Is the energy a shopping-mall landlord bills a tenant as 'additional rent' taxable, and is the landlord's 20% administrative markup taxable too?

Plain-English summary

The Richman Brothers Company, a men's clothing retailer, leased and operated stores in several New York shopping malls from 1980 through 1983. Under each lease it paid the landlord additional rent to cover the energy costs of its space — the lease promising the tenant wouldn't pay more than a directly metered utility bill — plus a 20% charge for the landlord's administration and overhead. Richman Brothers asked whether the energy charge is taxable when billed by the mall operator, and if so, whether the 20% markup is taxable too.

The Department held that both the energy charge and the 20% markup are taxable.

• The utility tax is broad. Tax Law 1105(b) taxes receipts from every sale of electricity and electric service "of whatever nature." The regulations say this is meant broadly and reaches the enumerated sales/services whether or not made by a regulated utility (20 NYCRR 527.2(a)(2)).
• The mall is a vendor of energy. When a mall operator makes taxable sales of property or services to its tenants, it acts as a "vendor" under Tax Law 1101(b)(8)(i)(A). So Richman Brothers must pay State and local tax on the energy it buys from the mall operator — the "additional rent" label doesn't matter.
• The landlord's own tax is recoverable. If the mall operator already paid sales tax to its supplier on this energy, it may file Form AU-11 (Application for Credit or Refund) for the portion of the energy costs on which it charged the tenant tax.
• The 20% markup is part of the receipt. "Receipt" means the sale price of property and the charge for any taxable service (Tax Law 1101(b)(3)). The 20% administrative and overhead charge added to the energy cost is part of that receipt and is also taxable.
• The Department pointed Richman Brothers to TSB-M-84(9)S for more on shopping-mall-operator charges.

What this means for you

Reselling utilities to tenants is a taxable sale — calling it "rent" doesn't change that. When a landlord bills a tenant for electricity or other energy it buys and passes through, the landlord is acting as a utility vendor, and the tenant owes sales tax on the charge, regardless of the lease's wording.

Markups and service fees ride along with the taxable charge. Because the "receipt" includes charges for the taxable service, an administrative or overhead percentage stacked on top of the energy cost is taxed too.

Watch for double tax — and use AU-11. If the landlord already paid sales tax to the utility and then charges the tenant tax on the same energy, the landlord can claim a credit or refund on Form AU-11 for the re-charged portion. (Contrast a landlord's charge for common-area maintenance billed as additional rent, which New York treats as exempt real-property rent — the utility resale here is different.)

Common questions

Q: My landlord bills my share of the building's electricity as "additional rent." Is that taxable?
A: Yes. The landlord is reselling energy and acting as a utility vendor, so the charge is subject to State and local sales tax despite the "additional rent" label.

Q: The lease adds a 20% administrative fee on the energy. Is that taxed too?
A: Yes. The receipt includes charges for the taxable service, so the administrative/overhead markup on the energy is also taxable.

Q: The landlord already paid tax to the utility. Isn't that double taxation?
A: The landlord can recover its portion by filing Form AU-11 for the energy costs on which it charged the tenant tax. The tenant still owes tax on the charge from the landlord.

Citations and references

Tax Law:

• 1105(b) — taxes receipts from sales of electricity and electric service "of whatever nature"
• 1101(b)(8)(i)(A) — a person making taxable sales of property or services is a "vendor"
• 1101(b)(3) — "receipt" means the sale price of property and the charge for any taxable service

Regulations and guidance:

• 20 NYCRR 527.2(a)(2) — the utility tax is construed broadly and applies whether or not the seller is a regulated utility
• TSB-M-84(9)S — Department guidance on shopping-mall-operator charges

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (22)S
Sales Tax
June 12, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840316A

On March 16, 1984 a Petition for Advisory Opinion was received from The Richman
Brothers Company, 1600 East 55th Street, Cleveland, Ohio 44103.
The issue raised is whether the charge for energy costs related to Petitioner's leased space in
a shopping mall is subject to State or local sales tax when billed to Petitioner by the mall operator.
If such charge is subject to tax, Petitioner inquires further as to whether a twenty percent charge
representing the landlord's administrative and overhead charges, added to such energy costs pursuant
to the lease agreement, is subject to tax.
Petitioner is a retailer of men's clothing. During the years 1980 through 1983, Petitioner
leased and operated retail stores in certain shopping malls located in New York State. In each of
these mall locations Petitioner entered into a lease agreement with the landlord whereby Petitioner
became obligated to pay additional rent to cover the energy costs associated with said rental
premises. Each lease agreement states that the tenant will not pay more for "energy costs" than if
billed directly and metered separately by the utility company furnishing such energy.
Petitioner contends that during the aforementioned period in each of the store locations the
landlord received monthly payments from Petitioner to cover the energy costs. When paying such
costs to the utility company, the landlord also paid the sales tax charged by the utility company.
Section 1105(b) of the Tax Law imposes a tax on "The receipts from every sale, other than
sales for resale of . . . electricity . . . and electric . . . service, of whatever nature . . ." The Sales and
Use Tax Regulations expound on the imposition of such tax stating in part:
"Although this tax is generally known as the 'consumer utility tax,' the
intention of the statute is to tax the enumerated sales and services whether or not
rendered by a company subject to regulation as a utility company. The words 'of
whatever nature' indicate that a broad construction is to be given the terms describing
the items taxed. The inclusion of the word 'service' indicates an intent to tax, under
this provision, items that are furnished as a continuous supply while the vendor­
vendee relationship exists." 20 NYCRR 527.2(a)(2).
The term "vendor" is defined in the Tax Law to include: "A person making sales of tangible
personal property or services, the receipts from which are taxed by this article;". Tax Law
1101(b)(8)(i)(A).

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

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

-2­
TSB-A-85 (22)S
Sales Tax
June 12, 1985

When a mall operator makes taxable sales of tangible personal property or services to its
tenants, it is acting as a vendor within the meaning of section 1101(b)(8)(i)(A) of the Tax Law.
Petitioner is therefore required to pay State and applicable local tax on its purchases of energy from
the mall operator notwithstanding the fact that the lease agreement specifies such charge as
"additional rent".
If the mall operator has paid sales tax to its supplier on this energy, the mall operator may file an
Application for Credit or Refund of State and Local Sales and Use Tax (Form AU-11) on the portion
of the energy costs on which it has charged tax to the tenant.
Section 1101(b)(3) of the Tax Law defines the term receipt in pertinent part as, "The amount
of the sale price of any property and the charge for any service taxable under this article. . . ". The
twenty percent charge, representing the landlords administrative and overhead charges added to the
energy costs, is part of the "receipt" and is therefore also subject to State and applicable local sales
tax.
For additional information on charges made by shopping mall operators, Petitioner should
consult Taxpayer Services Bureau Memorandum TSB-M-84(9)S.

DATED: May 23, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.