Does a company that arranges repair and maintenance work through subcontractors and bills customers a marked-up price owe sales tax on its charges?

Plain-English summary

Network Service Management, Inc. contracts with national retail stores to handle repairs and maintenance at their outlets (many in New York). When a customer needs work done, Network hires a local contractor to do it. The contractor quotes Network a price that includes sales tax and bills Network directly; Network pays that bill, then issues its own bill to the customer for a "marked-up" amount that includes its fee for supplying a contractor. Network collected no sales tax from customers and was not registered as a New York vendor. It asked whether its fees were taxable.

The Department's answer:

• Network is acting as a prime contractor. It contracts with the customer to perform repair/maintenance at an agreed price and subcontracts the actual work — evidenced by the subcontractor billing Network and Network re-billing the customer at a markup.
• The full marked-up charge is taxable. Under Tax Law § 1105(c)(5) (maintaining, servicing, or repairing real property) and Regulation § 541.5, charges for repairing, servicing, maintaining, and installing tangible personal property and real property are taxable. Network's charges are taxable on the full invoice price billed to the customer — including its markup.
• The subcontractor must collect tax from Network on all its charges, unless Network issues it a properly completed exemption certificate (a subcontractor must collect tax on charges to a prime contractor absent such a certificate or a capital-improvement certificate).
• Network must register. Because it is providing taxable services in New York, Network must register as a vendor. Once registered, it can issue exemption certificates to its subcontractors (so it isn't taxed twice — it collects tax from the customer and buys the subcontracted work for resale).

What this means for you

Middlemen who arrange and re-bill repair or maintenance work

If you contract with a customer to get repair/maintenance done, hire a subcontractor to do it, and bill the customer a marked-up price, New York treats you as a prime contractor. Sales tax is due on the entire amount you bill the customer, markup included — not just on the subcontractor's portion.

Register as a vendor and use exemption certificates

Providing taxable services in New York requires you to register as a vendor. Registration lets you give your subcontractor an exemption certificate, so the subcontractor doesn't charge you tax; you then collect tax from the customer on the full billed price. Skipping registration means the tax you should have collected still comes out of your pocket.

Don't assume it's just a "management fee"

Labeling your charge a fee for "providing a contractor" doesn't change the analysis. Because you contract for the work and re-bill it, the full charge is a taxable repair/maintenance service, not an untaxed service fee.

Accountants and tax professionals

The opinion characterizes the intermediary as a prime contractor under § 1105(c)(5) / Reg. § 541.5: taxable on the full invoice to the customer, with the subcontractor required to collect tax on charges to the prime contractor absent an exemption or capital-improvement certificate. Registration is mandatory because taxable services are being provided in New York.

Common questions

Q: Is a markup on subcontracted repair work taxable?
A: Yes. A company that contracts for repair/maintenance, subcontracts it, and bills the customer a marked-up price is a prime contractor, and the full invoice price to the customer — markup included — is taxable.

Q: Is only the subcontractor's charge taxable, not the fee?
A: No. Tax applies to the entire amount billed to the customer under § 1105(c)(5) and Reg. § 541.5, including the intermediary's fee for supplying a contractor.

Q: Does the intermediary have to register in New York?
A: Yes. Because it provides taxable services in New York, it must register as a vendor.

Q: How does registration prevent double taxation?
A: Once registered, the intermediary can issue an exemption certificate to its subcontractor so the subcontractor doesn't charge it tax; the intermediary then collects the tax from the customer on the full price.

Q: What if the intermediary gives the subcontractor no certificate?
A: The subcontractor must collect sales tax on all its charges to the prime contractor unless it receives a properly completed exemption certificate or a capital-improvement certificate.

Citations and references

Statutes and authorities:

• Tax Law § 1105(c)(5) (tax on maintaining, servicing, or repairing real property, as distinguished from a capital improvement)
• Sales and Use Tax Regulations § 541.5 (charges for repair, service, maintenance, and installation of tangible personal property and real property; subcontractor's duty to collect from a prime contractor)

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_58s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-92(58) S
Sales Tax
July 30, 1992

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920511B

On May 11, 1992, a Petition for Advisory Opinion was received from Network Service
Management, Inc., Endicott Street, Building 32 Norwood, MA 02062.
The issue raised by Petitioner, Network Service Management, Inc., is whether the fees
charged by it for managing the accounts of contractors are subject to New York State and local sales
and use taxes.
Petitioner contracts with local contractors in several states to perform repair and maintenance
services for national retail stores. Under the terms of contract, when Petitioner is notified by a
customer that repairs and maintenance is needed at one of its retail outlets, Petitioner contacts a
contractor to perform the work. Many of the retail outlets are in New York State.
When Petitioner advises a contractor that certain work must be performed, Petitioner is
quoted the charge for such particular service, which includes sales tax. Petitioner contacts the
customer and quotes a charge for the service which is "marked up" to compensate Petitioner for
providing the customer with a contractor.
Billing for the work performed by the contractor, including sales tax, is billed directly to
Petitioner. This bill is paid by Petitioner. Petitioner issues its own bill to the customer for the
"marked up" amount, which includes Petitioner's fee for providing the contractor. No sales tax is
collected by Petitioner on the charges to the customer for the repair and maintenance services
provided. Petitioner is not a registered vendor in New York State.
Section 1105 of the Tax Law states, in part:
Imposition of sales tax. - - ... there is hereby imposed and there shall be paid a tax
... upon:
*

*

*

(c) The receipts from every sale, except for resale of the following services:
*

*

*

(5) Maintaining, servicing, or repairing real property,
property or land, as such terms are defined in the real property tax
law, whether the services are performed in or outside of a building,
as distinguished from adding to or improving such real property,
property or land, by a capital improvement as such term capital

-2­
TSB-A-92(58) S
Sales Tax
July 30, 1992
improvement is as distinguished from adding to or improving such
real property, property or land, by a capital improvement as such term
capital improvement is defined in paragraph nine of subdivision (b)
of section eleven hundred one of this chapter, but excluding services
rendered by an individual who is not in a regular trade or business
offering his services to the public.
Section 541.5 of the Sales and Use Tax Regulations provides, in part, as follows:
(d) Maintaining, installing, repairing, and servicing tangible personal
property and real property. - - (1) Tangible Personal Property. (i) Charges for repair,
service, maintenance, and installation of tangible personal property which retains its
identity as tangible personal property are taxable to the customer based on the full
invoice price.
*

*

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(iii) A subcontractor must collect tax on all his charges to a prime contractor
for repair, service, maintenance, and installation of tangible personal property unless
the prime contractor issues a properly completed exemption certificate or a capital
improvement certificate to the subcontractor.
*

*

*

(2) Real Property. Charges for repair, service, and maintenance to real
property .... are taxable . ...., charges for the services of window cleaning, rodent and
pest control, and trash removal from buildings are also subject to tax. (emphasis
added)
The services provided by Petitioner are consistent with those of a prime contractor, since
Petitioner contracts with its customer to perform certain repair or maintenance service at an agreed
upon price and subcontracts with a contractor for the performance of such repair and maintenance
service. This is further evidenced by the fact that Petitioner is billed by the subcontractor for work
performed and, in turn, Petitioner bills the customer for the work performed, "marked up" to include
a fee for providing the subcontractor.
Pursuant to Section 1105(c)(5) of the Tax Law and Section 541.5 of the Sales and Use Tax
Regulations Petitioner's charges for maintaining, installing, repairing, and servicing tangible personal
property and real property are subject to sales tax based on the full invoice price billed to the
customer. In addition, the subcontractor must collect tax on all its charges to Petitioner for the repair
and maintenance services performed unless Petitioner issues a properly completed exemption
certificate to the subcontractor.

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TSB-A-92(58) S
Sales Tax
July 30, 1992
It is noted that Petitioner is not registered as a vendor in New York State. Therefore, since
Petitioner is providing taxable services in New York State it must register as a vendor. As a
registered vendor, Petitioner may then issue exemption certificates to its subcontractor.

DATED: July 30, 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.