A contractor working on a federal Department of Energy project rents equipment and claims it is the government's agent. Is the equipment rental exempt from New York sales tax?

Plain-English summary

Butler Mechanical, Inc. performs services at the West Valley Demonstration Project — a federal site run by West Valley Nuclear Services Co. (a Westinghouse division) as the general contractor for the U.S. Department of Energy (DOE). Butler argued it was acting as an agent of the federal government, so the United States — not Butler — was the lessee of the equipment Butler rents to do the work, making the rentals exempt. It pointed to a February 22, 1982 letter that had called West Valley an agent of DOE.

The Department held Butler is not a federal agent, so its equipment rentals are taxable.

• What an agency contract requires. Under 20 NYCRR 541.2(c), an agency contract lets a contractor act in the place of its principal, so purchases (including equipment rentals) the agent-contractor makes on the principal's behalf are treated as if the principal made them.
• The DOE contract forbids agency. The contract expressly stated that "Procurement arrangements under this contract shall be made in the name of the Contractor, shall not bind nor purport to bind the Government..." That language not only fails to name Butler an agent but specifically prohibits it from acting in an agency capacity.
• So the exemptions don't apply. Because Butler — not the government — makes the purchases, and the rented equipment does not become an integral component part of a government structure or real property, the rentals do not qualify under § 1116(a)(2) (federal-government exemption), § 1115(a)(15), or § 1115(a)(16).
• The old agent letter is rescinded. The February 22, 1982 letter that had wrongly treated West Valley Nuclear Services as a federal agent was rescinded, and Butler may not rely on it (citing Turner Construction Co. v. State Tax Commission).
• Result. Butler is liable for all appropriate sales and use taxes on the equipment it rents.

What this means for you

Working on a federal project does not, by itself, make you the government's agent. Federal-purchase exemptions flow to the government as the buyer/user. To stand in the government's shoes, your contract must actually authorize you to act as its agent — to bind it.

Read the procurement clause carefully. If the contract says purchases are made in the contractor's name and shall not bind the government, that is the opposite of an agency arrangement. Buying in your own name means you are the purchaser and you owe the tax.

Rented tools and equipment usually can't ride the government-materials exemption. The § 1115(a)(15)/(16) exemptions cover materials that become an integral component part of the government's real property — not equipment you rent to perform the work.

Don't rely on an old favorable letter that has been rescinded. A prior interpretation letter can be withdrawn; once rescinded, it provides no protection.

Common questions

Q: I'm a contractor on a federal job. Are my equipment rentals exempt because the work is for the U.S. government?
A: Not automatically. Unless your contract makes you the government's agent (able to act in its place and bind it), you are the purchaser, and your rentals are taxable.

Q: The contract says procurement is "in the name of the Contractor" and "shall not bind the Government." Does that help my exemption claim?
A: No — it defeats it. That language shows you are not an agent; you are buying in your own name, so you owe the tax.

Q: Could the rented equipment qualify under the government real-property exemptions?
A: No. Sections 1115(a)(15) and (16) cover materials that become an integral component part of the government's structure or real property, not rented equipment used to perform the work.

Q: We have an older letter saying our project company was a federal agent. Can we rely on it?
A: Not here. The Department rescinded that letter, and a rescinded letter cannot be relied upon.

Citations and references

Statute, regulation, and case:

• Tax Law § 1116(a)(2) — exempts the United States and its agencies/instrumentalities where the U.S. is the purchaser, user, or consumer
• Tax Law § 1115(a)(15) — exempts materials that become an integral component part of a structure/building of an exempt organization
• Tax Law § 1115(a)(16) — exempts materials that become an integral component part in maintaining, servicing, or repairing an exempt organization's real property
• 20 NYCRR 541.2(c) — defines an agency contract as one permitting a contractor/subcontractor to act as agent (in the place of) the principal
• Turner Construction Co. v. State Tax Commission, 57 A.D.2d 201, 394 N.Y.S.2d 78 (1977) — cited on rescinding the prior agent determination

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(7)S
Sales Tax
December 22, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870804C

On August 4, 1987, a Petition for Advisory Opinion was received from Butler Mechanical,
Inc., 63 Zoer Valley Road, P.O. Box 16, Springville, New York 14141.
The issue raised is whether Petitioner is required to pay sales tax on equipment it rents when
it performs a contract for the Federal government.
Petitioner has a contract to perform services at the West Valley Demonstration Project which
is operated by West Valley Nuclear Services Co., Inc, a division of Westinghouse Electric
Corporation, the general contractor for the U.S. Department of Energy.
Petitioner submitted a copy of the contract between the U.S. Department of Energy and West
Valley Nuclear Services Inc. Petitioner also submitted a copy of a letter dated February 22, 1982 and
written by the Sales Tax Instructions and Interpretations Unit addressed to West Valley Nuclear
Services stating that West Valley was acting as an agent for the Department of Energy. The pertinent
part of such letter stated:
Based on the information furnished in a letter dated October 9, 1981
by the Department of Energy Idaho Operations Office, it is considered
that you may act as an agent in the performance of contract No. DE­
AC07-8IME 44139.
Petitioner asserts that it is acting as an agent for the Federal government and, as such, the
Federal government and not Petitioner is the lessee of the equipment which Petitioner uses to
perform its services.
The applicable sections of the sales and use tax imposed by Article 28 of the Tax Law
provide that:
Sec. 1116. Exempt organizations.-(a) Except as otherwise
provided in this section, any sale or amusement charge by or to any
of the following or any use or occupancy by any of the following shall
not be subject to the sales and compensating use taxes imposed under
this article:
*
*
*
(2) The United States of America, and any of its agencies and
instrumentalities, insofar as it is immune from taxation where it is
the purchaser, user or consumer, or where it sells services or property
of a kind not ordinarily sold by private persons.
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-88(7)S
Sales Tax
December 22, 1987
Section. 1115. Exemptions from sales and use taxes. - (a)
Receipts from the following shall be exempt from the tax on retail
sales imposed under subdivision (a) of section eleven hundred five
and the compensating use tax imposed under section eleven hundred
ten:
*
*
*
(15) Tangible personal property sold to a contractor,
subcontractor or repairman for use in erecting a structure or building
of an organization described in subdivision (a) of section eleven
hundred sixteen, or adding to, altering or improving real property,
property or land of such an organization, as the terms of real property,
property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such
tangible personal property is to become an integral component part of
such structure, building or real property.
(16) Tangible personal property sold to a contractor,
subcontractor or repairman for use in maintaining, servicing or
repairing real property, property or land of an organization described
in subdivision (a) of section eleven hundred sixteen, as the terms real
property, property or land are defined in the real property tax law;
provided however, no exemption shall exist under this paragraph
unless such tangible personal property is to become an integral
component part of such structure, building or real property.
Section 541.2(c) of the sales tax regulations defines an agency contract as:
(c) An agency contract means an agreement which permits
a contractor and subcontractor to act as an agent of, that is, in the
place of the principal, his customer. Purchases made by the agent­
contractor or agent-subcontractor on behalf of the principal are treated
in the same manner as if the purchases were made by the principal.
All purchases (including rentals of contractor's tools, supplies,
machinery and equipment) made by the agent-contractor or agent
subcontractor on behalf of the principal are treated in the same
manner as if the purchases were made by the principal.

-3­
TSB-A-88(7)S
Sales Tax
December 22, 1987
The contract between the U.S. Department of Energy and West Valley Nuclear Services
Inc. submitted by Petitioner contained the following pertinent provisions:
ARTICLE IX - CONTRACTOR PROCUREMENT (Apr 1984)
9.1

DOE reserves the right at any time to require that the Contractor submit for approval any or
all procurements under this contract. The Contractor shall not procure any item whose
purchase is expressly prohibited by the written direction of DOE and shall use such special
and directed procurement sources as may be expressly required by DOE.
The Contractor shall provide information concerning procurement methods, practices, and
procedures used or proposed to be used and shall use methods, practices and procedures
which are acceptable to DOE. Procurement arrangements under this contract shall be made
in the name of the Contractor, shall not bind nor purport to bind the Government, shall not
relieve the Contractor of any obligation under this contract (including, among other things,
the obligation properly to supervise, administer, and coordinate the work of subcontractors),
and shall be in such form and contain such provisions as are required by this contract or as
DOE may prescribe. (Emphasis supplied).

11.1

Compensation for Contractor's Services. Payment for the allowable costs as hereinafter
defined, and of the fixed fee, and of the base fee, and of so much of the maximum available
award fee as may be determined by the Contracting Officer as hereinafter provided (termed
"award fee"), as the case may be, shall constitute full and complete compensation for the
performance of the work under this contract. This contract shall be a cost-plus-fixed-fee
contract for the period ending on September 30, 1983; and for the period subsequent to such
date this contract shall be a cost-plus-award-fee contract. (Emphasis supplied)

Based upon section 541.2(c) of the sales and use tax regulations, an agent must be able to act
in the place of his principal. The Department of Energy Contract contains specific language
prohibiting Petitioner from acting on its behalf (e.g. "[p]rocurement arrangements under this contract
shall be made in the name of the contractor shall not bind nor purport to bind the Government...").
The language of the contract not only fails to name the contractor as an agent of the government, but
also specifically prohibits the contractor from acting in an agency capacity. Consequently, since
Petitioner, rather than the Federal government, is making the purchases and since such purchases do
not become an integral component part of a structure, building or real property owned by the Federal
government, such purchases do not qualify for exemption from tax under any of the provisions
referred to above and are, therefore, subject to sales and use tax.

-4­
TSB-A-88(7)S
Sales Tax
December 22, 1987
In addition, the letter of February 22, 1982 wrongly determined that West Valley was an
agent of the Federal government for purposes of contract no. DE-AC07-81ME 44139. Accordingly,
such letter is rescinded and Petitioner may not rely upon such letter. (Turner Construction v. State
Tax Commission (1977) 57 A.D.2d 201 394 N.Y. Supp. 2d 78). Petitioner is liable for all
appropriate taxes.

DATED: December 22, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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