A developer builds subdivision roads it must later deed to the town — are the construction materials exempt from sales tax?

Plain-English summary

The Michaels Group, Inc., a residential developer, plans a new subdivision. As a condition of subdivision approval, it must build the subdivision's roads and then deed them to New York State, a municipality, or another exempt organization for public use. It hires a construction subcontractor to build the roads, and the subcontractor invoices Michaels for the materials, supplies, and labor. Michaels asked whether the materials and supplies are subject to sales tax — and whether the answer changes if the land is deeded to the municipality before construction.

The core rule: who owns the realty when the materials go in. Sales of materials to a contractor for use on real property are retail sales (§ 1101(b)(4)(i)) and taxable under § 1105(a) — unless an exemption applies. The exemptions for exempt-organization construction, §§ 1115(a)(15) and (16) and § 541.1(e), require that the materials become an integral component part of real property owned by an exempt organization at the time they are incorporated.

Result 1 — roads deeded after construction: TAXABLE. When the subcontractor builds the roads, "there is no municipal public works project involved." The roads are "a private facility being constructed on private land with private money"; the town's only connection is that it will accept them as a gift afterward. By the time the roads are conveyed, the materials have already become real property — but at the moment they were incorporated, the realty was not owned by an exempt organization. The future obligation to deed them over "does not satisfy the statutory and regulatory requirements." So the materials are taxable (citing 1973 Op. St. Compt. #73-30).

Result 2 — land deeded before construction: EXEMPT. If Michaels instead deeds the land to the municipality before the materials and supplies are incorporated into it, then the roads are built on realty already owned by the exempt organization, the §§ 1115(a)(15)/(16) and § 541.1(e) conditions are met, and the materials are exempt from sales tax.

What this means for you

Timing of ownership, not the eventual owner, controls

The exemption for building on exempt-organization property is unforgiving about when ownership exists. It's not enough that the finished improvement will belong to a town or the State; the property has to be owned by the exempt organization at the moment the materials are incorporated. A binding promise to convey later — even one required for approval — doesn't count.

Developers can plan around this

The opinion hands developers a concrete lever: deed the road land to the municipality up front, before construction, and the materials become exempt. Left as a post-completion dedication, the same materials are fully taxable. For large infrastructure dedications (roads, drainage, utilities), the order of operations can materially change the tax bill.

"It becomes public property anyway" is not an exemption

Dedications, gifts, and even the town's latent power to take the roads by eminent domain don't create an exemption while the work is private. Contractors and developers should assume materials are taxable unless the exempt owner already holds title to the realty.

Common questions

Q: Are materials for roads that will be dedicated to a town exempt?
A: Not if the land is still private when the materials are installed. The exemption requires the exempt organization to own the realty at the time of incorporation, so a later dedication doesn't qualify — the materials are taxable.

Q: How can the developer make the materials exempt?
A: Deed the underlying land to the municipality before the materials are incorporated. Then the work is on exempt-organization-owned realty and §§ 1115(a)(15)/(16) apply.

Q: Does the town's power of eminent domain matter?
A: No. While the roads are built on private land with private money, they're a private facility; the possibility of a future taking doesn't create the exemption.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — sale of materials to a contractor for use on real property is a retail sale
• Tax Law § 1115(a)(15) — exemption for materials becoming an integral part of an exempt organization's realty (erecting/adding to/improving)
• Tax Law § 1115(a)(16) — same exemption for maintaining/servicing/repairing an exempt organization's realty
• Tax Law § 1116(a)(1) — government/exempt-organization purchases
• 20 NYCRR § 541.1(e) — materials integral to real property owned by a § 1116(a) organization are exempt

Cited authority:

• 1973 Op. St. Compt. #73-30

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_53s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(53)S
Sales Tax
October 23, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900911A

On September 11, 1990 a Petition for Advisory Opinion was received from The Michaels
Group, Inc., 6 Century Hill Drive, Latham, New York 12110.
The issues raised by Petitioner, The Michaels Group, Inc., are:
1) Whether Petitioner pursuant to a construction contract with a subcontractor, is required
to pay New York State sales tax on materials and supplies purchased and used by subcontractors to
build, and which become a component part of, roads which, as required by the subdivision approval
process, are to be deeded over to New York State, a municipality, or other organization exempt from
sales tax pursuant to section 1116(a) of the Tax Law after the construction of the roads are
completed.
2) Whether the result would be different if the land on which the roads are to be constructed
are deeded to the exempt organization prior to the construction of the roads.
Petitioner, a land developer and builder of residential homes, proposes to build a new
residential subdivision. As part of the proposed subdivision, the Petitioner identifies roads which are
to be built. As part of the approval of the subdivision, the Petitioner agrees to deed the title to these
roads over to New York State, a municipality, or other exempt organization for public use. This
agreement is a condition of the approval of the subdivision. Petitioner contracts with a construction
contractor (the subcontractor) to build the subject roads using the requisite materials and supplies
and in accordance with the specifications as approved in the subdivision plat. The subcontractor
invoices the Petitioner for the costs of materials and supplies, as well as the labor incurred, in
connection with road construction in accordance with the construction contract.
Upon completion of the subdivision, these roads are deeded over to the municipality which
is an exempt organization. The materials and supplies used to build these roads then become an
integral part of real property owned by an exempt organization. At the time of the subdivision
approval, there is no speculation as to whether the roads will be deeded over to the municipality; the
approval for the subdivision is conditioned on this transfer. In addition, if the roads are not deeded
over, the municipality could claim the roads through its power of eminent domain, and no
compensation would be necessary.
Section 1105(a) of the Tax Law imposes sales tax upon "[t]he 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 in part defines a "retail sale" as:
TP-9 (9/88)

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TSB-A-90(53)S
Sales Tax
October 23, 1990
. . .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, is deemed
to be a retail sale regardless of whether the tangible personal property is to be
resold as such before it is so used or consumed. . . .
Section 1115(a)(15) of the Tax Law provides an exemption from the sales tax imposed by
section 1105(a) of the Tax Law for:
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 provides an exemption from the sales tax imposed by
Section 1105(c) of the Tax Law for:
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.
Section 1116(a)(l) of the Tax Law provides that a sale shall not be subject to sales tax when
it is made to:
The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement
or compact with another state or Canada) 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 541.1(e) of the Sales and Use Tax Regulations provides that:
Tangible personal property purchased by a contractor that is to become an
integral component part of real property owned by an organization described
in section 1116(a) of the Tax Law is exempt from the New York State and

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Sales Tax
October 23, 1990
local sales tax. (For contracts with exempt organizations, see section 541.3 of this Part.)
In the instant case when the Petitioner's subcontractors construct the roads, prior to deeding
them to the municipality, there is no municipal public works project involved. The roads are being
built for the purpose of providing access to homes being built in the development. The only
relationship that the municipality has to the roads is that it will accept them as a gift from the
Petitioner after they are built and thereafter maintain them. In the meantime they are a private facility
being constructed on private land with private money. By the time the roads are to be conveyed to
the municipality, all of the materials used in the construction of the roads will have been converted
into real property. See 1973 Op St Compt #73-30.
Thus the sale of the materials and supplies used in the construction of roads to Petitioner's
subcontractors are retail sales pursuant to Section 1101(b)(4)(i) of the Tax Law and subject to tax
pursuant to Section 1105(a) of the Tax Law, since they are not, at the time they are incorporated into
the realty, used in constructing a facility for an organization exempt from tax pursuant to Section
1116(a)(1) of the Tax Law as required by Sections 1115(a)(15) and 1115(a)(16) of the Tax Law.
Section 541.1(e) of the Sales and Use Tax Regulations requires that the real property be owned by
the municipality at the time the materials and supplies are incorporated into the project. The fact that
the Petitioner may be required at a future time to deed the roads to the municipality in order to obtain
subdivision approval does not satisfy the statutory and regulatory requirements needed to obtain
exemption from sales tax.
However if the real property upon which the roads are to be constructed are deeded by the
Petitioner to the municipality prior to the incorporation of the materials and supplies into the real
property, then the conditions set forth for exemption in sections 1115(a)(15) and 1115(a)(16) of the
Tax Law and Section 541.1(e) of the Sales and Use Tax Regulations would have been met and
therefore the purchase of such materials and supplies would be exempt from the sales tax imposed
by Section 1105(a) of the Tax Law.

DATED: October 23, 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.