Are the amounts a country club pays a management company for workers who maintain its grounds subject to sales tax, when the club hires and supervises the workers but the management company runs the payroll?

Plain-English summary

Skyline Golf and Country Club, Inc. used a management company to supply workers who maintain and service its grounds (real property). The club hired, scheduled, supervised, set pay for, and could dismiss the workers — but the management company issued the paychecks, included the wages in its own payroll reports, issued the W-2s under its own name and ID, and paid the workers whether or not the club had reimbursed it. The club asked whether its payments to the management company are subject to sales tax.

The Department held:

• It won't second-guess the audit. The club also challenged the Audit Division's mark-up methodology for its pro shop, but Advisory Opinions answer only questions of law — not audit methodology or questions of fact — so the Department addressed only the sales-tax question.
• Grounds maintenance is a taxable service. Maintaining, servicing, or repairing real property or land is taxable under Tax Law § 1105(c)(5).
• The wage exclusion needs the workers to be your employees. Section 1105(c)(5) excludes wages an employer pays its own employees for performing these services. That exclusion applies only if the workers are the club's employees.
• These workers were the management company's employees. They were on the management company's payroll and W-2s and were paid independently of the club's reimbursement. The club's power to hire, fire, and supervise did not make them its employees. So the club's payments were the purchase of a taxable service, not exempt wages.
• The club owes the tax. "Having elected to conduct its business under this format and having reaped the benefits thereof," the club must pay sales tax on the amounts it paid the management company. The Department modified its earlier Durham Temporaries, Inc. opinion (TSB-A-83(30)S) to the extent inconsistent, in light of 107 Delaware Assoc. v. New York State Tax Comm'n.

What this means for you

If you use a staffing or management company for taxable-service work (grounds, cleaning, building maintenance): Whether the payments are taxable turns on whose employees the workers are — not on who supervises them. If the workers are on the staffing company's payroll and W-2s, your payments buy a taxable service, and the company should be charging you tax (or you owe use tax).

Supervision and control don't create the wage exclusion. The club had extensive control over the workers and still lost, because the tax-law "employee" question here followed the payroll relationship: who pays the workers, files the returns, and issues the W-2s.

Structure has consequences. If you want § 1105(c)(5)'s wage exclusion, the workers generally need to be your own employees on your payroll. An arrangement that shifts the payroll to a third party can convert otherwise-exempt wages into a taxable purchased service. (Compare the companion opinion TSB-A-89(27)S, where the same employee analysis meant taxability depended on the nature of the service the worker performed.)

Common questions

Q: We hire, supervise, and can fire the workers — aren't they our employees?
A: Not necessarily for this tax. The Department looked at who runs the payroll. Because the management company paid the workers and issued their W-2s, they were its employees, and your payments buy a taxable service.

Q: Will the Department review whether our audit's mark-up was correct?
A: No. Advisory Opinions decide questions of law only, not audit methodology or questions of fact.

Q: What kind of work triggers the tax here?
A: Maintaining, servicing, or repairing real property or land — such as grounds maintenance — is taxable under § 1105(c)(5).

Citations and references

Statute:

• Tax Law § 1105(c)(5) — tax on maintaining, servicing, or repairing real property, property, or land; excludes wages an employer pays its own employees for such services

Case and prior opinion cited:

• In re 107 Delaware Assoc. v. New York State Tax Comm'n, 99 AD2d 29 (3d Dept. 1984), rev'd 64 NY2d 935 (1985)
• Durham Temporaries, Inc., TSB-A-83(30)S — modified to the extent inconsistent

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89(26)S
Sales Tax
July 17, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890221A

On February 21, 1989, a Petition for Advisory Opinion was received from Skyline Golf and
Country Club, Inc., 1010 James Street, Syracuse, New York 13203.
Petitioner raises two issues in its petition. First, Petitioner questions whether the Audit
Division properly concluded the increase in taxable sales of Petitioner's pro shop for the twelve
month periods ending February 28, 1986 and 1987 by applying the gross profit percentage (mark-up)
shown on Petitioner's books for the twelve month period ended February 29, 1988, to the prior two
twelve month periods. Secondly, Petitioner questions whether the amounts paid by Petitioner to its
management company to employ workers are subject to sales tax pursuant to Section 1105(c)(5) of
the Tax Law.
In regard to the first issue, we do not review questions of audit methodology. We only answer
questions of law. We do not address questions of fact in the context of Advisory Opinions.
Therefore, we will only determine whether Petitioner is required to collect sales tax on the amounts
it pays to its management company to employ workers.
Petitioner is a golf and country club. It does not file payroll tax returns with New York State.
Certain workers rendering services for the Petitioner are provided by the management company.
These workers maintain and service real property or land belonging to the Petitioner. The
management company issues the payroll checks to these workers and also includes the wages in its
worker payroll reports. The year-end W-2 wage report is issued to the worker under the management
company's name and identification number, not Petitioner's. Petitioner reimburses the management
company for the payroll and related costs.
The management company provides the workers and handles the payroll. Petitioner has full
and independent authority with respect to the acceptance or rejection of the hiring of the workers,
the work schedules and duties of the workers, the inspection and approval of the workers' time
sheets, the pay rates of the workers (raises, bonuses, etc.), and the dismissal of the workers. The
workers provided by the management company are paid by the management company. The issuance
of the paychecks is not dependent upon the receipt of funds from Petitioner to cover the payroll.
Section 1105(c)(5) of the Tax Law imposes a sales tax on the receipts from every sale, except
for resale, of: "[m]aintaining, servicing, or repairing real property, property or land... . Wages,
salaries and other compensation paid by an employer to an employee for performing as an employee
the services described in paragraphs (1) through (5) of this subdivision (c) are not receipts subject
to the taxes imposed under such subdivision."
The services provided by the workers supplied by the management company to the Petitioner
are used to maintain and service real property or land and therefore are taxable services pursuant to

-2­
TSB-A-89(26)S
Sales Tax
July 17, 1989

Section 1105(c)(5) unless the workers are employees of the Petitioner.
The management company initially recruits the workers. The workers are at all times on its
payroll. The Petitioner reimburses the management company for the payroll and related costs. The
management company reports the funds received from the Petitioner as income on its state and
federal tax returns, and takes the appropriate deductions. The mere fact that the Petitioner has the
authority to hire, fire and supervise the workers provided by the management company does not
mean that the workers, who are management company employees, are also employees of Petitioner.
Having elected to conduct its business under this format and having reaped the benefits thereof, the
Petitioner cannot now avoid any disadvantage arising out of the selected format. In Re 107 Delaware
Assoc. v. New York State Comm'n, 99 AD2d 29 (Third Dept., 1984) (Casey, J., dissenting), Rev'd
64 NY2d 935 (1985). Accordingly Petitioner is required to pay sales tax on the amounts paid by it
to the management company.
The Advisory Opinion issued to Durham Temporaries, Inc. (TSB-A-83[30]S) in 1981, prior
to the decision In Re 107 Delaware Assoc. supra, to the extent it is inconsistent with this Advisory
Opinion, is so modified.

DATED: July 17, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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