Is a construction contractor's purchase of required progress and special construction photographs -- submitted to New York City as a condition of getting paid -- exempt as a resale or as part of a tax-exempt capital improvement?

Subject

, is whether purchases of special construction photographs and progress photographs required to be submitted by it to the City of New York with progress requisitions for payment are subject to sales tax.

What this means for you

Magnetic Construction Corp. contracts with New York City on projects requiring detailed photographic documentation -- a professional architectural photographer must shoot "before" and "after" images of landmark interior surfaces, plus roughly eight progress photos a month throughout construction and final completion photos, all submitted with specific labeling requirements. Critically, the contract states the City won't pay Magnetic for that month's work until the photos are submitted, and separately requires six free copies of each photo be furnished to the Resident Engineer.

Photographs are tangible personal property under New York's regulations, so buying them is presumptively taxable unless an exemption applies. Magnetic argued the photos should be exempt either as a resale to the City or as materials incorporated into its construction work. The Department rejected both theories. For the resale exclusion to apply, the photographs would have to become a component part of something Magnetic actually sells to the City (a capital improvement) -- but the photos themselves never become part of the building; instead, Magnetic uses them itself as a condition of getting paid on its own contract, which the Department treated as Magnetic "consuming" the photos the same way it consumes any other job supply, not reselling them. And since the photos plainly don't become an integral, physically incorporated component of the structure (unlike materials that literally get built into a wall or foundation), they also don't qualify for the construction-materials exemption that covers goods sold to a contractor for erecting or repairing an exempt organization's real property. So Magnetic's photograph purchases are fully taxable.

Q&A

Q: Our government contract requires us to submit photos, reports, or similar documentation as a condition of getting paid -- can we treat that purchase as exempt since it's "for" the government client?
A: Not per this opinion -- if the documentation is something YOU use to satisfy your own contract obligations (rather than something you resell to the client as a standalone product, or that becomes a physical part of the structure you're building), it's treated as a taxable supply you consume, not an exempt resale.

Q: What would make a purchased item qualify for the resale exclusion on a construction job?
A: Per this opinion (citing Fred H. Geller & Co., TSB-A-92(33)S), the item generally needs to become a component part of something the contractor is actually selling -- typically the capital improvement itself -- not something the contractor uses to document or facilitate its own performance.

Q: Does providing free copies to the government client change the analysis?
A: No -- per this opinion, the contract's requirement that photos be furnished free of charge (and used purely for documentation, not sold) actually reinforced the finding that Magnetic wasn't reselling the photographs at all.

Citations

• Tax Law § 1105(a) -- imposes sales tax on retail sales of tangible personal property.
• 20 NYCRR § 526.8 -- defines tangible personal property to expressly include photographs.
• 20 NYCRR § 526.6(c) -- defines the resale exclusion, requiring the purchased property to be resold as such or as a component part of other property/services sold to the customer.
• Tax Law § 1115(a)(15) -- exempts materials sold to a contractor for erecting/improving an exempt organization's real property, only if they become an integral component part.
• Tax Law § 1115(a)(16) -- the parallel exemption for maintaining/repairing an exempt organization's real property, same integral-component-part requirement.
• Fred H. Geller & Co., Adv Op Comm T&F, April 6, 1992, TSB-A-92(33)S -- cited on the resale exclusion requiring the purchased item to become part of what's actually sold.
• Leslie H. Baker, Adv Op Comm T&F, June 23, 1994, TSB-A-94(26)S -- cited on an item being "consumed" by the purchaser (not resold) when used to satisfy the purchaser's own contract obligations.

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_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (31)S
Sales Tax
July 27, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940425A

On April 25, 1994, a Petition for Advisory Opinion was received from Magnetic
Construction Corp., 23-73 48th Street, Astoria, New York 11103.
The issue raised by Petitioner, Magnetic Construction Corp., is whether purchases of special
construction photographs and progress photographs required to be submitted by it to the City of New
York with progress requisitions for payment are subject to sales tax.
Petitioner is a construction company which has contracts with the City of New York and its
subdivisions. The contract with the City requires that requisitions for payment be accompanied with
photographs showing the progress of the work. Petitioner is required to engage a qualified
commercial architectural photographer to take photographs prior to the commencement of the
construction and at substantial completion, and to provide documentation of existing conditions of
the decorative painted surfaces of the land mark interiors.
The following are excerpts from Petitioner's contract with the City of New York relating to
special construction photographs and progress photographs.
1.02
A.

SUMMARY:
General:
This section specifies administrative and procedural
requirements for photographs of the decorative painted surfaces in the
Landmark Interiors.

1. Special Construction Photographs are in addition to Progress
   Photographs required in the General Conditions and additional
   photographs specified in other sections.

B.

The intent of this Section is to provide documentation of the existing
conditions of the decorative painted surfaces of the Landmark Interiors,...

2.02 PHOTOGRAPHIC PRINTS:
A.

Provide 8" by 10" smooth surface glossy color prints on double-weight
commercial-grade stock.

1. Color correct prints to match Kodak Color Card.

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Sales Tax
July 27, 1994
B.

Identification: Label each photograph on the back in the bottom margin
with project name and date the photograph was taken. On the back of each
print provide an applied archival quality label with the following
information:

1. Name of the Project.
2. Name and address of the photographer.
3. Name of the Architect.
4. Name of the Contractor.
5. Name of the Construction Manager.
6. Date the photograph was taken.
7. Description of vantage point and subject, in terms of location (by
   notation on, and reference to, elevation and plan drawings).

ARTICLE 19 - PROGRESS PHOTOGRAPHS
A) The Contractor for General Construction shall employ and pay for all
services of a competent photographer who shall take photographs showing
the progress of the work.
B)

There shall be an average of eight (8) photographs taken each month from
the commencement of the Contract to the time of completion. These
photographs shall show as far as possible, the work completed within and
on the exterior, of the structure. The first series of photographs shall be
taken prior to the actual commencement of work at the site for each phase.
In addition thereto before final payments, there shall be six (6) photographs
taken of unobstructed views of the completed buildings or buildings and
site, as directed by the Commissioner, after all scaffolding, hoists, shanties,
field offices or other temporary work has been removed and final cleaning
done. (For demolition work included in the Contract there shall be four (4)
photographs taken before commencement of demolition operation, four (4)
at mid-point of operations and four (4) at the completion of demolition
operations for each phase of the work.) The prints shall be 8" by 10" gloss
finish, mounted with a 1" binding flap of muslin on the left side. They
shall be marked on the back, with date of exposure, the title of the project
and the specific location.

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Sales Tax
July 27, 1994
Six copies of each photograph shall be furnished free of charge to the
Resident Engineer. Photographs shall be taken as ordered by the Resident
Engineer. (Emphasis supplied)
No payment will be made until each months photos are submitted.
Section 1105(a) of the Tax Law imposes a tax upon "[t]he receipts from every retail sale of
tangible personal property, except as otherwise provided in this article."
Section 526.8 of the Sales and Use Tax Regulations defines tangible personal property as
follows:
526.8 Tangible personal property. (Tax Law, §1101(b)(6)) (a) Definition. The
term tangible personal property means corporeal personal property of any nature
having a material existence and perceptibility to the human senses. Tangible
personal property includes, without limitation:

(3) artistic items, such as sketches, paintings, photographs, moving picture
films and recordings;

Section 526.6(c) of the Sales and Use Tax regulations defines the resale exclusion:
(c) Resale exclusion. (1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to sell, either in the
form in which purchased, or as a component part of other property or services, the
property or services which he has purchased will be considered as purchased for
resale and therefore not subject to tax until he has transferred the property to his
customer.
Section 1115(a)(15) of the Tax Law provides an exemption from sales tax 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 an 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.

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July 27, 1994
Section 1115(a)(16) of the Tax Law provides an exemption from sales tax 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.
Petitioner's purchases of the photographs are subject to sales tax pursuant to Section 1105(a) of
the Tax Law and Section 526.8(3) of the Sales and Use Tax Regulations unless such photographs
were purchased for resale or incorporated in a capital improvement for an organization exempt under
Section 1116(a) of the Tax Law.
In order to qualify for the resale exclusion, Petitioner must sell the photographs as a component
part of other property or services, or in the form in which purchased. Petitioner is in the business
of selling capital improvements of which the photographs do not become a part. (See: Fred H.
Geller & Co. Adv. Op. Comm. T & F, April 6, 1992 TSB-A-92(33)S).
Petitioner's contract does not create a resale of the photographs. In fact, Petitioner's contract
specifically provides that the photographs are to be supplied free. In addition, Petitioner's contract
provides that the photographs are used for documentation and that Petitioner will not be paid until
the photographs are submitted. Thus, Petitioner itself is using the photographs in order to get paid,
and although they may be transferred to the City of New York, the photographs are consumed by
Petitioner in the same manner as other supplies, and consequently do not qualify for the resale
exclusion. (See Leslie H. Baker, Adv. Op. Comm. T & F, June 23, 1994 TSB-A-94(26)S).
Furthermore the photographs do not become an integral component part of the structures involved
and thus do not qualify for the exemption from sales tax provided by Sections 1115(a)(15) and
1115(a)(16) of the Tax Law.

DATED: July 27, 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.