Is a shopping mall's lease-based charge to tenants for redistributed electricity (plus an administrative fee) a taxable resale of a utility service, or is it untaxed rent?

Subject

Issue raised by Petitioner, Pyramid Company of Ithaca, is whether its purchases of utilities that are redistributed to its tenants are subject to sales tax under Section 1105(b) of the Tax Law or may they be purchased for resale, and if resold, are the administrative fees charged in connection therewith subject to sales tax.

What this means for you

A shopping mall operator receives electricity through a single master meter from the utility, then redistributes it to about 65 tenant spaces without further metering -- tenant usage is instead estimated by individual engineering surveys of each space's electricity demand, with a pro rata charge for common-area electricity too. The mall's leases label all of this -- tenant-space electricity, common-area electricity, and a landlord fee to cover the cost of administering the whole redistribution system -- as "additional rent" owed under the lease itself, calculated using the landlord's own utility rate plus a 25% markup.

New York taxes sales of electricity and electric service, but the Court of Appeals held in a related case that a tenant's payment for electricity is not a taxable utility-service sale when it's just an incident of renting commercial space rather than a standalone transaction whose main purpose is furnishing the utility. Because these charges are built into the mall's leases as additional rent -- not billed as a separate utility-service contract -- the electricity and administrative-fee charges to tenants are part of the rental of real property, not a resale of utility service, and so escape the sales tax on utility service. That said, the mall's own purchase of the electricity from the utility company in the first place remains a fully taxable retail purchase; the landlord doesn't get to treat that upstream purchase as tax-exempt just because it's later folded into rent.

Q&A

Q: We redistribute utilities to tenants and bill it as "additional rent" under our leases -- is that a taxable resale of utility service?
A: No, per this opinion, following the Empire State Building Company precedent -- charges built into the lease as additional rent are incidental to the rental of the space, not a separate taxable utility-service transaction.

Q: We also charge tenants an administrative fee to cover our costs of running the redistribution system -- is that fee taxed differently from the electricity charge itself?
A: No, per this opinion -- the administrative fee is treated the same as the electricity charge, since both are part of the lease's additional-rent structure.

Q: Do we, as the landlord, owe sales tax on our OWN purchase of the electricity from the utility company?
A: Yes, per this opinion -- purchases of utilities by the landlord remain retail purchases subject to sales tax under Tax Law § 1105(b), regardless of how the landlord later bills tenants.

Q: Can another commercial landlord rely on this opinion for its own utility redistribution structure?
A: No. This advisory opinion binds the Department only as to the petitioner and the facts described here; another taxpayer cannot rely on it.

Citations

• Tax Law § 1105(b) -- imposes tax on receipts from every sale, other than for resale, of gas, electricity, refrigeration, and steam service.
• Empire State Building Company v. New York State Department of Taxation and Finance, 81 N.Y.2d 1002 -- held that a tenant's Electricity Rent Inclusion Factor payment was for electric service provided only as an incident of renting commercial premises, not a separate transaction whose primary purpose was furnishing utility service, following Debevoise & Plimpton v. New York State Dep't of Taxation & Finance, 80 N.Y.2d 657, 661.

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_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (57) S
Sales Tax
November 1, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930611B

On June 11, 1993, a Petition for Advisory Opinion was received from Pyramid Company of
Ithaca, c/o Pyramid Group, Inc., The Clinton Exchange, Four Clinton Square, Syracuse, New York
13203.
The issue raised by Petitioner, Pyramid Company of Ithaca, is whether its purchases of
utilities that are redistributed to its tenants, are subject to sales tax under Section 1105(b) of the Tax
Law or may they be purchased for resale, and if resold, are the administrative fees charged in
connection therewith subject to sales tax.
Petitioner operates a shopping mall by the name of Pyramid Mall-Ithaca located in the village
of Lansing, New York. The mall has approximately 65 tenants. Petitioner supplies its mall tenants
with electricity by means of a redistribution system in which the electricity is delivered by the utility
to Petitioner's master meter from which Petitioner redelivers electricity to tenant spaces, without
further metering, according to the electricity requirements of each individual tenant. In addition,
some of the electricity is used in the mall's common areas.
As provided in written leases, the mall's tenants are charged for their electricity by means of
an individual engineering survey of electricity demand and use for each tenant space. They are also
charged a pro rata share for electricity used in common areas. Petitioner then charges its tenants a
fee that will reimburse Petitioner for its overhead expenses in administering its electricity
redistribution system.
In each of the tenants leases it is stated that charges for tenant-space electricity, common area
electricity and landlord expense reimbursement on each of these items are "additional rent" to be
paid by the tenants to the landlord.
The pertinent parts of Petitioner's lease with its tenants states:
8.01 - Energy and Utility Costs
(a) From and after the date Tenant first enters into possession of the
Premises, Tenant shall pay to Landlord monthly in advance on the first day of each
month its "Energy Costs," as hereinafter defined . . .
(b) As used in this Lease "Energy Costs" shall mean the Landlord's cost,
determined in accordance with the then current utility rates applicable to Landlord,
of all energy used or consumed in the Premises including without limitation,
electricity, oil and gas, together with a charge of twenty-five percent (25%) of such
costs. Following the date that Tenant opens for business in the Premises, Landlord

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Sales Tax
November 1, 1993
shall calculate Tenant's energy requirements on the basis of Tenants construction
plans, equipment and lighting lists and the as-built condition of the Premises,
assuming a usage for an eighty (80) hour week and a loading factor based upon the
total connected load of the electrical fixtures and equipment in the Premises.
Landlord shall provide Tenant with a detailed statement of such Energy Cost
calculations. Prior to the completion of such Energy Cost calculation and submission
to Tenant, Tenant shall pay Energy Costs as estimated by Landlord based upon
energy requirements for a typical store layout comparable to Tenant's proposed use
and size of the Premises. Following completion of Landlord's Energy Cost
calculations, Tenant's energy billings and payment of Energy Costs shall be adjusted
accordingly. Any delay in Landlord's furnishing such Energy Cost calculations to
Tenant shall not in any way affect Tenant's obligations herein.
8.03 - Charge for Heating, Ventilating and Cooling the Common Areas
In addition to the charges set forth in sections 7.04 and 8.01 above, from and
after the Term Commencement Date Tenant shall pay to Landlord, as Additional
Rent, an annual charge of $.86 per square foot of the Premises or $950.00, whichever
is greater, representing Tenants contribution toward the cost of heating, ventilating
and cooling the Common Areas Such annual charge shall be paid to Landlord in
equal monthly installments, in advance, on the first day of each calendar month
during the term.
Section 1105(b) of the Tax Law imposes a tax upon "[T]HE receipts from every sale, other
than for resale, of gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam
service of whatever nature . .."
In Empire State Building Company v. New York State Department of Taxation and Finance,
81 NY2d 1002 the Court of Appeals held that:
Plaintiff's tenants' payment of an Electricity Rent Inclusion Factor (ERIF) was for
electric service provided only as an incident to the rental of commercial premises in
plaintiff's building and not as part of "separate transactions which have as their
primary purpose the furnishing of utilities or utility services" (Debevoise & Plimpton
v New York State Dept. of Taxation & Fin., 80 NY2d 657, 661). The taxing of the
ERIF payments as a sale of utility services under Tax Law § 1105(b) was therefore
improper.
Based upon the decision in Empire, supra, charges by Petitioner for utilities in accordance
with the terms of its leases with its tenants are a part of the rental of real property and not a resale
of a utility service. Therefore, charges by Petitioner to its tenants for electricity supplied under
provisions of its leases and the administration fees charged in connection with the lease payments
are not subject to the sales tax imposed under Section 1105(b) of the Tax Law.

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TSB-A-93 (57) S
Sales Tax
November 1, 1993
It is noted that purchases of the aforesaid utilities by Petitioner are purchases at retail which
are subject to the sales tax imposed under Section 1105(b) of the Tax Law.

DATED: November 1, 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.