If a contractor accepts a customer's exemption certificate in good faith, can New York later recover the uncollected sales tax from the contractor?

Plain-English summary

Harron's Electric Service, Inc., an electrical contractor, performed jobs where customers gave it properly completed Certificates of Capital Improvement (Form ST-124), Exempt Use Certificates (Form ST-121), or Direct Payment Permits (Form ST-123), and it accepted those in good faith instead of collecting sales tax. It asked whether the Department could later come after it to recover the uncollected tax.

The Department held a good-faith certificate shields the contractor — but with two important caveats.

• Good faith cuts off the vendor's liability. Under § 1132(c), all receipts are presumed taxable, but once a vendor takes a properly completed certificate the burden of proving the sale non-taxable shifts to the customer. The Appellate Division in Saf-Tee Plumbing Corp. v. Tully, 77 A.D.2d 1 held a vendor "should not be required to police or investigate his customers" (citing RAC Corp. v. Gallman, 39 A.D.2d 57), so long as the vendor accepted the certificate in good faith. A Counsel's Opinion dated January 31, 1967 says the same: absent actual knowledge the property/service wasn't for the exempt purpose, the vendor isn't liable — mere suspicion isn't enough.
• Caveat 1 — a Direct Payment Permit doesn't help when the contractor is the consumer. A contractor performing a capital improvement may not accept a Direct Payment Permit from its customer, because by law the contractor is the consumer of the materials. Accepting a DPP doesn't relieve a contractor of tax it owes as consumer.
• Caveat 2 — a Capital Improvement certificate doesn't exempt the contractor's own materials. A sale of materials to a contractor for a capital improvement is itself a retail sale (§ 1101(b)(4)), and a contractor making a capital improvement pays tax on the cost of its materials as the ultimate consumer (20 NYCRR 527.7(b)(5)). So even a valid ST-124 from the customer doesn't let the contractor off the hook for tax on the materials it buys to do the job.

What this means for you

A good-faith exemption certificate is real protection — keep it. If a customer hands you a properly completed ST-124, ST-121, or ST-123 and you accept it without actual knowledge that it's wrong, the state generally can't later bill you for the tax you didn't collect. You aren't required to investigate or police your customers; only actual knowledge of an improper certificate defeats the defense.

But the certificate protects you as a collector, not as a consumer. On a capital-improvement job, you are the end user of your materials, so you owe sales tax on what you buy — regardless of any certificate your customer gives you. A Certificate of Capital Improvement addresses the customer's liability on your charge to them; it does nothing for the tax on your own material purchases.

Don't accept a Direct Payment Permit for a capital-improvement contract. Because you're the consumer, a DPP from the customer won't shift that liability. Buy your materials tax-paid (or accrue the use tax), and price the job accordingly.

Common questions

Q: A customer's capital-improvement certificate turned out to be wrong. Am I on the hook?
A: Not for the tax you didn't collect, if you accepted it in good faith without actual knowledge it was improper (Saf-Tee Plumbing). The liability shifts to the customer who wrongly issued it.

Q: So the capital-improvement certificate means the whole job is tax-free for me?
A: No. You still owe sales tax on the materials you buy to perform the capital improvement, as the ultimate consumer (§ 1101(b)(4); 20 NYCRR 527.7(b)(5)). The certificate only affects the tax on your charge to the customer.

Q: Can I take a Direct Payment Permit from my customer on a capital-improvement job?
A: No. Because you're the consumer of the materials on a capital improvement, a DPP from the customer doesn't relieve you of that tax.

Citations and references

Statutes and regulations:

• Tax Law § 1132(c) — presumption of taxability; good-faith certificate defense; direct payment permits
• Tax Law § 1101(b)(4) — sale of materials to a contractor for a capital improvement is a retail sale
• 20 NYCRR 527.7(b)(5) — contractor pays tax on its materials as ultimate consumer

Authority cited:

• Saf-Tee Plumbing Corp. v. Tully, 77 A.D.2d 1; RAC Corp. v. Gallman, 39 A.D.2d 57; Counsel's Opinion dated January 31, 1967

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_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(44)S
Sales Tax
November 2, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810622A

On June 22, 1981, a Petition for Advisory Opinion was received from Harron's Electric
Service, Inc., 80 West Main Street, Gouverneur, New York 13642.
The issue raised is whether the Department of Taxation and Finance may seek to recover the
sales tax from Petitioner where Petitioner, in good faith, accepted from its customers: (i) a Certificate
of Capital Improvement (Form ST-124) certifying that the work performed was a capital
improvement, or (2) an Exempt Use Certificate (Form ST-121) certifying that the work performed
was for a purpose which was exempt from sales or use tax, or (3) a Direct Payment Permit (Form
ST-123).
Petitioner, an electrical contractor, performed jobs for various customers where the customers
furnished Petitioner properly completed Certificates of Capital Improvement or Exempt Use
Certificates or Direct Payment Permits. Petitioner, in good faith, accepted these certificates in lieu
of collecting sales tax.
Section 1132(c) of the Tax Law states, in part:
"For the purpose of the proper administration of this article and to prevent evasion of the tax hereby
imposed, it shall be presumed that all receipts for property or services of any type mentioned in
subdivisions (a), (b), (c) and (d) of section eleven hundred five . . . are subject to tax until the
contrary is established, and the burden of proving that any receipt . . . is not taxable hereunder shall
be upon the person required to collect tax or the customer. Unless (1) a vendor shall have taken from
the purchaser a certificate in such form as the tax commission may prescribe . . . to the effect that
the property or service was purchased . . . for some use by reason of which the sale is exempt from
tax under the provisions of section eleven hundred fifteen, . . . the sale shall be deemed a taxable sale
at retail. Where such a certificate or statement has been furnished to the vendor the burden of proving
that the receipt . . . is not taxable . . . shall be solely upon the customer . . . . Provided however, the
tax commission 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 tax
commission and waive collection of the tax by the vendor. No such authority shall be granted or
exercised except upon application to the tax commission and the issuance . . . of a direct payment
permit."
In defining the term "retail sale", the Tax Law states, in relevant part: ". . . A sale of any
tangible personal property to a contractor . . . for use or consumption in erecting structures or
buildings, or building on, or otherwise adding to, altering, improving . . . real property, property or
land, as such terms are defined in the real property tax law, is deemed to be a retail sale . . . . " Tax
Law §1101(b)(4).
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

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TSB-A-81(44)S
Sales Tax
November 2, 1981
The Sales and Use Tax Regulations state, in relevant part: "Any contractor who is making
a capital improvement must pay a tax on the cost of materials to him, as he is the ultimate consumer
of the tangible personal property. 20 NYCRR 527.7(b)(5).
A contractor (or other person) may accept a Direct Payment Permit where the tax obligation
rests with the issuer as consumer. A contractor accepting a Direct Payment Permit from his customer
is not relieved of any sales tax liability when under the contract terms, or by law, he is the consumer
of the tangible personal property purchased for a contract.
For example, a contractor or subcontractor performing a capital improvement contract may
not accept a Direct Payment Permit from his customer. Likewise, a contractor may not issue a Direct
Payment Permit to a subcontractor who is furnishing and installing tangible personal property which
constitutes a capital improvement after installation.
However, a contractor holding a Direct Payment Permit may issue copies of his permit to his
suppliers when purchasing tangible personal property for use in his business.
In a recent Appellate Division Decision (Saf-Tee Plumbing Corp. v. Tully, 77 AD 2nd 1) the
court ruled that "Respondent's position would virtually emasculate the language contained in Section
1132 (subd. (c)) relating to certificates for capital improvements, since vendors receiving them could
still be held personally liable for sales taxes they failed to collect in reliance on certificates later
found to have been improvidently issued. A vendor should not be required to police or investigate
his customers (see RAC Corp. v. Gallman, 39 AD2d 57, 61) and respondent's fear that such a rule
will lead to abuse is unfounded so long as it required that the vendor be found to have accepted the
certificate in good faith, a finding which was specifically made by respondent in the instant
proceeding. Furthermore, it must be pointed out that while this result may relieve the vendor from
tax liability in certain situations, it does not alter the liability of customers who are ultimately
determined to have made repairs to their property rather than capital improvements."
Counsel's Opinion dated January 31, 1967 deals with resale certificates but it will also apply
to exemption documents described in Section 1132(c). The Opinion states, in part: ". . . In my
opinion, if a purchaser furnishes the vendor with properly completed resale certificate . . ., the vendor
cannot be held liable for sales or use tax unless the vendor has actual knowledge that the articles or
services purchased were not for resale . . . .
A vendor is not under a duty to investigate or police his customers . . . . Where there is no
actual knowledge, mere suspicion or belief that the sales are taxable is insufficient to make a vendor
subject to the sales or use tax where he is presented with a certificate properly filled out. On the other
hand, where the vendor has actual knowledge that the articles or services are not purchased for the
sole purpose of resale, the vendor is liable for the sales or use tax . . . ."
Accordingly, when Petitioner, in good faith, accepts a properly completed Certificate of
Capital Improvement, Exempt Use Certificate or Direct Payment Permit (in conjunction with a repair
job) without actual knowledge that the Certificate has been issued erroneously, the Department of

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TSB-A-81(44)S
Sales Tax
November 2, 1981
Taxation and Finance may not seek to recover uncollected sales tax from Petitioner. However, when
Petitioner accepts a Direct Payment Permit from a customer, Petitioner is not relieved of any sales
tax liability when under the contract terms, or by law, Petitioner is the consumer of the tangible
personal property purchased for the contract, as in the case of a capital improvement.
Likewise, the acceptance of a Certificate of Capital Improvement by Petitioner from a
customer does not relieve Petitioner of liability for tax on it's purchases of tangible personal property
for use in performing the capital improvement. Tax Law §1101(b)(4) and 20 NYCRR 527.7(b)(5).

DATED: October 14, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau