Does a contractor on an Industrial Development Agency project owe sales tax on the materials, equipment, and supplies it buys for the work?

Plain-English summary

Kilby Brothers, Inc. performs excavation and site development on a construction project funded by an Industrial Development Agency (IDA). It asked whether it owes New York sales tax on the materials, equipment, and supplies it buys for the work.

The Department's answer turns on one thing: is the contractor a designated agent of the IDA?

• The starting point: a contractor is a consumer. A sale of property to a contractor "for use or consumption in erecting structures or buildings, or... improving... real property" is a retail sale to the contractor (Tax Law 1101(b)(4)) — so the contractor normally pays the tax on what it buys.
• The IDA is exempt, but that doesn't automatically flow to the contractor. New York and its public corporations may buy tax-free (Tax Law 1116(a)(1)), and an IDA is a public corporation (20 NYCRR 529.2). Property that becomes an integral component part of the exempt organization's building or realty can be bought exempt (Tax Law 1115(a)(15), (16)).
• Without an agency appointment — narrow exemption. Unless the IDA appoints the contractor its agent, the contractor may buy exempt only the tangible personal property that is actually transferred to the IDA and becomes an integral component of the building or realty. Its own construction machinery, tools, office supplies, form lumber, and rented equipment — things that don't become part of the realty — remain taxable (20 NYCRR 541.3(d)(2)(iv), Examples 7 and 8).
• With a proper agency contract — broad exemption. If the IDA and contractor enter a written agency contract and the IDA issues letters designating the contractor (and subcontractors) as its agents, the contractor can buy all project materials and its equipment, tools, and supplies exempt — by giving the supplier a Contractor's Exempt Purchase Certificate (Form ST-120.1) plus the agency designation, with each purchase order identifying the purchaser as agent of the IDA and the project. To be a valid agency contract, purchases must be billed to the exempt organization or to the contractor as its agent, paid from a special fund the IDA created for the project, and delivered to the job site (20 NYCRR 541.3(d)(4)).
• If the agency contract fails, or the contractor keeps the gear. If it later turns out the contract doesn't qualify as an agency contract, the contractor is liable for the tax on the tools, equipment, and supplies it bought tax-free (Example 9). And if the contractor keeps any equipment, tools, or supplies after the job, that acquisition is a taxable retail sale under 1105(a).

What this means for you

On an IDA (or other exempt-owner) job, "exempt project" does not mean "everything you buy is exempt." Default rule: only the materials that become part of the finished real property are exempt, and only your equipment/tools/supplies stay taxable — unless you are formally the owner's purchasing agent.

The agency contract is the mechanism that expands the exemption — and it has strict formalities. Billing as agent, payment from a dedicated IDA fund, and delivery to the job site are all required. Get the paperwork right (agency letters, Form ST-120.1, purchase orders naming you as agent and identifying the project) or the exemption can be unwound.

A failed agency contract shifts the tax back to you. If the arrangement is later found not to be a true agency contract, you — not the IDA — owe the tax on the tools, equipment, and supplies. And equipment you walk away with at the end is a taxable purchase.

Common questions

Q: My project is IDA-funded. Can I buy everything tax-free?
A: Only if the IDA has properly designated you as its purchasing agent under a qualifying written agency contract. Otherwise you can buy exempt only the materials that become an integral part of the realty; your tools, equipment, and supplies are taxable.

Q: What makes a valid agency contract?
A: Purchases billed to the IDA or to you as its agent, paid from a special IDA fund for the project, and delivered to the job site — plus agency-designation letters and Form ST-120.1 to suppliers (20 NYCRR 541.3(d)(4)).

Q: We bought tools tax-free as agent, but the contract turns out not to qualify. Who owes the tax?
A: The contractor. A failed agency contract makes you liable for the tax on the tools, equipment, and supplies (Example 9). Materials incorporated into the exempt owner's realty stay exempt if properly documented.

Q: I keep the excavator after the job. Any tax consequence?
A: Yes. Equipment, tools, or supplies you retain after the agency contract ends are treated as a taxable retail sale to you under 1105(a).

Citations and references

Tax Law:

• 1105(a) — imposes sales tax on retail sales of tangible personal property; retained equipment is a taxable retail sale
• 1101(b)(4) — a sale of property to a contractor for use in improving real property is a retail sale to the contractor
• 1115(a)(15), 1115(a)(16) — exempt property that becomes an integral component part of an exempt organization's building or realty
• 1116(a)(1) — New York and its agencies, public corporations, and political subdivisions may purchase exempt

Regulation:

• 20 NYCRR 529.2 — Industrial Development Agencies (and Urban Development Corporations) are public corporations
• 20 NYCRR 541.3(d)(2)(iv) — contractor's own equipment, tools, and supplies are taxable (Examples 7, 8)
• 20 NYCRR 541.3(d)(4) — requirements for an exempt-organization agency contract (billing as agent, payment from special fund, delivery to job site)
• 20 NYCRR 541.3(d)(4)(iii) — contractor liable for tax if a purported agency contract does not qualify (Example 9)
• 20 NYCRR 541.3(d)(2)(v) — Contractor's Exempt Purchase Certificate (Form ST-120.1); see TSB-M-82(2)S

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_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(51)S
Sales Tax
November 8, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840627A

On June 27, 1984, a Petition for Advisory Opinion was received from Kilby Brothers, Inc.,
9 Norman Drive, P.O. Box 12003, Albany, New York 12212.
The issue raised is whether Petitioner is required to pay New York State sales tax on material,
equipment and supplies purchased for use in the performance of a contract for excavation and site
development at a construction project which is funded by an Industrial Development Agency (IDA).
Section 1105(a) of the Tax Law imposes a sales tax upon the receipts from every retail sale
of tangible personal property unless otherwise excluded or exempt.
Section 1101(b)(4) of the Tax Law which defines the term "retail sale" states, in part: "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, main­
taining, servicing or repairing real property, property or land... is deemed to be a retail sale regardless
of whether the tangible personal property is to be sold as such before it is so used or consumed."
Section 1115(a)(15) and section 1115(a)(16) of the Tax Law provide exemptions from the
sales tax for property sold to contractors, subcontractors or repairman for use or consumption as
described in section 1101(b)(4) the Tax Law, if such property is to become an integral component
part of the structure, building or real property of an organization described in section 1116(a) of the
Tax Law.
Section 1116(a)(1) of the Tax Law allows the State of New York, or any of its agencies,
instrumentalities, public corporations or political subdivisions to purchase tangible personal property
or services without the payment of sales tax.
New York State Sales and Use Tax Regulations state in relevant part: "A public corporation
as used in this section means any corporation created by an act of the Legislature for a public purpose
or pursuant to an agreement or compact with another State or Canada.
Example:

Urban Development Corporations and Industrial Development Agencies are public
corporations and may purchase tangible personal property exempt from the sales and
use taxes.

New York State governmental entities as purchasers... must exercise their right to exemption
through the issuance of governmental purchase orders or the appropriate exemption document." (20
NYCRR 529.2(a)(2)(b)(2)).

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

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

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TSB-A-85(51)S
Sales Tax
November 8, 1985
In the case of contracts involving governmental entities, the contract signed by the
governmental representative and the prime contractor is sufficient proof of the exempt status of the
purchases made for such contract. The existence of a signed contract document between the prime
contractor and the subcontractor which identifies the project, location, and exempt owner will form
the basis for exemption (provided in Tax Law 1115(a)(15) and 1115(a)(16), supra) of tangible
personal property purchased for incorporation into the exempt project. When purchasing the
qualifying property from a supplier, the contractor or subcontractor must issue a Contractors Exempt
Purchase Certificate (Form ST-120.1) to the supplier. (20 NYCRR 541.3(d)(2)(v); See also:
Technical Service Bureau Memorandum TSB-M-82(2)S).
Hereinafter the terms "IDA" and "exempt organization" will be used interchangeably.
Sales and Use Tax Regulations pertaining to contracts with exempt organizations further
state: "Except for agency contracts, contractors' purchases of construction supplies which do not
become part of an exempt organization's real property and are used or consumed by the contractor,
as well as purchases of taxable service, such as electricity used by the contractor, are subject to the
tax.
The following types of property and services are representative, but not intended to be all­
inclusive, of contractor's purchases which are subject to tax, irrespective of whether the contractor
has a time and material, lump sum, or other type of contract (except agency contract), with an
exempt organization:
(a) construction machinery and equipment, including rentals and repair parts;
(b) contractor's office supplies;
(c) contractors' supplies, tools, and miscellaneous equipment, whether purchased or rented,
including materials to make forms and scaffolding; and
(d) any other items purchased or rented by a contractor for his use in performing the contract
and not incorporated into the realty.
Example 7:

Lumber and other materials which are used to build forms are not exempt
since they do not become a component part of the structure.

Example 8:

Equipment rentals under the dominion and control of the contractor, such as
rentals of cranes, bulldozers, backhoes, etc. for use in building a structure for
an exempt organization are subject to tax." (20 NYCRR 541.3(d)(2)(iv)).

When an IDA enters into an agency contract with the prime contractor and all subcontractors,
all purchases for such contract are exempt if the property and services are purchased by the
contractor or subcontractor as agent for the exempt organization. To create a principal/agent
relationship all of the following conditions must be met:

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TSB-A-85(51)S
Sales Tax
November 8, 1985
(a) purchases must be billed or invoiced by the vendor to the exempt organization or to the
contractor specifying that the contractor is acting as agent for the exempt organization (e.g., X
contractor, as agent for Y, name of exempt organization) and identify the place of delivery;
(b) payment must be made by the exempt organization or by the contractor, acting as agent,
directly to the vendor from a special fund created by the exempt organization for this specific
purpose;
(c) deliveries must be made to the job site; or under certain circumstances (such as where
the materials require additional fabrication before installation on the job site or for storage to protect
the materials from theft or vandalism prior to installation at the job site) deliveries may be made to
a site, other than the job site, providing the ultimate delivery of the materials is made to the job site.
Where delivery is made to a site, other than the job site, the purchases must be billed or invoiced by
the vendor to the exempt organization or to the contractor as agent, identify the place of delivery, the
exempt organization's full name and address and the job site location where the materials will
ultimately be delivered for installation. (20 NYCRR 541.3(d)(4)(i)).
If the proposed agency contract differs from the requirements of this subparagraph, copies
of the proposed contract and procedures may be submitted for an opinion to the Instructions and
Interpretations Unit, Sales Tax Section, Technical Services Bureau, State Campus, Albany, N.Y.
12227.
To establish that all purchases are made by the IDA, the IDA and the prime contractor must
enter into a written agency contract and the IDA must also issue letters designating the prime
contractor and the subcontractors as its agents for a particular project. The contractors then may
purchase material tax exempt as follows:

1. Present the supplier with a properly completed Contractors' Exempt Purchase Certificate
   and a statement from the IDA designating the purchaser as their agent with each purchase order.
2. Each purchase order must identify the purchaser as agent of the IDA and indicate the
   project for which the purchase is made.
3. All invoices and bills are to be addressed to the purchaser as agent of the IDA and must
   also identify the project.
   In consequence, unless Petitioner is appointed an agent of the IDA, it can purchase exempt
   only tangible personal property which is actually transferred to the IDA and becomes an integral
   component part of the building or the real property.
   However, if Petitioner is designated an agent of an IDA, it can purchase tax exempt all
   material incorporated in the capital construction, and it can also buy or rent equipment, tools and
   supplies necessary for the performance of the contract without paying the sales tax by following the
   procedures outlined in paragraphs 1, 2 and 3, above.

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TSB-A-85(51)S
Sales Tax
November 8, 1985
With respect to the latter purchases, Sales and Use Tax Regulations Section 541.3(d)(4)(iii)
provides as follows: "A contractor is liable for the tax due on purchases or rentals of equipment,
tools and supplies made under a purported exempt organization agency contract if subsequently it
is determined the contract does not qualify as an agency contract.
Example 9:

A contractor enters into a purported agency contract with an exempt
organization for the construction of a capital improvement to real property.
The exempt organization or the contractor, acting as agent for the exempt
organization, makes tax free purchases or rentals of materials, tools and/or
equipment and supplies. Subsequently, it is determined the contract does not
qualify as an agency contract. The contractor is liable for the tax due on the
purchases or rentals of tools and/or equipment and supplies. The purchase
of materials incorporated into the capital improvement to real property owned
by the exempt organization is exempt from the tax, providing proper exempt
documentation is given to the vendor of the materials."

Finally, should any equipment, tools or supplies purchased by Petitioner as an agent become
the property of Petitioner after completion of an IDA agency contract, such acquisition would constitute
a retail sale subject to the sales tax imposed by Tax Law 1105(a).

DATED: August 29, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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