Are janitorial services by resident apartment superintendents taxable when they are the complex's employees but are paid through a related company's central payroll?

Plain-English summary

Max M. Farash owns several apartment complexes, each with a resident on-site superintendent who performs light janitorial and related work. He asked whether those superintendents are employees of the complex (so their services are not taxable), even though their stipends are paid through Farash Corporation (FC) — a wholly owned company that runs a central payroll. Each superintendent is advertised for, interviewed, hired, supervised, controlled, and fired by that complex's manager, works only for that complex, and is paid a free apartment plus a $50–$100 weekly stipend. FC merely cuts the paychecks and files the W-2s, and is fully reimbursed by each complex.

The Department held the superintendents are the complexes' employees, so their services are not taxable:

• Employee services are excluded. Under § 527.7(c)(2), repair and maintenance services rendered by an employee for the employer are not receipts subject to tax (the relevant taxable category being servicing real property under § 1105(c)(5)).
• Control is the decisive test. The courts consistently hold that the determining element of an employer-employee relationship is the employer's right to direct and control the work (Brown v. St. Vincent's Hospital; Hardy v. Murphy; Greene v. Gallman; Albany College of Pharmacy v. Ross). Other factors — paying wages, the power to hire and fire — support but don't override the control test.
• The complex controls; FC doesn't. Because each complex interviews, hires, fires, supervises, and controls its superintendent, the employer-employee relationship is with the complex. That FC issues the checks and W-2s doesn't change it: FC exercises no control, and this is unlike DiMarco, Abiusi, Pascarella & Firnstein, TSB-A-89(27)S, where a management company both provided and controlled the worker.
• Result: the superintendents' light janitorial and related services are excluded from sales tax under § 527.7(c)(2), and the second question — whether bartering services for a free apartment is a taxable sale — is moot.

What this means for you

In-house employees' maintenance work isn't a taxable service

New York taxes maintaining/servicing/repairing real property, but it excludes that work when done by a genuine employee for the employer. A resident superintendent or maintenance worker who is truly your employee doesn't generate taxable service receipts — you're not buying a taxable service, you're paying wages.

Central payroll through a related company doesn't break the employee relationship

Routing paychecks and W-2s through an affiliated payroll company — on a fully reimbursed basis, with no control over the worker — does not convert your employees into an outside vendor's staff. The Department looked past the paperwork to who controls the work. Keep the control (hiring, supervision, direction, firing) with the entity that receives the services.

Contrast: a staffing/management company that controls the worker

The result flips when the outside company both supplies and controls the worker (as in the DiMarco opinion). There, the arrangement can look like a taxable service purchased from the management company. If you use a staffing or management company, the control facts — not just the payroll flow — determine the tax treatment.

Common questions

Q: Are a resident apartment superintendent's janitorial services taxable in New York?
A: Not if the superintendent is the complex's employee. Employee repair/maintenance services for the employer are excluded from tax under § 527.7(c)(2).

Q: We pay our maintenance staff through a related company's central payroll. Does that make their work a taxable service?
A: No, where the related company only processes payroll (fully reimbursed) and exercises no control. The employer-employee relationship — and the exclusion — follows control, which stays with the complex.

Q: When would using another company for staff create a taxable service?
A: When that company both supplies and controls the worker (as in TSB-A-89(27)S), the arrangement can be a taxable service purchased from that company.

Citations and references

Regulation, statute, and cases:

• 20 NYCRR § 527.7(c)(2) — repair/maintenance services rendered by an employee for the employer are not taxable receipts
• Tax Law § 1105(c)(5) — tax on maintaining, servicing, or repairing real property
• Brown v. St. Vincent's Hospital, 222 AD 402; Hardy v. Murphy, 29 AD2d 1038; Greene v. Gallman, 39 AD2d 270; Albany College of Pharmacy v. Ross, 404 NYS2d 779; DiMarco, Abiusi, Pascarella & Firnstein, CPA's, TSB-A-89(27)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (32)S
Sales Tax
April 15, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900628B

On June 28, 1990 a Petition for Advisory Opinion was received from Max M. Farash, 919
Winton Road South, Rochester, New York 14618.
The issues raised by Petitioner, Max M. Farash, are as follows:

1. Whether the on-site superintendents at each of Petitioner's apartment complexes are
   employees exclusively of the apartment complex at which they reside and work and therefore the
   services performed by them at apartment complexes owned by Petitioner are not subject to sales tax.
2. Whether the bartering for exchange of the superintendents' services for a free apartment
   results in a taxable sale under the provisions of Sections 526.7(a)2 and 526.7(d) of the Sales and Use
   Tax Regulations.
   Petitioner owns a number of apartment complexes, each of which engages at least one
   resident on-site superintendent for the purpose of performing light janitorial and other related
   functions. The superintendents are required to reside at the apartment complex where employed. The
   manager of a complex advertises for job applicants whenever a position for superintendent becomes
   available. Applicants are interviewed by the manager and the manager determines which applicant
   is to be hired. The superintendent is accountable solely to and will be under the direct supervision
   and control of such manager. The superintendent provides services only to the specific complex
   where employed and to no other person or organization.
   Each superintendent is compensated for services by receiving (and is required to live in) a
   rent free apartment at the complex where employed and a stipend ranging from $50.00 to $100.00
   per week.
   The stipends are paid through the Farash Corporation (hereinafter FC), a corporation wholly
   owned by Petitioner, as a central payroll processing service. FC is fully reimbursed for the stipends
   and related payroll taxes attributable to each superintendent by the respective complexes. The
   stipends are reported on forms W-2 issued by FC.
   None of the superintendents render services directly or indirectly to FC nor do any of the
   complexes directly or indirectly pay FC for the "use" of their respective resident superintendents.
   FC's business is completely unrelated to that of the complexes and such complexes are separate and
   distinct entities except for the payroll linkage noted above.
   FC has a staff and computer capability which is unavailable at the respective complexes.
   Cost savings are achieved by having the superintendents' payroll processed by FC. Each complex
   fully reimburses FC for the payroll and related taxes attributable to their superintendent. The W-2
   forms are also processed by FC. Although the W-2's should reflect the respective complexes as the

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Sales Tax
April 15, 1991

"employer/payor" of the stipend "wages", at one time they did not. This oversight has since been
corrected.
Each project manager is interviewed, hired and, if necessary, fired by an individual
designated as the Director of Residential Division. This individual reports directly to Petitioner, the
owner of each project, and implements the programs and operations of each of the specific projects
under the direction of and according to the objectives of Petitioner.
Direction and control of the services performed by the project managers rest with the Director
of Residential Division. The Director defines and redefines the scope and nature of the duties to be
performed by the project managers on a frequent and regular basis. The project managers report
exclusively and directly to the Director.
Project managers were paid, as was the case with the superintendents, through the central
payroll facilities of Farash Corporation with an accompanying direct charge to the specific projects
and direct reimbursement to Farash Corporation by the specific projects for their respective project
managers.
Section 527.7 of the Sales and Use Tax Regulations states, in part:
Maintaining, servicing or repairing real property. [Tax Law §1105(c)(5)]
(c) Exclusions.
(2)

Where repair and maintenance services are rendered by an employee for his
employer, the wages, salaries and other compensation paid to the employee
are not receipts subject to tax for the performance of such services.

In determining whether a relationship of master and servant or employer and employee exists,
the courts have consistently ruled that the determining element is the employer's right to direct and
control the work of the employee.
In Brown v. St. Vincent's Hospital, 222 AD 402, the Court stated, ". . .[t]he relation of
master and servant, or of employer and employee, is created by contract, express or implied.
(McNamara v. Leipzig, 227 N.Y. 291, 294.) In determining whether or not such relation exists
where the question of the contract is obscure, certain tests may be applied as bearing on the
relationship. Primarily the test is the right of the employer to control and direct the work of the
employee. (Baldwin v. Abraham, 57 App. Div. 67, 74; affd., 171 N.Y. 677; Meredosia Levee & Dr.
Dist. v. Industrial Comm; 285 ILL. 68.) Other tests, sometimes of value but not fully determinative
of the question, are the payment of wages, and the right to hire and discharge. (Braxton v.
Mendelson, 233 N.Y. 122, 124.)"

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Sales Tax
April 15, 1991

In Hardy v. Murphy, 29 AD2d 1038, the Court stated ". . .In determining the issue of
employer-employee relationship, it has been held that it is a question of control in the absence of
which there can be no finding of employment. (Matter of Morton, 284 N.Y. 167, People ex rel
Feinberg v. Chapman, 274 App. Div. 715.)"
In Greene v. Gallman, 39 AD2d 270, the Court stated ". . .It is the degree of control and
direction exercised by the employer that is determinative of whether or not the taxpayer is an
employee. (Matter of Frishman v. New York State Tax Comm., 33 AD2d 1071, mot. for lv. to app.
den. 27 NY2d 483; Matter of Hardy v. Murphy, 29 AD2d 1038; Matter of Britton v. State Tax
Comm., 22 AD2d 987, affd. 19 NY2d 613.)"
In Albany College of Pharmacy v. Ross, 404 N.Y.S.2d 779, the Court stated ". . .[I]t is said
that at common law there are four elements which are considered upon the question whether the
relationship of master and servant exists--namely, the selection and engagement of the servant, the
payment of wages, the power of dismissal and the power of control of the servant's conduct. . .' (53
Am. Jur. 2d, §2; see, also, Matter of Pelow v. Sork Enterprises, 39 AD2d 494, 496, 337 N.Y.S.2d
218, 220 affd. 33 N.Y.2d 944, 353 N.Y.S.2d 729, 309 N.E.2d 130), but of all the distinguishing
elements, it is the power of control which is conclusive (Matter of Liberman v. Gallman, 53 AD2d
766, 767, 384 NYS2d 252, 253 revd on other grounds 41 N.Y.2d 774, 396 N.Y.S.2d 159, 364
N.E.2d 823; Matter of Hardy v. Murphy, 29 A.D.2d 1038, 1039, 289 N.Y.S.2d 694)."
Accordingly, since a superintendent is interviewed, hired, fired and is under the direct
supervision and control of an apartment complex manager, the relationship between a superintendent
and the apartment complex is that of master and servant or employer and employee. The relationship
meets the primary test of the rights of the employer to control and direct the employee. (Brown v.
St. Vincent's Hospital, 222 AD 402, supra)
Although consideration must be given the fact that the stipends received by the
superintendents are paid through FC on FC's checks and the year end W-2 forms issued to the
superintendent are issued by FC and indicate FC to be the employer, it has been held that in the
absence of control of the employer there can be no finding of employment, (Hardy v. Murphy, 29
AD2d, 1038, supra) Unlike the facts presented in DiMarco, Abiusi, Pascarella & Firnstein, CPA's
Adv Op Comm of T & F, August 9, 1989, TSB-A-89(27)S, wherein the employee was provided by
and paid by a management company, in the instant case FC does not exercise any control over the
superintendents other than performing the payroll function of payment of the stipends, for which FC
is totally reimbursed by the applicable complex, and the withholding and reporting of applicable
payroll taxes.
Since the relationship between the superintendents and the apartment complexes is
determined to be that of employer and employee, the light janitorial and other related services
performed by the superintendent for the apartment complex are considered to be services performed
by an employee for an employer are therefore excluded from sales tax under the provisions of

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April 15, 1991

Section 527.7(c)(2) of the Sales and Use Tax Regulations. Moreover, because the relationship
between the superintendent and the apartment complex is that of employer and employee issue "2"
becomes moot and need not be addressed in this advisory opinion.

DATED: April 15, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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