Can a construction contractor buy materials tax-free using a customer's Direct Payment Permit?

Plain-English summary

Koepke-Vragel is a construction contractor whose work for one customer falls into two buckets: ordinary repairs and maintenance to real property, and capital improvements. For repair and maintenance work, the customer gives Koepke-Vragel a Direct Payment Permit (Form AU-297), which tells the vendor that the customer will pay any sales tax owed directly to the Department instead of having it collected at the point of sale. For capital-improvement work, the customer instead gives a Certificate of Capital Improvement (Form ST-124). Koepke-Vragel asked whether its own purchases of supplies for these projects are taxable given the customer's permit.

The Department's answer: a contractor's purchases of materials are always taxable retail sales, no matter what certificate or permit the customer holds. New York's rule is that a sale of tangible personal property to a contractor for use in construction, repair, or capital-improvement work is a retail sale regardless of whether the property is later resold as such or incorporated into real property -- a contractor simply cannot use a resale certificate to buy materials tax-free, and a customer's Direct Payment Permit cannot be used by the contractor to defer tax on the contractor's own purchases either.

Where the customer's Direct Payment Permit does help is on the service side, not the materials side: because the permit shifts responsibility for sales tax to the customer, Koepke-Vragel isn't required to collect tax from the customer on its taxable repair-and-maintenance service charges. And separately, Koepke-Vragel can apply for a refund or credit of the sales tax it already paid on materials, but only for materials used in a taxable repair-and-maintenance job that are actually transferred to the customer as part of that service -- there's no such refund for materials used in an exempt capital improvement, and none for materials simply consumed by the contractor (like scaffolding or tools) rather than transferred to the customer.

What this means for you

Construction contractors, subcontractors, and repairmen

You pay sales tax on your own material purchases up front, full stop -- neither a resale certificate, a customer's Direct Payment Permit, nor a Certificate of Capital Improvement changes that. Track which materials end up transferred to the customer as part of a taxable repair (not a capital improvement), because that's the category where you can later apply for a refund or credit of the tax you paid.

Customers holding a Direct Payment Permit

Your permit relieves the contractor of the duty to collect sales tax from you on taxable repair-and-maintenance charges -- you pay that tax directly to the Department instead. But don't hand your permit to a contractor expecting it to reduce or defer the contractor's own tax liability on materials; that's a misuse of the permit that can lead to its revocation.

Accountants and tax professionals

The three moving pieces here are distinct and easy to conflate: (1) the contractor's own material purchases are always taxable under 20 NYCRR § 541.1(b) regardless of any customer certificate; (2) a Direct Payment Permit under § 1132(c)(2) and § 532.5 only shifts the service-charge collection duty; and (3) a § 1119(c) refund or credit is available only for materials transferred to the customer in a taxable repair, never for capital-improvement materials.

Common questions

Q: Can a customer's Direct Payment Permit let a contractor buy materials tax-free?
A: No. The regulations expressly prohibit using a Direct Payment Permit as a device to defer tax on purchases that are clearly taxable, and misuse can be grounds for revoking the permit.

Q: Can a contractor get a refund of tax paid on capital-improvement materials?
A: No. The refund/credit mechanism under Tax Law § 1119(c) applies only to materials used in taxable repair-and-maintenance services that are transferred to the customer, not to materials incorporated into an exempt capital improvement.

Q: Does this ruling apply to my construction 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. It shows how the Department reasons, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (retail sale; sales to contractors deemed retail)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(5) (maintaining, servicing, or repairing real property)
• Tax Law § 1119(c) (refund or credit for materials transferred with a taxable service)
• Tax Law § 1132(c)(1), (2) (presumption of taxability; direct payment permits)
• 20 NYCRR § 532.5 (direct payment permits; eligibility, use, and revocation)
• 20 NYCRR § 541.1(b) (sales to contractors)
• 20 NYCRR § 541.5(b), (d)(3) (capital improvement and repair contracts)

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_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(44)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980129A

On January 29, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Koepke-Vragel, 176 Anderson Ave., Rochester,
New York, 14607.
Petitioner, Koepke-Vragel, provided additional information
pertaining to the Petition on February 13, 1998.
The issue raised by Petitioner is whether its purchases of supplies in
connection with repair projects are subject to tax where it receives a Direct
Payment Permit from its customer.
Petitioner submits the following facts as the basis for this advisory
opinion.
Petitioner is a construction contractor.
Petitioner’s work for its
customer falls into the category of either repairs and maintenance to real
property or capital improvements. The customer presents Petitioner with a Direct
Payment Permit (AU-297) for the repair and maintenance services performed,
indicating that the customer is paying the sales tax directly to the Department
of Taxation and Finance. The customer presents Petitioner with a Certificate of
Capital Improvement (ST-124) when the services performed involve a capital
improvement.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes
imposed by subdivisions (a), (b), (c) and (d) of section eleven
hundred five and by section eleven hundred ten, the following terms
shall mean:
*

*

*

(4) 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 that person 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,

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Sales Tax

servicing or repairing real property, property or land, as the
terms real property, property or land are defined in the real
property tax law, 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.... [See, 20 NYCRR 526.6.]
Section 1105(a) of the Tax Law imposes sales tax upon receipts from every
retail sale of tangible personal property, except as otherwise provided.
Section 1105(c)(5) of the Tax Law imposes sales tax upon receipts from
every sale, except for resale, of the following services:
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.
Section 1119(c) of the Tax Law provides:
A refund or credit equal to the amount of sales or
compensating use tax imposed by this article and pursuant to the
authority of article twenty-nine, and paid on the sale or use of
tangible personal property, shall be allowed the purchaser where
such property is later used by the purchaser in performing a service
subject to tax under paragraph (1), (2), (3), (5), (7) or (8) of
subdivision (c) of section eleven hundred five or under section
eleven hundred ten and such property has become a physical component
part of the property upon which the service is performed or has been
transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax or if a contractor,
subcontractor or repairman purchases tangible personal property and
later makes a retail sale of such tangible personal property, the
acquisition of which would not have been a sale at retail to him but
for the second to last sentence of subparagraph (i) of paragraph (4)
of subdivision (b) of section eleven hundred one. An application
for the refund or credit provided for herein must be filed with the
commissioner of taxation and finance within the time provided by
subdivision (a) of section eleven hundred thirty-nine.
Such
application shall be in such form as the commissioner may prescribe.
Where an application for credit has been filed, the applicant may
immediately take such credit on the return which is due coincident
with or immediately subsequent to the time that he files his
application for credit. However, the taking of the credit on the

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Sales Tax

return shall be deemed to be part of the application for
credit.
The procedure for granting or denying such
application for refund or credit and review of such
determinations shall be as provided in subdivision (e) of
section eleven hundred thirty-nine. [See, 20 NYCRR 534.5.]
Section 1132 of the Tax Law provides, in part:
(c)(1) 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 or services of any type
mentioned in subdivision (a), (b), (c) and (d) 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 required to collect tax
or the customer.
*

*

*

(2) Notwithstanding paragraph one of this subdivision or any
other law to the contrary, the commissioner may authorize a
purchaser, who acquires tangible personal property or services under
circumstances which make it impossible at the time of acquisition to
determine the manner in which tangible personal property or services
will be used, to pay the tax directly to the commissioner and waive
the collection of the tax by the vendor....The commissioner may
suspend or revoke a direct payment permit where the permit holder
fails to comply with any of the provisions of this article or any
rule promulgated by the commissioner with respect to this article.
The notice and hearing provisions applicable to the revocation and
suspension of certificates of authority under section eleven hundred
and thirty-four shall apply to the suspension and revocation of
direct payment permits. A vendor shall not be required to collect
tax from a purchaser who furnishes a direct payment permit in proper
form,...
Section 532.5 of the Sales and Use Tax Regulations provides, in
part:
(a) General. A direct payment permit is a notice to a vendor
that the holder thereof is authorized to pay directly to the
Department of Taxation and Finance any tax due on purchases made.
The vendor's responsibility for the collection of tax from the
permit holder is waived upon receipt of such permit.
(b) Eligibility for a direct payment permit. In order to be
eligible for a direct payment permit, a purchaser must meet the
following conditions:
(1) at the time tangible personal property or services are
acquired by a purchaser, it is impossible to determine the manner in
which the property or services will be used; ...

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Sales Tax

*

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*

(e) Use of direct payment permits. (1) A direct payment permit
may only be used by the holder who makes purchases of tangible
personal property or services, the use of which is unknown to him at
the time of purchase.

Example 1:

A
manufacturer-contractor
purchases
ingredients for use in the production of
concrete septic tanks. Some of the septic
tanks will be sold without installation,
while others are to be sold installed.
Since the manufacturer-contractor does not
know the number of tanks that will be
installed, he may use a direct payment
permit when purchasing the ingredients.

(2) A direct payment permit may not be used:
(i) as a device to defer payment of the sales tax on
purchases;
(ii) as a substitute for a resale certificate or other
exemption certificates; or
(iii) as a device to transfer the permit holder's
privileges to another person.

Example 2:

The holder of a direct payment permit
purchasing display cases for use in his
showroom gives his supplier a copy of his
direct payment permit to defer payment of
tax on his purchase which is taxable. This
is a use of the permit which is prohibited.

Example 3:

The holder of a direct payment permit
engages a contractor to erect a warehouse
and gives the contractor a copy of his
direct payment permit. The contractor may
not use the direct payment permit to defer
his payment of tax on purchases which are
for use by him in the erection of the
warehouse. The contractor's liability for
the tax on his purchases is not relieved by
his customer's direct payment permit. This
is a use of the permit which is prohibited.

*

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*

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(g) Revocation. (1) A direct payment permit may be revoked
for:
(i) failure by the holder thereof to timely file his sales and
use tax returns and timely pay any tax due;
(ii) any misuse of the privileges granted by the permit or
failure to comply with any requirement with respect to the permit;
(iii) a change in business operations, so that it is possible
to determine the use of purchases at the time made.
Section 541.1(b) of the Sales and Use Tax Regulations provides, in part:
The principal distinguishing feature of a sale to a
contractor, as compared to a sale to other vendors who purchase
tangible personal property for resale, is that the sale of tangible
personal property to a contractor for use or consumption in
construction is a retail sale and subject to sales and use tax,
regardless of whether tangible personal property is to be resold as
such or incorporated into real property as a capital improvement or
repair.
Whenever a contractor uses materials, on which the
contractor has paid sales tax, in a repair or maintenance
contract... subject to the sales tax on services under section
1105(c) of the Tax Law, the contractor may be entitled to a refund
or credit of the portion of the tax he paid attributable to the
materials transferred to the customer.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:

Capital improvements contracts. (1) Purchases. All purchases
of tangible personal property ... which are incorporated into and
become part of the realty or are used or consumed in performing the
contract are subject to tax at the time of purchase by the
contractor or any other purchaser.
A certificate of capital
improvement may not be validly given by any person or accepted by a
supplier to exempt the purchase of these materials.
(2) Labor and material charges. All charges by a contractor
to the customer for adding to or improving real property by a
capital improvement are not subject to tax provided the customer
supplies the contractor with a properly completed certificate of
capital improvement.
(3) Direct payment permit. A direct payment permit cannot be
used as a device to defer payment of the sales tax on purchases
which are taxable.
A contractor who receives a direct payment
permit from a customer cannot use such permit to defer his payment
of tax on purchases used by him or incorporated into a capital
improvement to real property. The contractor's liability for the
tax on his purchases are not relieved by his customer's direct
payment permit.

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(4) Documents; capital improvement contracts.
(i) When a properly completed certificate of capital
improvement has been furnished to the contractor, the burden of
proving the job or transaction is not taxable and the liability for
the tax rests solely upon the customer.

(a) The prime contractor should obtain a certificate of
capital improvement from the customer and retain it as part of his
records.
Copies of such certificate must be furnished to all
subcontractors on the job and retained as part of their records.
(b) A certificate of capital improvement may not be issued
by a contractor, subcontractor or any other person to a supplier on
the purchase of tangible personal property.
Section 541.5(d)(3) of the Sales and Use Tax Regulations provides, in part:
Purchases. Purchases of any tangible personal property ...
made by a contractor, subcontractor, or repairman for use or
consumption in maintaining, servicing, or repairing real or personal
property of others are subject to tax. The contractor is entitled
to a refund or credit of tax paid on such materials incorporated
into real property where such property is later transferred to the
purchaser in conjunction with the performance of a service subject
to the tax.
Opinion
Petitioner's purchases from its suppliers constitute retail sales pursuant
to Section 1101(b)(4) of the Tax Law and, therefore, are properly subject to tax
under Section 1105(a) of the Tax Law. As a contractor, Petitioner is not allowed
to use a resale certificate when purchasing tangible personal property for use
in performing capital improvement work or repairs and maintenance to real
property in accordance with Section 541.1(b) of the Sales and Use Tax
Regulations.
Petitioner may not claim a refund or credit for taxes paid on the purchase
of tangible personal property used in performing a capital improvement.
Petitioner is eligible for a refund or credit in accordance with Section 1119(c)
of the Tax Law and Section 541.1(b) of the Sales and Use Tax Regulations for any
sales tax paid upon the purchase of tangible personal property used in providing
repairs and maintenance services to real property to the extent that the property
is transferred to the customer in conjunction with the repair and maintenance
service. Petitioner is not eligible for a refund or credit to the extent that
the tangible personal property purchased by Petitioner in connection with
providing repairs and maintenance services is consumed by Petitioner in the
performance of the services and is not transferred to the customer in conjunction
with the repair and maintenance service.

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Under Section 1132(c)(2) of the Tax Law and Section 532.5 of the Sales and
Use Tax Regulations Petitioner is not required to collect tax from its customer
where a Direct Payment Permit is given.
Nevertheless,
Petitioner
may
be
eligible for a refund or credit in accordance with Section 1119(c) of the Tax Law
and Section 541.1(b) of the Sales and Use Tax Regulations of any sales tax paid
upon the purchase of tangible personal property used in providing taxable repairs
and maintenance services to real property, although Petitioner received a Direct
Payment Permit from the company and did not collect tax on the services.
It should be noted that a Direct Payment Permit may not be used to defer
payment of sales tax on purchases of services that are clearly taxable. Misuse
of a Direct Payment Permit in this manner by the permit holder may be grounds for
revocation of the permit.
See Section 532.5(g) of the Sales and Use Tax
Regulations.

DATED: July 1, 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.