Can an environmental engineering and consulting firm buy supplies, equipment, and services tax-free for a project performed for a tax-exempt government agency, by acting as the agency's purchasing agent?

Subject

Issue raised by Petitioner, Genetelli & Associates, is whether purchases of supplies, equipment and services for use in performing environmental engineering and consulting services for exempt governmental agencies are subject to sales tax and, if so, would such purchases be exempt if Petitioner's client entered into an agency contract with the exempt governmental agency.

What this means for you

An environmental engineering and consulting firm ("Company X") does site investigations, remedial design, and related work for government clients, buying books, maps, engineering equipment, computers, vehicles, and services like printing, graphics, drilling, and lab testing along the way. Ordinarily, a contractor's own purchases are just its cost of doing business and are taxable -- the government client's own tax exemption doesn't automatically flow through to its contractor's purchases.

The exception is a genuine agency relationship: if the exempt government client formally appoints the contractor as its purchasing agent, purchases made in that capacity can be exempt too. New York has a detailed regulatory checklist for this (invoicing that names the exempt organization, payment from a dedicated fund, delivery requirements, and a signed certification) -- but that checklist, by its own terms, only applies to certain categories of exempt organizations (charities and similar groups under Tax Law § 1116(a)(3)-(6)).

For government agencies exempt under § 1116(a)(1) (New York State and its agencies/subdivisions) or § 1116(a)(2) (the U.S. government), no such regulatory checklist exists. Instead, the Department applies the general common-law test for agency (from Hooper Holmes, Inc. v. Wetzler): was there a manifestation that the contractor consented to act on the client's behalf, subject to the client's control, with the client's authorization? Here, contract language expressly conferring agency status on the contractor for purchasing purposes, combined with purchase orders that identify the contractor as acting as agent, satisfies that test -- making the purchases exempt.

Q&A

Q: We're a consultant working for a New York State agency (or a federal agency) -- can we buy tax-free if our contract lets us purchase for them?
A: Yes, if your contract confers genuine agency status on you for purchasing, and your purchase orders reflect that you're buying as the agency's agent (not just doing your own procurement). Because the client is a government body under § 1116(a)(1) or (a)(2), you don't need to satisfy the stricter agency checklist that applies to other exempt organizations -- ordinary agency law controls.

Q: What language does our contract need?
A: The petition's model language had the exempt organization expressly conferring agency status on the contractor (and its subagents) for the purpose of purchasing supplies, equipment, and services for the specific project, and acknowledging that the resulting exemption applies only to those project-related purchases.

Q: Does this exemption cover services we resell to the client too?
A: Yes -- any service the client will resell can also be purchased tax-free by the contractor, separate from the agency analysis.

Q: What if our contract is silent on agency status?
A: Then the purchases are not exempt; the contractor is simply buying as a regular business, and its purchases are subject to sales tax like any other purchaser's.

Citations

• Tax Law § 1105(a) -- imposes sales tax on retail sales of tangible personal property.
• Tax Law § 1115(a)(15), (16) -- exemptions for property sold to a contractor for a § 1116(a) exempt organization's capital improvement or repair work.
• Tax Law § 1116(a)(1), (2) -- exempts New York State/its agencies and subdivisions, and the U.S. government/its agencies, from sales and use tax as purchaser, user, or consumer.
• 20 NYCRR 541.3(d)(4) -- sets the agency-contract checklist, but only for exempt organizations under Tax Law § 1116(a)(3)-(6).
• Matter of MGK Constructors, Dec Tax App Trib, March 5, 1992, TSD-D-92(23)S -- New York City (a § 1116(a)(1) exempt purchaser) and its agent-contractor aren't subject to the § 541.3(d)(4) checklist; general agency principles apply instead.
• Hooper Holmes, Inc. v. Wetzler, 152 AD2d 871 (1989), lv denied 75 NY2d 706 -- states the general agency test: consent to act on another's behalf, subject to that party's control, with authorization.
• Monetary Management of New York, Inc., Adv Op Comm T&F, August 23, 1993, TSB-A-93(45)S -- applied in confirming the agency relationship here can be established without the § 541.3(d)(4) checklist.

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_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (30)S
Sales Tax
July 18, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940705A

On July 5, 1994, a Petition for Advisory Opinion was received from Genetelli & Associates,
400 Madison Avenue, New York, New York 10017.
The issue raised by Petitioner, Genetelli & Associates, is whether purchases of supplies,
equipment and services for use in performing environmental engineering and consulting services for
exempt governmental agencies are subject to sales tax and, if so, would such purchases be exempt
if Petitioner's client entered into an agency contract with the exempt governmental agency.
Additionally, if purchases made under such agency contract are exempt, must all the conditions
specified in section 541.3(d)(4) of the Sales and Use Tax regulations be met.
Company X will purchase certain supplies, equipment and services for use in performance
of its services. Included among Company X's purchases will be books, maps, engineering
equipment, computers, automobiles, and services including printing, graphics, drilling and lab
testing. These items will not be transferred to the clients by Company X in conjunction with the
performance of its services, but nevertheless will often be transferred to the clients when the services
are completed.
Some of the written contracts entered into by Company X will specify that the company may
act as an agent of the client in purchasing supplies, equipment and services, while other written
contacts will be silent on the matter. Regardless of the terms of the written contract, all of the
principal/agent relationship conditions set forth in section 541.3(d)(4)(i) of the Sales and Use Tax
Regulations will not be met.
The contracts that Company X enters into with clients that appoint it as agent will contain
the following:
______ hereby confers agency status, for the purpose of
purchasing supplies, equipment and services, to the Contractor and to the
Contractor's subagents responsible for the performance of environmental engineering
and consulting services, including, but not limited to, preliminary site
characterizations, detailed site investigations, site analysis, remedial investigations,
feasibility studies and preparation of written reports, as well as remedial design and
engineering services during construction and operating and maintenance engineering
and consulting services during start-up.
_____ acknowledges that any sales tax exemption resulting
from the delegation set forth above applies solely to

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TSB-A-95 (30)S
Sales Tax
July 18, 1995
purchases of supplies, equipment and services for use in performing the environmental
engineering and consulting services set forth in this agreement.

• The blank line represents a New York Tax Law Section 1116(a)(1) or (2)
  organization.
  Section 1105(a) of the Tax Law imposes a tax on "[t]he receipts from every retail sale of
  tangible personal property, except as otherwise provided in this article."
  Section 1115(a)(15) and (16) of the Tax Law exempts from the sales tax imposed under
  Section 1105(a) of the Tax Law and from the compensating use tax imposed under section 1110 of
  the New York State Tax Law:
  (15) 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.
  (16) 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.
  Section 1116(a)(1) of the Tax Law provides an exemption from sales and compensating use
  taxes with respect to the "State of New York, or any of its agencies, instrumentalities, public
  corporations (including a public corporation created pursuant to agreement or compact with another
  state or Canada) or political subdivisions where it is the purchaser, user or consumer or where it is
  a vendor of services or property of a kind not ordinarily sold by private persons." Section 1116(a)(2)
  of the Tax Law provides essentially the same exemption for the United States government and its
  agencies and instrumentalities.
  Section 541.3(d)(4) of the sales tax regulations sets forth the conditions necessary to create
  an agency contract.
  (4) Agency contracts.(i) If an exempt organization described in section
  1116(a)(3),(4),(5) or (6) of the Tax Law enters into an agency contract with the prime
  contractor and all subcontractors, all purchases for such contract are exempt as long
  as the property and services are purchased by the contractor or subcontractor as agent
  for the exempt organization. In order to create a principal/agent relationship all of
  the following conditions must be met;

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TSB-A-95 (30)S
Sales Tax
July 18, 1995
(a) purchases must be billed or invoiced by the vendor to the exempt organization or
to the contractor specifying that the contractor is acting as agent for the exempt
organization (e.g. X contractor, as agent for Y, name of exempt organization) and
identify the place of delivery;
(b) payment must be made by the exempt organization or by the contractor, acting as
agent, directly to the vendor from a special fund created by the exempt organization
for this specific purpose;
(c) deliveries must be made to the job site; or under certain circumstances (such as
where the materials require additional fabrication before installation on the job site
or for storage to protect the materials from theft or vandalism prior to installation at
the job site) deliveries may be made to a site, other than the job site, providing the
ultimate delivery of the material is made to the job site. Where delivery is made to
a site other than the job site, the purchases must be billed or invoiced by the vendor
to the exempt organization or to the contractor as agent, identify the place of delivery,
the exempt organization's full name and address and the job site location where the
materials will ultimately be delivered for installation; and
(d) The contractor must furnish the vendor with the exempt organization certification
when acting as agent for such organization. A statement signed by a responsible
officer of the exempt organization which identifies the contract and the contractor,
as agent for the exempt organization, must be either made on the exempt organization
certification or appropriately attached thereto. (Emphasis supplied)
In the matter of MGK Constructors, Dec Tax App Trib, March 5, 1992, TSD-D-92(23)S, the
Tribunal held that when acting as a purchaser, user or consumer, the City of New York is not subject
to sales tax pursuant to Section 1116(a)(1) of the Tax Law. Moreover, a contractor acting as an
agent of the city would likewise not be subject to sales tax in accordance with Sections 541.2(c) and
529.2(b) of the Sales and Use Tax Regulations.
The Tribunal further held that the criteria set out in Section 541.3(d)(4) of the Sales and Use
Tax Regulations for establishing whether an agency relationship exists is applicable only to exempt
organizations identified under Sections 1116(a)(3) - (6) of the Tax Law, and as New York City is
an exempt organization pursuant to Section 1116(a)(1) of the Tax Law, it was not subject to such
criteria.
Thus the Tribunal held that since no regulation sets forth a criteria for establishing whether
an agency relationship exists with an exempt organization identified in Sections 1116(a)(1) and (2)
of the Tax Law, that the general rule of agency as cited in the Matter of Hooper Holmes, Inc. v.
Wetzler, 152 AD2d 871, 544 NY2d 233, 235, lv denied 75 NY2d 706, 552 NYS2d 929, must be
applied. In Hooper Holmes, Inc. v. Wetzler, supra, the court stated: "To establish an agency or
representative relationship there must be a manifestation that petitioners consented to act on behalf
of their clients, subject to the latter's control and that the clients authorized this fiduciary
relationship."

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Sales Tax
July 18, 1995
Accordingly, in the instant case, where Company X is authorized by a governmental agency
exempt from sales tax under sections 1116(a)(1) or 1116(a)(2) of the Tax Law, to act as agent on its
behalf in connection with the purchase of the supplies, equipment and services described above, and
such delegation is authorized by law, the purchase of such supplies, equipment and services will not
be subject to sales tax in accordance with the provisions of said sections. The criteria for exemption
set forth in Hooper Holmes, Inc. v. Wetzler, supra, that the agency relationship be manifested
through the exempt organization's consent for Company X to act as agent on its behalf will be met
if the contract between the exempt organization and Company X contains substantially the language
contained in the contract provision conferring agency status set forth above and if the purchase
orders issued by Company X indicate that it is acting as agent for the exempt organization. Monetary
Management of New York, Inc., Adv Op Comm T&F, August 23, 1993, TSB-A-93(45)S.
Any service that will be resold by Petitioner's client may also be purchased tax free.

DATED: July 18, 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.