Must a city collect sales tax on the sewer 'user charges' it bills residents, even when a private firm runs the treatment plant?

Plain-English summary

The City of Long Beach owns a wastewater treatment plant and bills its residential and commercial users a "user charge" for sewage treatment. The City planned to have a private company build, own, and operate a new plant on the site (leasing the existing plant and land to the firm), with the firm billing the City for treatment while the City continues to bill the public. The City asked whether its user charges are subject to sales and use tax.

The Department held the City's charges are exempt.

• Government sales can be exempt under § 1116(a)(1). That section exempts sales by the State of New York or its political subdivisions — including where the government is a vendor of services of a kind not ordinarily sold by private persons.
• Sewage treatment isn't "ordinarily" sold privately. The City is an instrumentality of the State, and while waste treatment services may sometimes be sold by private persons, they are not ordinarily sold by private persons within the meaning of § 1116(a)(1) (following Village of East Aurora, TSB-A-85(26)S). So the City need not collect sales tax on its sewer-rent charges to property owners.
• Outsourcing the plant doesn't change the answer. The fact that the City buys the treatment service from a private company does not alter its exempt status for what it charges the public.

What this means for you

A municipality's charge for a core public service is generally exempt. Under § 1116(a)(1), when a city or other political subdivision provides a service that private businesses don't ordinarily sell — like sewage treatment — its charges to the public aren't subject to sales tax.

"Sometimes sold privately" isn't the test — "ordinarily" is. The Department focused on whether the service is ordinarily offered by private sellers. Occasional private provision of waste treatment didn't strip the exemption.

Privatizing operations behind the scenes doesn't create a tax on the public charge. A city can contract with a private operator to run the plant and still bill residents tax-free; buying the underlying service privately doesn't convert the city's exempt charge into a taxable one. (Note this addresses the city's charge to the public — the private operator's own dealings are analyzed separately.)

Common questions

Q: Does a city have to charge sales tax on sewer or similar utility charges?
A: Generally no. Under § 1116(a)(1), a political subdivision's charge for a service not ordinarily sold by private persons — such as sewage treatment — is exempt.

Q: Our city is hiring a private company to run the treatment plant. Does that make the user charge taxable?
A: No. Buying the treatment service from a private operator doesn't change the city's exempt status for what it charges the public.

Q: What makes a service "not ordinarily sold by private persons"?
A: The Department looked at whether private sellers ordinarily offer it, not whether they ever do. Sewage treatment isn't ordinarily sold privately, so it qualified.

Citations and references

Statute:

• Tax Law § 1116(a)(1) — exempts sales by the State or its agencies, instrumentalities, public corporations, or political subdivisions, including as a vendor of services not ordinarily sold by private persons

Decision cited:

• Village of East Aurora, State Tax Commission Advisory Opinion, June 10, 1985, TSB-A-85(26)S — waste treatment services are not ordinarily sold by private persons under § 1116(a)(1)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(36)S
Sales Tax
September 10, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860612A

On June 12, 1986 a Petition for Advisory Opinion was received from the City of Long Beach,
Kennedy Plaza, Long Beach, New York 11561.
The issue raised is whether "user charges" billed by the City of Long Beach for sewage
treatment services are subject to the sales and use taxes imposed under Articles 28 and 29 of the Tax
Law.
The City of Long Beach is a municipal corporation which, at the present time, owns and
maintains a Wastewater Treatment Plant. The City is going to have constructed at the site of the
existing plant, a new sewage treatment plant. The new plant will be constructed, owned and
maintained by a private enterprise. The existing facility and lands will be leased by the City to such
private enterprise firm.
Upon completion of such new sewage treatment plant, the private enterprise firm will own,
operate and maintain the same under a long term contract with the City of Long Beach. The City
will retain the right to buy out the private enterprise firm's interest in the new sewage treatment plant.
The private enterprise firm, pursuant to the contract, will bill the City, either monthly, yearly,
etc., for wastewater treatment services. The City will then bill individual users (both residential and
commercial) a user charge. In summary, the City will continue to be the provider of the services to
the public while procuring the treatment services from the private sector rather than directly treating
the sewage.
Section 1116(a)(1) of the Tax Law provides that any sales by the State of New York or any
of its agencies, instrumentalities, public corporations or political subdivisions shall not be subject
to the sales and compensating use tax where it is the purchaser, user or consumer or where it is a
vendor of services or property of a kind not ordinarily sold by private persons.
Petitioner is an instrumentality of the State of New York, and as such is not liable for the
collection of sales tax on the sale of any service which is not ordinarily offered for sale by private
persons.
While waste treatment services may sometimes be sold by private persons, they are not
ordinarily sold by private persons within the meaning and intent of section 1116(a)(1) of the Tax
Law. See: Village of East Aurora, State Tax Commission Advisory Opinion, June 10, 1985,

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

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

-2­
TSB-A-86(36)S
Sales Tax
September 10, 1986

TSB-A-85(26)S. Accordingly, Petitioner is not required to collect sales tax on its charge to property
owners for sewer rent. The fact that petitioner initially purchases waste treatment services from a
private company does not alter its exempt status.

DATED: September 10, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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

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

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