Is an airline's purchase and installation of a custom baggage-conveyor system in a leased airport terminal exempt when title vests in the exempt Port Authority?

Plain-English summary

Trans World Airlines, Inc. purchased and installed a customized baggage conveyor/handling/sorting system — costing more than $3,250,000 — at its terminal building at JFK Airport, on land it leases from the Port Authority of New York and New Jersey. The installation removed sections of terminal floor, required architectural, mechanical, plumbing, sprinkler, and electrical work, and the system was permanently bolted and/or welded to the building so it can't be removed without material damage. TWA asked whether this was a capital improvement exempt from sales and use tax.

The Department's answer turned on who owns the installation, under Tax Law §§ 1116(a)(1) and 1115(a)(15):

• The Port Authority is an exempt organization. Section 1116(a)(1) exempts sales/uses by New York and its agencies, instrumentalities, and public corporations — which includes the Port Authority.
• Title vests in the Port Authority. Under Section 33 of TWA's lease, title to any installation vests immediately in the Port Authority upon completion, without any further instrument. So the baggage system becomes the exempt agency's real property.
• The § 1115(a)(15) exemption applies. That provision exempts tangible personal property sold to a contractor/subcontractor for erecting or improving the real property of a § 1116(a) organization, where the property becomes an integral component of that real property. Because the system becomes the Port Authority's realty, TWA's purchase and installation are not subject to sales or use tax (citing 450 Lexington Venture, TSB-A-89(8)S, and Salamon, Inc., TSB-A-89(46)S).

What this means for you

Improvements on exempt-agency land can be tax-free

If you build or install something on property leased from an exempt government agency, and your lease makes title vest in that agency, the purchase and installation of the materials can be exempt under § 1115(a)(15) — because the work becomes the exempt organization's real property.

The lease's title clause is decisive

The key fact here was Section 33 of the lease: title passed to the Port Authority on completion. Read your lease. If title to improvements stays with you, this exemption may not apply; if it vests in the exempt lessor, you may qualify.

It has to become an integral component

The exemption requires the property to become an integral component of the exempt organization's structure or real property — not merely equipment sitting on the premises. A permanently bolted/welded, custom-built system that can't be removed without material damage fits.

Accountants and tax professionals

This follows the 450 Lexington Venture / Salamon line: where a lessee improves an exempt lessor's realty and title vests in the exempt organization, the § 1115(a)(15) integral-component exemption removes the transaction from sales/use tax. Compare the title-vesting analysis in the DOT fuel-tank opinion, TSB-A-92(57)S.

Common questions

Q: Was the airline's baggage-conveyor installation taxable?
A: No. Because title to the installation vested in the Port Authority (an exempt organization) on completion, the purchase and installation were exempt from sales and use tax under §§ 1116(a)(1) and 1115(a)(15).

Q: Why does title matter so much?
A: The exemption applies to property that becomes an integral component of an exempt organization's real property. Title vesting in the Port Authority is what makes the system that organization's realty.

Q: Would it be taxable if the airline kept title?
A: The analysis would differ. This exemption depends on the property becoming the exempt organization's real property; if title stayed with the airline, § 1115(a)(15) wouldn't apply on these grounds.

Q: Does the size or permanence of the system matter?
A: Permanence supports that it becomes real property, but the exemption here rests on title vesting in the exempt Port Authority under the lease.

Citations and references

Statutes and authorities:

• Tax Law § 1116(a)(1) (exempt status of the State, its agencies, instrumentalities, and public corporations, including a public corporation created by compact with another state)
• Tax Law § 1115(a)(15) (exemption for tangible personal property that becomes an integral component of the real property of a § 1116(a) organization)
• Tax Law § 1105(c)(3) (tax on installing tangible personal property)
• 450 Lexington Venture, Adv. Op. Comm. T&F, Mar. 7, 1989, TSB-A-89(8)S; Salamon, Inc., Adv. Op. Comm. T&F, Nov. 20, 1989, TSB-A-89(46)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (30)S
Sales Tax
March 26, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITIONER NO. S911106B

On November 6, 1991, a Petition for Advisory Opinion was received from Trans World
Airlines, Inc., 100 S. Bedford Road, Mount Kisco, New York 10549.
The issue raised by Petitioner, Trans World Airlines, Inc., is whether its installation of a
baggage conveyor system on leased property in an airline terminal building constituted a capital
improvement and was, therefore, exempt from sales and use taxes.
Petitioner, a common carrier in the airline industry, purchased and had installed a customized
baggage conveyor/handling/and sorting system at its terminal building at JFK Airport. The cost of
the system exceeded $3,250,000.00 and the installation substantially added to the value of the
terminal building.
The installation of the system required the removal of sections of the floor in the terminal
building, along with architectural, mechanical, plumbing and sprinkler modifications of the terminal
building itself. The system was permanently bolted and/or welded to the terminal building structure.
Extensive electrical work was required during installation to integrate the baggage system with the
terminal's electrical system.
Petitioner intends that the baggage system will remain as permanent installation. Each system
installed is custom designed for the particular location where it will be situated. The system is so
customized that it cannot be removed without causing material damage to both the system and the
terminal building.
Pursuant to Section 33 of the lease between Petitioner and The Port of New York Authority
(hereinafter the "Port Authority"), Petitioner obtained approval from the lessor, dated October 12,
1990, for the installation of a baggage conveyor system. With respect to the terms and conditions of
the approval, Petitioner and the Port Authority agreed to the following:

11. Title to any installation, improvement, alteration, modification, addition,
    repair or replacement resulting from work done pursuant hereto shall immediately
    upon completion vest in the Port Authority (or in the Port Authority's lessor, if any
    and if the agreement between such lessor and the Port Authority so provides) without
    execution of any further instrument. The Applicant shall not remove or change the
    same unless the Port Authority on or prior to the expiration or termination of the
    lease or permit described in Part I of this Application or within sixty (60) days after
    such expiration or termination, shall give notice to the Applicant requiring removal
    or restoration, in which case the Applicant (on or prior to the expiration or
    termination date or, if the notice is given after such date, then immediately after
    receipt of the Notice) shall complete the removal of all of the same (or as much

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TSB-A-92 (30)S
Sales Tax
March 26, 1992

thereof as may be required by the notice) and the restoration (to the extent required
by the notice) of the space affected by the work to the same condition as it was in
prior to the commencement of the said work. If the Applicant shall fail to comply
with such notice, the Port Authority may effect the removal and restoration and the
Applicant shall pay the cost thereof to the Port Authority upon demand.
Section 1116(a) of the Tax Law provides, in part, as follows:
(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.
(1) 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 1115(a) of the Tax Law provides, in part, that 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 real property,
property or land 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.

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TSB-A-92 (30)S
Sales Tax
March 26, 1992

Accordingly, since in the instant case the Port Authority is an organization described in
Section 1116(a)(1) of the Tax Law and pursuant to Section 33 of the lease, title to the baggage
conveyor system vests with the Port Authority upon completion of its installation pursuant to Section
1115(a)(15) of the Tax Law the purchase and installation of the baggage conveyor system by
Petitioner is not subject to sales and use taxes. 450 Lexington Venture, Adv Op Comm T&F, March
7, 1989, TSB-A-89(8)S; Salamon, Inc., Adv Op Comm T&F, November 20 1989, TSB-A-89(46)S.

DATED: March 26, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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