Does a tenant owe sales tax on removing and replacing fuel tanks when the property is leased from a state agency and title to the improvements vests in that agency?

Plain-English summary

Beechcraft East, Inc. leased areas at Republic Airport from the New York State Department of Transportation (DOT). To meet current sanitary codes, it had a contractor remove five existing 3,500-gallon heating-oil tanks and install five 3,000-gallon replacement tanks (double-wall aboveground tanks with leak detection, alarms, piping, wiring, and disposal of the old tanks and surrounding concrete). Beechcraft asked whether it owed sales tax on this work.

The lease was decisive. Under its terms, complete and unencumbered title to all improvements vests in DOT (Article 2, § 2.1.3), title to improvements vests in DOT upon completion of construction or installation, subject to the tenant's leasehold (Article 5, § 5.6), and on termination the tenant must surrender the premises with its improvements to DOT (Article 20, § 20.1).

The Department's answer, exempting the work:

• DOT is an exempt organization. Under Tax Law § 1116(a)(1), the State of New York and its agencies are exempt from sales and compensating use taxes, so DOT qualifies.
• The tanks became an integral part of the exempt agency's real property. Tax Law § 1115(a)(15) exempts tangible personal property sold to a contractor for use in improving the real property of a § 1116(a) organization, provided the property becomes an integral component part of that real property. Because title to the tanks vested in DOT on completion, the tanks became an integral part of DOT's real property.
• Result: no tax. Under § 1115(a)(15), the removal of the old tanks and the purchase and installation of the new tanks was not subject to sales or use tax (citing 450 Lexington Venture, TSB-A-89(8)S; Salamon, Inc., TSB-A-89(46)S; Trans World Airlines, Inc., TSB-A-92(30)S).
• Substantiation. Beechcraft should give the contractor a copy of the relevant lease portions to substantiate that the work was exempt under § 1115(a)(15).

What this means for you

Tenants improving property leased from a government agency

If you lease from an exempt organization (a state agency, for example) and, under your lease, title to the improvements vests in that agency, materials that become an integral part of the property can qualify for the § 1115(a)(15) exemption — even though you, the tenant, are paying for and arranging the work.

The lease terms carry the exemption

What made this work exempt was the lease language vesting title to the improvements in DOT. The vesting of title in the exempt agency is what turns the tanks into "an integral component part" of the exempt organization's real property. Read your lease before assuming the exemption applies.

Give your contractor the paperwork

The tenant should provide the contractor with copies of the relevant lease provisions as substantiation for exempt treatment. The contractor needs documentation, not just an assurance, to support not charging tax.

Accountants and tax professionals

This chains § 1116(a)(1) (exempt agency) with § 1115(a)(15) (integral-component exemption for a contractor's materials): title vesting in the exempt lessor makes the improvement part of the exempt organization's realty, so both the tank removal and the purchase/installation of the replacements fall outside sales and use tax. The Department cites 450 Lexington Venture, Salamon, and TWA for the same result.

Common questions

Q: Why wasn't the tank work taxable?
A: Because the property was leased from an exempt state agency (DOT) and, under the lease, title to the improvements vested in DOT. The tanks became an integral part of the exempt agency's real property, so § 1115(a)(15) exempts the materials, removal, and installation.

Q: Does the exemption depend on who pays for the work?
A: No. Even though the tenant paid for and arranged the work, the exemption applies because the tanks became an integral component of the exempt agency's real property under the lease.

Q: What in the lease mattered?
A: The provisions vesting complete and unencumbered title to all improvements in DOT — including title vesting upon completion of installation and the tenant's duty to surrender improvements on termination.

Q: What does the contractor need to avoid charging tax?
A: The tenant should furnish the contractor a copy of the relevant lease provisions as substantiation that the work was exempt under § 1115(a)(15).

Q: Would this apply to any improvement on leased state land?
A: The key is that the materials become an integral component of the exempt organization's real property and that title vests in the exempt agency. The specific lease terms drive the result.

Citations and references

Statutes and authorities:

• Tax Law § 1116(a)(1) (exemption for the State of New York and its agencies, instrumentalities, and public corporations)
• Tax Law § 1115(a)(15) (exemption for tangible personal property sold to a contractor that becomes an integral component part of an exempt organization's real 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
• Trans World Airlines, Inc., Adv. Op. Comm. T&F, Mar. 26, 1992, TSB-A-92(30)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_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(57) S
Sales Tax
July 29, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920422E

On April 22, 1992 a Petitioner for Advisory Opinion was received from Beechcraft East, Inc.,
Hangar B, Republic Airport, East Farmingdale, New York 11735-1579.
The issue raised by Petitioner, Beechcraft East, Inc., is whether it is liable for payment of
sales tax on charges for the removal of five existing 3500 gallon heating oil tanks and for installation
of five replacement 3000 gallon heating oil tanks located at Petitioner's leased facility at Republic
Airport, East Farmingdale, New York.
Petitioner leased from the New York State Department of Transportation certain areas at
Republic Airport, East Farmingdale, New York. Petitioner had five existing 3500 gallon heating oil
tanks removed and replaced by five 3000 gallon heating oil tanks. The tanks were removed and
replaced with upgraded tanks to comply with current Department of Health sanitary codes.
An invoice submitted by Petitioner, dated January 9, 1992, indicates that the contractor
installed five 3000 gallon doublewall aboveground tanks, electronic leak detection and overfill
alarms, suction and return lines connected to existing piping inside the building, all necessary wiring
and conduit and fill spill boxes. The contractor also epoxy coated the new tanks, located the new
tanks at the existing tank locations, removed and disposed of the existing five 3500 gallon fuel oil
storage tanks and all concrete and block around the tanks, provided all necessary drawings to the
Suffolk County Health Department and obtained all required permits.
Petitioner is presently leasing the premises from New York State Department of
Transportation and must maintain the premises in accordance with the lease agreement dated
December 8, 1987.
Section 2.1.3 of Article 2 of the lease between Petitioner and the New York State Department
of Transportation states, in part: ". . .Complete and unencumbered title to all Improvements hereby
vests in the Department (except for trade fixtures paid for solely by Lessee) free and clear of all
claims by Lessee or third party interests."
Section 5.6 of Article 5 of such lease states, in part: "Upon the completion of construction
or installation and subject to the Lessee's leasehold interest therein, the complete and unencumbered
title to all Improvements located on the Leased Premises shall immediately vest in the Department
free and clear of all claims on the part of the Lessee on account of any repair or improvement work
done or to be done under the terms hereof by the Lessee. This vesting of title in the Department at
the time specified is a part of the consideration for this lease."

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July 29, 1992
Section 20.1 of Article 20 of the lease provides, in part: "Upon the expiration, cancellation
or termination of this Agreement pursuant to any terms hereof, the Lessee agrees peaceable to
surrender up the Leased Premises to the Department in the same condition as they are at the time of
the commencement of the term hereof, and as they may hereafter be repaired and improved by the
Lessee; . . .Upon such cancellation or termination, the Department may re-enter and repossess the
Leased Premises together with all improvements and additions thereto, or pursue any remedy
permitted by law for the enforcement of any of the provisions of this Agreement, at the Department's
election. Furthermore, upon such cancellation or termination, and for a reasonable time thereafter
(not exceeding thirty (30) days after such cancellation or termination, and for which period the
Lessee will pay to the Department current lease rentals), or during the term of this Agreement, if the
Lessee is not in default in rentals or any other charges or obligations due the Department, the Lessee
shall have the right to remove its personal property, fixtures and trade equipment which it may have
on the Leased Premises, provided the removal thereof does not impair, limit or destroy the utility of
said Leased Premises or building for the purpose for which they were constructed or improved, and
provided, further, that the Lessee repairs all damages that might be occasioned by such removal, and
restore the building and site to the condition above required."
Section 1116(a)(1) of the Tax Law provides for an exemption from sales and compensating
use taxes with respect 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 of property of a kind not ordinarily sold by private persons" Based on the
provisions of Section 1116(a)(1) of the Tax Law the New York State Department of Transportation
constitutes an agency exempt from sales and compensating use taxes.
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
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.
In the instant case the New York State Department of Transportation is an organization
described in Section 1116(a)(1) of the Tax Law. Pursuant to Section 5.6 of Article 5 of the lease, title
to the oil tanks vested in the New York State Department of Transportation upon completion of the

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Sales Tax
July 29, 1992
construction and installation subject to Petitioner's leasehold interest therein. Also pursuant to
Section 2.1.3 of Article 2 of the lease, complete and unencumbered title to all improvements vested
in the Department, and pursuant to Section 20.1 of Article 20 of the lease, Petitioner, upon the
expiration, cancellation or termination of the lease agreed to surrender the leased premises to the
lessor in the same condition as at the commencement of the lease, plus any repairs and
improvements.
Accordingly, since in the instant case the New York State Department of Transportation is
an organization described in Section 1116(a)(1) of the Tax Law and pursuant to Section 5.6 of
Article 5 of the lease, title to the oil tanks vested in the New York State Department of
Transportation upon completion of their installation, therefore pursuant to Section 1115(a)(15) of
the Tax Law the removal of the old oil tanks and the purchase and installation of the new oil tanks
by Petitioner was 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; Trans World Airlines, Inc., Adv Op Comm T&F March 26, 1992, TSB-A-92(30)S.
Petitioner should furnish the contractor with a copy of the relevant portions of the lease
between Petitioner and New York State Department of Transportation as substantiation that the
construction performed was exempt from sales and use tax under Section 1115(a)(15) of the Tax
Law.

DATED: July 29, 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.