Can a mechanical contractor buy or rent temporary boilers tax-free for resale when installing them at a customer's building during a boiler replacement job?

Plain-English summary

Dierks Heating Company is a mechanical contractor that removes old boilers and installs new permanent ones. While the new boiler is being installed and certified, tenants still need heat and hot water, so Dierks' contracts require it to provide a temporary boiler in the meantime. Dierks rents or buys these temporary boilers, delivers and installs them, but never operates them itself -- the buildings' own personnel (Housing Authority staff or a customer's employees) run the temporary boiler and arrange their own fuel supply. The charge for the temporary boiler is separately itemized on the contract. Dierks asked whether it owes sales tax on buying or renting these temporary boilers, and whether it must collect sales tax on what it bills the customer for the boiler rental and installation.

New York normally treats a temporary heating facility installed as a "necessary prerequisite" to a capital improvement (like helping other trades work through a cold building during construction) as part of the capital improvement itself, exempt from tax. But that's not what's happening here -- Dierks' temporary boilers exist solely to keep the building's own tenants warm during the changeover, not to help Dierks or other contractors do their construction work. Because Dierks doesn't use the temporary boilers for anything but making them available to its customer, they count as tangible personal property purchased or rented for resale, not as a step toward the capital improvement. That means Dierks doesn't owe sales tax on its own purchase or rental of the temporary boilers (as long as it gives its supplier a completed contractor exempt purchase certificate, Form ST-120.1, within 90 days), but it must collect sales tax from its customer on the rental and installation charge when it bills for the temporary boiler -- unless that customer is a government entity or another organization exempt under Tax Law § 1116, in which case the charge is exempt if the customer provides a properly completed exemption document. The one caveat: if Dierks ever used the very same temporary boiler as a genuine prerequisite to its own construction work (rather than purely for the tenants' benefit), that boiler would lose its resale treatment and become taxable to Dierks.

What this means for you

Contractors installing temporary equipment during a replacement or renovation job

Whether temporary equipment (like a boiler, generator, or similar) is a tax-free "capital improvement prerequisite" or a taxable resale item to your customer depends entirely on who actually benefits from it and who operates it -- equipment used purely to keep the customer's tenants comfortable, that you don't operate yourself, is a resale item, not part of your own construction process.

Contractors billing customers for temporary-facility rentals

You must collect sales tax on your rental and installation charge for temporary equipment used this way, unless your customer is a government agency or other exempt organization presenting a proper exemption document -- keep that documentation for at least three years.

Accountants and tax professionals

This is a useful precedent distinguishing 20 NYCRR § 541.8's "temporary facilities as part of the capital improvement" rule (which applies when temporary heat/power/plumbing serves the construction trades themselves) from an ordinary taxable equipment rental to the building owner or its tenants -- the operator's identity and the equipment's actual purpose are the deciding factors, not just the fact that the boiler is "temporary."

Common questions

Q: Is a temporary boiler installed during a boiler replacement job automatically tax-exempt as part of the capital improvement?
A: No -- that exemption only applies when the temporary facility serves as a prerequisite to the construction trades' own work. A temporary boiler installed purely to keep tenants warm, and operated by the building's own staff, is instead a taxable resale item to the customer.

Q: Does a contractor need to collect sales tax on a temporary equipment rental billed to a government agency?
A: No, if the government agency or other exempt organization presents a properly completed exemption document (like an official purchase order), and the contractor retains that documentation for at least three years.

Q: What certificate does a contractor need to buy temporary equipment tax-free for resale?
A: A properly completed contractor exempt purchase certificate (Form ST-120.1), given to the supplier within 90 days of the purchase date.

Q: Does this ruling apply to my company's temporary-equipment rental arrangement?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own contract terms and who operates the equipment would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_72s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(72)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960712A

On July 12, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Dierks Heating Company, Inc., 43-32 33rd
Street, Long Island City, New York 11101. Petitioner, Dierks Heating Company,
Inc., submitted additional information pertaining to the Petition on November 26,
1996. It is noted that this Advisory Opinion does not modify an earlier Advisory
Opinion issued to Petitioner, dated April 21, 1993 (TSB-A-93(29)S). The present
Advisory Opinion is based on new facts and issues submitted by Petitioner.
The issues raised by Petitioner are:
1.

Whether temporary boilers rented to or purchased by Petitioner
may be purchased for resale for sales tax purposes where the
boilers are installed at projects to provide heat for tenants
and are operated only by Petitioner’s customer’s personnel
during the replacement of existing boilers.

2.

Whether sales tax should be collected by Petitioner on the
itemized rental cost plus installation of a temporary boiler
rented or purchased by Petitioner and installed at a
customer's premises. The temporary boilers in this instance
are not being operated by Petitioner once they are installed
at the customer's premises.

Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a mechanical contractor who enters into contracts to remove
existing boilers and install new boilers. These contracts specifically provide
that Petitioner shall provide temporary boilers to maintain tenants' hot water
and heating requirements while new permanent boilers are being installed.
Petitioner rents or purchases temporary boilers. These temporary boilers
are usually delivered on site to be installed by Petitioner. The site is often
a tax exempt project. Once installed, the temporary boilers are operated by New
York City personnel at Housing Authority Projects and schools to provide heat and
hot water for tenants while new permanent boilers are being installed.
The
temporary boilers remain tangible personal property.
Some contracts only provide for the replacement of the existing boilers by
Petitioner. However, if the need arises for temporary boilers to be installed,
a change order, i.e., an amendment to the contract, will be made to provide for
the installation of the temporary boilers.
The charges for the temporary boilers are separately itemized on the
contract, or the amendment to the contract, which is based on bid documents
specifically requiring temporary boilers to be installed and in use until the new
boilers pass inspection and can be certified.

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Petitioner does not operate the boilers.
The designated operators,
licensed and unionized steam fitters, are not employed by Petitioner but are
employees of the Housing Authority or the non-exempt customer of Petitioner.
Petitioner does not supply fuel for the boilers to its customers. Customers are
responsible for obtaining fuel from third party suppliers.
The temporary boilers are not necessary to provide temporary heating for
Petitioner or other contractors in the performance of a capital improvement. The
temporary boilers are solely intended to provide heat and hot water for the
tenants.
Applicable Law and Regulations
Section 1105(a) of the Tax Law imposes tax on "[t]he receipts from every
retail sale of tangible personal property, except as otherwise provided in this
article."
Section 1101(b)(4) of the Tax Law defines the term "retail sale", in part,
to mean "(i) A sale of tangible personal property to any person for any purpose,
other than (A) for resale as such or as a physical component part of tangible
personal property . . . "
Section 1116 of the Tax Law provides, in part:
Sec. 1116. Exempt organizations. (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:
(1) 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 526.6 of the Sales and Use Tax Regulations provides, in part, as
follows:
(a)
The term "retail sale" or "sale at retail" means the
sale of tangible personal property to any person for any purpose
except as specifically excluded.
*

*

*

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Sales Tax

(c)
Resale exclusion. (1) Where a person, in the course of
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 541.5(b)(4) of the Sales and Use Tax Regulations provides, in part:
(iii) If a contract includes the sale of tangible personal
property
which
remains
tangible
personal
property
after
installation, the contractor must collect the appropriate New York
State and local taxes from the customer on the selling price,
including any charge for installation, of the tangible personal
property unless a properly completed exemption certificate is issued
by the customer. The contractor may apply for a credit or refund of
taxes he has paid on purchases of the tangible personal property
that remain tangible personal property after installation.
*

*

*

Example 1: A contractor sells a building he has constructed
and, as a part of the sale agreement, installs free standing water
fountains which remain tangible personal property when installed.
The contractor's billing to his customer must separately state all
charges for tangible personal property included in the sales
agreement. The New York State and applicable local tax rate must be
collected on the total charges for the water fountains including
any installation charges.
In this instance, the contractor may
purchase the water fountains tax-free using a contractor exempt
purchase certificate. If he pays the tax to his supplier, he is
entitled to a refund or credit of the tax paid on the purchase of
the water fountains.
Section 541.8 of the Sales and Use Tax Regulations provides, in part:
Reg. Sec. 541.8.
Charges for temporary facilities at
construction sites.--(Tax Law, Sec. 1105(c)(3), (5)). (a) General.
Subcontracts to provide temporary facilities at construction sites,
which are a necessary prerequisite to the construction of a capital
improvement to real property, are considered a part of the capital
improvement to real property. Charges for installation of materials
and the labor to provide temporary heat, temporary electric service,
temporary protective pedestrian walkways, and temporary plumbing by
a subcontractor are therefore not subject to tax provided the
subcontractor receives a copy of the properly completed certificate
of capital improvement issued by the customer to the contractor.

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Sales Tax

Example 1: A subcontractor agrees to furnish to the prime
contractor the materials and labor necessary to furnish temporary
light and electrical facilities throughout a building under
construction so that the various trades may have light,
communications and power facilities necessary for them to perform
their work and operate their tools. The charges are a constituent
part of the capital improvement and are not subject to tax.
(b) The subcontractor is liable, however, for the tax on the
purchase of the materials used to provide the temporary facilities
at construction sites described in subdivision (a) of this section.
Example 2: A subcontractor agrees to furnish temporary site
plumbing service to the prime contractor engaged in the construction
of an office building. The subcontractor must purchase a quantity
of pipes, pumps, and fittings in order to provide the temporary
service.
The services is a constituent part of the capital
improvement, thus, the subcontractor's charge for the temporary
plumbing services are not subject to tax.
However, the
subcontractor is liable for the tax due on his purchase of all
materials needed to provide the temporary plumbing service.
Opinion
Pursuant to Section 541.8 of the Sales and Use Tax Regulations, the
installation of temporary heating facilities qualifies as a capital improvement
and therefore is not subject to sales tax when the temporary facilities are used
to generate heat as a necessary prerequisite to the construction of the capital
improvement to real property. But, in the instant case, Petitioner has indicated
that it is renting or purchasing temporary boilers to be installed in buildings
solely for the tenants' use to provide heat during replacement of existing
boilers. The temporary boilers are not operated by Petitioner's employees, but
rather by Housing Authority personnel or employees of Petitioner's non-exempt
customers. Petitioner's customers are responsible for obtaining heating fuel
from third party suppliers. The charges for the temporary boilers are separately
stated in the contract, and the bid documents for Petitioner's projects
specifically require temporary boilers to be installed for use until the new
permanent boilers can be certified.
Therefore, the temporary boilers are
purchased or rented by Petitioner for resale rather than as a prerequisite to the
construction of the capital improvement to real property, provided that
Petitioner does not use the temporary boilers for any purpose other than resale.
For example, if Petitioner uses the same temporary boiler also as a prerequisite
to the construction of a capital improvement, then this boiler would not be
purchased for resale and Petitioner would be liable for tax on this boiler.
Accordingly, with respect to issues "1" and "2", a person who, in the
course of business operations, purchases (or rents) tangible personal property
for sale (or rental), in either the form in which it was purchased (or rented),
or as a component part of other property, will be considered to have made a non­
taxable purchase for resale, provided the purchaser does not make any self-use
of the purchased (or rented) property. See Section 1101(b)(4) of the Tax Law and
Section 526.6(c) of the Sales and Use Tax Regulations. Petitioner may purchase

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for resale tangible personal property which remains tangible personal property
after installation, if Petitioner furnishes its supplier with a properly
completed contractor exempt purchase certificate (Form ST-120.1) within 90 days
of the purchase date. See Section 541.5(b)(4)(iii), Example 1 of the Sales and
Use Tax Regulations. Therefore, sales tax is not due on the purchase or rental
of the temporary boilers by Petitioner, but must be collected on the rental and
installation of the temporary boiler when installed at Petitioner's customer's
premises. It should be noted, however, that, where the temporary boiler and
installation service are sold to a government entity or other organization exempt
from tax under Section 1116 of the Tax Law, the charges for rental and
installation of the temporary boiler will not be subject to sales tax, provided
the governmental agency or exempt organization presents Petitioner with a
properly completed official purchase order (exemption document).
The
documentation substantiating the exempt transaction must be retained by the
vendor for at least three years following the date the transaction was required
to be reported to the Department of Taxation and Finance. See Part 529 of the
Sales and Use Tax Regulations.

DATED: November 19, 1997

NOTE:

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

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