Can a cost-reimbursement Army facilities contractor buy property tax-free as purchases for resale?

Plain-English summary

A company has a cost-reimbursement (cost-plus) contract to operate, maintain, and repair facilities at a U.S. Army post in New York -- servicing government-owned real property (snow plowing, trash, lawn care, building/road repair) and government-owned vehicles. It buys property in its own name, pays the seller, and invoices the Army, with title passing to the Army on delivery. It says it is not the Army's agent. It asked whether its purchases are exempt as purchases for resale.

The Office of Counsel concluded the purchases are not exempt as purchases for resale:

• Sales tax applies to retail sales of tangible personal property (Tax Law section 1105(a)); a "retail sale" is a sale other than for resale (section 1101(b)(4)(i)(A)).
• Only purchases made exclusively for resale come within the resale exclusion (West Valley Nuclear Services; Michelli; Savemart). Here the contractor uses the property to perform its contract -- so the property is not purchased exclusively for resale, and the resale exclusion doesn't apply (even though title passes to the Army and the contractor invoices it).
• Therefore the contractor must pay New York State and local sales tax on its purchases under the Army contract.

One exemption: materials that will become an integral component part of the Army's real property (a structure, building, or other real property the contractor maintains, services, or repairs) can be bought tax-free under Tax Law section 1115(a)(16) -- the contractor gives its supplier Form ST-120.1 (Contractor Exempt Purchase Certificate).

What this means for you

Government cost-plus contractors

Reimbursement and title passing to the government don't turn your purchases into resales. If you use the property to perform the contract, you're the consumer and owe tax on those buys.

"Exclusively for resale" is the test

The resale exclusion is narrow: the property must be bought only to resell it. Mixed or contract-performance use defeats it.

The real-property materials carve-out

Materials that become an integral component of real property you're servicing for the government can be bought tax-free under section 1115(a)(16) with Form ST-120.1 -- a separate exemption, not the resale exclusion.

Common questions

Q: Title to everything passes to the Army -- isn't that a resale?
A: No. The resale exclusion requires buying exclusively for resale. You use the property to perform the contract, so you're the consumer and owe tax.

Q: Does invoicing the Army for the cost change the result?
A: No. Reimbursement doesn't convert a consumption purchase into a resale.

Q: Is anything exempt?
A: Yes -- materials that become an integral component of the Army's real property you maintain/repair, bought with Form ST-120.1 under section 1115(a)(16).

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(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(4)(i)(A) (retail sale; sale other than for resale)
• Tax Law section 1115(a)(16) (exemption for materials becoming an integral component of real property)
• 20 NYCRR 526.6(c) (purchases for resale)

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_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(46)S
Sales Tax
November 18, 2015

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S091015A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED
(“Petitioner”). Petitioner asks whether its purchases of tangible personal property made pursuant
to a contract with the US Army are exempt from New York State and local sales taxes as
purchases for resale.
We conclude that Petitioner’s purchases are not exempt as purchases for resale.
Facts
Petitioner has a cost-reimbursement contract with the United States to provide facilities
operations, maintenance, repair and renovations at an Army post located within New York State
(“Post”).
The contract with the Army requires Petitioner to provide two main categories of
services: servicing government-owned real property and servicing government-owned tangible
personal property (e.g., motor vehicles). Examples of services to real property include snow
plowing, trash collection, lawn care, and repair and maintenance of buildings, structures and
roads. Petitioner is also responsible for operating a warehouse on the base and for operating an
office that handles paperwork for moving the possessions of military personnel overseas.
However, these two functions involve few or no purchases for which Petitioner obtains
reimbursement from the Army.
Petitioner is paid on a cost-plus basis. It is reimbursed dollar-for-dollar for certain
purchases it makes as part of the contract. In addition, it is paid for general administrative
expenses. This portion of Petitioner’s receipts is calculated as percentage of the total cost.
Petitioner also receives a base fee, which is 2.5 percent of the total contract cost. In addition,
Petitioner may receive a reward fee, which is a bonus, if in performing the contract it satisfies
quantitative and qualitative goals set by the Army.
When it is necessary for Petitioner to purchase property in order to perform the contract,
Petitioner purchases this property in its own name and is responsible for paying the seller. Title
to the property is transferred to the Army immediately upon delivery to the Post. Petitioner
states that it is not an agent of the Army and does not hold itself out as such. Petitioner invoices
the Army on a monthly basis for such purchases. All such property remains on the Post after
Petitioner’s contractual relationship with the Army concludes.

Analysis

-2-

TSB-A-15(46)S
Sales Tax
November 18, 2015

Tax Law § 1105(a) imposes sales tax on the receipts from the retail sale of tangible
personal property. “Retail sale” is defined, in relevant part, as the “sale of tangible personal
property to any person other than for resale . . . .” Tax Law § 1101(b)(4)(i)(A). The Sales and
Use Tax Regulations provide:

Where a person, in the course of his business operations, purchases tangible personal
property or services which he intends to sell, either in the form in which purchased, or as
a component part of other property or services, the property or services which he has
purchased will be considered as purchased for resale, and therefore not subject to tax
until he has transferred the property to his customer.
20 NYCRR § 526.6(c).
However, only purchases made exclusively for resale come within the resale exclusion.
See Matter of West Valley Nuclear Services Co. v. Tax Appeals Tribunal, 264 AD2d 101(3d
Dep’t 2002); see also Michelli Contracting Corporation v. State Tax Comm’n, 109 AD2d 957
(3d Dep’t 1985); Matter of Savemart Inc. v. State Tax Comm’n, 105 AD2d 1001 (3d Dep’t
1984). Petitioner’s purchases of property are made for the purpose of performing its contract
with the Army, and Petitioner uses the property in the performance of that contract. Therefore,
the property is not purchased exclusively for resale and Petitioner cannot avail itself of the resale
exclusion. See Matter of West Valley Nuclear Services, supra. Accordingly, Petitioner must pay
State and local sales tax on its purchases of property under its contract with the Army.
If, however, Petitioner makes purchases of materials that will be used in maintaining,
servicing or repairing a structure, building or other real property owned by the Army, and those
materials will become an integral component part of such structure, building or other real
property, Petitioner can purchase those materials exempt from sales tax. See Tax Law §
1115(a)(16). Petitioner can claim this exemption by providing its supplier with a properly
completed Form ST-120.1 Contractor Exempt Purchase Certificate.

DATED: November 18, 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.