Can 14 related commercial property owners consolidate their on-site maintenance and janitorial staff's payroll processing into a single payroll corporation without triggering New York sales tax on the wages funneled through it?

Subject

, is whether a commercial property owner's on-site maintenance and janitorial workers can be paid through a payroll service company without the property owner incurring sales tax on the owner's funding of the payroll costs paid through the payroll service company.

What this means for you

New York taxes maintaining, servicing, or repairing real property as a service -- but specifically excludes wages, salaries, and other compensation an employer pays its own employee for that work. Fourteen related entities, each owning one or more commercial office buildings, each employed their own on-site maintenance and janitorial crews. A separate management company oversaw leasing and building-services contracts, but each property owner (not the management company) controlled hiring/firing, set salaries and benefits, and would keep the staff as its own employees even if the management agreement ended.

To cut down on the administrative burden of maintaining 14 separate payroll systems, 401(k) plans, and health plans, the owners proposed routing all their maintenance staff's paychecks through one central payroll processing corporation, which would issue checks and W-2s, handle payroll tax withholding, and administer benefit plans -- but would be fully reimbursed each week by the applicable property owner for exactly that owner's staff costs, with no markup or profit margin.

The Department applied the traditional common-law "right of control" test for the employer-employee relationship (citing a line of New York cases and a similar 1970 IRS revenue ruling on real-estate managing agents): the key question isn't who cuts the paycheck, it's who actually directs and controls the worker's job. Since each property owner retained hiring/firing authority, set compensation, and reimbursed the payroll company dollar-for-dollar, the maintenance staff remained employees of the property owners, not the payroll processor. Their wages stayed exempt employee compensation rather than becoming a taxable purchase of maintenance/repair services.

Q&A

Q: We want to consolidate payroll for maintenance staff across several related property-owning entities -- does that create a taxable service purchase?
A: Not if each entity keeps real employer control -- hiring, firing, setting pay and benefits -- and simply reimburses the payroll processor for its own staff's costs. What matters for sales tax purposes is who controls the work, not who administratively processes the paycheck.

Q: What if the payroll company also directed the day-to-day work of the maintenance staff?
A: That would push toward the payroll company (or another entity) being the real employer, potentially converting the wage payments into a taxable services purchase by the property owner. The exclusion depends on the property owner retaining actual control, hiring/firing power, and compensation-setting authority.

Q: Does using a related-party payroll processor (rather than an outside payroll firm) change the analysis?
A: No -- the analysis turns on the control factors (hiring/firing, salary authority, reimbursement structure), not on whether the payroll processor is affiliated with the property owners.

Citations

• Tax Law § 1105(c)(5) -- taxes maintaining, servicing, or repairing real property, but excludes wages paid by an employer to its own employee for such services.
• 20 NYCRR 527.7(c)(2) -- confirms wages paid to an employee performing repair/maintenance services for their employer are not taxable receipts.
• Building Owners and Managers Association of Greater New York, Adv Op Comm T&F, October 4, 1993, TSB-A-93(52)S -- wages paid to building-owner employees through a managing agent stay untaxed where the owners retain employer responsibilities and reimburse the agent.
• Internal Revenue Ruling 70-267, 1970-1 C.B. 205 -- a managing agent hiring/paying/discharging building staff on the owner's behalf, from the owner's funds, doesn't make the agent the employer under common-law control principles.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (17)S
Sales Tax
June 1, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941031F

On October 31, 1994, a Petition for Advisory Opinion was received from D'Agostino,
Hoblock, Greisler & Siegal, P.C., 39 North Pearl Street, Albany, New York 12207.
The issue raised by Petitioner, D'Agostino, Hoblock, Greisler & Siegal, P.C., is whether a
commercial property owner's on-site maintenance and janitorial workers can be paid through a
payroll service company without the property owner incurring sales tax on the owner's funding of
the payroll costs paid through the payroll service company.
Fourteen related entities each own one or more commercial office buildings (each entity is
hereinafter referred to individually as a Property Owner "the PO" and collectively as Property
Owners "the POs"). Each PO employs on-site maintenance and janitorial crews who perform interior
cleaning and maintenance services, including simple repairs (hereinafter collectively referred to as
the "Staff"). With limited exceptions, the Staff provide services at only one building for one PO.
A few custodial workers have two jobs and are employed by two POs. Extensive repair work done
for a PO is contracted out to independent third parties.
Each PO employs Management Company (hereinafter "MC") which oversees the leasing of
each PO's building, provides accounting services, negotiates contracts for building services such as
refuse removal, snow removal and landscaping, provides periodic oversight of the quality of the
work performed by the PO's Staff and makes recommendations regarding the PO's Staff. The
Management Agreement between each PO and MC state that either party may terminate the
Management Agreement upon thirty days notice.
The MC directs the operations of each of the buildings under the direction of the PO. The
MC reports directly to each PO. The MC maintains its own payroll and benefit plans for its
employees, and the employees of MC are paid directly by MC.
The Management Agreement between each PO and MC state that the Staff are employees
of the PO. If a Management Agreement were terminated by either MC or a PO, the Staff would
remain the employees of the PO. Each PO oversees the hiring and firing of its Staff. In addition,
each PO authorizes the salary, including benefits and bonuses of its Staff.

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Currently, each PO maintains its own payroll. Each PO currently issues paychecks and W-2
forms to its Staff. Each PO files its own payroll reports. The POs would like to obviate the
administrative burden of 14 separate payroll accounts, 14 separate payroll tax returns, 14 separate
401(k) plans and 14 separate health insurance premiums.
The POs propose paying the Staff of each PO through a single Payroll Corporation
(hereinafter "PC"), a related entity. PC, as a central payroll processing service, would handle all
payroll matters related to each PO's employees. PC would issue paychecks and W-2 forms to the
Staff of each PO. PC would also handle the withholding and reporting of payroll taxes for the POs.
PC would also administer the 401(k) plan and health insurance plans for the Staffs of the POs. Cost
savings would be achieved by having the Staffs' payrolls processed by PC. MC, however, will
continue to maintain its own payroll and benefit plans for its employees.
PC would be totally reimbursed on a weekly basis by the applicable PO for salaries, which
would include specifically identifiable benefits, and related payroll taxes for its Staff. PC's issuance
of payroll checks to the Staff of each PO would be completely dependent on PC receiving funding
each week from each PO for its Staff. The payments received each week by PC from each PO would
not be treated as income by PC, but merely as an offset. The Staff of each PO would not render
services, directly or indirectly, to PC.
Each PO is a separate and distinct entity, except for payroll linkage and a common MC.
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.
*

(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.

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Sales Tax
June 1, 1995

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 Irishman 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. Jur. 2d, §2; 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
     supplies, and discharging and paying building employees. The Court concluded that 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 agent's] efforts were expended on behalf of [the
     building] owner and Greig was the servant of [the owner] and not of the agent." Id. at 110. The
     agents were held not to be liable for the consequences of Greig's acts.

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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)--l.
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 Building Owners and Managers Association of Greater New York, Adv Op Comm T&F,
October 4, 1993, TSB-A-93(52)S the Commissioner advised that wages, salaries, and other
compensation paid to the employees of various building owners through a managing agent for the
performance of their services were not receipts subject to sales tax since the employees were in the
employ of the owners solely and not the agent, the owners reimbursed the agent for all payroll
expenses incurred and the building owners were 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.

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June 1, 1995

In the instant case, while the Staff of each PO will be paid through PC, as a central payroll
processing service, and PC will issue the paychecks and W-2 forms, handle the withholding and
reporting of payroll taxes for the POs, and administer the 401(k) and health insurance plans of the
Staff, the PO of each building will oversee the hiring and firing of its staff, direct operations of the
Staff through the MC and authorize salaries, including benefits and bonuses of the Staff. Moreover,
PC will be totally reimbursed on a weekly basis by the applicable PO for salaries, which would
include specifically identifiable benefits and related payroll taxes for the Staff. Therefore, pursuant
to Section 1105(c) of the Tax Law, Section 527.7 of the Sales and Use Tax Regulations, the above
noted court decisions, Revenue Ruling 70-267, supra, and Building Owners and Managers
Association of Greater New York, supra, since the Staff will be the employees of the POs, the wages,
salaries and other compensation paid to the Staff for the performance of their services will not be
receipts subject to sales tax.

DATED: June 1, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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