Does a gas utility charge sales tax on new gas-service hookups, and does it owe tax on the pipe and materials it installs?

Plain-English summary

Syracuse Suburban Gas Company, a natural gas public utility, installs new gas service by running pipes and fittings in the ground from its main line to a customer's building. It keeps title to everything it installs and maintains the lines. The customer pays a fee called an "aid to construction," on which the utility charges sales tax. Many customers object, arguing the new connection is a capital improvement to real property and should be exempt. The utility asked (1) whether it must collect tax on the installation charge and (2) whether it owes tax on the material, equipment and labor it uses.

The Department said the installation charge is taxable, even though the work is a capital improvement.

• Laying new gas lines is a capital improvement. The Department has held that installing new gas transmission lines is a capital improvement to real property (Brooklyn Union Gas, TSB-A-85(7)S; TSB-M-78(4)S). Ordinarily a capital improvement is not taxed to the customer.
• But a special rule overrides that here. Section 1105(c)(3) taxes the service of installing tangible personal property "whether or not property is transferred." Its proviso says that nothing excludes from tax a charge, made by a person furnishing a service taxable under § 1105(b), for installing property at a purchaser's premises for use in connection with that service. Section 1105(b) taxes the sale of gas and gas service.
• So the hookup charge is taxable. Because the utility sells taxable gas service under § 1105(b), its charge to install the service to connect that gas is taxable. The utility must collect state and local sales tax on any amount billed to customers for installation of gas service.

On the utility's own costs:

• Employee labor: No sales tax liability arises from using the utility's own employees to do the construction.
• Outside labor: If the utility hires outside labor for the installation, it is buying a service "for resale" under § 1105(b) and can give the supplier Form ST-120 (Resale Certificate) to buy that labor tax-free.
• Materials it consumes: As the end user of all piping, fittings and instrumentation built into the real property, the utility must pay sales or use tax on those materials at the rate where the connection is put in service. Its purchases of construction equipment, tools and supplies for its own use are also taxable.

Exempt organizations: If a § 1116(a) exempt organization is both the purchaser and the consumer of the installation and gives the utility Form ST-119.1, it need not pay tax on the installation charge. But the utility is still not relieved of tax on its own purchases of property installed on the exempt organization's premises if the utility keeps ownership of that property (see TSB-M-80(2)S).

What this means for you

A "capital improvement" label does not always defeat the tax. New York's general rule exempts capital improvements to real property, but § 1105(c)(3) carves out installation charges made by a provider of a taxable utility service. If a utility installs equipment to deliver the very gas, electric, or similar service it sells you, expect tax on the installation charge.

Utilities carry a double role. You collect tax from customers on the hookup, and you pay tax yourself on the pipe, fittings, tools and supplies you consume in the ground — because as to those materials you are the end user, not a reseller.

Know when a resale certificate fits. Outside installation labor can be bought for resale with an ST-120 because you resell it as part of your taxable service; the physical materials you consume cannot, because you use them up rather than resell them.

Exempt customers still need the right form. A qualifying exempt organization avoids tax on the installation charge only by giving you a completed ST-119.1 — and your own tax on retained materials does not go away.

Common questions

Q: Isn't a new gas hookup a tax-exempt capital improvement?
A: The installation is a capital improvement, but a special rule in § 1105(c)(3) makes an installation charge by a taxable-service provider (like a gas utility) taxable anyway. So the "aid to construction" hookup fee is taxable.

Q: Do we owe tax on our own crews' wages?
A: No. Using the utility's own employees to do the construction creates no sales tax liability. Only outside labor and purchased materials are addressed separately.

Q: We keep title to the pipe. Do we still owe tax on it?
A: Yes. As the end user of the piping, fittings and instrumentation built into the real property, the utility owes sales or use tax on those materials, plus its tools, equipment and supplies.

Q: How does an exempt customer avoid the installation tax?
A: A § 1116(a) exempt organization that is both purchaser and consumer must give the utility a completed Exempt Organization Certificate (Form ST-119.1). Even then, the utility still owes tax on materials it installs but keeps ownership of.

Citations and references

Statute:

• Tax Law § 1105(c)(3) — taxes installing tangible personal property; the proviso keeps taxable an installation charge by a provider of a § 1105(b) taxable service
• Tax Law § 1105(b) — taxes receipts from sales of gas and gas service
• Tax Law § 1116(a) — exempt organizations

Related Department guidance:

• Brooklyn Union Gas Company, TSB-A-85(7)S — new gas transmission lines are a capital improvement
• TSB-M-78(4)S — Utilities, Problem Areas and Determinations
• TSB-M-80(2)S — exempt organization certification

Forms:

• Form ST-120 (Resale Certificate) — supports tax-free purchase of outside installation labor bought for resale
• Form ST-119.1 (Exempt Organization Certificate) — supports an exempt customer's exemption on the installation charge

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_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(6)S
Sales Tax
January 17, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850930B

On September 30, 1985, a Petition for Advisory Opinion was received from Syracuse
Suburban Gas Company, Inc., 207 North Center Street, East Syracuse, New York 13057.
The issues raised are whether Petitioner is required to collect New York State sales tax on
charges to its customers for new installations of natural gas service, and whether sales tax is due on
material, equipment or labor used by Petitioner in performing the installation.
Petitioner, a natural gas public utility, installs new gas service by running pipes and fittings
in the ground from its main pipe line to the customer's building. Petitioner reserves title to all
property incorporated in the new connection and also maintains and services the lines and equipment
during and after construction.
The customer contributes to the cost of the installation by paying Petitioner a fee called an
"aid to construction". Petitioner charges sales tax on this fee, a practice questioned by many of its
customers who consider the new connection a capital improvement to real property, and therefore
exempt from sales tax. Petitioner takes the position that it has not performed a capital improvement,
because it has not transferred title to the pipeline and fittings to the customer.
The Tax Commission and the Tax Department have held the laying of new gas service
transmission lines a capital improvement to real property. (See: Brooklyn Union Gas Company,
State Tax Commission Advisory Opinion, April 23, 1985, TSB-A-85[7]S; Department of Taxation
and Finance, Utilities - Problem Areas and Determinations, April 14, 1978, TSB-M-78[4]S.) This
holding, however, is not material in determining the taxability of the installation charges at issue,
in the light of special provisions contained in the Tax Law.
Subdivision (c) paragraph (3) of Section 1105 states, in relevant part, that sales tax is
imposed on the services of "installing tangible personal property, whether or not property is
transferred in conjunction therewith". The same paragraph then enumerates certain specific services
excluded from tax, and concludes as follows: "Provided, however, that nothing contained in this
paragraph three shall be construed to exclude from tax under this paragraph or under subdivision (b)
of this section any charge, made by a person furnishing service subject to tax under subdivison (b)
of this section, for installing property at the premises of a purchaser of such a taxable service for use
in connection with such service." Section 1105(b) of the Tax Law imposes a sales tax on the receipts
from every sale, other than sales for resale, of gas, and gas service of whatever nature.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86(6)S
Sales Tax
January 17, 1986

Accordingly, Petitioner must collect the applicable State and local sales tax on any amount
billed to customers for installation of gas service.
No sales tax liability will accrue to Petitioner from the use of employee construction labor.
If Petitioner hires outside labor for the installation, it will be purchasing a service "for resale" within
the meaning and intend of the above quoted Section 1105(b) of the Tax Law. To avail itself of the
tax exemption, Petitioner must present its supplier with a properly completed Form ST-120 (Resale
Certificate).
Additionally, as the end user of all piping, fittings and instrumentation incorporated in the
real property, Petitioner is required to pay sales or use taxes on its purchases of such material at the
rate in effect in the locality where the new connection is put in service. Petitioners purchases, for
its own use, of construction equipment, tools and supplies are also subject to tax.
Furthermore, where one of various "exempt organizations" enumerated in Section 1116(a)
of the Tax Law is both the purchaser and the consumer of Petitioner's services, such organization is
not required to pay tax on the installation charges, if it has furnished Petitioner with a completed
Exempt Organization Certificate (Form ST-119.1).
In that event, however, Petitioner is not relieved of the obligation to pay sales tax on its
purchases of any property installed on the premises of the exempt organization, if ownership of such
property is retained by the Petitioner. For additional information on exempt organization
certification, Petitioner should refer to Taxpayer Services Bureau Memorandum TSB-M-80(2)S.

DATED: January 17, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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