Can a contractor buy dynamite tax-free because it's used to blast a construction site for a tax-exempt organization's project?

Plain-English summary

F.G. Compagni Construction Company, Inc. does capital-improvement contracts for exempt organizations. It argued that the dynamite and dynamite caps it uses for site-preparation blasting are "totally incorporated into the job" and consumed on a project for an exempt organization, so it shouldn't owe sales tax when buying them.

The Department held the dynamite is taxable to the contractor.

• A contractor's construction materials are bought at retail. Under § 1101(b)(4), a sale of tangible personal property to a contractor for use in erecting, adding to, altering, improving, servicing or repairing real property is a retail sale — even if the property would otherwise be resold before it's used.
• The exempt-organization exemption has an "integral component part" requirement. Section § 1115(a)(15) exempts a contractor's materials used to erect a structure or building for an exempt organization (as defined in § 1116) — but only if the property is to become an integral component part of the structure, building or real property.
• Dynamite is consumed, not incorporated. The dynamite and accessories are used up during blasting and do not become an integral component part of any structure, building or realty. So the § 1115(a)(15) exemption doesn't apply, and Compagni owes sales tax on its purchases of these materials.

What this means for you

Working on a tax-exempt organization's project doesn't make all your purchases exempt. The exempt customer's status isn't a blanket pass-through for a contractor. The § 1115(a)(15) exemption is narrow: it reaches only materials that actually become part of the finished structure.

"Consumed on the job" is the wrong test — "becomes part of the building" is the right one. Explosives, form lumber, fuel, blades, and other things used up or worn out during construction generally stay taxable to the contractor, because they don't end up as an integral component of the realty. Steel, concrete, wiring and similar materials that remain in the structure are what the exemption covers.

Budget the tax on your consumables. When you bid an exempt-organization capital-improvement job, treat your blasting materials and other consumables as tax-paid inputs — you're the consumer of them, and the customer's exemption won't cover them.

Common questions

Q: The dynamite was used entirely on an exempt organization's project — why is it taxable?
A: Because § 1115(a)(15) exempts only materials that become an integral component part of the structure. Dynamite is consumed during blasting and never becomes part of the building, so it doesn't qualify.

Q: What contractor purchases do qualify for the exempt-organization exemption?
A: Materials that are physically incorporated into and remain part of the exempt organization's structure or realty — not items that are used up, worn out, or consumed in the process.

Q: Does a Certificate of Capital Improvement or the customer's exempt status change this?
A: No. The controlling point is whether the specific material becomes an integral component part. Consumables like explosives remain taxable to the contractor regardless of the customer's exempt status.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4) — sale to a contractor for construction is a retail sale
• Tax Law § 1115(a)(15) — exemption for a contractor's materials that become an integral component part of an exempt organization's structure

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(39)S
Sales Tax
October 23, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810728C

On July 28, 1981 a Petition for Advisory Opinion was received from the F.G. Compagni
Construction Company, Inc., 182 Port Washington Street, Cortland, N.Y. 13045.
The issue raised is whether the purchase of dynamite and dynamite caps to be used for
blasting purposes by a construction company is subject to sales tax.
Petitioner, a construction company, is engaged in capital improvement contracts with exempt
organizations.
Petitioner contends that dynamite and accessories which are used in connection with site
preparation are totally incorporated into the job and that, because this material is consumed in a
project for an exempt organization, Petitioner should not be liable for tax when purchasing such
material.
Section 1105(a) of the Tax Law, imposes a tax on: "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article."
The term "retail sale" is defined in section 1101(b)(4) of the Tax Law to include:
"a sale of any tangible personal property to a contractor, subcontractor or repairman for use
or consumption in erecting structures or buildings, or building on, or otherwise adding to,
altering, improving, maintaining, servicing or repairing real property, property or land, as the
terms real property, property or land are defined in the real property tax law, is deemed to be
a retail sale, regardless of whether the tangible personal property is to be resold as such
before it is so used or consumed."
Section 1115(a)(15) of the Tax Law grants an exemption from tax for materials purchased
by a contractor, subcontractor or repairman for use in erecting a structure or building of an exempt
organization, as defined in section eleven hundred sixteen of the Tax Law. However, "no exemption
shall exist under this paragraph unless such tangible personal property is to become an integral
component part of such structure, building or real property. (Emphasis Added) Tax Law
§1115(a)(15).

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81(39)S
Sales Tax
October 23, 1981

The dynamite and accessories used by Petitioner in its construction business do not become
an integral component part of any structure, building or real property but rather are consumed during
the construction process. Accordingly, no exemption is available to Petitioner with respect to
purchases of these materials.

DATED: October 7, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau