New York Advisory Opinion TSB-A-95(38)S: When a prime contractor buys trash removal from a subcontractor and then re-bills the exact cost to a federally tax-exempt customer, is the subcontractor's charge to the prime contractor taxable, and is the prime contractor's pass-through charge to the exempt customer taxable?

Plain-English summary

Pasquale & Bowers described a project performed by a prime contractor for a customer that is exempt from sales tax under Tax Law § 1116(a)(2) -- an organization related to the United States government (which is immune from taxation as purchaser, user, or consumer, or when selling services/property not ordinarily sold by private persons). The project itself does not qualify as a capital improvement; it's a repair-type job. As part of the work, the prime contractor hires a subcontractor to remove the waste material -- trash and garbage -- generated by the repair. The subcontractor's charge for that removal service is billed to the prime contractor, and the prime contractor then re-bills that exact cost to the tax-exempt customer.

The Department ruled that 20 NYCRR § 541.7 controls: trash or debris removal resulting from maintaining, servicing, or repairing real property (as opposed to debris removal from a capital-improvement project) is subject to sales tax on the total amount charged. The regulation's own Example 3 closely mirrors these facts: a contractor performing a repair job hires a subcontractor to remove the resulting debris, the subcontractor's charge to the contractor is taxable, and the contractor's total charge to ITS customer for the repair job is also taxable. Applying that principle, the Department held the prime contractor is required to pay sales tax on the subcontractor's charge for removing the waste material -- the prime contractor is the purchaser of a taxable trash-removal service, and nothing about who its own downstream customer is changes that. However, the prime contractor's SUBSEQUENT charge to the tax-exempt organization (re-billing that same cost) is not itself subject to sales tax, because that customer is specifically exempt under § 1116(a)(2).

What this means for you

Prime contractors working for government or other tax-exempt customers

Don't assume that because your end customer is tax-exempt, your OWN purchases of taxable services (like subcontracted trash removal) from third parties are also exempt -- you generally must pay sales tax on your inputs regardless of your customer's exempt status, unless a specific resale exclusion or agency-purchase structure applies.

Subcontractors providing trash/debris removal to prime contractors

Your charge to the prime contractor for removing debris from a repair job is taxable, and you're required to collect that tax from the contractor -- the contractor's own arrangement with ITS customer (even a tax-exempt one) doesn't change your collection obligation.

Contractors billing tax-exempt organizations directly for repair work

While your own inputs (like subcontracted trash removal) may be taxed to you, your final charge to a genuinely tax-exempt customer (such as one qualifying under § 1116(a)(1) or (a)(2)) for that repair work is not itself subject to sales tax.

Common questions

Q: Would the outcome differ if the prime contractor purchased the trash removal service using a resale certificate?
A: The ruling doesn't indicate that a resale exclusion applies here -- trash and debris removal resulting from a repair is taxed to the CONTRACTOR who purchases it as an input to a taxable repair service, per 20 NYCRR § 541.7's own example, rather than being treated as a service purchased for resale.

Q: Would the analysis change if the underlying project qualified as a capital improvement instead of a repair?
A: Yes -- 20 NYCRR § 541.7 specifically distinguishes debris removal resulting from repair/maintenance (taxable) from debris removal resulting from adding to, demolishing, or improving real property BY a capital improvement (which the regulation treats differently); Petitioner's facts specifically stated the project does not qualify as a capital improvement.

Q: Does re-billing the subcontractor's exact cost (with no markup) change the tax treatment?
A: No -- the ruling doesn't tie the outcome to whether there's a markup; the subcontractor's charge to the contractor is taxable regardless, and the contractor's downstream charge is analyzed separately based on the tax status of its own customer.

Citations and references

Statutes and regulations:

• Tax Law § 1116(a)(2) (federal government exemption)
• 20 NYCRR 541.7 (trash and debris removal tax; Example 3)

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_38s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-95 (38)S
Sales Tax
October 10, 1995

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950502A

On May 2, 1995, a Petition For Advisory Opinion was received from Pasquale & Bowers,
90 Presidential Plaza - Suite 210, Syracuse, New York 13202.
The issue raised by Petitioner, Pasquale & Bowers, is whether the service of trash and
garbage removal purchased from a subcontractor by the prime contractor and then resold to a tax
exempt organization described in Section 1116(a)(2) of the Tax Law is subject to sales tax.
The Petitioner submitted the following facts:
The customer is a tax-exempt organization exempt from sales tax pursuant to section
1116(a)(2) of the Tax Law.
The project being performed by the prime contractor does not qualify as a capital
improvement.
The service being performed by the subcontractor is the removal of waste material consisting
of trash and garbage.
The cost of the service being billed to the prime contractor by the subcontractor is re-billed
to the tax-exempt organization.
Section 1116(a) of the Tax Law provides in part that:
(a) Except as otherwise provided in this section, any sale or amusement charge by
or to any of the following or any use or occupancy by any of the following shall not
be subject to the sales and compensating use taxes imposed under this article:
*

*

*

(2) The United States of America, and any of its agencies and instrumentalities,
insofar as it is immune from taxation where it is the purchaser, user or consumer, or
where it sells services or property of a kind not ordinarily sold by private persons;
Section 541.7 of the Sales and Use Tax Regulations provides in part as follows:
Trash and debris removal. (a) Receipts from the service of trash or debris removal
resulting from maintaining, servicing, or repairing real property, property or land (as
distinguished from the receipts from the service of removal of debris resulting from

-2­
TSB-A-95 (38)S
Sales Tax
October 10, 1995
the adding to, demolishing or improving such real property, property or land by a
capital improvement) are subject to sales tax on the total amount charged.
Example 3: A contractor in the performance of a repair job for a customer, hires a
subcontractor to remove the debris accumulated as a result of the repair job. The
subcontractor's charge to the contractor for the debris removal is subject to tax. The
contractor's total charge to the customer for the repair job is subject to tax.
Section 541.7 of the Sales and Use Tax Regulations specifically subjects the purchase of a
trash removal service to sales tax when such service is purchased by a contractor who is performing
a repair service. Therefore the prime contractor under the facts presented is required to pay sales tax
on the subcontractor's charges for removal of the waste material. The contractor's subsequent
charges to an organization described in Section 1116(a)(2) of the Tax Law are not subject to sales
tax.

DATED: October 10, 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.