
directly from the seller to purchase the building materials with the broker facilitating the
transaction. However, in other cases, the broker would not disclose to the seller the relationship
between the broker and Petitioner, and the broker would purchase the building materials directly.
In turn, the broker would send Petitioner an invoice for the cost of the building materials in
addition to the broker fee. In both cases, the building materials would be delivered directly to
the Petitioner without the broker taking possession of the goods.
Analysis
The application of sales tax to the purchases of construction material through a broker
depends on the relationship that exists between the broker and Petitioner. If an agency
relationship is present, i.e., the broker is the Petitioner’s agent, the sale of taxable tangible goods
is deemed to be a retail sale from the vendor directly to Petitioner. See 20 NYCRR §
541.5(c)(2). Therefore, sales tax will be due upon the initial purchase of construction materials
from the vendor, but not on any reimbursements paid by Petitioner to the agent. Furthermore, a
broker fee in conjunction with this reimbursement will not be subject to tax, because it is a fee
for a nontaxable service.

-2-

TSB-A-15(37)S
Sales Tax
November 13, 2015

To establish an agency relationship between Petitioner and the broker, there must be a
“manifestation” that the broker consents to act on behalf of Petitioner, subject to Petitioner’s
control. See Matter of Hooper Holmes v. Wetzler, 152 AD2d 871 (3d Dep’t 1989); Matter of
Swet, TSB-D-91(10)S. This requires that purchases made by the broker must be billed directly
by the vendor to Petitioner or, if billed to the broker, the bill must specify that the broker is
acting as Petitioner’s agent. Secondly, payment must be made directly by Petitioner to the
vendor or, if payment is made by the broker, it must come from a special fund created
specifically for this purpose. Finally, the purchased items must be delivered directly to
Petitioner. See generally 20 NYCRR § 541.5(c).
However, if an agency relationship is not present, the broker is deemed to be purchasing
the goods directly and reselling those goods to Petitioner. Tax Law § 1105(a) imposes tax on the
receipt of any tangible personal property, except for purchases intended exclusively for resale.
Because the broker is purchasing the goods for resale, the broker is a person required to collect
tax and must register for sales tax purposes. See Tax Law § 1134(a)(1)(ii). The broker will be
charged sales tax on the purchase of the construction materials unless the broker timely furnishes
the vendor with a properly completed Form ST-120–Resale Certificate. The broker must collect
sales tax from Petitioner on the resale of the goods to Petitioner unless an exemption applies; the
broker then is required to pay over the collected tax to the State. See Tax Law § 1134. The entire
price paid by Petitioner for the materials will be subject to sales tax as part of the receipt under
Tax Law § 1101(b)(3), including any mark-ups or “broker fees” charged by the broker. See 20
NYCRR § 526.5. The fact that the goods are delivered directly from the vendor to Petitioner
does not, by itself, prevent two transactions from taking place in the absence of an agency
relationship.
DATED: November 13, 2015
_/S/_____
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE: 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 of 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.