Can a food-service management company buy supplies tax-free for a school district it serves, when the district reimburses it?

Plain-English summary

ARASERVE, Inc. manages a New York school district's food-service program under contract, running the school lunch, breakfast, and special-milk programs. To do so it buys "miscellaneous expense" items — paper supplies, cleaning materials, equipment rentals, uniforms, menu printing, and the like — and the district reimburses ARASERVE for these allowable costs up to a per-meal maximum. Some of ARASERVE's invoices to the district included sales tax, and the district objected: as a non-profit governmental entity, it argued, these items should be tax-free, and asked why ARASERVE couldn't just use a resale certificate or the district's exemption number.

The Department sided with taxing ARASERVE's purchases. Its reasoning:

• Sales to the school district (a political subdivision) are exempt under § 1116(a)(1) and § 529.2 — but only when the district, or a properly authorized agent of the district, is the direct purchaser.
• ARASERVE is an independent contractor, not the district's agent. The contract says ARASERVE "shall be an independent contractor and not an employee," there is no agency agreement, and title to all commodities remains with ARASERVE. ARASERVE's own personnel initiated the purchases, ARASERVE paid the vendors, and ARASERVE sought monthly reimbursement. So it cannot make tax-exempt purchases on the district's behalf under § 1116(a)(1) (citing The Seiler Corporation, TSB-H-85(236)S).
• ARASERVE also cannot buy the items for resale under § 1101(b)(4), because title never passes to the district — ARASERVE uses and consumes the items in performing its management service.

Therefore the sales tax ARASERVE pays is its own business expense, not a tax imposed on the school district.

What this means for you

A government contract doesn't automatically confer the government's exemption

Serving an exempt entity — even a school district on a cost-reimbursement basis — does not let a contractor buy tax-free. The exemption belongs to the governmental purchaser, and a contractor gets it only by being properly designated as the entity's agent. Absent that agency, the contractor is a taxable consumer of what it buys to perform the job.

Agency must be real and documented — and title matters

Two facts sank ARASERVE's position: there was no agency agreement, and title to the goods stayed with ARASERVE. This mirrors the treatment of construction contractors on exempt-organization jobs (see the IDA-agency analysis in TSB-A-90(52)S): to buy on an exempt entity's behalf, you need an actual agency designation, and to buy for resale you need title to pass to the exempt entity. A cost-plus reimbursement arrangement, by itself, is neither.

Structure the deal deliberately if you want the exemption

If tax-free purchasing is important, the parties can set it up: have the district appoint the contractor as its authorized purchasing agent (with the paperwork to prove it), or have the district buy directly. Left as an ordinary independent-contractor reimbursement, the contractor eats the tax as a cost of doing business.

Common questions

Q: Can a contractor use a school district's tax exemption to buy supplies?
A: Only if the contractor is a properly authorized agent of the district. An ordinary independent contractor cannot, even if the district reimburses the cost.

Q: Can the contractor instead buy the items for resale to the district?
A: No, if title to the items never passes to the district. Here ARASERVE used and consumed the items itself, so the resale exclusion didn't apply.

Q: Who bears the sales tax?
A: ARASERVE. The tax is its own expense of performing the food-service management contract, not a tax on the district.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — definition of retail sale; resale exclusion
• Tax Law § 1116(a)(1) — exemption for New York State and its political subdivisions (including school districts)
• 20 NYCRR § 529.2 — governmental entities; how a school district exercises its exemption

Cited authority:

• The Seiler Corporation, Dec. St. Tax Comm., Sept. 13, 1985, TSB-H-85(236)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(47)S
Sales Tax
September 27, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900628A

On June 28, 1990, a Petition for Advisory Opinion was received from ARASERVE, Inc. P.O.
Box 7548, Philadelphia, PA 19101.
The issue raised by Petitioner, ARASERVE, Inc., is whether purchases or sales of certain
"miscellaneous expense" items by Petitioner (a food management company) are subject to New York
State and local sales tax when such items are used by Petitioner in fulfillment of a contractual
agreement entered into with a New York State school district and the agreement provides that
Petitioner be reimbursed for such purchases by the school district.
Petitioner and a school district located within New York State have entered into a contract
whereby Petitioner manages the school district's food service program, providing food service for
students, faculty and staff. Petitioner has the exclusive right to operate the school lunch program
and/or breakfast program and/or special milk program. The school district reimburses Petitioner for
allowable direct costs up to a maximum amount per meal.
Allowable direct costs include miscellaneous expenses which are defined as paper supplies
(including decorations), equipment rental, cleaning materials, commodity handling and warehousing
charges, travel as required for effective program management and agreed upon by the school district,
uniforms, menu paper and printing, taxes and licenses, laundry and insurances and other costs.
The agreement entered into between Petition and the school district states, in part:
Page 15
1.
Scope and Purpose
E.
The F.S. Contractor [Petitioner] shall be an independent contractor and not
an employee of the S.F.A. [school district]...
Page 19
6.
Purchases
B.
Title to all commodities purchased by the F.S. Contractor shall remain with
the F.S. Contractor.
In correspondence to Petitioner dated May 22, 1990, the school district notes that upon
review of detailed transactions submitted by Petitioner for monthly reimbursement, several invoices
include a charge for sales tax. The school district contends that as it is a non-profit organization,
items purchased from Petitioner should not include sales tax. The school district reasons that if it had
directly purchased and paid for the same items, sales tax would not have been invoiced. It is also the
school district's contention that Petitioner appears to be merely buying items for the school lunch
program, paying for such items and then invoicing the school district for the exact amount paid. The
TP-9 (9/88)

-2­
TSB-A-90(47)S
Sales Tax
September 27, 1990

school district questions why Petitioner cannot issue either a Form ST-120, Resale Certificate or an
exemption certificate using the school district's tax exempt number?
Section 1105 of the Tax Law states, in part:
Imposition of sales tax - ... there is hereby imposed and there shall be paid a tax ...upon:
(a) 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 a retail sale as:
A sale of tangible personal property to any person for any purpose other than (A) for
resale as such...
Section 1116 of the Tax Law states, in part:
Exempt organizations - (a) Except as otherwise provided in this section, any sale... to any of
the following ... shall not be subject to the sales and compensating use taxes imposed under
this article:
(1) The State of New York or any of its ... political subdivisions where it is the
purchaser, user or consumer...
Section 529.2 of the New York State Sales and Use Tax Regulations states, in part:
New York State, agencies, instrumentalities, public corporations, and political subdivisions
thereof. [Tax Law, §1116(a)(1)]
(a) Governmental entities.
(3) A political subdivision as used in this section means a ... school district ... of this State.
(b) As purchaser.
(1) New York State or any of its ... political subdivisions (hereinafter referred to as
New York State governmental entities) are not subject to sales or use tax when they
are the purchaser, user or consumer of tangible personal property or services....
(2) New York State governmental entities as purchasers, users, consumers ... must
exercise their right to exemption through the issuance of governmental purchase
orders or the appropriate exemption document.

Pursuant to Section 1116(a)(1) of the Tax Law and Section 529.2 of the New York State
Sales and Use Tax Regulations, sales to New York State or political subdivisions thereof, in the
instant case the school district, are not subject to the sales and compensating use tax imposed by
Articles 28 and 29 of the Tax Law.

-3­
TSB-A-90(47)S
Sales Tax
September 27, 1990

However, in order for the exemption provided under Section 1116(a)(1) of the Tax Law to
apply to Petitioner's purchases of miscellaneous expense items for use by Petitioner in performing
food service operations for the school district, it must be clearly established that such items are
directly purchased by Petitioner as a properly authorized agent of the school district. (The Seiler
Corporation, Dec St Tax Comm, September 13 1985, TSB-H-85(236)S.)
In the instant case the school district, either itself or through Petitioner, was not the direct
purchaser, user or consumer of the miscellaneous expense items at issue. Petitioner and the school
district have not entered into an agreement whereby Petitioner is designated to act as agent for the
school district. To the contrary, the purchases in question were initiated by Petitioner's personnel,
the vendor invoices arising therefrom were sent to the school district location for verification of
quantity, pricing, etc. and then forwarded to Petitioner's home office for payment to the vendors by
Petitioner. Petitioner sought monthly reimbursement for such expenses by submitting a listing of
detailed transactions to the school district. Additionally, Petitioner used and/or consumed the items
at issue in performing its food services management operation for the school district.
Since Petitioner has not been properly authorized to act as agent for the school district,
Petitioner is precluded from making tax exempt purchases on behalf of the school district as
provided under Section 1116(a)(1) of the Tax Law. Moreover, as title to the items purchased by
Petitioner does not pass to the school district, such items are not considered to be resold to the school
district but are deemed to be used and/or consumed by Petitioner in performing its food service
management operation. Therefore, Petitioner is precluded from making such purchases tax exempt
as purchases for resale pursuant to Section 1101(b)(4) of the Tax Law.
Accordingly, when Petitioner submits listings of detailed transactions, including
miscellaneous expense items, to the school district, the sales tax shown is considered to be an
expense incurred by Petitioner in performing its food service management operation and is not
considered to be a sales tax imposed on the school district.

DATED: September 27, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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