Can a newly formed sister corporation buy pool construction materials for resale to an affiliated pool-building contractor, and collect tax on those resales?

Plain-English summary

Majestic Pools Inc. builds in-ground concrete swimming pools (making it a contractor) and also resells pool accessories. Its shareholders want to split the buying function into a new sister corporation ("Newco") — same owners, officers, and directors, renting space/equipment from Majestic, but with its own EIN and employees. Newco would buy all construction materials and supplies from third-party vendors on resale certificates (Form ST-120), take title and possession, then sell construction materials to Majestic (for Majestic's pool building) and accessories to retail customers — collecting and remitting sales tax on those sales. Majestic asked whether this works.

The Department held it does:

• A contractor can't buy for resale what it installs; a reseller can. A contractor like Majestic cannot treat as purchases for resale the materials it uses to perform a repair or capital improvement (§ 1101(b)(4); § 541.1(b) — a sale to a contractor for use in construction is a retail sale). But Newco is not a contractor — it simply buys and resells — so its purchases can qualify as purchases for resale.
• Related-company sales are treated like arm's-length sales. Sales by one corporation to a related corporation are treated the same as sales between unrelated taxpayers unless the first bought as the other's agent, or a specific exclusion applies under § 1101(b)(4)(iii) (merger/consolidation, liquidating dividend, or incorporation). Agency requires things like a written agency agreement and passing property on at cost plus a normal agency fee (§ 541.3(d)(4)). Affiliated corporations — parent/subsidiary or brother-sister — are usually separate entities for sales tax (Tops, Inc., TSB-D-89(66)S; 107 Delaware Associates, 64 NY2d 935).
• No agency here. Because Newco will not act as Majestic's agent (each does business in its own name, neither binds the other), Newco is a separate entity when it buys and sells.
• Result: third-party vendors' sales to Newco are sales for resale if Newco issues valid ST-120 certificates; and Newco's sales of construction materials to Majestic are taxable — Newco must collect and remit tax on those sales where delivery to Majestic occurs in New York.

What this means for you

Splitting purchasing into a separate reseller entity is a recognized structure

A contractor pays tax on the materials it installs, because it's the end user of those materials — it can't buy them for resale. But interposing a genuinely separate reseller company changes who does what: the reseller buys for resale (tax-free on ST-120) and then charges tax when it sells the materials to the contractor. The tax still gets paid — just at the reseller-to-contractor sale instead of at the vendor-to-contractor purchase.

The entity has to be real and independent — not an agent

This only works because Newco is treated as a separate entity. If the new company were merely the contractor's agent — buying on its behalf, passing goods through at cost plus a fee — the Department could collapse the transaction. Keep the entities genuinely independent: own name, own EIN and employees, own title and possession, no authority to bind each other, no agency documentation.

Same-owner affiliates are still separate taxpayers for sales tax

Common ownership doesn't merge two corporations for sales-tax purposes. Brother-sister and parent-subsidiary companies are generally treated as independent (Tops; 107 Delaware Associates), so intercompany sales between them are taxable sales like any other.

Common questions

Q: Can a separate company buy construction materials for resale and sell them to an affiliated contractor?
A: Yes. A non-contractor reseller can buy for resale on Form ST-120, and its sales of those materials to the contractor are taxable sales on which it collects tax.

Q: Why can't the contractor just buy the materials for resale itself?
A: Because a contractor is the end user of materials it installs in a repair or capital improvement; those purchases are retail sales, not purchases for resale (§ 1101(b)(4); § 541.1(b)).

Q: Does common ownership make the two companies one taxpayer?
A: No. Affiliated corporations are usually separate entities for sales tax, so intercompany sales are taxable — unless one is acting as the other's agent or a specific merger/liquidation/incorporation exclusion applies.

Citations and references

Statutes, regulations, and decisions:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4) — "retail sale" excludes purchases for resale; a contractor's purchases for use in a repair/capital improvement are not for resale; § 1101(b)(4)(iii) exclusions (merger, liquidating dividend, incorporation)
• 20 NYCRR § 541.1(b) — a sale to a contractor for use in construction is a retail sale
• 20 NYCRR § 541.3(d)(4) and § 526.10(a)(11) — when agency is found; joint liability of agent and principal
• Tops, Inc., TSB-D-89(66)S; 107 Delaware Associates, 64 NY2d 935

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_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (34)S
Sales Tax
April 17, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S901227A

On December 27, 1990 a Petition for Advisory Opinion was received from Majestic Pools
Inc., 4370 Walden Avenue, Lancaster, New York 14086.
The issue raised by Petitioner, Majestic Pools Inc., is whether a newly-formed corporation,
wholly owned by the shareholders of Petitioner, may purchase swimming pool construction material
for resale to Petitioner, issuing a resale certificate to its suppliers but collecting sales tax on all sales
to Petitioner.
Petitioner is a corporation which constructs in-ground concrete swimming pools and sells
certain pool accessories. Petitioner purchases swimming pool construction material and the heaters,
chlorinators, ladders and slides for use in constructing the pools. Petitioner also purchases other
items such as floats, long-handled strainers, pool chemicals and pool liners and resells these items
to its customers. In order to separate its construction and pool accessory functions, and for other
business reasons, Petitioner's shareholders wish to form a new corporation (hereinafter "Newco")
to purchase all construction material and pool supplies from third-party vendors. Newco will take
title and possession of all of its purchases. Newco will register with New York State for sales tax
collection and will issue resale certificates (Form ST-120) to all of its suppliers. It will then sell
construction material to Petitioner for Petitioner's use in constructing pools and will sell pool
accessories to retail customers (including purchasers of Petitioner's swimming pools). When Newco
sells the purchased items, it will collect sales taxes from both Petitioner and the retail customers, and
will remit the taxes to New York State.
Newco will have the same shareholders, officers and directors as Petitioner and will utilize
space and equipment rented from Petitioner. Newco will have its own federal employer identification
number and one or more employees who will handle all of Newco's purchases and sales. Petitioner
will not buy or sell for Newco, but will buy from Newco. Virtually all of Newco's sales will be to
Petitioner or customers of Petitioner. Newco will not file consolidated federal returns or combined
reports with Petitioner and will not distribute its profits to Petitioner. Title and possession of all
purchased items will remain with Newco until they are resold to Petitioner or Newco's other
customers. Neither Petitioner nor Newco will act as agent for the other or have the ability to enter
into contracts for or to bind the other. Each corporation will do business under its own name.
Pursuant to Section 1105(a) of the Tax Law sales taxes are payable when a retail sale of
tangible personal property occurs. Section 1101(b)(4)(A) of the Tax Law defines the term "retail
sale" as any sale of tangible personal property to any person for any purpose, other than for resale.
Purchases by a contractor such as Petitioner do not qualify as purchases for resale if the purchased
items are used by the contractor to perform a repair or a capital improvement pursuant to Section
1101(b)(4) of the Tax Law and Section 541.1(b) of the Sales and Use Tax Regulations. Purchases
by an entity such as Newco may qualify as purchases for resale, since Newco is not a contractor and

-2­
TSB-A-91 (34)S
Sales Tax
April 17, 1991

since all of its purchases are resold to Petitioner or unrelated third parties.
Retail sales by a corporation to a related corporation are treated, for sales tax purposes, in the
same manner as sales between unrelated taxpayers, unless the first corporation purchased the
property as the agent of the other, or the transfer qualifies for an exclusion, not applicable here, under
Sections 1101(b)(4)(iii) (A) (merger or consolidation); (B) (liquidating dividend); or (D)
(incorporation) of the Tax Law. Agency may be found when one entity purchases for the other under
a written agency agreement, identifies the agency relationship in purchase documents, and passes
on the purchased items at cost plus a normal agency fee. See, Section 541.3(d)(4) of the Sales and
Use Tax Regulations. In certain unusual cases, agency may be found when one entity solicits
business on behalf of the other or sells property obtained from the other. In these instances, both the
agent and the principal may be held liable for sales taxes payable on sales by the agent in accordance
with Section 526.10(a)(11) of the Sales and Use Tax Regulations. Case and administrative law has
established that affiliated corporations, such as a parent and its subsidiaries and brother-sister
corporations, are usually treated as independent entities for sales tax purposes. See Tops, Inc., Tx
App Trib, November 22, 1989, TSB-D-89(66)S; 107 Delaware Associates, 64 N.Y.2d 935. The
facts of this case do not permit "agency" treatment because Newco will not function as Petitioner's
agent. When Newco purchases or sells property, it will be treated as a separate entity for sales tax
purposes.
Based upon the facts presented, sales by third party vendors to Newco will be treated as sales
for resale if Newco issues valid resale certificates (Form ST-120) to its suppliers. Sales of pool
construction materials by Newco to Petitioner will be taxable. Newco must collect and remit to New
York State taxes on all such sales where delivery to Petitioner occurs in New York State.

DATED: April 17, 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.