Are construction materials exempt from sales tax when a private developer builds an office tower on land owned in fee by the U.S. Postal Service, so that the finished work becomes Postal Service property?

Plain-English summary

450 Lexington Venture, a New York partnership, holds a 99-year lease from the U.S. Postal Service (which owns the land in fee) covering the land, an existing eight-story post office, and the subsurface (where the MTA runs railroad tracks under retained easements). The Venture plans to build a 31-story commercial office tower on top of the existing building, construct new supporting columns, footings, and girders in the subsurface, and renovate the existing building. Under the lease, title to all materials built into the project automatically becomes USPS property. The Venture asked whether the construction materials are exempt, and how to prove it.

The Department said the materials are exempt from sales and use tax.

• USPS is an exempt organization, and title vests in it. The USPS is a federal instrumentality under Tax Law § 1116(a)(2). Because the materials become an integral component of real property owned by the USPS, and title to them immediately transfers to the USPS, they qualify for the exemption in § 1115(a)(15) and (16) (erecting/improving, and maintaining/servicing/repairing an exempt organization's property).
• The subsurface supports are exempt too. Even though the Railroad retained subsurface easements, the deed granted back to the United States a permanent easement to maintain the supporting structures — so the new columns/footings/girders become USPS real property, and the materials for them are exempt under § 1115(a)(15).
• It doesn't matter that the buyer is a private developer. The exemption follows the ownership of the improved property (USPS), not the identity of the contracting party. The form of the contract is irrelevant (20 NYCRR § 528.16).
• How to document it. For a governmental customer, the signed lease/contract is sufficient proof of the exempt job (20 NYCRR § 541.3(a)), and purchases by subcontractors and materialmen get the same treatment as the prime contractor's. Each buyer furnishes the supplier a completed Form ST-120.1 (Contractor Exempt Purchase Certificate); the developer and contractor should keep a copy of the USPS lease on file.

What this means for you

Building on land an exempt organization owns can make your materials tax-free. If the finished improvement becomes the property of a government body (here, the USPS) and title to the materials vests in that owner, the materials are exempt under § 1115(a)(15)/(16) — even though a private developer is the one signing the construction contracts. The key facts are exempt ownership of the real property and immediate transfer of title to the incorporated materials.

Contrast this with work on privately owned property. Where the improved property belongs to a private owner, materials are taxable to the contractor regardless of who funds the work (see the companion 1989 opinion on a city housing-rehab program, TSB-A-89(7)S). Exempt ownership of the property is what unlocks the exemption.

Get the paperwork right. Keep the signed government lease/contract on file as proof of the exempt job, and have every tier — prime contractor, subcontractors, and materialmen — issue a completed Form ST-120.1 to suppliers when buying the exempt materials.

Common questions

Q: We're a private developer building on land the Postal Service owns. Are our materials exempt?
A: Yes, on these facts. Because the improvements become USPS-owned real property and title to the materials vests immediately in the USPS, the materials are exempt under § 1115(a)(15)/(16) — the private identity of the developer doesn't defeat the exemption.

Q: What about the columns and footings down in the subsurface under the railroad?
A: Also exempt. A deed easement makes those supporting structures USPS real property, so the materials for them qualify under § 1115(a)(15).

Q: How do we prove the exemption to our suppliers and to auditors?
A: Keep the signed USPS lease/contract on file (sufficient proof for a governmental job under § 541.3(a)), and have the contractor, subcontractors, and materialmen give suppliers a completed Form ST-120.1 when purchasing the materials.

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; the form of the contract is not relevant
• 20 NYCRR § 541.3 — contracts with exempt organizations; the signed government contract is sufficient proof, and subcontractors/materialmen get 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_8s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89(8)S
Sales Tax
March 7, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881116A

On November 16, 1988, a Petition for Advisory Opinion was received from 450 Lexington
Venture, 885 Third Avenue, New York, N.Y. 10022.
The issues raised are:
(1)
Whether purchases of materials, by Petitioner or the general contractor, for use in
constructing a thirty-one story commercial office tower (Tower) on top of an existing eight story
building, constructing new building columns, footings, girders and supports (Supports) in the
subsurface beneath the existing building, and renovating the facade and internal portions of the
existing building, are exempt from state and local sales tax when pursuant to the lease between
Petitioner as tenant and the United State Postal Service (USPS) as landlord, such materials are to be
permanently affixed and incorporated into real property owned in fee by the USPS or held by the
USPS under a permanent and perpetual easement.
(2)
(a) Whether a copy of the lease will provide sufficient substantiation of the exempt
status of purchases of materials, by Petitioner or the general contractor, for use in constructing the
Tower and Supports and in the renovation of the existing building.
(b) Whether the Form ST-120.1, Contractor Exempt Purchase Certificate will provide
sufficient substantiation of the exempt status of the purchases of such materials by the subcontractors
and the materialmen.
Petitioner is a New York partnership. 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.
This real property consists of the land, an eight story building currently being used as a USPS Post
Office and the subsurface of the land (beneath the building) wherein the Metropolitan Transportation
Authority (MTA) maintains railroad tracks and platforms on which it conducts certain railroad
activities.
The United States of America purchased the land from the New York Central Railroad
Company and subsequently transferred title to the property to the USPS, which, under the Deed,
owns the land in fee. The land includes the subsurface and ownership of the subsurface is subject
to rights and easements retained by the New Central Railroad Company in the Deed and currently
held by New York Central's successors, The Penn Central Corporation and its subsidiary, The
Owasco River Railway, Inc. (collectively, the Railroad). The Railroad has leased these retained
subsurface rights and easements to the MTA. However, the Deed grants back to the United States
of America, out of the retained rights and easements, certain easements in the subsurface for
structural support of the United States buildings and improvements.

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TSB-A-89(8)S
Sales Tax
March 7, 1989

The relevant portion of the Deed which grants back such easements states: Excepting and
reserving unto the Railroad Company, its successors and assigns forever, from out of the
grant of the above described parcel of land, the permanent and perpetual rights and
easements required for the exclusive use by the Railroad Company, its successors and
assigns, (including lessees and licencees) for railroad, station, terminal and other purposes
of the Railroad Company, its successors and assigns, of [the Subsurface] ... The Railroad
Company further grants to the United States, its successors and assigns, the permanent and
perpetual right and easement to maintain, renew and replace within the [Subsurface] the
building columns, footings, girders and supports hereinafter called supporting structures, now
or at any time constructed therein. The location and/or dimensions of the supporting
structures may at any time or times at the request and to accommodate the necessary
purposes of either the Railroad Company or the United States, with the written assent of the
other and upon such other terms and conditions as may be agreed between them be from time
to time changed; provided such change shall not prevent or interfere with the suitable and
convenient occupation, use and operation of the [Subsurface] for railroad, station, terminal
and other purposes of the Railroad Company, its successors and assigns, or the proper and
necessary support of the present building, or the building or buildings that may be erected
by the United States upon the parcel of land above described. (N.Y. County Register's Office,
Liber 3850, cp. 488-489 and 490-491.)
As tenant under the lease, Petitioner will construct a thirty-one story commercial office tower
on top of the existing eight story building and make certain renovations to the facade and internal
portions of that building. Under the terms of the lease, title to the building and all materials that are
incorporated into the building by Petitioner(other than any materials that may belong to a subtenant
pursuant to the terms of such subtenant's space lease) will, without any payment or any other act on
the part of the USPS, be and become an integral part of the building and property of the USPS.
In order to construct the commercial office tower, it is necessary that new building columns,
footings, girders and supports be constructed in the subsurface. Because the Railroad and the MTA
hold rights and easements in the subsurface, and as the construction of the building columns,
footings, girders and supports will interface with railroad operations, Petitioner must obtain certain
consents from the Railroad and the MTA regarding the exact location and/or dimensions of the new
subsurface construction as well as to certain related matters. Petitioner, the MTA and the Railroad
will therefore enter into an agreement under which the MTA and the Railroad will grant their
consent.
It is anticipated that Petitioner will hire a contractor or construction manager (hereinafter the
contractor) to act as a general contractor or construction coordinator during the construction period.
The contractor will, in turn, hire subcontractors. Other subcontractors or materialmen may also be
engaged. Purchases of materials for incorporation into the building will be made by Petitioner, the
contractor, the subcontractors and materialmen.

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TSB-A-89(8)S
Sales Tax
March 7, 1989

Petitioner and the contractor intend to rely on the lease as sufficient proof of the exempt
status of the materials purchased. The subcontractors and materialmen will rely on a signed
exemption document, 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.
Section 1105(a) of the Tax Law imposes a sales tax on "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4)(i) 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 1115(a) of the Tax Law exempts from the sales tax imposed under section 1105(a)
of the Tax Law and from the compensating use tax imposed under section 1110:
*

*

*

(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 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.

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TSB-A-89(8)S
Sales Tax
March 7, 1989
Among the organizations described in subdivision (a) of section eleven hundred sixteen are:
*
*
*
(2)
The United States of America and any of its agencies and
instrumentalities ....
Section 528.16 of the Sales and Use Tax Regulations states:
Tangible personal property sold to contractors for use in erecting structures of tax
exempt organizations.[Tax Law, §1115(a)(15)]
Form of Contract. (1) The form of contract entered into between an exempt
organization and its contractor is not relevant.
Section 541.3 of the Sales and Use Tax Regulations states:
Contracts with exempt organizations. [Tax Law, 1115(a)(15),(16),1116(a);...]
(a) When a contractor's customer is a governmental entity described in section
1116(a)(1) or (2) of the Tax Law, the contract signed by the government
representative and the prime contractor is sufficient proof of the exempt status of
purchases made for such contract.
(1) such governmental entities include:
(i) Pursuant to section 1116(a)(1) of the Tax Law the
State of New York, or any of its agencies,
instrumentalities, ... or political subdivisions. This
group includes, but is not limited to:
*
*
*
(g)... cities... and
(h)
any authority ... created by act of the
Legislature for a public purpose.
(ii) Pursuant to section 1116 (a) (2) of the Tax Law
the United State of America and any of its agencies
and instrumentalities, insofar as it is immune from
taxation.

(d)

*
*
Contracts with exempt organization.
(2)

*

Purchase for contracts (other then agency contracts).
(i)
Tangible personal property sold to a
contractor, subcontractor, or
repairman for use in erecting,

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TSB-A-89(8)S
Sales Tax
March 7, 1989
repairing, adding to, or altering a
structure or building owned by an
exempt organization, described in
section 1116(a) of the Tax Law, is
exempt when it is to become an
integral component part of such
structure or building.
(ii)

*
(v)

Purchases of tangible personal
property incorporated into the real
property of an exempt organization by
subcontractors and repairmen are
accorded the same treatment as
purchases by the prime contractor.
*

*

Documents. (a) If the customer is a
governmental entity, copies of signed
contracts and government purchase
orders are sufficient evidence to
establish the exempt status of the job
between the governmental entity and
the prime contractor. With respect to
the documents required between a
prime contractor and the
subcontractors, a signed document
between them which identifies the
project, location and exempt owner,
will form the basis for tax exemption
of tangible personal property
purchased for incorporation into the
exempt project. When purchasing such
tangible personal property for the
exempt project, the contractor or
subcontractor will issue a properly
completed contractor exempt purchase
certificate to the supplier.

Accordingly, because the materials which are purchased by Petitioner, the contractor,
subcontractors or materialmen for use in constructing the thirty-one story commercial office tower
or for renovating the facade and internal portions of the existing building will become integral
components of the real property owned by the USPS and because the USPS will immediately take
title to such materials, the purchases of such materials will be exempt from sales and compensating
use tax as provided under Section 1115 (a)(15) and 1115 (a)(16) of the Tax Law.

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TSB-A-89(8)S
Sales Tax
March 7, 1989
Ownership to the subsurface is granted to the USPS through the Deed which originally
conveyed the property from the New York Central Railroad to the United States of America. Under
the provisions of the Deed, the Railroad retained permanent and perpetual rights and easements to
the subsurface for exclusive use by the Railroad, its successor's and assigns (including lessees and
licensees) for railroad, station, terminal and other purposes. However, the deed also granted back to
the United States of America, its successors and assigns, the permanent and perpetual right and
easement to maintain, renew and replace within the subsurface the supporting structures then or at
any time constructed therein. The Deed also provides that the location and/or dimensions of the
supporting structure may be changed at any time at the request of either the Railroad Company or
the United States by written assent and upon such terms and conditions as may be agreed. Although
title to the property and the right and easement subsequently transferred from the U.S. to the USPS
and the rights and easements of the Railroad transferred to the Penn Central Corporation and its
subsidiary and subsequently transferred to their lesser, the MTA, the rights and easements as
provided in the Deed continue to be relevant. Accordingly, as the materials which are purchased for
use in constructing the new building columns, footings, girders and supports within the subsurface
beneath the existing building will become integral components of real property owned by the USPS,
the purchases of such materials will be exempt from sales and compensating use tax as provided
under Section 1115 (a)(15) of the Tax Law.
Petitioner, the contractor, subcontractor's and 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 with a properly completed form ST-120.1, Contractor
Exempt Purchase Certificate. Petitioner and the contractor should keep on file a copy of the lease
between Petitioner and the USPS as substantiation that the construction performed was exempt from
sales and use tax under Section 1115 (a)(15) and 1115(a)(16) of the Tax Law.

DATED: March 7, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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