Does a contractor owe sales tax on construction equipment it rents to perform public-works contracts for the State and other government agencies?

Plain-English summary

A petition (submitted by the firm Spahr, Lacher, Berk & Naimer) described a general contractor or subcontractor performing public-works contracts with the State of New York and other governmental agencies. To do the work, the contractor rents heavy construction equipment. The question: is that equipment rental subject to sales tax, given that the customer is a tax-exempt government?

The Department held the rental is taxable — the government's exemption does not extend to the contractor.

• A rental is a taxable "sale." Section § 1105(a) taxes receipts from the retail sale of tangible personal property, and Section § 1101(b)(5) defines "sale" to include any rental or lease. So the equipment rental is a taxable retail sale.
• The exemption belongs to the government buyer, not its contractor. The exemption under Section § 1116(a)(1) is available where the party renting the property is the State or another exempt governmental entity — not where a contractor rents equipment to perform services for such an entity.
• The regulation is explicit. 20 NYCRR § 528.16(a)(1), Example 6 provides that "equipment rentals such as cranes, bulldozers, back hoes, etc. for use in building a structure for an exempt organization are subject to tax."
• Result: taxable. The contractor's construction-equipment rentals are subject to State and local sales tax.

What this means for you

Working for a tax-exempt government doesn't make your purchases exempt. A contractor's own buying and renting is taxed on its own terms. The exempt status of the project owner — the State, a municipality, a school district — does not flow through to the equipment and materials the contractor rents or buys to do the job.

Renting equipment is a taxable transaction, same as buying it. New York treats a rental or lease as a "sale," so tax applies to the rental receipts. Budget the equipment rental with sales tax included on public-works and other exempt-owner projects.

The exemption turns on who the renter is. If the government entity itself rents the equipment (and pays for it directly), § 1116(a)(1) can exempt that rental. If the contractor is the one renting, it is taxable. Structure and documentation matter — but a contractor rented in its own name pays the tax.

Common questions

Q: We rent cranes and bulldozers for a state highway job. Is the rental taxable?
A: Yes. The rental is a taxable "sale" of tangible personal property, and the State's exemption does not pass through to you as the contractor. The regulation lists exactly this scenario as taxable.

Q: Our customer is a tax-exempt government agency — why do we owe tax?
A: Because § 1116(a)(1) exempts the rental only when the exempt entity itself is the renter. A contractor renting equipment to perform services for that entity is not covered.

Q: Does it matter that it's a rental rather than a purchase?
A: No. Section 1101(b)(5) defines a "sale" to include any rental or lease, so the equipment rental is taxed like a retail sale.

Citations and references

Statutes:

• Tax Law § 1105(a) — sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(5) — "sale" includes any rental or lease
• Tax Law § 1116(a)(1) — exemption where the purchaser is the State or an exempt governmental entity

Regulations:

• 20 NYCRR § 528.16(a)(1), Example 6 — equipment rentals (cranes, bulldozers, backhoes) for building a structure for an exempt organization are taxable

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_23s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-83(23)S
Sales Tax
May 20, 1983

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820823A

On August 23, 1982 a Petition for Advisory Opinion was received from Spahr, Lacher, Berk
& Naimer, 3000 Marcus Avenue, Lake Success, New York 10042.
The issue raised is whether the rental of construction equipment used in the performance of
public works contracts with the State of New York and other governmental agencies would be
subject to sales tax.
Petitioner describes a general contractor or subcontractor engaged in the performance of
public works contracts with the State of New York and other governmental agencies. The contractor
rents heavy construction equipment which is used in the performance of these contracts.
Section 1105(a) of the Tax Law imposes a tax on the receipts from the retail sale of tangible
personal property. Section 1101(b)(5) of the Tax Law defines the term "sale" to include "Any. . .
rental, lease . . . ." The rental described by Petitioner thus constitutes a retail sale, and is subject to
tax. While an exemption from such imposition of tax would be available where the party renting the
property is the State of New York or other exempt governmental entity (Tax Law, § 1116 (a)(1)),
such exemption is not available with respect to a contractor performing services for such an exempt
entity. See in this regard section 528.16(a)(1), Example 6, of the Sales and Use Tax Regulations,
which provides as follows:
Equipment rentals such as cranes, bulldozers, back hoes, etc.
for use in building a structure for an exempt organization are
subject to tax."
Accordingly, the rental of construction equipment under the circumstances described by
Petitioner is subject to State and local sales taxes.

DATED: May 4, 1983

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR