When does a steel subcontractor collect sales tax, which exemption certificates can it accept, and what's taxable on a taxable job?

Plain-English summary

A registered materials-supply and steel-fabrication business also acts as a subcontractor, supplying and installing fabricated steel for prime contractors -- sometimes on jobs that are ultimately for exempt organizations or that are capital improvements for non-exempt customers. It asked when it must collect tax, what exemption certificates it can accept and from whom, and -- when a job is taxable -- what parts of its charge are taxable.

The Office of Counsel concluded:

Exempt-organization jobs. Materials a contractor installs into a structure owned by a Tax Law section 1116(a) exempt organization can be bought tax-free (sections 1115(a)(15)/(16)). The exempt organization gives the prime contractor Form ST-119.1; the prime gives copies to every subcontractor, who keeps it with a contract identifying the project and location. To buy the materials, the contractor/subcontractor gives its supplier Form ST-120.1. For a governmental customer, signed contracts or government purchase orders establish the exempt status. So the subcontractor doesn't charge the prime tax on an exempt-organization job when it has the right paperwork -- and if it hires a sub-subcontractor, it passes a copy of ST-119.1 down.

Capital-improvement jobs. Installing property that becomes a capital improvement to real property (Tax Law section 1101(b)(9)) is not a taxable installation service (section 1105(c)(3)). The test is the end result of the work (20 NYCRR 527.7(b)(4)): capital improvement = not taxable; repair/maintenance = taxable. The customer gives the prime Form ST-124; the prime gives a copy to each subcontractor, who passes it to any sub-subcontractor. The subcontractor doesn't charge the prime tax on a capital-improvement job.

Taxable jobs. When the job is taxable, the subcontractor collects tax on the entire charge -- the steel materials, any fabrication (section 1105(c)(2)), charges to ship/deliver or pick up the property, and amounts charged to recover shop-drawing, in-shop and on-site labor, and supervision costs (20 NYCRR 526.5(g)). Exceptions: the prime can buy the installation for resale with Form ST-120.1 (then the subcontractor doesn't charge tax); and a subcontractor that buys steel-installation services from its own sub-subcontractor for a taxable job can give that firm an exempt purchase certificate in lieu of paying tax.

What this means for you

Subcontractors -- get the certificate, then don't charge tax

On an exempt-org or capital-improvement job, your charge to the prime is tax-free only if you hold the right document (ST-119.1 copy, or ST-124 copy). No paperwork = collect tax. Pass copies down to any sub-subcontractor.

Taxable jobs tax the whole bill

Don't carve out "labor" or "delivery." On a taxable job, materials + fabrication + freight + pickup + labor + supervision are all part of the taxable receipt -- unless you're selling the installation for resale to the prime (ST-120.1).

Buying materials

Use ST-120.1 to buy materials for an exempt or capital-improvement job tax-free. Buying steel-installation services for a taxable job? You can give your sub-subcontractor an exempt purchase certificate instead of paying tax (you'll collect from the customer).

Common questions

Q: My customer is the prime contractor, not the exempt organization. Whose certificate do I rely on?
A: The prime passes down the exempt organization's ST-119.1 (or the ST-124 for a capital improvement). Keep the copy plus a contract identifying the project and location.

Q: On a taxable job, can I leave delivery or labor off the tax?
A: No. Freight, pickup, shop drawings, in-shop and on-site labor, and supervision are all part of the taxable receipt.

Q: How can I avoid double tax when I hire a sub-subcontractor?
A: For a taxable job, give your sub-subcontractor an exempt purchase certificate (buying its service for resale); for exempt/capital-improvement jobs, pass down the ST-119.1 or ST-124.

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 1105(c)(2) (tax on fabricating or processing services)
• Tax Law section 1105(c)(3) (tax on installing tangible personal property, except capital improvements)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• Tax Law section 1115(a)(15), (16), (17) (exemptions for property used for exempt organizations and capital improvements)
• 20 NYCRR 541.3, 541.5 (contractors; exemption documents; capital improvement)

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_48s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(48)S
Sales Tax
November 20, 2015

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120917A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED (Petitioner). Petitioner asks
whether, as a subcontractor, it should collect sales tax on its charges for various services to a
prime contractor where the prime contractor’s customer is an exempt organization or where the
job is a capital improvement for a non-exempt customer, what type of exemption certificates
Petitioner may accept in either of those cases, and whether it should receive the appropriate
exemption certificates from the prime contractor or from the prime contactor’s customer.
Petitioner also asks, if its job as a subcontractor is taxable, whether its materials and services and
certain other expenses it incurs to provide those services are subject to tax.
We conclude that Petitioner need not collect sales tax as a subcontractor on its charges to
a prime contractor if the job is for an exempt organization or is for a capital improvement and it
receives the appropriate exemption certificate. In either case, petitioner as subcontractor should
receive copies of the exemption certificates from the prime contractor, and, if Petitioner hires its
own subcontractor, Petitioner should give a copy of the exemption certificate that it receives
from the prime contractor to its subcontractor. When Petitioner’s job is taxable, it should collect
sales tax on its charges to the customer for any tangible personal property or fabrication or other
taxable service it sells, including its charges to its customer for shipping or delivering the
property it sold or upon which it performed a taxable service, and any other amounts it charges
the customer for its taxable sales of property or services to recover its expenses related to those
sales. If Petitioner purchases steel installation services from a subcontractor for a taxable job,
Petitioner may give its subcontractor an exempt purchase certificate in lieu of paying tax on its
purchase.
Facts
Petitioner is registered for sales tax purposes. It is a materials supply and steel
fabrication business. It maintains an inventory of steel products, insulated concrete forms, and
other products and sells them from inventory. It also provides the service of fabricating steel
products, and it acts as a subcontractor to prime contractors to install fabricated steel products it
supplies as part of the contract. As a subcontractor, it might supply the steel material, labor in its
shop, outside labor involving shop drawings or steel installation, delivery of materials by truck to
the work site, and on-site supervision. As a subcontractor, it hires (sub-subcontracts with) other
firms to install its fabricated steel products. Some of its business with prime contractors is
ultimately for exempt organizations or constitutes capital improvements for non-exempt
customers.
Analysis

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CONTRACTS FOR EXEMPT ORGANIZATIONS
Building materials are tangible personal property. See Tax Law § 1101(b)(6). Tax Law
§ 1105(a) imposes sales tax on retail sales of tangible personal property, unless an exemption or
exclusion applies. While sales of tangible personal property for resale are not subject to tax, a
sale of tangible personal property to a contractor for use or consumption in erecting structures or
buildings, or building on, or otherwise adding to, altering, improving, maintaining, servicing or
repairing real property is deemed to be a retail sale (and not a sale for resale), regardless of
whether the contractor will resell the property as such before it is so used or consumed. See Tax
Law § 1101(b)(4)(i). Although a contractor or subcontractor cannot purchase building materials
for resale and generally must pay tax on its purchases of building materials, tangible personal
property sold to a contractor or subcontractor for use in erecting, repairing, adding to, or altering
a structure or building owned by an exempt organization described in Tax Law § 1116(a) is
exempt when it is to become an integral component part of such organization’s structure or
building. In addition, tangible personal property purchased by a contractor that remains tangible
personal property after installation is exempt from tax when purchased for and sold to an exempt
organization. See Tax Law § 1115(a)(15) and (16); 20 NYCRR § 541.3(d). Thus, a contractor
or subcontractor may purchase building materials exempt from tax if it will use them to erect,
repair, add to, or alter a structure or building owned by an exempt organization, provided that the
materials become an integral component part of the structure or building.
When Petitioner purchases steel or other materials as inventory for its materials supply
business, it may give its suppliers a resale certificate so that it need not pay sales tax on its
purchases if it intends to resell the materials as such to its customers. When it sells the materials
at retail, it should collect sales tax unless the customer gives it a valid exemption document.
Where Petitioner sells materials to a contractor or subcontractor, it generally must collect tax
from the contractor or subcontractor, because contractors and subcontractors are not allowed to
purchase materials for resale. However, Petitioner may sell materials to a contractor or
subcontractor that has a contract with an exempt organization without collecting sales tax, if the
contractor or subcontractor gives Petitioner proper exemption certificates, as described below.
When Petitioner engages in erecting, constructing, adding to, altering, or improving,
buildings, other structures, or improvements on or to real property, it is a construction contractor
for sales tax purposes. See 20 NYCRR § 541.2(d). Thus, if Petitioner takes any materials from
its inventory and, as a contractor or subcontractor, installs them or agrees to install them as an
integral component part of a customer's property, it is a contractor for sales tax purposes and
would owe tax on its purchases of the materials (just as a contractor would have had to pay tax
on materials it purchases), unless the customer is an exempt organization and Petitioner receives
a properly completed exemption document as described below. Likewise, if Petitioner purchases
materials that it knows it will install as a contractor or subcontractor (rather than purchase as
inventory to be resold as such to others), then it cannot purchase them for resale and must pay
tax on those purchases, unless Petitioner purchases the materials knowing it will install them
under a contract for an exempt organization and Petitioner receives a proper exemption
certificate, as described below.
In order for a contractor or subcontractor to purchase materials that it will install for an
exempt organization customer without paying sales tax, the exempt organization must give the

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contractor an appropriate exemption document. If the contractor’s customer is a governmental
entity, copies of signed contracts between the governmental entity and the contractor or of
government purchase orders to the contractor are sufficient evidence to establish the exempt
status of the job between the governmental entity and the prime contractor. With respect to the
documents required between a prime contractor and any subcontractor, a signed document
between them that identifies the project, location, and exempt owner will form the basis for tax
exemption of tangible personal property purchased for incorporation into the exempt project.
When purchasing such tangible personal property for the exempt project, the contractor or
subcontractor should give its supplier a properly completed Form ST-120.1, Contractor Exempt
Purchase Certificate. See 20 NYCRR § 541.3(d)(2)(v)(a).
If the contractor’s customer is an exempt organization other than a governmental entity,
the prime contractor must obtain Form ST-119.1, Exempt Organization Exempt Purchase
Certificate, from its customer and retain it as part of its records. The prime contractor must give
copies of the Exempt Organization Exempt Purchase Certificate to all subcontractors on the job.
Each subcontractor must retain a copy of the certificate in its records with a copy of the contract
that identifies the project and the location. When purchasing tangible personal property for
incorporation into the exempt project, the prime contractor or subcontractor should give its
supplier a properly completed Form ST-120.1, Contractor Exempt Purchase Certificate. See 20
NYCRR § 541.3(d)(2)(v)(b).
Thus, if Petitioner, as subcontractor, contracts with another firm as sub-subcontractor to
perform the installation services that Petitioner agreed with the prime contractor to perform,
Petitioner should give to its sub-subcontractor a copy of the Form ST-119.1 it received from the
prime contractor.
CAPITAL IMPROVEMENTS and OTHER SERVICES
Tax Law § 1115(a)(17) exempts from sales and compensating use taxes tangible personal
property sold by a contractor, subcontractor or repairperson to a person, other than an exempt
organization, for whom it is performing a capital improvement, provided that the property is to
become an integral component part of the structure, building or real property.
Tax Law § 1105(c)(3) imposes sales tax on receipts from every sale, except for resale, of
the service of installing tangible personal property, except when such installed property will be a
capital improvement to real property. “Capital improvement” means an addition or alteration to
real property that (1) substantially adds to the value of the real property, or appreciably prolongs
the useful life of the real property; (2) becomes part of the real property or is permanently affixed
to the real property so that removal would cause material damage to the property or article itself;
and (3) is intended to become a permanent installation. See Tax Law § 1101(b)(9)(i). A
contractor’s receipts from the performance of a capital improvement to real property (that is, its
charges to its customer for materials and for the services to install those materials as a capital
improvement) are not subject to sales tax. See 20 NYCRR § 541.1(c).
Tax Law § 1105(c)(2) imposes sales tax on receipts from every sale, except for resale, of
the service of fabricating or processing tangible personal property, performed for a person who
directly or indirectly furnishes the tangible personal property, not purchased by him for resale,

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upon which services are performed. “Fabrication” is the alteration or modification of tangible
personal property to the specifications of the owner without a change in the identity of the
product. Fabrication includes cutting, perforating, and similar operations. See 20 NYCRR §
541.2(m).
“Receipts” subject to sales tax include the vendor’s charge to its customer for shipping or
delivering taxable tangible personal property to the customer, if the sale of the property is subject
to tax or if taxable services were performed on the property, regardless of whether the vendor
separately states such charges in a written contract or on an invoice and regardless of whether the
vendor ships or delivers the property itself or hires a third party to ship or deliver the property.
Similarly, a vendor’s charges to its customer for picking up the customer's property upon which
the vendor is to perform a taxable service are part of the vendor's receipt from the sale of the
service subject to tax. In addition, a vendor’s charge to its customer for the cost of transportation
of the property from a supplier, manufacturer, warehouse, or other distribution point to the
vendor's place of business is also part of the vendor's receipt from the sale of the property to the
customer subject to tax, whether the charge is designated as transportation, shipping, handling, or
in some other manner. See 20 NYCRR § 526.5(g)(1) and (2).
The imposition of tax on services performed on real property depends on the end result of
the service. If the end result of the service is the repair or maintenance of real property, the
service is taxable. If the end result of the same service is a capital improvement to the real
property, the service is not taxable. See 20 NYCRR § 527.7(b)(4). The prime contractor on a
capital improvement contract should obtain a properly completed Form ST-124, Certificate of
Capital Improvement, from the customer and retain it as part of its records. The prime contractor
must give a copy of that certificate to each subcontractor on the job and the subcontractor must
retain it as part of its records. See 20 NYCRR § 541.5(b)(4)(a).
Thus, when Petitioner is providing materials and services as a subcontractor on a capital
improvement, it should not charge sales tax on its charges to the prime contractor. It should
obtain from the prime contractor a copy of the capital improvement certificate that the prime
contractor received from its customer. Petitioner must retain the certificate copy as part of its
records and maintain a method of associating an exempt sale made to a particular customer with
the exemption certificate on file for that customer. See Tax Bulletin, Recordkeeping
Requirements for Sales Tax Vendors (TB-ST-770). If Petitioner, as subcontractor, contracts with
another firm as sub-subcontractor to perform the steel installation services on a capital
improvement project that Petitioner agreed with the prime contractor to perform, Petitioner
should give a copy of the capital improvement certificate it received from the prime contractor to
its sub-subcontractor.
When Petitioner is a subcontractor on a taxable project, it should collect sales tax on its
charge for the installation services it sells (including the materials actually transferred to the
customer as part of the taxable service). Petitioner’s receipts subject to tax would include its
charges for the steel materials and any fabrication services, as well as any charges to its customer
to ship or deliver the materials to the site, whether it does the shipping or delivery itself or pays
someone else to ship or deliver. Petitioner’s receipts subject to tax also would include its
charges to its customer to recover its expenses paid for shop drawings, its labor both in-shop and

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on-site for others to install the steel, as well as its supervision on-site. However, if the prime
contractor purchases Petitioner’s installation service for resale to its customer and gives
Petitioner a properly completed Form ST-120.1, Contractor Exempt Purchase Certificate,
Petitioner may sell its installation service (including the materials actually transferred to the
customer as part of the taxable service and any fabrication service to the materials) to the prime
contractor for resale and not collect tax. If Petitioner engages in erecting, constructing, adding
to, altering, or improving, real property when it performs (or agrees to perform) its installation
service, it is a contractor and must pay tax on the materials actually transferred to its customer.
However, it may apply for a refund or credit of the amount of tax it paid when it purchased those
materials. See Tax Law § 1119(c); Tax Bulletin, Contractors-Sales Tax Credits (TB-ST-130). If
Petitioner as subcontractor contracts with another firm to perform the installation service that
Petitioner agreed with the prime contractor to perform, Petitioner should give a properly
completed Contractor Exempt Purchase Certificate to its sub-subcontractor so that it may
purchase the sub-subcontractor’s installation services for resale.

DATED: November 20, 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.