Is routine office cleaning that a commercial landlord bundles into a tenant's lease payment subject to New York sales tax as a maintenance/repair service?

Subject

Issue raised by Petitioner, Ebasco Services Incorporated, is whether the cleaning services furnished to Petitioner, pursuant to Section 42 of the Agreement of Lease between the Port Authority of New York and New Jersey ("Port") and Petitioner, and more fully described in SCHEDULE B, Part I as "Routine Cleaning in Office Areas," is subject to State and local sales and use taxes.

What this means for you

A commercial tenant at the World Trade Center is required, as part of its lease with the Port Authority, to take (and pay for) a defined package of routine cleaning -- office areas, corridors, restrooms, elevators. That baseline cleaning cost is folded into the annual per-square-foot rental rate and billed in equal monthly installments, regardless of exactly when each cleaning task happens to be performed. Separately, the tenant can also buy ADDITIONAL cleaning -- more frequent cleaning than the baseline, or extra services like carpet shampooing, floor refinishing, drapery cleaning, or window washing -- billed per unit of service.

New York taxes services that maintain or repair real property, but two Court of Appeals cases (on overtime HVAC and an electricity charge, both baked into commercial leases) established that a charge folded into rent for something INCIDENTAL to renting the space -- not a separately-purposed transaction -- isn't a taxable sale of that underlying service. Applying that same logic here, the baseline routine cleaning is incidental to the lease itself (it's priced into rent, not billed as its own standalone service), so it escapes the real-property-maintenance tax. But the OPTIONAL extra cleaning -- anything beyond the negotiated baseline package, billed per unit of service performed -- is a genuinely separate transaction whose primary purpose is providing a cleaning service, so that portion IS taxable.

Q&A

Q: Our commercial lease includes a baseline package of routine cleaning, priced into our rent -- is that cleaning taxable?
A: No, per this opinion -- cleaning that's part of the negotiated lease terms and priced into rent (not billed as a standalone service) is incidental to the rental, following the same reasoning courts have applied to bundled HVAC and electricity charges in commercial leases.

Q: We also pay extra, per-unit-of-service fees for cleaning beyond our lease's baseline (more frequent cleaning, carpet shampooing, window washing, etc.) -- is that taxable?
A: Yes, per this opinion -- optional cleaning services bought beyond the lease's baseline package are a separate transaction with cleaning as its primary purpose, so they're taxable under Tax Law § 1105(c)(5).

Q: We're also paying a local Commercial Rent or Occupancy Tax on this cleaning charge -- does that affect the sales tax analysis?
A: This opinion doesn't address any interaction with a local Commercial Rent Tax -- it addresses only whether the cleaning charge itself is subject to State and local SALES tax.

Citations

• Tax Law § 1105(c)(5) -- imposes sales tax on maintaining, servicing, or repairing real property, distinguished from a capital improvement.
• Debevoise & Plimpton v. New York State Dep't of Taxation and Finance, 80 N.Y.2d 657 (1993) -- held tenants' payment for overtime HVAC service was incidental to the rental of commercial premises, not a separate taxable utility/refrigeration service sale.
• Empire State Building Co. v. New York State Dep't of Taxation and Finance, 81 N.Y.2d __ (1993) -- held tenants' Electricity Rent Inclusion Factor payment was incidental to rental, not a separate taxable utility-service transaction; both cases applied here.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (1)S
Sales Tax
February 18, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920401A

On April 1, 1992, a Petition for Advisory Opinion was received from Ebasco Services
Incorporated, Two World Trade Center, New York, New York 10048.
The issue raised by Petitioner, Ebasco Services Incorporated, is whether the cleaning services
furnished to Petitioner, pursuant to Section 42 of the Agreement of Lease between the Port Authority
of New York and New Jersey (hereinafter "Port") and Petitioner, and more fully described in
SCHEDULE B, Part I as "Routine Cleaning in Office Areas" is subject to State and local sales and
use taxes.
In accordance with SCHEDULE B of the Agreement of Lease between Petitioner and Port,
Port is to supply to Petitioner, and Petitioner is required to take all of the cleaning services described
in Part I of SCHEDULE B. Such services include routine office cleaning, routine cleaning in
corridor areas, routine cleaning in toilet areas, routine cleaning in passenger elevators, etc.
Petitioner is required to pay Port's cost of supplying the cleaning services as billed by Port
on a monthly basis. If at the time of billing Port's cost of performing the services has not been
determined, the amount of payment shall be Port's estimate of its cost, subject to later retroactive
adjustment when Port's costs are determined.
The cost of the cleaning services described in Part I are determined on an annual per rentable
square foot basis. Petitioner's annual rate of payment is the annual per rentable square root basis in
the premises. Petitioner's monthly payments are equal monthly installments of the annual rate, as
the same may be charged or adjusted from time to time during the letting, without regard as to
whether or not all items of service in Part I are scheduled for performance during a single payment
period.
The cost of cleaning services performed at greater frequency than described in Part I and the
cost of optional cleaning services described in Schedule B, Part II are determined on a per unit basis
for each item of service performed. The SCHEDULE B, Part II cleaning services consist of
vacuuming carpets, striping and refinishing floors, spraying and buffing floors, shampooing carpets,
removing, cleaning and rehanging draperies, providing plastic liners for waste, specialized porter
service and window cleaning service.
Petitioner is currently paying Commercial Rent or Occupancy Tax, imposed by New York
City Administrative Code Title 11, Chapter 7, on the cleaning services described in Part I of
SCHEDULE B.

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TSB-A-94 (1)S
Sales Tax
February 18, 1994
Section 1105(c) of the Tax Law provides, in part, as follows:
Sec. 1105. Imposition of sales tax.--On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
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
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.
In Debevoise & Plimpton v New York State Dept. of Taxation and Finance, 80 NY2d 657,
661, the Court of Appeals held that the tenants' payment for overtime heat, ventilation and air
conditioning services was incidental to the rental of the commercial premises and not the sale of a
refrigeration and steam service and, therefore, not subject to the sales tax imposed pursuant to
Section 1105(b) of the Tax Law.
In Empire State Building Company v New York State Dept. of Taxation and Finance, 81
NY2d ___, the Court of Appeals held that the tenants' payment of an Electricity Rent Inclusion
Factor was for an electric service provided only as an incident to the rental of the commercial
premises and not as part of "separate transactions which have as their primary purpose the furnishing
of utilities or utility services", and therefore, the taxing of such payments as a sale of utility services
under Section 1105(b) of the Tax Law was improper.
In the instant case the routine cleaning in office areas described in SCHEDULE B, Part I of
the lease between Petitioner and Port are incidental to the rental of the commercial premises and are
not part of a separate transaction which has the primary purpose of furnishing an interior cleaning
and maintenance service. Accordingly, in accordance with the rationale of Debevoise & Plimpton,
supra, and Empire State Building Company, supra, payments by Petitioner to Port for such routine
cleaning services are not taxable under Section 1105(c)(5) of the Tax Law.

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TSB-A-94 (1)S
Sales Tax
February 18, 1994
It is noted, however, that interior cleaning and maintenance services which may be purchased
from Port at the option of Petitioner, such as cleaning services performed at a greater frequency than
described in SCHEDULE B, Part I of the lease or as set forth in SCHEDULE B, Part II of the lease,
are subject to sales tax pursuant to Section 1105(c)(5) of the Tax Law.

DATED: February 18, 1994

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

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