Can a wholesale supplier accept a resale certificate from a contractor buying materials for capital improvement or repair jobs?

Plain-English summary

A wholesale supplier of heating and plumbing products sells materials to contractor customers, who use them to perform capital improvement jobs and taxable maintenance/repair work on real property. Some of those contractor customers want to hand the supplier a resale certificate (Form ST-120), arguing that the materials become a physical component of the property they're servicing. The supplier's accountant asked whether the supplier can accept those certificates, and whether it has any duty to police how the materials are actually used.

New York's tax law specifically overrides the ordinary resale exclusion for this situation: a sale of tangible personal property to a contractor, subcontractor, or repairman for use in erecting, altering, improving, maintaining, servicing, or repairing real property is deemed a taxable retail sale, regardless of whether the property is later resold as such or incorporated into the job. Resale certificates simply aren't valid for these purchases -- the regulations flatly state that contractors buying materials for capital improvement work or repairs on real property aren't permitted to use one. So the supplier must collect sales tax on all such sales to contractors, and cannot accept a resale certificate for them.

Separately, the ruling addresses the supplier's exposure if it does, in good faith, accept some other (valid) exemption certificate from a customer: New York presumes all receipts are taxable until the contrary is shown, and the burden of proving a sale isn't taxable normally falls on the vendor and the customer together. But if the supplier accepts a properly completed exemption certificate in good faith -- without actual knowledge that it's false or fraudulent -- within 90 days of the sale, it's relieved of liability, and the burden shifts entirely to the customer. The supplier isn't required to investigate or interrogate the customer about how the materials will actually be used, unless it has actual knowledge (not just suspicion) that the certificate is false.

What this means for you

Wholesale suppliers selling to contractors

You cannot accept a resale certificate from a contractor buying materials for capital improvement work or repairs on real property -- collect sales tax on those sales regardless of what certificate the contractor tries to hand you.

Distributors relying on exemption certificates generally

If you accept a properly completed exemption certificate in good faith and without actual knowledge it's false, you're protected from liability even if it later turns out to be wrong -- you don't have to investigate or second-guess a customer's stated basis for exemption, but that protection disappears if you actually know the certificate is false or fraudulent.

Accountants and tax professionals

This ruling is a clean statement of the interaction between Tax Law § 1101(b)(4)(i)'s deemed-retail-sale rule for contractor purchases and the good-faith exemption-certificate defense in 20 NYCRR § 532.4 -- useful anytime a wholesale-distributor client asks whether to accept a contractor's resale certificate.

Common questions

Q: Can a contractor buy materials tax-free with a resale certificate if those materials end up part of the building?
A: No -- New York deems sales to contractors for capital improvement or repair work on real property to be taxable retail sales regardless of whether the materials are later incorporated into the property, and contractors aren't permitted to use a resale certificate for these purchases.

Q: What happens if a vendor accepts an exemption certificate that turns out to be false?
A: If the vendor accepted it in good faith (without actual knowledge it was false or fraudulent) within 90 days of the sale, it's relieved of liability, and the customer alone bears the burden of proving the sale wasn't taxable.

Q: Does a vendor have to investigate whether a customer's exemption certificate is legitimate?
A: No -- a vendor accepting a certificate in good faith has no duty to investigate or debate taxability with the customer, unless it actually knows (not merely suspects) the certificate is false.

Q: Does this ruling apply to my business's sales to contractors?
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 sales and certificates 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_78s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(78)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S970922C

On September 22, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Andrew S. Hollander, CPA, 18 Haven Avenue,
Port Washington, NY 11050.
The issues raised by Petitioner, Andrew S. Hollander, CPA, are:
1)
Whether Petitioner's client, a wholesale supplier of heating and
plumbing products, can accept resale certificates (Form ST-120) from contractors.
2) Whether Petitioner's client is under any obligation to make sure that
the purchases made are for the purposes enumerated on the resale certificate
(Form ST-120) or on any other authorized exemption document.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner's client is a wholesale supplier of heating and plumbing
products. Petitioner's client's customers are contractors who purchase various
materials and supplies for use in performing capital improvement jobs and for use
in performing taxable maintenance and repair work.
Petitioner's client's
customers (i.e., contractors) wish to present Petitioner's client with a resale
certificate (Form ST-120) when purchasing materials and supplies. Petitioner's
client's customers state that they are purchasing tangible personal property for
use in performing taxable services, and such property becomes a component part
of the property upon which their services will be performed. Petitioner notes
that the resale certificate states at the top of the form that "This certificate
cannot be used by contractors to purchase materials and supplies".
Applicable Law and Regulations
Section 1101(b)(4) of the Tax Law provides, in part:
Retail Sale. (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, or (B) for use by the
purchaser in performing the services subject to tax under paragraphs
(1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five where the property so sold becomes a physical component
part of the property upon which the services are performed or where
the property so sold is later actually transferred to the purchaser
of the service in conjunction with the performance of the service
subject to tax. Notwithstanding the preceding provisions of this
subparagraph, a sale of any tangible personal property to a
contractor, subcontractor or repairman for use or consumption in
erecting structures or buildings, or building on, or otherwise
adding to, altering, improving, maintaining, servicing or repairing

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Sales Tax

real property, property or land, ... is deemed to be a retail sale
regardless of whether the tangible personal property is to be resold
as such before it is so used or consumed, ... (emphasis added)
Section 1132(c)(1) of the Tax Law provides, in part:
For the purpose of the proper administration of this article and to
prevent evasion of the tax hereby imposed, it shall be presumed that
all receipts for property ... of any type mentioned in subdivisions
(a) ... of section eleven hundred five ... are subject to tax until
the contrary is established, and the burden of proving that any
receipt ... is not taxable hereunder shall be upon the person
Except as provided in
required to collect tax or the customer.
subdivision (h) or (k) of this section, unless ... the purchaser,
not later than ninety days after delivery of the property ...
furnishes to the vendor: any affidavit, statement or additional
evidence, documentary or otherwise, which the commissioner may
require demonstrating that the purchaser is an exempt organization
described in section eleven hundred sixteen, the sale shall be
deemed a taxable sale at retail. Where ... an affidavit, statement
or additional evidence referred to in the previous sentence is
received within the time limit set forth therein, but is deficient
in some material manner, and where such deficiency is thereafter
removed, the receipt of ... such affidavit, statement or additional
evidence shall be deemed to have satisfied all of the requirements
of the preceding sentence. Where such ... an affidavit, statement
or additional evidence has been furnished to the vendor, the burden
of proving that the receipt ... is not taxable hereunder shall be
solely upon the customer.
The vendor shall not be required to
collect tax from purchasers who furnish ... such an affidavit,
statement or additional evidence in proper form ....
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
Retail Sale (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.
(b)
Special rule - sales specifically included as retail
sales. (1)
A sale of any tangible personal property to a
contractor, subcontractor or repairman for use or consumption in
erecting structures or buildings or adding to, altering, improving,
maintaining, servicing or repairing real property, property or land,
is deemed to be a retail sale, regardless of whether the tangible
personal property is to be resold as such before it is used or
consumed.
Section 532.4 of the Sales and Use Tax Regulations provides, in part:
(b) Burden of proof.
(1)
The burden of proving that any
receipt, amusement charge, or rent is not taxable shall be upon the
person required to collect the tax and the customer.

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Sales Tax

(2) A vendor who in good faith accepts from a purchaser a
properly completed exemption certificate or, as authorized by the
Department, other documentation evidencing exemption from tax not
later than 90 days after delivery of the property or the rendition
of the service is relieved of liability for failure to collect the
sales tax with respect to that transaction. ...
(i)
A certificate or other document is "accepted in good
faith" when a vendor has no knowledge that the exemption certificate
or other document issued by the purchaser is false or is
fraudulently presented.
If reasonable ordinary due care is
exercised, knowledge will not be imputed to the seller required to
collect the tax.
*

*

*

(5) A vendor is not relieved of the burden of proof when it
failed to obtain an exemption certificate or accepted an improper
certificate, or had knowledge that the exemption certificate issued
by the purchaser was false or fraudulently presented. (emphasis
added)
*

*

*

(d) Resale certificate. (1) A resale certificate is used to
claim exemption from tax on purchases of tangible personal property
or services which will be resold or transferred to a customer when
the:
(i) tangible personal property is for resale as such or as a
physical component part of tangible personal property;
(ii)
tangible personal property is for use in performing
taxable services under paragraph (1), (2), (3) or (5) of subdivision
(c) of section 1105 of the Tax Law where such property becomes a
physical component part of the tangible personal property upon which
the services are performed or will be actually transferred to the
purchaser of the service in conjunction with the performance of the
service; or
(iii)

service is for resale.
*

*

*

(5) Contractors who are purchasing tangible personal property
for use in performing capital improvement work or repairs on real
property are not permitted to use a resale certificate. (emphasis
added)

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Sales Tax

Opinion
In accordance with Section 1101(b)(4)(i) of the Tax Law and Section
532.4(d)(5) of the regulations, Petitioner's client cannot accept resale
certificates (Form ST-120) from customers which are contractors, and such
customers are not authorized or permitted to issue such certificates (Form ST­
120), for purchases of tangible personal property for use in performing capital
improvement work or repairs on real property. Petitioner's client must collect
sales tax on all its sales of materials and supplies made to contractors for
these purposes.
In accordance with Section 1132(c) of the Tax Law and Section 532.4 of the
Sales and Use Tax Regulations, the burden of proving that Petitioner's client's
sale of materials and supplies are not subject to sales tax is upon Petitioner's
client and its customers. If Petitioner's client, in good faith, timely accepts
a properly completed resale or other exemption certificate, Petitioner's client
is relieved of its liability to collect the sales tax with respect to the
applicable sale, and the burden of proving whether the sale is taxable rests
solely upon the customer. Petitioner's client is not relieved of this duty to
collect tax if Petitioner's client has actual knowledge (i.e., more than a mere
suspicion or belief) that the resale or exemption certificate is false or
fraudulent. Where Petitioner's client accepts the certificate in good faith, it
is under no duty to investigate or police the customer or to debate the
taxability of the sale with the customer. Accordingly, Petitioner's client may
not accept a resale certificate from a contractor if Petitioner's client has
actual knowledge that the purchaser is a contractor and will use the materials
and supplies purchased in performing capital improvement work or repairs on real
property.

DATED: December 4, 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.