Does a contractor owe sales tax on materials used to rehabilitate privately owned homes, when the work is paid for with state and federal housing-program funds?

Plain-English summary

The City of Gloversville's Community Development Agency runs a housing-rehabilitation program: using state (DHCR) and federal (HUD) funds, it awards contracts to the lowest bidders to fix up property belonging to qualified private owners, and pays the contractors when the work passes inspection. The City asked whether contractors owe sales tax on the materials they buy for these jobs.

The Department said yes — and the government funding does not change the answer.

• The exemption depends on who owns the property, not who pays. Tax Law § 1115(a)(15) and (16) exempt construction materials only when they become an integral component of real property owned by an exempt organization described in § 1116(a) — a government body or similar. That is the only path to exemption here.
• These homes belong to private owners, so no exemption. The rehab work is done on property of private owners who are not exempt organizations. So the materials do not qualify under § 1115(a)(15)/(16), and their sale to the contractor is a taxable "retail sale" under § 1101(b)(4)(i) and § 1105(a). The contractor must pay sales tax on the materials whether the job is a capital improvement or a repair.
• The funding source is irrelevant. That the money comes from state and federal programs, and is administered by the City agency, "does not have any bearing on the sales tax liabilities" of the contractor or the owner.
• Repairs allow a credit to avoid double tax. When the work is a repair, the contractor must collect sales tax from the property owner on the job — and may then take a credit or refund (on its sales-tax return or via Form AU-11) for the tax it paid on the materials built into that job.

What this means for you

"It's a government program" is not a sales-tax exemption. For construction materials, New York's exemption keys entirely on the owner of the property being improved. If that owner is a private person or business, the contractor buys the materials at retail and owes tax — no matter that a housing agency designed the program, chose the contractor, or cut the check.

Contractors are the consumers of the materials they install. On a capital improvement to private property, the contractor pays the tax on the materials and does not charge the owner sales tax on the job. On a repair to private property, the contractor charges the owner sales tax on the repair — and should then recover the tax it already paid on the incorporated materials as a credit or refund (AU-11) so the same materials aren't taxed twice.

The exemption path you'd need requires an exempt owner. If the improved property actually belonged to a government body or other § 1116(a) organization, materials that become an integral part of it could be bought tax-exempt under § 1115(a)(15)/(16) — but that's not this program.

Common questions

Q: Our rehab work is 100% funded by HUD and the state. Doesn't that make the materials exempt?
A: No. The exemption looks at who owns the property, not who funds the work. Because these homes belong to private owners, the materials are taxable to the contractor.

Q: Do we owe the tax on both repairs and capital improvements?
A: You pay tax on the materials in either case. On a capital improvement you're the consumer and stop there. On a repair you also collect tax from the owner on the job — but can credit or refund (AU-11) the tax you paid on the materials so it isn't taxed twice.

Q: When would materials for this kind of work be exempt?
A: Only if the improved property were owned by a government body or other exempt organization under § 1116(a). Privately owned homes don't qualify, regardless of the funding.

Citations and references

Statute and regulation:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — a sale of materials to a contractor for use in improving or repairing real property is a taxable "retail sale," even if the property is resold before being used
• Tax Law § 1115(a)(15) and (16) — exempt materials that become an integral component part of real property of an exempt organization (erecting/improving, and maintaining/servicing/repairing, respectively)
• Tax Law § 1116(a) — lists exempt organizations, including New York State and the United States and their agencies
• 20 NYCRR § 527.7 — services of maintaining, servicing or repairing real property; the end-result (repair vs. capital improvement) test; a contractor making a capital improvement pays tax on its materials as the ultimate consumer

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_7s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-89(7)S
Sales Tax
February 16, 1989

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881101A

On November 1, 1988, a Petition for Advisory Opinion was received from the City of
Gloversville, City Hall, Frontage Road, Gloversville, New York 12078.
The issue raised is whether contractors are required to pay sales tax on purchases of materials
which will be used in performing services on privately owned homes and rental property, when such
materials are purchased with funds made available by the New York State Division of Housing and
Renewal and the United States Department of Housing and Urban Development.
The Community Development Agency for the City of Gloversville administers Federal and
State funded programs under which contracts for the rehabilitation and improvement of property
belonging to qualified property owners are awarded to the lowest bidders. Upon completion and
inspection of the work, the Community Development Agency distributes the appropriate funds to
the contractors.
Section 1105(a) of the Tax Law imposes the State sales tax on the "...receipts from every
retail sale of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4)(i) of the Tax Law defines the term "retail sale" to include:
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,
maintaining servicing or repairing real property, property or land, as
the terms real property, property or land are defined in the real
property tax law, ...regardless of whether the tangible personal
property is to be resold as such before it is so used or consumed."
Section 527.7 of the Sales and Use Tax Regulations states:
Maintaining, servicing or repairing real property. [Tax Law, § 1105(c)(5)]
(b)

Imposition

(l)

The tax is imposed on receipts from every sale of the services of maintaining,
servicing or repairing real property, whether inside or outside of a building.
*

(4)

*

*

The imposition of tax on services performed on real property depends on the end
result of such service. If the end result of the service is the repair or maintenance of
real property, such services are taxable. If the end result of the same service is a

-2­
TSB-A-89(7)S
Sales Tax
February 16, 1989

capital improvement to the real property, such services are not taxable.
(5)

Any contractor who is making a capital improvement must pay a tax on the cost of
materials to him, as he is the ultimate consumer of the tangible personal property.

Section 1116(a)(l) of the Tax Law provides for an exemption from sales and compensating
use taxes with respect to the "state of New York, or any of its agencies...or political subdivisions
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." Section 1116(a)(2) of the Tax Law provides an exemption
from sales and compensating use taxes with respect to the "United States of America, and any of its
agencies...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."
Section 1115(a)(15) of the Tax Law exempts from sales and use tax receipts from the
following:
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 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 1115(a)(16) of the Tax Law exempts from sales and use tax receipts from the
following:
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.
Under the provisions of Section 1115(a)(15) and (16) of the Tax Law a contractor is allowed
to make tax exempt purchases of tangible personal property only if the tangible personal property
is actually incorporated into the structure, building or real property of an exempt organization as
described in section 1116(a) of the Tax Law.
In the instant case, the rehabilitation and improvements are not being performed on property
belonging to the State of New York, any of its agencies or political subdivisions nor the United
States of America of any of its agencies. Instead, the rehabilitation and improvements are being
performed on property belonging to a property owner who is not an exempt organization as described

-3­
TSB-A-89(7)S
Sales Tax
February 16, 1989

in Section 1116(a) of the Tax Law. Accordingly, the contractor's purchases of building materials,
for use in rehabilitating and improving property under the programs administered by the Community
Development Agency for the City of Gloversville, will not qualify for the sales and use tax
exemption provided under Section 1115(a)(15) and (16) of the Tax Law.
Inasmuch as the building materials will be incorporated into the real property belonging to
a property owner who is not described as an exempt organization under Section 1116(a) of the Tax
Law, the sale of such materials to the contractor will be considered a "retail sale", as defined under
Section 1101(b)(4)(i) of the Tax Law, subject to the tax imposed under Section 1105(a) of the Tax
Law. Accordingly, the contractor must pay sales tax on the purchase of the materials whether the
work results in a capital improvement or a repair to real property.
The facts that the funding is from state and federal sources and that the programs and funds
are administered by the Community Development Agency for the City of Gloversville does not have
any bearing on the sales tax liabilities incurred by the contractor or the property owner.
However, it is noted that inasmuch as the contractors must collect sales tax from the property
owner when the work results in a repair to the property, the contractor may be entitled to a credit for
the sales tax paid on the purchase price of the materials incorporated into the job. The credit must
be claimed on the sales and use tax return filed for the period in which the repair job was performed.
In lieu of claiming a credit on the sales and use tax return, the contractor may claim a refund or credit
by filing a Form AU-11, Application for Credit or Refund of State and Local Sales and Use Tax.

DATED: February 16, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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