Are an underwater/topside inspection and reporting subconsultant's services for government infrastructure projects subject to New York sales tax?

Plain-English summary

Underwater Consultants International, Inc. performs underwater and topside inspection, consulting, and reporting work as a subconsultant on infrastructure projects -- pipelines, sewer treatment facilities, dams -- for engineering firms that are themselves hired directly by federal, state, city, and municipal government owners. The company isn't a licensed engineer; it's paid by and works for the engineering firm rather than the government agency directly, though the government agency ultimately benefits from and authorizes the work. Sometimes its work is pure inspection with follow-up reporting and recommendations; other times it observes and reports on all phases of an ongoing construction project. It asked whether its services are subject to New York sales tax.

The Department's answer turned on the nature of the underlying project the inspection supports, not on who's actually being inspected or reported to. New York taxes services that maintain, service, or repair real property, but doesn't tax services tied to a genuine capital improvement -- and the same rule extends to inspection and reporting services that support one type of project or the other. So if Underwater Consultants' inspection work is part of a repair or maintenance project, its services are taxable (unless performed solely to demonstrate code compliance, or bought for resale); but if the work supports a capital improvement project instead, the services aren't taxable at all. On top of that distinction, if the company sells its services directly to a tax-exempt government entity, the sale is exempt regardless of which category the project falls into -- but the company needs to get a properly completed exemption certificate, or documentation confirming the buyer's exempt government status, within 90 days of performing the service.

What this means for you

Engineering, inspection, and consulting subconsultants on infrastructure projects

Your tax treatment depends on what your client (the prime engineering firm or government agency) is actually doing with your inspection results -- repair/maintenance work is taxable, capital-improvement work is not. Ask your client which category their project falls into, and get the right documentation (exemption certificate or proof of government status) within 90 days if you're selling directly to an exempt entity.

Engineering firms and government agencies hiring inspection subconsultants

Be ready to tell your subconsultants whether the underlying project is a repair/maintenance job or a capital improvement, since that answer determines whether their invoices to you should include sales tax.

Accountants and tax professionals

This ruling applies the "end result" test from 20 NYCRR § 527.7(b)(4) -- previously used for direct repair/improvement contractors -- to a subconsultant's inspection and reporting services, following George Industries, Inc., TSB-A-90(16)S and Monroe Livingston Sanitary Land-Fill, Inc., TSB-A-91(64)S. The taxability of the inspection work rides on the classification of the underlying project it's reporting on.

Common questions

Q: Is an inspection company's report always taxable if it's for a government infrastructure project?
A: No. Taxability depends on whether the project the inspection supports is a taxable repair/maintenance job or a nontaxable capital improvement, not on who owns the project.

Q: Does working for an engineering firm instead of directly for the government change the tax analysis?
A: Not by itself -- the repair-versus-capital-improvement distinction applies regardless of whether the inspector's direct client is the engineering firm or the government agency.

Q: How does an inspection company sell services tax-free to a government entity?
A: By obtaining a properly completed exemption certificate or documentation of the entity's exempt government status within 90 days after performing the service.

Q: Does this ruling apply to my inspection or consulting business?
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. Whether your specific project is a repair or a capital improvement depends on its own facts.

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_3s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(3)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S951127A

On November 27, 1995, a Petition for Advisory Opinion was received from
Underwater Consultants International Inc., 11390 Transit Road, East Amherst, New
York 14051.
The issue raised by Petitioner, Underwater Consultants International, Inc.,
is whether the services performed by Petitioner are subject to sales tax.
Petitioner makes the following submission of facts.
Petitioner frequently performs subconsultant services for owners' agents on
projects including pipelines, sewer treatment facilities, dams, etc. Petitioner
performs underwater and topside inspection, consulting and reporting services for
engineering companies who are retained by federal, state, city and municipal
agencies on projects owned by these government entities. Petitioner is not a
licensed engineer.
Petitioner generally works for and is paid by the engineering firm who works
directly for the government owner.
Petitioner performs this work with the
authorization of the government agency, who is the beneficiary of Petitioner’s
efforts. The work Petitioner performs in this case is not construction but is
underwater inspection with follow up reporting and recommendations on the results
of that inspection. At other times, Petitioner observes and reports on all phases
of a construction project for an engineering company.
Applicable Law and Regulations
Section 1105(c)(5) of the Tax Law imposes tax on the receipts from every
sale, except for resale, of:
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.

-2­
TSB-A-98(3)S
Sales Tax

Section 527.7(b)(4) of the Sales and Use Tax Regulations provides:
The imposition of tax on services performed on real property depends
on the end result of such service. If the end result of the services
is the repair or maintenance of real property, such services are
taxable.
If the end result of the same service is a capital
improvement to the real property, such services are not taxable.
Section 1116(a) of the Tax Law provides, in part:
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;
(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....
Opinion
In the present case, Petitioner is providing its clients with reports on
underwater and topside inspections of construction projects for government
agencies.
If the inspection, consulting and reporting services performed by
Petitioner are part of repairs to real property being made by Petitioner's client,
then Petitioner's services would be considered to be the repair or maintenance of
real property under Section 1105(c)(5) of the Tax Law and Section 527.7(b)(4) of
the Sales and Use Tax Regulations. See George Industries, Inc., Adv Op Comm T&F,
April 16, 1990, TSB-A-90(16)S; Monroe Livingston Sanitary Land-Fill, Inc., Adv Op
Comm T&F, September 20, 1991, TSB-A-91(64)S. In this case, Petitioner's services
would be subject to sales tax, unless performed solely for purposes of
demonstrating compliance with government building or construction codes, or
purchased for resale. However, if Petitioner's services are sold to a client who
is performing a capital improvement project, then Petitioner's services would not
be subject to tax. See Section 527.7(b)(4) and Part 541 of the Sales and Use Tax
Regulations. If Petitioner were to sell its services to an exempt government
entity, the sale would not be subject to sales tax. See Part 529 of the Sales and
Use Tax Regulations.

-3­
TSB-A-98(3)S
Sales Tax

In order to make a tax exempt sale of its services or tangible personal
property, Petitioner should receive in good faith from the purchaser a properly
completed exemption certificate, or documentation indicating that the purchaser
is an exempt government entity, within 90 days after the performance of the
service. See Section 1132(c) of the Tax Law and Part 532 of the Sales and Use Tax
Regulations.

DATED: February 2, 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.