Does Conrail, a private company running MTA commuter lines under contract, owe New York sales and use tax on its purchases for those lines — as the MTA, its agent, or on its own?

Plain-English summary

Consolidated Rail Corporation ("Conrail"), a private, for-profit company, operated the Harlem-Hudson and New Haven commuter rail services under joint-service agreements with the Metropolitan Transportation Authority (MTA) (the New Haven agreement also involved Connecticut's transportation authority). Conrail and the MTA asked whether Conrail owed New York sales, use or other excise taxes on the materials, equipment, facilities and supplies it bought for those lines.

The Department held Conrail owed the tax on its own purchases (before a later federal exemption), because it was neither exempt itself nor the MTA's agent — with two service-related carve-outs.

• The MTA's own exemption doesn't reach Conrail. Public Authorities Law § 1275 exempts the MTA from sales and other excise taxes, and § 1266.5 can extend that to MTA subsidiaries — but Conrail is not an MTA subsidiary, so § 1275's exemption doesn't apply to it. (The first sentence of § 1275 concerns real-property taxation, not the Tax Law.)
• Conrail isn't an exempt governmental entity. Section § 1116(a)(1) exempts the State and its agencies, instrumentalities, public corporations and political subdivisions. Conrail is a private, for-profit corporation and none of those (and, by federal law, not a federal agency or instrumentality either).
• Conrail isn't the MTA's agent. An agency relationship turns on control over the manner of performance, not just the result (Matter of Morton, 284 N.Y. 167). Here the MTA set policy, fares, schedules and service standards, but Conrail had sole responsibility for day-to-day operations, appointed its own service manager, and made its own purchasing decisions (only capital outlays/leases over $50,000 needed MTA approval). That is not the control required for agency, and Conrail did not buy in the MTA's name.
• Two carve-outs for repair/maintenance services. Where Conrail performed taxable maintaining/servicing/repairing of tangible personal property or real property, its purchases of property that becomes a physical component part of, or is transferred with, that service are refundable under § 1119(c) (and Conrail's Direct Pay Permit effectively relieved it of paying first and claiming later). And property becoming an integral component of MTA-owned real property is exempt under § 1115(a)(16).
• A 1981 federal law then exempted Conrail — from state, not local, tax. Under the Regional Rail Reorganization Act § 217(c) (added by the Omnibus Budget Reconciliation Act of 1981, P.L. 97-35), effective August 13, 1981, Conrail became exempt from any state tax except taxes imposed by a political subdivision. So: before August 13, 1981, Conrail owed the New York taxes (subject to the carve-outs above); on and after August 13, 1981, it was no longer subject to the taxes imposed under the Tax Law — including the New York City sales/use taxes (§§ 1107, 1108) — but remained subject to local taxes imposed by New York political subdivisions under Article 29.

What this means for you

A private contractor running a public agency's operations usually isn't covered by the agency's tax exemption. The MTA's statutory exemption reaches the MTA and its subsidiaries, not an independent operator like Conrail.

"Agent of an exempt entity" is a demanding, control-based test. To buy tax-free as an exempt entity's agent, that entity generally must control the manner of your performance and you must purchase in its name — not merely follow its policies, fares and schedules.

Repair and maintenance work has its own relief. Even a taxable operator can recover tax on property that becomes a physical component of, or is transferred with, a taxable repair/maintenance service (§ 1119(c)), and property built into an exempt owner's real property can be exempt (§ 1115(a)(16)).

Federal law can override state tax — but watch the local carve-out. The federal Conrail exemption ended state (and NYC) tax liability as of August 13, 1981, yet expressly preserved taxes imposed by political subdivisions, so local Article 29 taxes still applied.

Common questions

Q: We operate a government agency's service under contract. Are we covered by its tax exemption?
A: Generally no. Unless a statute extends the exemption to you (as § 1266.5 can for MTA subsidiaries) or you truly act as the agency's agent, you buy on your own account and owe the tax.

Q: When does a contractor count as the exempt entity's agent?
A: When the entity controls the manner of your performance (not just the result) and you buy in its name (Matter of Morton). Setting your policies, fares and schedules isn't enough by itself.

Q: Was there any relief for Conrail's purchases before the federal exemption?
A: Yes — property that becomes a physical component of, or is transferred with, a taxable repair/maintenance service was refundable (§ 1119(c)), and property built into MTA-owned real property was exempt (§ 1115(a)(16)).

Q: Did the 1981 federal exemption end all of Conrail's New York tax?
A: It ended state and New York City tax as of August 13, 1981, but Conrail remained subject to local taxes imposed by political subdivisions under Article 29.

Citations and references

Statutes and authorities:

• Tax Law § 1116(a)(1) — exemption for the State, its agencies and public corporations
• Public Authorities Law § 1275 (MTA exemption); § 1266.5 (extension to MTA subsidiaries)
• Tax Law § 1119(c) — refund for property that becomes a component of, or is transferred with, a taxable service
• Tax Law § 1115(a)(16) — property becoming an integral component of an exempt organization's real property
• Regional Rail Reorganization Act of 1973 § 217(c) (45 U.S.C. 711 et seq.), added by P.L. 97-35 (eff. Aug. 13, 1981)
• Matter of Morton, 284 N.Y. 167 — agency control test
• Tax Law §§ 1107, 1108 (New York City taxes); Article 29 (local taxes)

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_61s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(61)S
Sales Tax
December 8, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801110B

On November 10, 1980 a Petition for Advisory Opinion was received from Consolidated Rail
Corporation, Six Penn Central Plaza, Philadelphia, Pennsylvania 19104 and the Metropolitan
Transportation Authority, 347 Madison Avenue, New York, New York.
The issue raised is whether the Consolidated Rail Corporation (hereinafter "Conrail"), is
required to pay sales, use or other excise taxes on materials, equipment, facilities or supplies
purchased for use on lines it operates under joint service agreements entered into with the
Metropolitan Transportation Authority (hereinafter "MTA").
MTA is a public benefit corporation created under Title II of Article 5 of the Public
Authorities Law for the purpose, among other things, of continuing and furthering the development
and improvement of commuter transportation and other related services within the Metropolitan
Commuter Transportation District. In the furtherance of its purposes, MTA has entered into joint
service agreements with Conrail, a private, for-profit corporation created under the Regional Rail
Reorganization Act of 1973 (PL. 93-236), as successor to the Penn Central Transportation Company.
Conrail, however, is "not...an agency or instrumentality of the Federal Government" P.L. 93-236,
§301(b). Pursuant to one of these joint service agreements, Conrail operates the Harlem-Hudson
passenger train service. Conrail also operates the New Haven suburban passenger train service under
another joint service agreement with MTA, to which the Connecticut Department of Transportation
(acting by the Connecticut Transportation Authority, hereinafter "CTA") is also a party. The two
agreements are substantially similar in their terms.
Under the subject agreements, Conrail bears "sole responsibility for the day to day operation,"
to be performed according to service standards constituting a part of the agreements. Section 503 of
the Harlem-Hudson agreement states that Conrail is to appoint an individual to be the HarlemHudson manager, who is to be in overall charge of the Harlem-Hudson Service, and who is to report
directly to the chief passenger operating officer of Conrail. MTA reserves the right to amend the
Harlem-Hudson schedule, consists, service standards, fares, and pass policy, subject to certain
limitations. Conrail is nonetheless permitted to modify the prescribed scheduling in order "to
accommodate fluctuations in travel or to effect more efficient equipment utilization." Equipment,
including rolling stock, is either leased to Conrail by MTA or CTA, or is dedicated to the HarlemHudson Service or the New Haven Service by Conrail.
Conrail is required to maintain a separate set of Harlem-Hudson Accounts to which all
Harlem-Hudson revenues are to be credited and against which all Harlem-Hudson costs are to be
charged. Harlem-Hudson costs include, inter alia,

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

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

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Sales Tax
December 8, 1981

"all costs . . . incurred by . . . [Conrail] in the operation of the Harlem-Hudson Service, including,
without limitation, the operation, maintenance and repair of track, interlockers, roadbed, passenger
stations, electric power, power furnishing and distribution systems, rolling stock, repair shops and
all other appurtenances and premises owned or operated by . . . [Conrail] and used in the HarlemHudson Service . . . . " Section 409 of the Harlem-Hudson agreement provides for the submission
of proposed annual budgets by Conrail to MTA, and for MTA's approval thereof. MTA retains the
right to modify an already approved budget, at any time. Conrail is required to submit to MTA
monthly reports setting forth actual revenues and costs. Conrail is required to submit to MTA a
quarterly income statement reflecting the financial operation of the Harlem-Hudson Service as
shown by the Harlem-Hudson Accounts. If the operation produces net income Conrail is to remit
such income (less taxes thereon) to MTA. If the operation incurs a deficit, MTA is required to remit
to Conrail a check for the amount of such deficit. Provisions similar to the foregoing apply under the
New Haven Agreement, except that MTA and CTA share equally in net income or loss. As
compensation for its contributed expertise, Conrail is to receive an annual fee of $125,000 under the
Harlem-Hudson agreement, and $100,000 under the New Haven agreement.
It is asserted that Conrail derives its exempt status with respect to sales and use taxes
pursuant to section 1275 of the Public Authories Law. It is there provided, with respect to MTA
(referred to as "the authority" in the statutory provision), in relevant part, that "without limiting the
generality of the following provisions of this section, property owned by the authority, property
leased by the authority and used for transportation purposes, and property used for transportation
purposes by or for the benefit of the authority exclusively pursuant to the provisions of a joint service
arrangement or of a joint facilities agreement or trackage rights agreement shall all be exempt from
taxation and special ad valorem levies. The authority shall be required to pay no fees, taxes or
assessments, whether state or local, including but not limited to fees, taxes or assessments on real
estate, franchise taxes, sales taxes or other excise taxes, upon any of its property, or upon the use
thereof, or upon its activities in the operation and maintenance of its facilities or any fares, tolls,
rentals, rates, charges or other fees, revenues or other income received by the authority and the bonds
of the authority and the income therefrom shall at all times be exempt from taxation, except for gift
and estate taxes and taxes on transfers. This section shall constitute a convenant and agreement with
the holders of all bonds issued by the authority. The terms 'taxation' and 'special ad valorem levies'
shall have the same meanings as defined in section one hundred two of the real property tax law and
the term 'transportation purposes' shall have the same meaning as used in titles two-a and two-b of
article four of such law."
The first sentence of the quoted material exempts from "taxation and special ad valorem
levies" property which is owned or leased by MTA, and property used for specified purposes. The
terms "taxation" and "special ad valorem levies" are explicitly stated to refer to real property taxation
and not to any tax imposed under the Tax Law. The second sentence of the quoted material provides
for an exemption from the payment of "sales taxes or other excise taxes", but this exemption is made
applicable to MTA and to no other entity. Under section 1266.5 of the Public Authorities Law,
however, such exemption may also be made applicable to subsidiary corporations of MTA. Inasmuch

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Sales Tax
December 8, 1981

as Conrail is not a subsidiary of MTA, the exemption language of section 1275 of the Public
Authorities Law is not applicable thereto.
Section 1116(a)(1) of the Tax Law exempts from subjection to the sales and use taxes
imposed under Article 28 of the Tax Law "The state of New York, or any of its agencies,
instrumentalities, public corporations . . . or political subdivisions where it is the purchaser, user
or consumer . . . " As indicated above, Conrail is a private, for-profit corporation and has been
neither asserted nor demonstrated to be an agency, instrumentality, public corporation or political
subdivision of the State of New York. MTA itself, of course, does come within the ambit of this
section.
Not only is Conrail not itself an exempt governmental entity within the meaning of Section
1116(a)(1) of the Tax Law, it can not be said to make the purchases in question as an agent of the
State, nor of MTA. Thus, there has not been shown to exist any explicit designation of Conrail as
such an agent. Nor do the facts set forth warrant an inference that such an agency has been otherwise
created. Thus, one important factor in determining whether an agency relationship exists is the
degree of control that can be exercised over the performing party by the other party. If not only the
result of the contract performance but the way in which the work is to be performed is subject to
such control, an agency relationship may be found to exist. Matter of Morton, 284 N.Y. 167. Such
control is absent under the agreements in question. Section 202 of both the New Haven and the
Harlem-Hudson Agreements provides that Conrail is to have sole responsibility for the day-to-day
operations of the services and is to provide its own supervising personnel. Although this same
section also provides that operation of the service is to be in accordance with detailed service
standards, the effect of this section is to give the operator control over the daily actions it takes in
operating the services. Each agreement gives the operator the right to appoint a service manager who
will be in charge of the service and need report only to the operator. Although MTA must be notified
of such appointments, its approval of them is not required. MTA does set train schedules, rates, the
Harlem-Hudson pass policy, and the service standards noted above. The provisions here described
thus appear to leave policy matters and standards of performance to MTA while reserving the details
of daily operations to Conrail.
Conrail's purchasing activities also appear to be largely free of MTA's control under the
agreements. Although the operator's annual budgets must be approved by MTA, expenditures made
in the course of operations need not be contained in the budget or approved by MTA unless the
expenditures are part of outlays exceeding $50,000 for capital projects or leases. MTA has general
control over the operator's spending by way of monthly financial reports which the operator must
submit to it. Specific spending decisions appear to be made by the operator. There is no indication
that Conrail makes purchases in MTA's name, nor in any other way holds itself out to be an agent
of MTA. Thus, MTA does not have the control over details of performance which the courts have
required as a precondition for a finding of agency.
Part of the service provided by Conrail consists of the service of maintaining, servicing or
repairing both tangible personal property not held for sale in the regular course of business and real
property. Insofar as tangible personal property is involved, Section 1119(c) of the Tax Law provides

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Sales Tax
December 8, 1981

for a refund with respect to sales and compensating use taxes paid on the purchase of property which
becomes "a physical component part of [tangible personal] property upon which the service is
performed or . . . [which is] transferred to the purchaser of the service in conjunction with the
performance of the service . . ." Inasmuch as Conrail possesses a Direct Pay Permit, it is in effect
relieved of any obligation to make an initial payment of tax, followed by the filing of a claim for
refund. The same considerations apply with respect to tangible personal property purchased for use
in the service of maintaining, servicing or repairing real property. In addition, where the real property
upon which the service is performed is owned by MTA, Conrail's purchases of property to be used
in such service, where such tangible personal "property is to become an integral component of" the
real property, is exempt from sales and compensating use taxes pursuant to Section 1115(a)(16) of
the Tax Law.
It is to be noted that pursuant to Section 217(c) of The Regional Rail Reorganization Act of
1973 (45 U.S.C. 711 et seq.), as added by Section l140(a), of the Omnibus Budget Reconciliation
Act of 1981, (P.L. 97-35) effective August 13, 1981 Conrail became exempt from liability for any
state tax, except for any tax imposed by a political subdivision of a state. Such exemption is to
continue in effect until the property of Conrail is transferred by the Secretary of Transportation
pursuant to Title IV of the Regional Rail Reorganization Act of 1973, such Title added by P.L.
97-35, §1142.
Accordingly, prior to August 13, 1981, Conrail was required to pay sales and use taxes on
purchases made in connection with its operations performed pursuant to the subject agreements, with
the exception, relating to the service of maintaining, servicing and repairing real and tangible
personal property, noted above. It was also similarly subject to all applicable excise taxes imposed
under the Tax Law, based on the considerations set forth above. On and after August 13, 1981,
Conrail was no longer subject to the sales and compensating use taxes, or other taxes, imposed under
the Tax Law. It is to be noted that this includes New York City's sales and compensating use taxes,
which are imposed under Sections 1107 and 1108 of the Tax Law. Conrail remains subject, however,
to taxes imposed by political subdivisions of New York State, including the local sales and use taxes
and other taxes imposed pursuant to the authority of Article 29 of the Tax Law.

DATED:

November 23, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau