Is a utility's fee for operating a building's heating, air conditioning, and electric generating equipment on the owner's behalf subject to sales tax?

Plain-English summary

The Brooklyn Union Gas Company, a natural gas utility, was expanding into a new line of business called Energy Management Services (EMS). Large commercial and residential buildings normally need round-the-clock staff -- typically licensed stationary engineers -- to run and maintain the building's heating, air conditioning, and hot water equipment: turning equipment on and off, adjusting it, monitoring it, and logging performance. Some building owners struggled to staff those positions and wanted to hire Brooklyn Union Gas to do it instead. The company proposed offering (1) round-the-clock operating and monitoring services for a building's central boiler plant, air conditioning units, and electric generators, and (2) a separate, smaller routine preventive maintenance service (expected to run about 5% of the operating fee), billed as an optional add-on.

The Department held that operating and monitoring a building's boilers and air conditioning units, filling out equipment logs, and starting/synchronizing/stopping the building's electric generators all count as "maintaining, servicing, or repairing real property" under Tax Law § 1105(c)(5) -- citing an earlier ruling on the same point, Matter of Allied Maintenance (later confirmed on appeal). Because this activity involves running equipment that's part of the real property's own infrastructure (not just servicing a piece of tangible personal property the owner separately owns), it's taxed as a real-property service. The Department also noted that the separate equipment-maintenance service is independently taxable under § 1105(c)(3) or (c)(5), whether billed under a service contract or on a per-transaction basis. Bottom line: Brooklyn Union Gas has to collect sales tax on both the operating-services fee and the maintenance fee when the work is performed in New York.

What this means for you

Facilities-management and energy-services companies

If you take over the day-to-day operation of a building's own heating, cooling, or power-generation systems -- effectively stepping into the role of the building's own operating engineers -- that operating fee is a taxable real-property service in New York, not an exempt professional or consulting service. Billing operating services and maintenance services separately doesn't make either one exempt; both are taxable here.

Commercial and residential building owners

Contracting out your building's HVAC/generator operations doesn't avoid sales tax -- expect your vendor to charge tax on both the operating fee and any add-on maintenance fee for services performed in New York.

Accountants and tax professionals

This opinion is a clean example of how "operating" equipment that's integrated into a building (not just repairing a standalone piece of equipment) still falls within the § 1105(c)(5) real-property service category, tracing back to the Allied Maintenance line of authority.

Common questions

Q: Does it matter that the operating fee and maintenance fee are billed separately?
A: No -- both are taxable in this fact pattern; separate billing doesn't create an exemption for either one.

Q: Would a one-time equipment repair be taxed the same way?
A: The opinion treats ongoing maintaining/servicing/repairing of the equipment as taxable under § 1105(c)(3) or (c)(5) whether performed under a service contract or transaction-by-transaction.

Q: Can another energy-services company rely on this ruling?
A: No. This advisory opinion binds the Department only with respect to Brooklyn Union Gas and the specific EMS service package it described.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(3) (tax on installing, maintaining, servicing, or repairing tangible personal property)
• Tax Law § 1105(c)(5) (tax on maintaining, servicing, or repairing real property)

Prior rulings and cases referenced:

• Matter of Allied Maintenance, State Tax Commission, February 29, 1984, TSB-H-84(50)S, confirmed, Matter of Allied Maintenance Corporation v. New York State Tax Commn, 115 AD2d 143

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_90s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (90) S
Sales Tax
December 30, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960306A

On March 6, 1996, the Department of Taxation and Finance received a Petition for Advisory
Opinion from The Brooklyn Union Gas Company, One Metrotech Center, Brooklyn, New York
11201.
The issue raised by Petitioner, Brooklyn Union Gas, is whether the service of operating a
heating, ventilation, air conditioning and electrical generating plant is subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a public utility providing natural gas service in the New York City area and is
expanding into new lines of business which traditionally have not been offered by public utilities.
One of these ventures is Energy Management Services (EMS). Generally, the owner of a large
commercial or residential building requires round- the- clock staff to operate and maintain the
building's heating, ventilation, air conditioning and hot water requirements. The duties required,
which include turning on, monitoring, adjusting and shutting down the equipment, are usually
performed by the owner's employees who are generally licensed as stationary engineers. In addition,
these employees provide routine maintenance on an as-needed basis. Their principal function
however, is to operate the equipment. Some building owners who have found it difficult to staff
these positions or who would like to rely on Petitioner's expertise in energy management, now wish
to have Petitioner perform these functions.
Petitioner proposes to provide operating services which are identical to those provided by the
owner's employees. In addition, Petitioner also intends to offer, for a separate fee, routine preventive
maintenance of the above equipment. It is anticipated that the fee for maintenance service will not
comprise more than 5% of the operating fee. In the service contract that is negotiated and on invoices
that it will render, Petitioner intends to offer to the building owner the option to separately purchase
the operating service and routine maintenance services.
The operating services that Petitioner will provide to a building's existing central boiler plant,
air conditioning, and electric power generation are:
1.

24 hour/day, 365 day/year operating and monitoring of the large
boilers and air conditioning units as required by building load and
weather.

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TSB-A-96 (90) S
Sales Tax
December 30, 1996

2.

Monitoring of the performance of the equipment and filling out the
equipment log.

3.

Starting, synchronizing, and stopping the electric generators as required
by electrical load and engine operating conditions.

Applicable Law
Section 1105(c) of the Tax Law imposes sales tax upon:
The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith, except:
*

*

*

(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.
Operating and monitoring a building's boilers and air conditioning units; monitoring the
performance of this equipment and filling out equipment logs; and starting, synchronizing, and
stopping the building's electric generators as required by electrical load and engine operating
conditions, are considered to be maintaining, servicing, or repairing real property and thus are subject
to sales tax under Section 1105(c)(5) of the Tax Law. See Matter of Allied Maintenance, State Tax
Commission, February 29, 1984, TSB-H-84(50)S, confirmed, Matter of Allied Maintenance
Corporation v. New York State Tax Commn, 115 AD2d 143. In addition maintaining, servicing or
repairing Petitioner's customers' equipment is subject to the tax imposed under section 1105(c) (3)

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TSB-A-96 (90) S
Sales Tax
December 30, 1996

or (5) of the Tax Law whether or not the services are performed under a service contract or on a
transaction by transaction basis. Accordingly, Petitioner is required to collect sales tax on receipts
from the sale of these services when performed in New York State.

DATED: December 30, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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