Can a security guard company accept Direct Payment Permits from customers when it already knows its services are taxable?

Plain-English summary

A security guard company had been accepting Direct Payment Permits from its customers for all sales. A Direct Payment Permit lets a buyer pay sales tax directly to the State and waives the vendor's duty to collect, but only in limited circumstances. The company knows, at the time of each sale, where its guards will be dispatched, so it knows whether the services are taxable protective services. It asked whether it can keep accepting the permits across the board.

The Office of Counsel concluded it cannot. Tax Law § 1132(c)(2) authorizes a Direct Payment Permit only when a buyer acquires property or services "under circumstances which make it impossible at the time of acquisition to determine" how they'll be used (and thus whether they're taxable). A permit may not be used merely to defer tax (20 NYCRR 532.5(e)(2)(i)). Because the guard company knows at the time of sale that in-State guard services are taxable protective services under § 1105(c)(8), it must refuse the permit for those sales and collect the tax itself. Misuse of a permit can lead to its revocation.

What this means for you

Vendors who accept Direct Payment Permits

A Direct Payment Permit is not a blanket waiver. If you can tell at the time of sale that a charge is taxable, you must refuse the permit and collect the tax. Accepting permits to defer or skip tax on clearly taxable sales is misuse.

Security and protective-service providers

In-State guard, patrol, and watchman services are taxable under § 1105(c)(8). When you know the service location at sale, collect the tax; don't rely on a customer's Direct Payment Permit.

Accountants and tax professionals

The test is impossibility of determining taxable use at acquisition (§ 1132(c)(2)). Permit holders and vendors share responsibility; misuse risks revocation (20 NYCRR 532.5(g); TSB-A-98(44)S).

Common questions

Q: Can a vendor always rely on a customer's Direct Payment Permit?
A: No. Only when it's impossible at the time of sale to know how the purchase will be used and whether it's taxable.

Q: Why must the guard company collect tax?
A: Because it knows the dispatch location at sale and therefore knows the protective services are taxable.

Q: What happens if a permit is misused?
A: It can be revoked.

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

Statutes and guidance:
- Tax Law § 1132(c)(2); § 1105(c)(8)
- 20 NYCRR 532.5; TSB-A-98(44)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20-31s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(31)S
Sales Tax
July 14, 2020

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance received a Petition for Advisory Opinion from
[ REDACTED ] (Petitioner). Petitioner requests guidance on whether it can accept Direct
Payment Permits from its customers where the dispatched location of its security guards is
known at the time of sale. We conclude that Petitioner must refuse to accept Direct Payment
Permits for any sale where it is not impossible at the time of acquisition of services to determine
the taxable nature of those services.
Facts
Petitioner operates a security guard service company. Currently, Petitioner accepts
Direct Payment Permits issued by the Department from its customers at the time of sale for all
sales. At the time of its sales, Petitioner has knowledge of the location to which a security guard
will be dispatched. Given the knowledge of the location to which the security guard will be
dispatched and at which services will be performed, Petitioner knows at the time of sale whether
its services are taxable protective services pursuant to Tax Law § 1105(c)(8). Petitioner seeks
guidance as to whether a Direct Payment Permit can be accepted in all sales or, if not, when it
must refuse to accept the permits and collect tax on its services pursuant to Tax Law §
1105(c)(8).
Analysis
Tax Law § 1132(c)(2) provides that the Commissioner may authorize a purchaser, who
“acquires tangible personal property or services under circumstances which make it impossible at
the time of acquisition to determine the manner in which the tangible personal property or
services will be used, to pay the tax directly to the Commissioner and waive the collection of the
tax by the vendor” (emphasis added). This authorization is documented by way of a Direct
Payment Permit. The statute provides further that a vendor shall not be required to collect tax
from a purchaser who furnishes a valid Direct Payment Permit in proper form.
Sales and Use Tax Regulation 532.5 explains that a Direct Payment Permit is a notice to
a vendor that the holder is authorized to pay directly to the Department any tax due on purchases
any tax due on purchases. The regulation states that “[t]he vendor’s responsibility for the

-2-

TSB-A-20(31)S
Sales Tax
July 14, 2020

collection of tax from the permit holder is waived upon receipt of such permit.” See 20 NYCRR
532.5(a). However, the regulation expressly states that the permit may not simply be used as a
device to defer payment of the sales tax on purchases. See 20 NYCRR 532.5(e)(2)(i).
Petitioner asks whether it can accept Direct Payment Permits from its customers for all
sales. In selling and scheduling its services as a security guard service company, Petitioner has
knowledge of the location to which its guards will be dispatched and at which services will be
performed. Petitioner acknowledges that its services would be subject to taxation where security
guard services are provided within the State. See Tax Law § 1105(c)(8).
Accordingly, a Direct Payment Permit cannot be accepted routinely by Petitioner for
every sale. The permit must not be used by a holder and Petitioner must not accept such permit
where it is not impossible at the time of acquisition to determine the manner in which the
purchaser will use its services. If Petitioner knows that the security services are clearly taxable
at the time of sale, as is the case here for certain sales, it must refuse to accept the Direct
Payment Permit for these sales and collect tax pursuant to Tax Law § 1105(c)(8).
It must also be noted, as the Department set forth in TSB-A-98(44)S, misuse of a Direct
Payment Permit by the holder may be grounds for revocation of the permit. See 20 NYCRR
532.5(g).
DATED: July 14, 2020

/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 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.