Can a federal contractor buy tax-free as the government's agent, and is the state estopped by an old letter that wrongly said it could?

Plain-English summary

West Valley Nuclear Services Co., Inc., a Westinghouse subsidiary, is the general contractor to the U.S. Department of Energy at the West Valley Demonstration Project. It made two arguments: (I) that a 1982 Department letter it received — stating it "may act as an agent" for DOE — estops New York from assessing any sales or use tax before January 31, 1989; and (II) that it qualifies for the agency-contract exemption, so its purchases under the contract shouldn't be taxed.

The Department rejected both.

• The contract forbids agency. Under 20 NYCRR § 541.2(c), an agent-contractor must be able to act in the place of its principal. But the DOE contract expressly states that procurement "shall be made in the name of the Contractor, shall not bind nor purport to bind the Government." That language doesn't just fail to create an agency — it prohibits the contractor from acting as one.
• So the contractor is the purchaser, and its purchases are taxable. Because the contractor (not the United States) makes the purchases, and the items don't become an integral component of federal real property, no exemption applies under § 1116(a)(2) (sales to the U.S.) or § 1115(a)(15)/(16) (property becoming part of an exempt entity's real property). The purchases are subject to sales and use tax (Butler Mechanical, TSB-A-88(7)S).
• No estoppel from the erroneous letter. The 1982 letter wrongly determined the contractor was a federal agent, so the contractor may not rely on it (Turner Construction v. State Tax Commission, 57 AD2d 201). It is liable for all appropriate taxes.

What this means for you

Read your government contract's procurement clause before claiming agency

The agency-contract exemption lets a contractor buy tax-free for an exempt principal — but only if the contract actually makes it the principal's agent. A clause saying purchases are in the contractor's own name and don't bind the government is fatal: it makes you the purchaser and the buys taxable. The words in the contract control, not the label "agent."

Materials must become part of the exempt owner's real property to be exempt

Even for work on a federal project, the § 1115(a)(15)/(16) exemptions require the property to become an integral component of the exempt entity's building or real property. General procurement that doesn't meet that test is taxable to the contractor.

You can't rely on a state letter that got the law wrong

This is the hard lesson on estoppel: an erroneous favorable ruling doesn't bind the state. New York generally cannot be estopped by an incorrect determination, so a letter that wrongly blessed your position won't shield you from tax later. Reliance on an incorrect agency letter is not protected.

Common questions

Q: Our contract calls us the government's contractor — can we buy tax-free as its agent?
A: Only if the contract makes you a true agent who can act in the government's place. A clause that purchases are in your name and don't bind the government defeats agency, making your purchases taxable.

Q: Doesn't working on a federal project exempt our purchases?
A: Not by itself. The property must become an integral component of the exempt owner's real property; general procurement in your own name is taxable.

Q: We got a state letter years ago saying we were an agent — doesn't that protect us?
A: No. Because that letter was wrong on the law, you can't rely on it; the state isn't estopped by an erroneous determination.

Citations and references

Statutes and regulations:

• Tax Law § 1116(a)(2) — exemption for the United States and its agencies where it is the purchaser
• Tax Law § 1115(a)(15), (16) — exemption for property that becomes an integral component of an exempt entity's real property
• 20 NYCRR § 541.2(c) — definition of an agency contract (agent acts in the place of the principal)

Cited authority:

• Turner Construction v. State Tax Commission, 57 AD2d 201, 394 NYS2d 78 (1977) — no reliance on an erroneous determination
• Re Butler Mechanical, Inc., Adv Op Comm T & F, December 22, 1987, TSB-A-88(7)S — contractor purchases not exempt

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_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(7)S
Sales Tax
February 7, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890829A

On August 29, 1989, a Petition for Advisory Opinion was received from West Valley Nuclear
Services Co., Inc., P.0. Box 191, West Valley, New York 14171-0191.
The issues raised by Petitioner, West Valley Nuclear Services Co., Inc. are:
I. Whether it relied to its detriment on the Department's letter of February 22, 1982, such that
New York is now estopped from assessing any sales or use tax prior to January 31, 1989.
II. Whether it qualifies for the agency contract exemption, thereby making inappropriate any
sales or use tax on its purchases under the contract.
Petitioner, a subsidiary of Westinghouse Electric Corporation, has a contract to perform
services at the West Valley Demonstration Project as the general contractor for the U.S. Department
of Energy.
Petitioner submitted a copy of the contract between the U.S. Department of Energy and West
Valley Nuclear Services Inc. Petitioner also submitted a copy of a letter dated February 22, 1982 and
written by the Sales Tax Instructions and Interpretations Unit addressed to West Valley Nuclear
Services stating that West Valley was acting as an agent for the Department of Energy. The pertinent
part of such letter stated:
Based on the information furnished in a letter dated October 9, 1981
by the Department of Energy Idaho Operations Office, it is considered
that you may act as an agent in the performance of contract No.
DE-ACO7-81NE 44139.
Petitioner asserts that it is acting as an agent for the Federal government and, as such, the
Federal government and not Petitioner is the purchaser of the property which Petitioner uses to
perform its services. It further asserts that the Department is estopped from assessing any taxes prior
to January 31, 1989.
The applicable sections of the sales and use tax imposed by Article 28 of the Tax Law
provide that:
Sec. 1116. Exempt organizations.-(a) Except as otherwise
provided in this section, any sale or amusement charge by or to any
of the following or any use or occupancy by any of the following shall
not be subject to the sales and compensating use taxes imposed under
this article:

(2) The United States of America, and any of its agencies and
instrumentalities, insofar as it is immune from taxation where it is the

-2­
TSB-A-90(7)S
Sales Tax
February 7, 1990
purchaser, user or consumer, or where it sells services or property of
a kind not ordinarily sold by private persons.
Section. 1115. Exemptions from sales and use taxes. - (a)
Receipts from the following shall be exempt from the tax on retail
sales imposed under subdivision (a) of section eleven hundred five
and the compensating use tax imposed under section eleven hundred
ten:

(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 of 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.
Section 541.2(c) of the sales tax regulations defines an agency contract as:
(c) An agency contract means an agreement which permits a
contractor and subcontractor to act as an agent of, that is, in the place
of the principal, his customer. Purchases made by the agent-contractor
or agent-subcontractor on behalf of the principal are treated in the
same manner as if the purchases were made by the principal. All
purchases (including rentals of contractor's tools, supplies, machinery
and equipment) made by the agent-contractor or agent- subcontractor
on behalf of the principal are treated in the same manner as if the
purchases were made by the principal.
The contract between the U.S. Department of Energy and Petitioner submitted by it contained
the following pertinent provisions:
ARTICLE IX - CONTRACTOR PROCUREMENT (Apr 1984)
9.1 DOE reserves the right at any time to require that the Contractor submit for approval any or all
procurements under this contract. The Contractor shall not procure any item whose purchase is

-3­
TSB-A-90(7)S
Sales Tax
February 7, 1990
expressly prohibited by the written direction of DOE and shall use such special and directed
procurement sources as may be expressly required by DOE.
The Contractor shall provide information concerning procurement methods, practices, and
procedures used or proposed to be used and shall use methods, practices and procedures
which are acceptable to DOE. Procurement arrangements under this contract shall be made
in the name of the Contractor, shall not bind nor purport to bind the Government, shall not
relieve the Contractor of any obligation under this contract (including, among other things,
the obligation properly to supervise, administer, and coordinate the work of subcontractors),
and shall be in such form and contain such provisions as are required by this contract or as
DOE may prescribe. (Emphasis supplied)
11.1

Compensation for Contractor's Services. Payment for the allowable costs as hereinafter
defined, and of the fixed fee, and of the base fee, and of so much of the maximum available
award fee as may be determined by the Contracting Officer as hereinafter provided (termed
"award fee"), as the case may be, shall constitute full and complete compensation for the
performance of the work under this contract. This contract shall be a cost-plus-fixed-fee
contract for the period ending on September 30, 1983; and for the period subsequent to such
date this contract shall be a cost-plus-award-fee contract. (Emphasis supplied)

On October 1, 1986 the contract was extended for another five-year term; however, the
substance of the contract remained unchanged.
Based upon section 541.2(c) of the sales and use tax regulations, an agent must be able to act
in the place of his principal. The Department of Energy Contract contains specific language
prohibiting Petitioner from acting on its behalf (e.g. "[p]rocurement arrangements under this contract
shall be made in the name of the Contractor, shall not bind nor purport to bind the Government...").
The language of the contract not only fails to name the contractor as an agent of the government, but
also specifically prohibits the contractor from acting in an agency capacity. Consequently, since
Petitioner, rather than the Federal government, is making the purchases and since such purchases do
not become an integral component part of a structure, building or real property owned by the Federal
government, such purchases do not qualify for exemption from tax under any of the provisions
referred to above and are, therefore, subject to sales and use tax. (Re Butler Mechanical, Inc., Adv
Op Comm T & F, December 22, 1987, TSB-A-88(7)S.)
In addition, the letter of February 22, 1982 wrongly determined that Petitioner was an agent
of the Federal government for purposes of contract no. DE-ACO7-81NE 44139. Accordingly,
Petitioner may not rely upon such letter.

-4­
TSB-A-90(7)S
Sales Tax
February 7, 1990
(Turner Construction v. State Tax Commission 57 AD2d 201, 394 NY Supp 2d 78, (1977); Re
Butler Mechanical, Inc., supra.) Petitioner is liable for all appropriate taxes.

DATED: February 7, 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.