If a building-cleaning company also runs payroll for a building owner's own maintenance engineers and mechanics, does the building owner owe sales tax on the payroll costs it funds through that company?

Plain-English summary

Maintenance Service Resources, Inc. provides building cleaning and security services to owners of commercial buildings and separately collects and remits sales tax on those charges. As a convenience to one New York City customer, it also started handling all payroll matters for the building's watch engineers and HVAC mechanics -- unionized workers who maintain the building's mechanical systems. Petitioner doesn't supervise these workers, has no expertise in their trade, and has no management control over them; the customer's managing agent hires, fires, and directs them through their own chief engineer, sets their pay above union scale when it chooses, approves their timesheets, and buys their uniforms (which carry the customer's logo, not Petitioner's). Petitioner just processes payroll, invoices the customer monthly for the full cost (fully reimbursed), and adds a flat $500-a-month administrative fee. It asked whether the customer owes sales tax on the payroll costs it funds this way.

The Department said no. New York taxes charges for maintaining, servicing, or repairing real property, and building maintenance work like this would normally be a taxable service -- but wages an employer pays its own employees for that kind of work are specifically excluded from tax. The key question was who the workers' real employer is. Because the customer (through its managing agent) controls hiring, firing, supervision, pay levels, and equipment, and because the workers would stay at the building even if Petitioner's payroll arrangement ended, the Department concluded the workers are employees of the customer, not of Petitioner. Since they're the customer's own employees, the wages, salaries, and benefits paid to them aren't a taxable receipt at all -- Petitioner is just administering payroll on the customer's behalf. Only Petitioner's separate $500 monthly administrative fee is a charge for an unenumerated (non-taxable) service.

What this means for you

Building owners using a third-party payroll administrator for on-site maintenance staff

Running your building's own maintenance staff's payroll through an outside company doesn't create sales tax on those wages, as long as the workers are genuinely your employees -- meaning you (or your managing agent) control their hiring, supervision, pay, and equipment, not the payroll administrator.

Cleaning, security, or facilities companies offering payroll administration as an add-on service

If you take on payroll processing for a customer's own maintenance staff without taking on any real supervisory or employment control over those workers, your administrative fee for that service is a separate, nontaxable charge -- distinct from your taxable building-maintenance service billing.

Accountants and tax professionals

The analysis turns entirely on common-law employment factors -- who hires, fires, supervises, sets pay, and provides equipment -- to determine whose "employee" the worker is for purposes of the wage exclusion in 20 NYCRR § 527.7(c)(2). A payroll pass-through arrangement with no real supervisory control doesn't convert the customer's own employee wages into a taxable service charge.

Common questions

Q: Does running a customer's maintenance staff payroll through your company make those wages taxable?
A: No, as long as the workers remain the customer's employees in substance -- controlled, supervised, hired, and equipped by the customer rather than the payroll processor.

Q: Is a flat administrative fee for handling someone else's payroll taxable?
A: No. It's an unenumerated service under New York's sales tax law and isn't subject to tax.

Q: What facts mattered most in deciding whose employees the workers were?
A: Who controlled hiring/firing, supervised day-to-day work, set compensation above union scale, purchased uniforms and equipment, and whether the workers would stay at the building if the payroll arrangement ended.

Q: Does this ruling apply to my building-services or payroll 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 control and supervision arrangements over the workers may differ.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(22)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971015C

On October 15, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Maintenance Service Resources, Inc., 20 Avenue
at the Common, Shrewsbury, NJ 07702. Petitioner, Maintenance Service Resources,
Inc., provided additional information pertaining to the Petition on October 28,
1997.
The issue raised by Petitioner is whether a building owner’s on-site
maintenance workers can be paid through Petitioner’s payroll service without the
building owner incurring sales tax on its funding of the payroll costs paid
through Petitioner.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner is in the business of providing building cleaning and security
services to owners of commercial buildings. Since July 1996, as a convenience
to one of its customers in New York City, Petitioner has additionally been
handling all payroll matters related to the building watch engineers and HVAC
(heating, ventilation and air conditioning) mechanics who also perform services
at the customer’s building.
The customer uses such full-time, permanent
engineers and mechanics (hereinafter referred to as the workers) to provide
mechanical maintenance service to its building; Petitioner has no one on its
staff with this type of expertise.
None of these workers render services
directly or indirectly to Petitioner.
The workers are members of the International Union of Operating Engineers,
AFL-CIO.
Petitioner is signatory to a citywide labor agreement negotiated
between the Building Owners and Managers Association of Greater New York (BOMA),
of which the customer is a member, and the labor unions. By signing an assent
to the BOMA agreement, Petitioner agreed to its terms and conditions and became
responsible for paying all of the union benefits to the workers.
The customer, through its managing agent, oversees the hiring, firing and
transferring of the workers.
Petitioner has no management control of the
workers. Direction and control of the services performed by the workers rests
with their chief engineer, who is one of the workers and reports directly to the
managing agent of the customer.
The chief engineer, who acts as immediate
supervisor of the workers, defines the scope and nature of the duties to be
performed by the workers according to the objectives of the customer and
determines the hours and shifts to be worked.
All supplies and equipment used by the workers, including their uniforms,
are approved and purchased by the customer. The workers’ uniforms carry the
customer’s logo, not Petitioner’s logo. If either party terminated the agreement
between Petitioner and the customer, the workers would remain at the customer’s
building.

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TSB-A-98(22)S
Sales Tax

The customer, or its managing agent, reviews and approves the weekly time
sheets and submits the payroll forms to Petitioner for payment to the workers.
Petitioner has no authority to alter the payroll sheet or deny payment to any of
the workers. The customer has the right to authorize payment in excess of the
union scale, including Christmas bonuses.
Petitioner invoices the customer
monthly for each expense, including all payrolls, payroll related taxes and
insurance and all applicable union paid benefits. Petitioner is fully reimbursed
by the customer for all of these expenses, and additionally receives a flat fee
of $500.00 a month for performing the payroll service. Petitioner maintains
separate payrolls for its own employees.
Petitioner
separately
invoices
its
customer
for
the
building
cleaning/security services it provides. Petitioner collects New York State sales
tax imposed on these services and remits such tax to New York State.
Applicable Law and Regulations
Section 1105 of the Tax Law imposes sales tax, in part, upon:
(c) The receipts from every sale, except for resale, of the
following
services:
*

*

*

(5) Maintaining, servicing or repairing real property, property or
land . . . whether the services are performed in or outside of a
building . . .
*

*

*

Wages, salaries and other compensation paid by an employer to an
employee for performing as an employee the services described in
paragraphs (1) through (9) of this subdivision (c) are not receipts
subject to the taxes imposed under such subdivision.
Section 527.7(c)(2) of the Sales and Use Tax Regulations provides:
Where repair and maintenance services are rendered by an employee
for his employer, the wages, salaries and other compensation paid to
the employee are not receipts subject to tax for the performance of
such services.
Opinion
Petitioner provides building cleaning and security services for a customer
who is a building owner in New York City. To obviate an administrative burden
for this customer, Petitioner agreed to handle all payroll matters related to the
mechanical maintenance workers who work at this New York City building. The
workers in question are used to maintain, service and repair real property and,

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TSB-A-98(22)S
Sales Tax

therefore, would be performing taxable services pursuant to Section 1105(c)(5)
of the Tax Law, unless these workers are considered employees of the customer
rather than Petitioner, performing services for the customer, and not for
Petitioner.
The customer, or its managing agent, oversees the hiring and firing of the
workers, sets the work hours and shifts, determines the compensation levels above
the union scale, and approves the prescribed work rules and practices as being
in accordance with the collective bargaining agreements and labor laws.
Petitioner does not supervise the workers.
The services performed by these
workers are done so under the supervision of their chief engineer, who reports
to the managing agent of the customer. These workers work full time at the
customer's building, and would continue to do so if the agreement between
Petitioner and the customer ended.
Moreover, Petitioner will be totally
reimbursed on a monthly basis by the customer for salaries which include
specifically identifiable benefits and related payroll taxes.
These factors
indicate that the workers are employees of the customer. Accordingly, since the
workers are employees of the customer and not Petitioner, the wages, salaries and
other compensation paid to them for the performance of their services are not
receipts subject to sales tax (see Max M.Farash, Adv Op Comm T&F, April 15, 1991,
TSB-A-91(32)S; Building Owners and Managers Association of Greater New York, Adv
Op Comm T&F, October 4, 1993, TSB-A-93(52)S; D’Agostino, Hoblock, Greisler &
Siegal, P.C., Adv Op Comm T&F, June 1, 1995, TSB-A-95(17)S). The $500 monthly
administrative fees which Petitioner receives for performing the payroll function
are not subject to sales tax as they are for unenumerated services.

DATED: March 24, 1998

NOTE:

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

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