Is a monthly fee to operate and maintain a sewage treatment plant subject to New York sales tax?

Plain-English summary

A company operates and maintains sewage treatment plants (STPs) that serve New York apartment/condo complexes. Under its contract, it sends certified/licensed personnel to each plant every day (about two hours) to survey the plant, review records, take and test output samples, oil/grease and adjust pumps and equipment, maintain logs and pump stations, and file required Monthly Discharge Monitoring reports. It charges a monthly fee for this work (sludge removal, emergency repairs, and parts/labor for repairs are billed separately and aren't at issue). It asked whether the monthly fee is taxable. (This opinion is a companion to TSB-A-15(41)S, which reaches the same conclusion on the same facts.)

The Office of Counsel concluded the monthly fee is taxable as a maintenance service:

• Tax Law section 1105(c)(3) and (5) tax services of maintaining, servicing, or repairing tangible personal property and real property -- "all activities that relate to keeping property in a condition of fitness, efficiency, readiness or safety or restoring it to such condition" (20 NYCRR 527.7(a)(1)). Waste-water removal and equipment testing are specifically included.
• An integrated service is taxed by its primary function (Penfold). Here, the daily visits -- inspecting, reviewing records, testing the treated water, oiling pumps, monitoring sludge, and adjusting equipment -- are aimed at keeping the plant operating as intended and documenting it.
• That primary function is maintenance, so the monthly fee is taxable (Allied Maintenance -- operation/maintenance/inspection of power plants; TSB-A-96(90)S -- operating and maintaining a building's HVAC and hot-water systems and keeping logs).

What this means for you

Facility operations & maintenance contractors

A bundled "operate and maintain" contract -- daily inspection, testing, adjustments, logs, routine upkeep of equipment and real property -- is a taxable maintenance service, even when it's billed as a flat monthly fee and even when you're keeping the system running rather than fixing a specific break. The Department taxes the primary function, and "keeping it in working condition" is maintenance.

Sewage/water/HVAC/building-systems operators

Running and maintaining environmental or building systems (STPs, HVAC, boilers, pumps) for an owner is taxable servicing of real property and equipment. Testing and monitoring count as servicing too.

Separately billed repairs and removals

Charges carved out of the monthly fee -- emergency repairs, parts/labor, sludge hauling, outside lab testing -- have their own tax treatment and weren't decided here. Bundling them into the monthly fee, though, would still be taxable maintenance.

Common questions

Q: We're operating the plant, not repairing it -- why is the fee taxable?
A: "Maintaining/servicing" covers keeping property in a condition of fitness, efficiency, readiness, or safety. Daily operation, inspection, testing, and adjustments are taxable maintenance.

Q: We bundle many tasks into one monthly fee -- how is it taxed?
A: An integrated service is taxed by its primary function. Here the primary function is maintenance, so the whole monthly fee is taxable.

Q: Are the separately billed repairs and sludge removal covered by this opinion?
A: No. Those were billed separately and their taxability wasn't at issue; they have their own treatment.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(c)(3) (services of maintaining, servicing, or repairing tangible personal property)
• Tax Law section 1105(c)(5) (services of maintaining, servicing, or repairing real property)
• 20 NYCRR 527.7 (maintaining/servicing/repairing; primary function; waste-water removal and testing)

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_40s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(40)S
Sales Tax
November 13, 2015

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S131106A
PETITION NO. S131212A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner, REDACTEDREDACTED and a Petition for Advisory Opinion from Petitioner, Four
REDACTEDREDACTED. Both Petitioners will be referred to as “Petitioner” in this Advisory
Opinion. Petitioner asks whether the monthly fee it charges for certain services it performs in
regard to sewage treatment plants (“STP”) is subject to sales and use tax. We conclude that the
monthly fee is subject to tax as a charge for maintenance services under Tax Law § 1105(c)(3)
and (5).
Facts
Petitioner has entered into contracts with owners of certain STPs for apartment/condo
complexes in New York. An STP is real property that includes inflow pipes that bring sewage to
a series of large holding tanks where the sewage is treated, and outflow pipes that take the
decontaminated water to leaching fields. The STPs, which vary in size from approximately
1,500 to 5,000 square feet, run 24 hours a day, 7 days a week. Attached to the petition is a
contract between Petitioner and the owner of a particular STP for the provision of these services
(the “Contract”).
Petitioner is required under the Contract to send “qualified personnel” to the plant every
day “to carry out control, operations, preventative maintenance, testing and record keeping
services” and to “operate the plant in accordance with good practices,” pursuant to an operations
and maintenance manual to be provided by the plant’s owner. In return for receiving a monthly
fee, the Contract requires Petitioner to perform the following activities:
• Provide all preventative maintenance, including: oiling, greasing, routine
mechanical adjustments and housekeeping within the STP building. This includes
surveying the plant for problems, maintaining daily logs of the plant’s
performance and taking samples as detailed below, and attending any meetings on
the plant’s operation.
• Complete all the necessary Monthly Discharge Monitoring reports and submit
them to the applicable government agency and the owner.
• Notify the owner and arrange for sludge removal by a licensed liquid waste
hauler. (Petitioner bills the owner separately for the cost of the sludge removal.)
• Maintain all pump stations located within the facility.
Visits to the STP generally take a minimum of two hours a day. All of the employees
making the visits are certified or licensed by the New York State Department of Environmental
Conservation. When the employees arrive at the plant, they survey the plant, review the records
on the plant computer, and record the plant’s activity. As part of that review, they make any

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Sales Tax
November 13, 2015

necessary adjustments in the plant’s machinery and equipment to ensure that the plant is
operating properly. These adjustments can be necessitated by a variety of factors, including the
time of year, weather patterns, or the aging of equipment. To monitor whether the sewage is
being properly treated and to meet State and Federal legal requirements, the employees take
samples of the plant’s output that are sent for analysis to an in-house lab operated by Petitioner.
The contract also requires Petitioner to have a company representative present “at all meetings
and conferences, and inspections pertaining to the plant’s daily operation.” In addition, weekly,
during one of the visits, the employees will grease and check oil in pumps and generators, make
sure generators come on in case of power outages, and clean facility and lab areas. The Contract
also requires Petitioner to “maintain all pump stations located within the facility.” This entails
inspecting the pumps to make sure they are working, and performing any necessary maintenance.
Repairs of the pump stations are not included in the monthly fee. These services will be
hereafter referred to as Petitioner’s “monthly fee activities.”
Under the Contract, Petitioner is permitted to separately charge for a number of other
required services, including providing 24 x 7 emergency repairs, contracting with waste haulers
to remove the sludge generated by the plants, providing labor and parts for repairs and arranging
for periodic lab testing of the treated water at outside labs. The taxability of the charges for these
additional services is not at issue in this Advisory Opinion. Petitioner asks only whether its
monthly fee is subject to sales and use tax under New York law.
Analysis
The Tax Law imposes sales and use tax on retail sales of tangible personal property and
certain enumerated services, including maintaining, servicing, or repairing tangible personal
property or real property. See Tax Law § 1105(c) (3), (c)(5). “Maintaining, servicing, or
repairing” are terms used to cover all activities that relate to keeping property in a condition of
fitness, efficiency, readiness or safety or restoring it to such condition. See 20 NYCRR §
527.7(a)(1). Included in the services subject to tax under Tax Law § 1105(c)(5) are waste-water
removal and equipment testing. See 20 NYCRR § 527.7(b)(2); TSB-A-08(33)S. Integrated
services are to be taxed according to their primary function. See Penfold v State Tax Commission,
114 AD 2d 696 (3d Dep't 1985).
Here, the issue is the taxability of Petitioner’s daily activities at the STPs for which it
receives its monthly fee. On these daily visits, Petitioner’s employees physically inspect the
plant, review the computer records of the plant’s operation and test the decontaminated water
produced by the plant. They also perform routine maintenance as necessary, such as oiling the
pumps, monitoring the sludge build-up, or making mechanical adjustments to the plant’s
equipment, such as its pumps. The purpose of these activities appears to be to ensure that the
plant is operating as intended and to document that fact by maintaining the necessary records.
Thus, the primary function of Petitioner’s monthly fee activities is to keep the plant “in a
condition of fitness, efficiency, readiness or safety or restoring it to such condition” by ensuring
that it is operating as it supposed to. 20 NYCRR § 527.7(a)(1). Therefore, Petitioner’s monthly
fee is taxable as a maintenance service. See Tax Law § 1105(c)(3) and (5); Matter of Allied
Maintenance Corporation v. New York State Tax Commn., 115 AD2d 143 (3d Dept 1985)
(contract to provide operation, maintenance, repair and inspection services at certain power
plants found taxable under former Tax Law § 1105(c)(5), which imposed tax on interior cleaning

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Sales Tax
November 13, 2015

and maintenance services; TSB-A-96(90)S (contract to operate and maintain a large apartment
building's heating, ventilation, air conditioning and hot water systems and maintain logs thereof
found to be a taxable maintenance service.)

DATED: November 13, 2015

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.