When tenants build out their leased space in a tower on land owned by the U.S. Postal Service, are the tenants' construction materials also sales-tax exempt?

Plain-English summary

This is a Modified Advisory Opinion that follows up on TSB-A-89(8)S. In the original opinion, 450 Lexington Venture — a partnership holding a 99-year lease from the U.S. Postal Service (the fee owner) — was told that materials built into its planned 31-story tower on USPS-owned land are exempt from sales and use tax. Here the Venture asked the natural next question: what about its space tenants (subtenants) who build out their own leased space?

The Department reached the same result for the tenants.

• Tenant-improvement materials are exempt. Because the materials the space tenants and their contractors install become integral components of the tower — real property owned in fee by the USPS, an exempt federal instrumentality under § 1116(a)(2) — and title to the materials transfers immediately to the USPS, those purchases are exempt under § 1115(a)(15) and (16). This covers purchases by the developer, the space tenants, their contractors, subcontractors, and materialmen alike.
• The space lease is the proof. A copy of the space lease / sublease is sufficient substantiation of the exempt job, and each buyer furnishes suppliers a completed Form ST-120.1 (Contractor Exempt Purchase Certificate). The Venture, its contractor, and the space tenants should keep the sublease on file.
• Tax savings flow to the MTA. Under a separate consent agreement tied to the MTA's subsurface railroad easements, the Venture pays the tax savings generated by the USPS ownership to the MTA (either directly or via reduced credits to the space tenants).

What this means for you

Exempt ownership carries down to the tenants who build out the space. When tenant improvements become the property of an exempt organization (here, the USPS) and title to the materials vests in that owner, a space tenant's construction materials qualify for the same § 1115(a)(15)/(16) exemption the prime developer gets. The exemption tracks ownership of the finished real property, not the tier of the party doing the build-out.

Everyone in the chain documents it the same way. The signed space lease proves the exempt job, and the tenant, its contractor, subcontractors, and materialmen each hand suppliers a completed Form ST-120.1 when buying the exempt materials. Keep the sublease on file.

Watch for deal-specific pass-throughs of the savings. In this project the tax savings didn't simply stay with the tenants — a consent agreement routed them to the MTA in exchange for its cooperation with the subsurface work. The tax result and the economic result can be split by contract.

Common questions

Q: I'm a tenant building out my space in a tower on Postal Service land. Are my materials exempt?
A: Yes, on these facts. Because your tenant improvements become USPS-owned real property and title to the materials vests immediately in the USPS, your purchases are exempt under § 1115(a)(15)/(16) — the same as the developer's.

Q: Does the exemption cover my contractor and subcontractors too?
A: Yes. The developer, space tenants, contractors, subcontractors, and materialmen all qualify; each issues suppliers a completed Form ST-120.1.

Q: What proof do we keep?
A: A copy of the space lease/sublease is sufficient substantiation of the exempt job, plus the Form ST-120.1 certificates issued to suppliers.

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) — sale of materials to a contractor for use in erecting/improving real property is a taxable "retail sale"
• Tax Law § 1115(a)(15) and (16) — exempt materials that become an integral component part of real property of an exempt organization
• Tax Law § 1116(a)(2) — the United States and its agencies and instrumentalities are exempt organizations
• 20 NYCRR § 528.16 — materials sold to contractors for erecting structures of exempt organizations
• 20 NYCRR § 541.3 — contracts with exempt organizations; subcontractors and materialmen receive the same treatment as the prime contractor

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_8_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (8.1)S
Sales Tax
April 27, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
MODIFIED ADVISORY OPINION

PETITION NO. S881116A

This modifies an Advisory Opinion issued to 450 Lexington Venture, 885 Third Avenue,
New York, N.Y. 10022.
The purpose of this modification is to address issues which were raised by Petitioner
subsequent to the issuance of the original opinion.
The additional issues raised are:
1)
Whether the purchases of materials, by "space tenants" or their contractors, for use
in constructing and installing "space tenant" improvements are exempt from state and local sales tax
when, pursuant to the space lease agreement between Petitioner and the space lessee, such materials
are to be permanently incorporated into real property owned in fee by the United States Postal
Service (USPS).
2)
Whether a copy of the space lease agreement is sufficient proof of the exempt status
of the purchases of materials, by the "space tenants" and the contractor, for use in constructing and
installing "space tenant" improvements in the leased premises owned in fee by the USPS and
whether the Form ST-120.1, Contractor Exempt Use Certificate is sufficient proof of the exempt
status of the materials purchased, by the subcontractors and materialmen, for use in constructing and
installing such "space tenant" improvements.
The original Advisory Opinion established that Petitioner, as tenant, has entered into a lease
with the USPS, whereby the USPS, as landlord, is leasing to Petitioner real property for a period of
99 years. Under the terms of the lease between Petitioner and the USPS, Petitioner is to construct
a thirty-one story commercial tower (Tower) on top of an existing eight story building.
Petitioner has also entered into space lease agreements with "space tenants" whereby
Petitioner will sublease space to the space tenants. Under the terms of each space lease, title to all
materials that are incorporated into the Tower by each space tenant (other than any materials that
may belong to a space tenant as expressly provided in the space lease) will automatically, without
any payment or any other act on the part of the USPS, be and become an integral component of the
Tower and the property of the USPS.
It is anticipated that each space tenant will engage either its own contractor or construction
manager, Petitioner or Petitioner's contractors (hereinafter referred to as contractor) to act as the
general contractor for the construction or installation of its space tenants improvements. The
contractor will, in turn, hire subcontractors or materialmen. Purchases of materials which are
incorporated into and become physical components of the Tower, for the purpose of constructing and
installing space tenant improvements, will be made by Petitioner, the space tenants, the contractor,
the subcontractors and the materialmen.

-2­
TSB-A-89 (8.1)S
Sales Tax
April 27, 1989

Petitioner, the contractor and the space tenants intend to rely on the space lease as sufficient
proof of the exempt status of the materials purchased. The subcontractors and materialmen will rely
on a properly completed form ST-120.1, Contractor Exempt Purchase Certificate, between the space
tenant and the contractor and between the contractor and each subcontractor or materialman, that
identifies the project, location and exempt owner (USPS) as the basis for the exempt status of the
materials purchased.
Petitioner, under the terms of a consent agreement, will pay to the Metropolitan
Transportation Authority (MTA) any tax savings, that accrue during the initial construction and
finishing of the Tower, on the purchase of materials for the construction and installation of space
tenant improvements, as a result of ownership of the real property by the USPS. Each space lease
will provide, in most instances, that the space tenant pay to Petitioner the amount of any tax savings
which accrue to the space tenant or that any sums to be paid or credited to the space tenant by
Petitioner be reduced by the amount of such accrued tax savings. In either instance, Petitioner,
pursuant to the consent agreement, will pay any tax savings accrued by the space tenants to the MTA.
The relevant portions of Sections 1105(a), 1104(b)(4)(i), 1115(a)(15) and (16), and
1116(a)(2) of the Tax Law are set forth in the original Advisory Opinion. Applicable portions of
Sections 528.16 and 541.3(a)(1)(i) and (d)(2)(i), (ii) and (v) of the Sales and Use Tax Regulations
are also set forth in the original Advisory Opinion.
Inasmuch as the materials purchased by Petitioner, the contractor, the space tenants,
subcontractors or materialmen for use in constructing and installing the space tenant improvements
will become integral components of the real property owned by the USPS, and inasmuch as title to
the materials will immediately transfer to the USPS upon such installation, the purchases of such
materials will be exempt from sales and compensating use tax as provided under Sections
1115(a)(15) and 1115(a)(16) of the Tax Law.
Petitioner, the contractor, space tenants, subcontractors or materialmen may purchase
materials, which will be incorporated as integral components of the real property owned by the
USPS, tax exempt provided they furnish the building material supplier a properly completed form
ST-120.1, Contractor Exempt Purchase Certificate. Petitioner, the contractor and the space tenants
should keep on file a copy of the sublease agreement between Petitioner and the space tenants as
substantiation that the construction and installation performed was exempt from sales and use tax
under Section 1115(a)(15) and 1115(a)(16) of the Tax Law.

DATED: April 27, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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