When a building owner hires an independent managing agent to hire, pay, and supervise building maintenance staff, are those workers' wages exempt from New York sales tax as employee wages, or taxable as the managing agent's service charge?

Subject

Whether certain building maintenance workers, hired and paid through an independent managing agent, are employees of the building owner, so that the compensation paid to them is not subject to sales and use tax.

What this means for you

New York office building owners commonly hire outside managing agents to run day-to-day building operations -- payroll, supervising staff, collecting rent, handling tenant issues -- for a flat annual fee unrelated to headcount or payroll size. Workers are typically hired by the agent but the owner still approves work rules, sets staffing levels, hours and shifts, and pay rates (within union contracts where applicable); the agent has no authority to pay above union scale on its own. Contracts and purchase orders are always signed by the agent "as agent for" the owner, and although the agent processes payroll through its own special bank accounts (funded by the owner, not the agent) and issues the workers' W-2s, the owner remains liable for the workers under state disability, unemployment insurance, and tort law, and both sides treat the wages for income-tax purposes as paid directly by the owner, not as a management fee that the agent then spends on its own staff.

New York taxes services that maintain, service, or repair real property, but specifically excludes wages an EMPLOYEE earns performing that kind of work for their EMPLOYER -- the tax only reaches an independent contractor's charge for the service, not an employer's payroll. So the whole question comes down to who is legally the workers' employer, which under long-standing New York case law turns on who has the right to direct and control the work -- not simply who signs the paychecks or the hiring paperwork. Because the owner here approves staffing decisions, work rules, and pay levels, funds the payroll from its own money, and bears the legal liabilities of an employer, the workers are legally employees of the OWNER (with the agent acting merely as the owner's payroll-processing agent), so their wages are excluded from sales tax entirely. The opinion draws a clear counter-example, though: in cases where the owner specifically agrees that the AGENT itself will be the employer of the building's maintenance staff, those workers' wages are the agent's own payroll cost for providing a maintenance service to the owner, and that charge IS subject to sales tax.

Q&A

Q: Our managing agent hires and pays our building's maintenance staff, but we (the owner) set staffing levels, hours, pay, and bear the legal liabilities -- are those wages subject to sales tax?
A: No, per this opinion -- if the owner genuinely controls the workers (the classic test for an employer-employee relationship), the workers are the owner's own employees, and their wages are excluded from the real-property-maintenance sales tax even though the agent processes payroll and issues W-2s.

Q: What if our agreement specifically makes the managing agent itself the legal employer of the building staff?
A: In that situation, per this opinion, the wages paid to those workers are subject to sales tax, since the charge is then the agent's own cost of providing a maintenance/service to the owner.

Q: Does it matter that the managing agent physically pays the workers and files their W-2s?
A: Not by itself, per this opinion -- the deciding factor is who has the right to direct and control the workers' day-to-day performance, not who technically cuts the checks or issues tax forms.

Q: Can another building owner or managing agent rely on this opinion for their own arrangement?
A: No. This advisory opinion binds the Department only as to the petitioners and the facts described here; another taxpayer cannot rely on it.

Citations

• Tax Law § 1105(c)(5) -- imposes sales tax on maintaining, servicing, or repairing real property, but excludes wages, salaries, and other compensation an employer pays an employee for performing that work as an employee.
• Sales and Use Tax Regulations § 527.7(c)(2) -- confirms that wages paid by an employer to its own employee for real-property maintenance/repair services are not receipts subject to sales tax.
• Brown v. St. Vincent's Hospital, 222 A.D. 402; Hardy v. Murphy, 29 A.D.2d 1038; Greene v. Gallman, 39 A.D.2d 270; Albany College of Pharmacy v. Ross, 404 N.Y.S.2d 779 -- New York cases holding that the right to direct and control the worker is the primary (and ultimately conclusive) test for an employer-employee relationship.
• Currier v. International Magazine Co., Inc., 256 N.Y. 106 (1931) -- held building managing agents were not personally liable for a building employee's negligence because the employee worked on behalf of, and was controlled by, the building owner, not the agents.
• In the Matter of MGK Constructors, Dec. Tax App. Trib., March 5, 1992 -- cited for the principle that a contractor acting as a true agent of an exempt entity is likewise not subject to sales tax.
• Internal Revenue Ruling 70-267, 1970-1 C.B. 205 -- a federal ruling reaching the same conclusion under federal employment-tax law: building employees paid and supervised by a managing agent, but controlled by the owner and paid from the owner's own segregated funds, remain employees of the owner, not the agent.

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_52s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (52)S
Sales Tax
October 4, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920601A

On June 1, 1992, a Petition for Advisory Opinion was received from Building Owners and
Managers Association of Greater New York, 350 Fifth Avenue, Suite 316, New York, New York
10118 and The Real Estate Board of New York, 12 East 41st Street, New York, New York 10017.
The issue raised by Petitioners, Building Owners and Managers Association of Greater New
York and The Real Estate Board of New York, is whether certain workers are employees of the
building owner so that amounts paid by the building owner for their compensation are not subject
to the sales and use taxes.
Petitioners represent various building owners and managing agents of office buildings in New
York. It is common for owners of office buildings in New York to hire independent managing agents
to perform various services at the buildings. These services include administering the payroll,
supervising employees of the building, collecting rents, handling tenant inquiries and complaints,
and similar matters. In return, the agent typically receives an annual fee of an agreed dollar amount,
payable monthly.
A managing agent normally gets a flat fee from the building owner. In addition, if the agent
also serves as the leasing agent it receives a fee each time a new lease is signed with a new tenant
or a lease with an old tenant is renewed. The managing agent does not receive fees with respect to
continuing tenants, either as a percentage of rents or otherwise. The agent's fee is not related to the
number of employees at a building or to the size of a building's payroll. Although the agent may
consider its costs of providing payroll services in setting the flat fee, it is not reimbursed for its costs
and it is at risk if it turns out that its expenses in performing services under an agreement with a
building owner exceeds its income.
Workers are typically hired by the agent, but on behalf of the owner. The owner, however,
approves prescribed work rules and practices, subject to, and within the limitations of, applicable
collective bargaining agreements and labor laws. The owner determines the number of employees,
the hours that they will work, and the shifts. In the case of union employees, compensation levels
are prescribed by the collective bargaining agreement, but the owner has the right to pay premium
rates above the union scale to such employees as the owner chooses. The agent cannot decide to pay
amounts in addition to the union scale. In the case of nonunion employees, the owner prescribes the
compensation level. The employees work exclusively for the particular owner.
Pursuant to the union contracts, the building owners are liable for covering the building
employees under the New York State Disability Benefit Law, the New York State Unemployment
Insurance Law and for all other obligations to the employees under the contract. In addition, the
building owners are considered employers for tort liability purposes.

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When a managing agent contracts with a third party to do work at a building, the contract is
always in the name of the agent "as agent for" or "as manager for" the owner. Purchase orders are
signed by the agent in the same manner. The agents want to make it clear that the owners, and not
the agents, are responsible for payment and for any resulting liabilities.
The agent pays the workers (including all benefits) from, or gets reimbursed from, a special
bank account that it maintains for each building that it manages. The rents that the agent collects
from tenants in the building are deposited in the account and the owner is asked to replenish the
account if the balance in the account is insufficient to pay the operating expenses, including the
compensation of the on-site employees. Often, the owner funds the account at the outset before
wages are paid. Thus, the workers are paid with the owner's money, not with the agent's.
Typically, three separate accounts are maintained by the agent. The principal account, known
as the "operating account", is the one in which rents are deposited and that is funded directly by the
owner. When salaries are paid, an amount equal to the payment is transferred from the operating
account to another account, known as the "payroll concentration account". Payments of employment
taxes are made from this account. Amounts equal to the take-home pay of the workers are transferred
to a third account, known as the "payroll account". Checks to the employees are made from the
payroll account. The payroll concentration and payroll accounts are nothing more than conduits. The
only time that they receive funds is when a payroll is due and the funds that they receive from the
operating account are immediately paid out to the taxing authorities and to the workers. If a
managing agent operates several different buildings, it will always have a separate operating account
for each building and only one payroll concentration account and payroll account through which
payments are funneled to the taxing authorities and to the employees of all buildings.
At no time do any funds of the agent pass through the operating account. Some Agents may
as a convenience use the payroll accounts to pay their own employees. When they do, the funds flow
through the two accounts as conduits on an immediate basis.
In all cases, the operating account indicates that the owner is the beneficial owner of the
funds. In some cases, the account is in the name of the owner. In other cases, the account is in the
name of the agent "as agent for" or "in trust for" the owner. If a payroll concentration or payroll
account is used for several buildings, the account will typically be in the name of the agent without
any indication that the funds are held as agent for another. Nevertheless, these accounts are mere
conduits and funds that they receive from an operating account maintained for a building are
immediately paid out to the tax authorities and to that building's employees.
If the account does not contain sufficient funds when a payroll is due, the agent pays the
workers with its own funds and requests immediate reimbursement from the owner. The account is
in the name of the agent in trust for the owner, and the owner, and not the agent, is the beneficial
owner of the account. The agent's creditors cannot reach the amounts in the account. The agreement
between the owner and the agent typically limits the amount that the agent can spend from the

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account. The owner can direct the agent to distribute funds in the account to the owner or itself or
it can withdraw money from the account at any time. Typically at the end of each month the balance
is distributed to the owner, less amounts needed to meet estimated future expenses.
The employee wages are reported on Forms W-2 issued by the agent. The owners and the
agents both treat the payments of compensation to the employees for income tax purposes as
payments made directly by the owner to the employees. The owners deduct those amounts as
compensation to employees. The parties do not treat the payments as if the owners paid a
management fee to the agent which then paid compensation to its employees.
The collective bargaining agreements with the unions are negotiated by the Realty Advisory
Board, an organization of owners and agents. The agent, on behalf of and as agent for the owner of
each building, signs an "assent agreement" in which it agrees to have the Realty Advisory Board
represent it in connection with union matters. Union grievances are typically filed against the Realty
Advisory Board, which conducts the negotiations. The unions and the National Labor Relations
Board regard both the owner and the agent as the party with whom they must deal.
In the case of union employees, the agent does not have the right to transfer workers from
one building to another. If the agent of a building resigns or is fired by the owner and the owner
hires a new agent, the workers at the building must remain at the building and go on the payroll of
the new agent. Neither the agent nor the owner can transfer an employee from one building to
another building without the union's consent. Seniority is based on service at the building. If a
worker moves to another building, he or she starts at the bottom of the seniority ladder even if he or
she is on the payroll of the same agent. Eligibility and participation in union pension plans and other
benefits is not affected because these are administered on an industry-wide basis. The agent is
generally prohibited by contract or practice from transferring nonunion employees without the
owner's consent.
The Standard Management Agreement of the Real Estate Board of New York, Inc. entered
into by building owners and agents provides, in part, as follows:
Article I
Exclusive Agency:
Owners hereby appoints Agents as the sole and exclusive
renting, sale and management agent of the Owner's property known as ...
Article II
*

*

*

Employees: (h) Agent agrees in behalf of Owner to supervise the work of and to
hire and discharge employees. Agent agrees to use reasonable care in the hiring of
such employees. It is expressly understood and agreed, however, that all employees
are in the employ of Owner solely and not in the employ of Agent and that Agent is
in no wise liable to employees for their wages and compensation nor to Owner of

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others for any act or omission on the part of such employees.
The standard Management Agency Agreement of the Real Estate Board of New York, Inc.
entered into by building owners and agents provides, in part, as follows:

1. Owner hereby appoints Agent sole agent for the management of
   (hereinafter) referred to as the "Building" or the "Property"). Agent shall use its best
   efforts in the management of the Building and due diligence in collecting the rents
   and other income therefrom.
2. Agent agrees on behalf of Owner to supervise the work of, and to hire and
   discharge employees of the Building, and agrees to use reasonable care in the hiring
   of such employees. It is agreed, however, that unless Owner specifically requests
   otherwise, all employees are in the employ of Owner solely had not in the employ of
   Agent, and that Agent is in no way liable of any such employees for their wages or
   compensation nor to Owner or others for any act or omission on the part of such
   employees.
   In the event Owner specifically request that Agent employ the employees
   necessary for the operation an maintenance of the Building, it is agreed that all such
   employees shall be the employees of the Agent or one of its subsidiaries, as an
   independent contractor, and not the employees of Owner. All wages, salaries and
   other compensation paid to such employees including all items payable in respect to
   the payroll, such as but not limited to, unemployment insurance, social security,
   workmen's compensation, disability benefits, medical and surgical plans now in
   existence or hereafter imposed or included in union agreements which Agent may
   enter into, shall be considered as operating expenses of the Property.
   Section 1105(c)(5) of the Tax Law imposes a sales tax on the receipts from every sale, except
   for resale, of: "[m]aintaining, servicing, or repairing real property, property or land ... . Wages,
   salaries and other compensation paid by an employer to an employee for performing as an employee
   the services described in paragraphs (1) through (5) of this subdivision (c) are not receipts subject
   to the taxes imposed under such subdivision."
   Section 527.7 of the Sales and Use Tax Regulations states, in part:
   Maintaining, servicing or repairing real property.

[Tax Law § 1105(c)(5)]

(c) Exclusions.
*

*

*

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2)

Where repair and maintenances service are rendered by an employee for his employer, the
wages, salaries and other compensation paid to the employee are not receipts subject to tax
for the performance of such services. (emphasis added)

In determining whether a relationship of master and servant or employer and employee exists,
the courts have consistently ruled that the determining element is the employer's right to direct and
control the work of the employee.
In Brown v. St. Vincent's Hospital, 222 AD 402, the Court stated, "... [t]he relation of master
and servant, or of employer and employee, is created by contract, express or implied. (McNamara
v. Leipzig, 227 N.Y. 291, 294.) In determining whether or not such relation exists where the
question of the contract is obscure, certain tests may be applied as bearing on the relationship.
Primarily the test is the right of the employer to control and direct the work of the
employee.(Baldwin v. Abraham, 57 App. Div. 67, 74; affd., 171 N.Y. 677; Meredosia Levee & Dr.
Dist. v Industrial Comm; 285 ILL. 68.) Other tests, sometimes of value but not fully determinative
of the question, are the payment of wages, and the right to hire and discharge.(Braxton v. Mendelson,
233 N.Y. 122, 124.)"
In Hardy v. Murphy, 29 AD2d 1038, the Court stated" ... In determining the issue of
employer-employee relationship, it has been held that it is a question of control in the absence of
which there can be no finding of employment. (Matter of Morton, 284 N.Y. 167, People ex rel
Feinberg v. Chapman, 274 App. Div. 715.)"
In Greene v. Gallman, 39 AD2d 270, the Court stated" ... It is the degree of control and
direction exercised by the employer that is determinative of whether or not the taxpayer is an
employee. (Matter of Frishman v. New York State Tax Comm., 33 AD2d 1071, mot. for lv. to app.
den. 27 NY2d 483; Matter of Hardy v. Murphy, 29 AD2d 1038; Matter of Britton v. State Tax
Comm., 22 AD2d 987, • affd, 19 NY2d 613.)"
In Albany College of Pharmacy v. Ross, 404 N.Y.S.2d 779, the Court stated" ... [I]t is said
that at common law there are four elements which are considered upon the question whether the
relationship of master and servant exists--namely, the selection and engagement of the servant, the
payment of wages, the power of dismissal and the power of control of the servant's conduct... ' (53
Am. 3ur. 2d, S2; see, also, Matter of Pelow v. Sork Enterprises, 39 AD2d 494, 496, 337 N.Y.S.2d

218. 220 affd. 33 N.Y.2d 944, 353 N.Y.S.2d 729, 309 N.E.2d 130), but of all the distinguishing
     elements, it is the power of control which is conclusive (Matter of Liberman v. Gallman, 53 AD2d
     766, 767, 384 NYS2d 252, 253 revd on other grounds 41 N.Y.2d 774, 396 N.S.2d 159, 364 N.E.2d
     823; Matter of Hardy v. Murphy, 29 A.D.2d 1038, 1039, 289 N.Y.S.2d 694)."
     In Currier v. International Magazine Co., Inc., 256 NY 106 (1931), the Court held that
     managing agents of an apartment building were not liable for an accident which resulted from a
     handyman's negligent operation of the building's elevator. The Court opined that the agents' liability
     depended on whether Greig was their employee or the owner's. The agents were paid a commission
     on apartment rentals in return for attending to repairs and tenants, collecting rents, purchasing

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supplies, and discharging and paying building employees. The Court concluded that since the agents
had not hired the building employees for their own benefit but, rather, that they had acted on behalf
of the owner. The Court found that "[a]ll of [the agents'] efforts were expended in behalf of [the
building] owner and Greig was the servant of [the owner] and not of the agents." Id. at 110. The
agents were held not to be liable for the consequences of Greig's acts.
Internal Revenue Ruling 70-267, 1970-1 C.B.205 provides, in part, as follows:
The question presented is whether the owner of improved real estate or R
company, the managing agent for the owner, is the employer of the individuals
engaged in the operation of the property, for purposes of the Federal Insurance
Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income
Tax at Source on Wages (chapters 21, 23,and 24, respectively, subtitle C, Internal
Revenue Code of 1954).
R company manages improved real estate for the owner thereof under an
agency contract. Under the contract R, as agent of the owner, employs, pays, and
discharges building managers, janitors, maids, and other help. R supervises these
employees but it is not responsible for the payment of their wages except from the
funds of the owner in its possession that are deposited in a special bank account in
the owner's name. The owner's funds are not commingled with the funds of R.
For the purposes of the Federal employment taxes the usual common law
rules ordinarily apply in determining whether the employer-employee relationship
exists and, if so, who is the employer. Guides for determining the employer-employee
relationship are found in three substantially similar sections of the Employment Tax
Regulations, namely, sections 31.3121(d)--1(c), 31.3306(i)--1, and 31.3401(c)--1.
Although R hires, pays, discharges, and otherwise controls and directs the
services of the individuals employed in the operation of the owner's property, the
individuals are not employees of R under the usual common law rules. R is merely
the agent and, as such, is authorized by the owner to employ individuals for and on
his behalf. Under the stated facts it is the owner, acting through R, who exercises or
has the right to exercise over the individuals in the performance of their services the
control necessary under the usual common law rules to establish the relationship of
employer and employee. Accordingly, the individuals so employed are employees
of the owner and not of R company for purposes of the Federal Insurance
Contributions Act and the Federal Unemployment Tax Act.
This conclusion is also applicable for purposes of the Collection of Income Tax at
Source on Wages.
In the instant case, while the workers are typically hired by agent and sometimes placed on
the payroll of the agent or its subsidiary, the owner approves the prescribed work rules and practices

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for the workers, in cooperation with the collective bargaining agreements and labor laws, determines
the number of employees, the work hours and shifts, the compensation levels for nonunion
employees and the amount of premium rates above the union scale for union workers to be paid to
such workers. Moreover, pursuant to the agreements between the owners and agents it is expressly
provided that the employees are in the employ of the owners solely and not in the employ of the
agent. In addition, while the agent sometimes pays the workers and issues W-2 forms in its own
name as the employer, the owners reimburse the agent for all payroll expenses incurred and, in most
cases, the payroll checks are drawn on a special payroll account in the name of the agent in trust for
the owner. Moreover, the building owners are liable for covering the employees under the New York
State Disability Benefit Law, the New York State Unemployment Insurance Law and for tort liability
purposes. Therefore, pursuant to Section 1105(c)(5) of the Tax Law, Section 527.7 of the Sales and
Use Tax Regulations, the above noted court decisions and Revenue Ruling 70-267, supra, since the
workers are employees of the owners, the wages, salaries and other compensation paid to the
employees for the performance of their services are not receipts subject to sales tax.
It is noted that in instances other than those described above, where the owner specifically
requests the agent to employ the employees necessary for the operation and maintenance of the
building and it is agreed that such employees are solely the employees of the agent, that pursuant to
Section 1105(c)(5) of the Tax Law, Section 527.7 of the Sales and Use Tax Regulations and the
above noted court decisions the receipts for such services are subject to sales tax.

DATED: October 4, 1993

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

NOTE: The opinions expressed in Advisory 0pinions
are limited to the facts set forth therein.