Can a contractor buy construction materials tax-free when they will be built into property owned by New York State?

Plain-English summary

Hendrickson Bros., Inc. is a subcontractor on a job to widen and lengthen an existing ramp to the Meadowbrook Parkway. The ramp and land are owned by the New York State Parks Department. The subcontractor asked whether it can buy the construction materials without paying sales tax.

The Department said yes:

• Materials sold to contractors are normally taxable. A sale of tangible personal property to a contractor or subcontractor for use on real property is a taxable retail sale (Tax Law 1105(a), 1101(b)(4)(i)) -- even if it will be built into the property.
• But there's an exemption for exempt-organization property. Tax Law 1115(a)(15) and 1115(a)(16) exempt materials sold to a contractor/subcontractor for use in erecting, improving, maintaining, or repairing the real property of an organization described in section 1116(a) -- which includes New York State and its agencies (Tax Law 1116(a)(1)) -- provided the materials become an integral component part of the structure or real property (20 NYCRR 541.1(e)).
• This job qualifies. Because the ramp is New York State property and the materials will be built into it, the subcontractor may buy them tax-exempt. It should give its suppliers a completed Form ST-120.1, Contractor Exempt Purchase Certificate.

What this means for you

Contractors and subcontractors on government or exempt-entity projects

When you build materials into real property owned by New York State, a public agency, or another section 1116(a) exempt organization, you can generally buy those materials sales-tax-free -- as long as they become an integral component part of the property. This is a real cost saving on public-works and exempt-entity jobs.

You still need the right certificate

The exemption isn't automatic at the register. Give each supplier a properly completed Form ST-120.1 (Contractor Exempt Purchase Certificate) identifying the exempt project. Keep documentation tying the purchases to the exempt-owned property.

The "integral component part" requirement matters

The exemption covers materials that become part of the real property. Tools, equipment, and supplies that don't become an integral part of the structure generally remain taxable to the contractor.

Common questions

Q: Materials sold to contractors are usually taxable -- why not here?
A: Because the materials are built into real property owned by New York State, a section 1116(a) exempt organization. Sections 1115(a)(15)/(16) exempt materials that become an integral component of an exempt organization's property.

Q: Does this apply to any government or nonprofit project?
A: It applies to property of organizations described in section 1116(a) (including New York State and its agencies). The materials must become an integral component part of the property.

Q: What do I give my supplier to buy tax-free?
A: A completed Form ST-120.1, Contractor Exempt Purchase Certificate.

Q: Are my tools and equipment exempt too?
A: No -- the exemption is for materials that become an integral part of the real property, not tools or equipment that don't.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner and the facts described. Treat it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(4)(i) (sale to a contractor for use on real property is a retail sale)
• Tax Law section 1115(a)(15) (exemption for materials integrated into an exempt organization's structure/real property)
• Tax Law section 1115(a)(16) (exemption for materials integrated into an exempt organization's real property in repair/maintenance)
• Tax Law section 1116(a)(1) (New York State and its agencies are exempt)
• 20 NYCRR 541.1(e) (integral component part of exempt-organization real property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (34)S
Sales Tax
May 18, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S921207D

On December 7, 1992, a Petition for Advisory Opinion was received from Hendrickson
Bros., Inc., 63 N Central Ave., Box 2006, Valley Stream, NY 115822006.
The issue raised by Petitioner, Hendrickson Bros., Inc., is whether a contractor may purchase
materials which are to be incorporated into the property of an organization described in Section
1116(a)(1) of the Tax Law without payment of sales tax.
Petitioner is a subcontractor for a general contractor who has a contract to widen and
lengthen an existing entrance-exit ramp to the Meadowbrook Parkway. The land and the ramp is
owned by the New York State Parks Department and will remain under the jurisdiction of said
department.
Section 1105(a) of the Tax Law imposes sales tax upon "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4)(i) of the Tax Law in part defines a "retail sale" as:
... a sale of any tangible personal property to a contractor, subcontractor or repairman
for use or consumption in erecting structures or buildings, or building on, or
otherwise adding to, altering, improving, maintaining, servicing or repairing real
property, property or land, as the terms real property, property or land are defined in
the real property tax law, is deemed to be a retail sale regardless of whether the
tangible personal property is to be resold as such before it is so used or consumed ....
Section 1115(a)(15) of the Tax Law provides an exemption from the sales tax imposed by
section 1105(a) of the Tax Law for:
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 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.

-2­
TSB-A-93 (34)S
Sales Tax
May 18, 1993
Section 1115(a)(16) of the Tax Law provides an exemption from the sales tax imposed by
Section 1105(c) of the Tax Law for:
Tangible personal property sold to a contractor, subcontractor or repairman for use
in maintaining, servicing or repairing real property, property or land of an
organization described in subdivision (a) of section eleven hundred sixteen, 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.
Section 1116(a)(1) of the Tax Law provides that a sale shall not be subject to sales tax when
it is made 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 or property of a kind not ordinarily old
by private persons;
Section 541.1(e) of the Sales and Use Tax Regulations provides that:
Tangible personal property purchased by a contractor that is to become an integral
component part of real property owned by an organization described in section
1116(a) of the Tax Law is exempt from the New York State and local sales tax. (For
contracts with exempt organizations, see section 541.3 of this Part.)
Since Petitioner is widening and lengthening an existing entrance-exit ramp upon property
which is owned by New York State, it may purchase tangible personal property, which will be
incorporated as integral components of such property, tax exempt in accordance with Sections
1101(b)(4)(i), 1105(a), 1115(a)(15), 1115(a)(16) and 1116(a)(i) of the Tax Law and Section 541.1(e)
of the Sales and Use Tax Regulations. Petitioner should furnish its material suppliers with a properly
completed Contractor Exempt Purchase Certificate (Form ST-120.1).

DATED: May 18, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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