Can a vendor bundle sales tax into its hourly rate, and must it investigate a customers exemption certificate?

Plain-English summary

A security-guard service contracted with a construction contractor customer. The contract set an hourly rate including all applicable sales tax, and the customer handed over Contractor Exempt Purchase Certificates (Form ST-120.1); the vendors invoices then showed tax as EXMPT 0.000%. The services later turned out not to be exempt. The vendor asked: (1) can it absorb the tax into its hourly rate and not separately state it, and (2) does accepting an exemption certificate create a duty to investigate whether the deal is really exempt?

The Office of Counsel concluded:

• No absorbing tax. A person required to collect tax must collect the tax from the customer and separately state it on the invoice (Tax Law section 1132(a)(1)). A contract clause that the rate includes tax does not satisfy this; tax included is not a separate statement (20 NYCRR 532.1(b)(3)), and a contract with a third party cannot relieve the vendor of its duties. On underpayment, the vendor is personally liable with penalties/interest (Tax Law section 1133(a)), and willful failures can carry criminal penalties. Courts have held such absorb-the-tax clauses unenforceable (Rudnick Bros.).
• No duty to investigate. Transactions are presumed taxable, but a vendor meets its burden by timely accepting in good faith a properly completed exemption certificate (20 NYCRR 532.4(b)(2)). That good-faith standard imposes no duty to investigate the customer (Saf-Tee Plumbing) — though it does require reasonable due care. (A vendor may also decline certificates entirely and just collect tax.)
• Background: the security-guard service is a taxable protective service (section 1105(c)(8)) and was not actually exempt.

What this means for you

Always separately state the tax

You cannot bury sales tax in your price. Collect it from the customer and show it as a separate line. Writing tax included — or signing a contract that says your rate covers tax — does not count, and you remain personally liable for any shortfall.

A contract cant override the Tax Law

A customer cant contract you out of your statutory collection duties. Clauses making you absorb the tax are unenforceable.

Exemption certificates: good faith, not detective work

If a customer gives you a timely, properly completed exemption certificate, you may accept it in good faith and you dont have to investigate their claim — but you must still exercise reasonable due care (e.g., the certificate must on its face apply to the transaction). You can also simply collect the tax instead of accepting certificates.

Common questions

Q: Can I just build the sales tax into my hourly rate to keep invoices simple?
A: No. You must collect the tax from the customer and separately state it. Tax included does not satisfy the law, and you stay personally liable for any underpayment.

Q: A customer contractually agreed to cover the tax in my rate. Doesnt that protect me?
A: No. A contract with a third party cannot relieve you of your collection duties, and absorb-the-tax clauses are unenforceable.

Q: If a customer gives me an exemption certificate, must I verify their exemption is valid?
A: No duty to investigate the customer, but you must accept it in good faith with reasonable due care, and it must be timely and properly completed.

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)(8) (protective and detective services are taxable)
• Tax Law section 1132(a)(1) (tax collected from customer; must be separately stated)
• Tax Law section 1133(a) (personal liability of person required to collect tax)
• 20 NYCRR 532.1(b)(3) (tax included does not count as separately stating tax)
• 20 NYCRR 532.4(b)(2) (good-faith acceptance of exemption certificate; reasonable due care)
• Saf-Tee Plumbing Corp. v. Tully, 77 AD2d 1 (3d Dept 1980) (no duty to investigate the customer)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2016.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a16_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(28)S
Sales Tax
October 12, 2016

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S140729A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED (“Petitioner”). Petitioner asks
whether a person required to collect tax can contract to include sales tax within its hourly rate for
the job and not separately state the sales tax on the bill to the customer. Petitioner also asks
whether a person required to collect tax that is presented with an exemption certificate has a duty
to investigate the nontaxability of the transaction.
We conclude that a person required to collect tax may not “absorb” the sales tax that it
must collect from its customers into its hourly rate. A person required to collect tax that accepts
in good faith a timely, properly completed certificate is under no duty to investigate the
customer’s representations on that certificate.
Facts
Petitioner entered into a contract with a construction contractor (“Purchaser”) whereby
Petitioner agreed to provide security guard services at sites where Purchaser was doing
construction projects. Purchaser told Petitioner that, because of a sales tax exemption, it was
entitled to purchase Petitioner’s services without paying sales tax. Shortly after the contract was
signed, Purchaser provided Petitioner with Contractor Exempt Purchase Certificates (Form ST120.1) for each location where the services would be provided. Petitioner’s contract stated the
hourly rate to be charged. The parties also executed a purchase order for each location, which
stated the hourly rate, “including all applicable sales tax.” Thereafter, Petitioner sent Purchaser
monthly invoices that delineated the hourly rate and the sales tax separately, indicating that the
sales tax was “EXMPT 0.000%.” Petitioner was later advised that its security guard services
were not exempt.
Analysis
Sales and use tax is imposed on, among other things, the receipts from the retail sale of
tangible personal property and the sale, except for resale, of certain enumerated services. See
Tax Law § 1105(a), (c). Here, Petitioner’s security guard service qualifies as a taxable protective
service. See Tax Law § 1105(c)(8). As relevant here, a “person required to collect tax” is every
vendor of tangible personal property and shall include any officer, director, or employee of a
corporation or of a dissolved corporation, who as such officer, director, or employee, is under a
duty to act for such corporation in complying with any requirement of the Sales and Use Tax
Law. See Tax Law § 1131(1).
Petitioner asks whether it may “absorb” the sales tax that should be charged to its
customers within its hourly rate for the job. The Tax Law provides that the tax is to be collected

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TSB-A-16(28)S
Sales Tax
October 12, 2016

by the person required to collect tax from the customer when collecting the purchase price from
the customer. See Tax Law § 1132(a)(1). The Tax Law further provides that the person
required to collect tax is required to separately state the tax on any invoice or other statement of
the transaction provided to the customer. Accordingly, it would not be consistent with
Petitioner’s duties as a person required to collect tax under the Tax Law to agree to a contract
clause that prohibits it from properly stating the tax due on an invoice for its security guard
service. Moreover, a contract with a third party does not relieve Petitioner of these duties. “The
words tax included or words of similar import, on a sales slip or other document, do not
constitute a separate statement of the tax, and the entire amount charged is deemed the sales
price of the property sold or services rendered.” 20 NYCRR § 532.1(b)(3). In the event of a
nonpayment or underpayment of sales tax, Petitioner, as a person required to collect tax, would
be personally liable for the amount of the tax due for the service, along with penalty and interest.
See Tax Law § 1133(a). Furthermore, a person required to collect tax that willfully fails to
separately state sales tax on an invoice given to a customer in accordance with Tax Law §
1132(a) or willfully fails to collect sales tax may be subject to criminal penalties. See Tax Law
§§ 1801(a)(6), 1817(d).
We note that the issue of whether a contract clause forbidding a person required to collect
tax from separately stating a sales tax on a taxable service is enforceable has been addressed by
at least one court, which held, in the context of the sales and use tax imposed by New York City,
that such a contract is not enforceable. See Rudnick Bros., Inc. v. John A. Johnson & Sons, Inc. 8
AD2d 775 (1st Dept 1959) (“[w]hile the contract in issue provides that the seller is to absorb the
sales tax in the purchase price, such provisions are illegal and unenforceable, since a buyer may
not, by contract, be relieved of his statutory obligation to pay a city sales tax.”)
Petitioner also asks whether a person required to collect tax that is presented with an
exemption certificate has a duty to investigate the nontaxability of the transaction 1. Transactions
of any type mentioned in Tax Law § 1105(c) are presumed to be subject to sales tax, with the
burden on the person required to collect tax to prove that the transaction is not taxable. See Tax
Law 1132(c)(1). A person required to collect tax can meet this burden by timely accepting in
good faith a properly completed exemption certificate that applies to the transaction. See 20
NYCRR § 532.4(b)(2). This good faith standard does not impose a duty on a person required to
collect tax “to investigate his customer” See Saf-Tee Plumbing Corp. v. Tully, 77 AD2d 1, 4 (3d
Dep’t 1980). However, it does require the person required to collect tax to exercise “reasonable
due care.” See 20 NYCRR § 532.4(b)(2)(i).

DATED: October 12, 2016
/S/
DEBORAH R. LIEBMAN
Deputy Counsel

1

Note that a person required to collect tax is not obligated to accept exemption certificates at all and instead may
collect tax from its customers. See TSB-A-81(48)S.

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NOTE:

TSB-A-16(28)S
Sales Tax
October 12, 2016

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.