When two construction companies form a joint venture and each contributes equipment, is that equipment subject to sales or use tax?

Plain-English summary

Robert A. King asked on behalf of two unrelated New York construction contracting corporations considering a joint bid on a contract as a joint venture. If successful, each corporation would contribute equipment and labor to the venture, sharing profits equally, and the venture would dissolve once the contract was finished. Both corporations had already paid sales tax on the equipment when they originally bought it, and neither is in the equipment-rental business. He asked how sales and use tax would apply under four different possible structures: (1) a simple 50/50 profit split with no separate charge for equipment use; (2) the joint venture hiring each corporation as a subcontractor providing its own labor and equipment; (3) each corporation providing equipment operated by joint venture-supervised workers, but where the corporation's own supervisors still control what the workers do; and (4) the same as (3), except the operators stay on the corporations' own payrolls throughout.

The Department explained that a joint venture is treated as a partnership for sales tax purposes, and transactions between a partnership and its own partners can be taxable or not depending entirely on their substance. Contributing property to a partnership as your capital stake, in exchange for a share of the partnership, isn't a taxable sale at all -- so under scenario 1, simply dividing profits equally doesn't by itself create any sales tax, as long as there's no separate rate schedule paying the partners for the equipment's use. But if the agreement does set a rate schedule for equipment payments, that use becomes a taxable rental. Under scenario 2 (hiring each partner as a subcontractor), the joint venture is dealing with each corporation as a separate taxable entity, and whether tax applies depends on whether the underlying contract is a capital improvement (no tax) or repair/maintenance work (taxable). Under scenarios 3 and 4, what matters is who actually controls the equipment operators -- if the contributing corporation's own supervisors still decide what work gets done, when, and how, and can hire or fire the operators, the corporation retains "dominion and control" of its equipment regardless of whose payroll the operators are on, meaning the corporation is providing a service rather than renting equipment, and that service is taxed the same way as scenario 2 (capital improvement vs. repair). In none of these scenarios can the corporations claim a credit for the sales tax they already paid when they originally bought the equipment, unless it was purchased exclusively for rental purposes.

What this means for you

Construction companies forming joint ventures with contributed equipment

Whether your equipment contribution to a joint venture triggers sales tax depends entirely on the deal's actual structure -- a pure capital contribution for a partnership share is untaxed, but a rate-based payment arrangement or continued control over your own equipment operators can turn the same contribution into a taxable rental or service. Structure and document your joint venture agreement with this distinction in mind.

Joint ventures classifying member contributions as subcontracts

If your joint venture hires its own member corporations as subcontractors, treat those transactions as you would with any outside subcontractor for sales tax purposes -- taxability turns on whether the underlying project is a capital improvement or a repair.

Accountants and tax professionals

This ruling synthesizes Matter of Great Lakes Dunbar-Rochester v. State Tax Commission (65 NY2d 339) (a taxable rental can occur between a partner and its own partnership) with Aberthaw-Cowper Joint Venture, TSB-H-80(161)S (a genuine capital contribution with no consideration exchanged is excluded under § 1101(b)(4)(iv)(E)), and applies the dominion-and-control test from 20 NYCRR § 541.9(c)(1)(ii) to determine whether an equipment-with-operator arrangement is a rental or a service.

Common questions

Q: Is contributing equipment to a joint venture in exchange for a partnership share taxable?
A: No, as long as it's a genuine capital contribution with no separate payment or rate schedule for the equipment's use.

Q: Does paying a partner a per-hour or per-job rate for equipment used in the joint venture change the analysis?
A: Yes -- setting a rate schedule for equipment use converts what would otherwise be a nontaxable contribution into a taxable rental.

Q: If equipment operators stay on the contributing corporation's own payroll, does that make it a service rather than a rental?
A: Payroll placement isn't decisive by itself -- what matters is who actually controls the operators' day-to-day work (dominion and control), regardless of whose payroll they're on.

Q: Does this ruling apply to my joint venture's equipment 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. The right classification depends on your own contract terms and actual practices.

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_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(4)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S971020A

On October 20, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Robert A. King, 10 Dana Lane, Smithtown, New
York 11787.
The issues raised by Petitioner, Robert A. King, are:

1. Whether, under certain conditions, sales and compensating use tax is due
   on equipment provided to a joint venture by its members.
2. Whether, if tax is due on the transactions referred to in issue 1, the
   members of the joint venture are entitled to a credit for sales tax previously
   paid on the equipment.
   Petitioner submits the following facts as the basis for this Advisory
   Opinion.
   Corporation A and Corporation B are New York corporations that have non­
   related shareholders. The corporations are contemplating bidding on a contract
   as a joint venture. If they are the successful bidders, they plan to enter into
   a written agreement confirming the establishment of a joint venture. The joint
   venture requires each corporation will provide equipment and labor which will be
   assessed to the joint venture based upon prescribed rates.
   Profits will be
   shared equally by each corporation.
   The joint venture will dissolve upon
   completion of the contract.
   Each corporation paid sales tax on the equipment it owns at the time of
   purchase.
   The corporations are not in the business of renting or leasing
   equipment but are in the construction contracting business.
   Petitioner asks about the application of sales and compensating use tax in
   the following scenarios.
   1.

The joint venture agreement simply divides all profits equally.

2. The joint venture agreement requires the joint venture to hire each
   corporation (i.e., partner) as a subcontractor, each subcontractor providing all
   its own labor and equipment.
3. The joint venture agreement requires each corporation (i.e., partner)
   to provide equipment to be operated by joint venture operators but under the
   supervision of the corporation’s employees. The equipment operators will be
   instructed by partners’ personnel when and where to work, what hours to work, and
   which equipment is to be used and how it is to be used. The partners through
   their supervising personnel would have the right to hire and fire the equipment
   operators at any time.
   The equipment operators are on the corporations'
   payrolls.

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Sales Tax

4. Assume the facts as number three, except that the equipment operators
   are also employees of each corporation, paid by the joint venture when assigned
   to the joint venture and returned to the corporations' payrolls upon completion
   of the joint venture.
   The equipment operators remain under the direct and
   constant supervision of the corporation’s employees.
   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
service subject to tax. . . .
*

*

*

(iv) The term "retail sale" does not include:
*

*

*

(C)
The distribution of property by a partnership to its
partners in whole or partial liquidation.
*

*

*

(E)
The contribution of property to a
consideration for a partnership interest therein.
*
(8)

*

partnership

in

*

Vendor. (i) The term "vendor" includes:

(A)
A person making sales of tangible personal property or
services, the receipts from which are taxed by this article. . .

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Sales Tax

Section 541.5(d)(1) of the Sales and Use Tax Regulations provides, in part:
(i)
Charges
for
repair,
service, maintenance, and
installation of tangible personal property
which
retains its
identity
as
tangible
personal
property are taxable to the
customer based on the full invoice price.
*
*
*
(iii)
A
subcontractor
must
collect
tax
on
all his
charges to a prime contractor for repair, service, maintenance, and
installation of tangible personal property unless the prime
contractor issues a properly completed exemption certificate or a
capital improvement certificate to the subcontractor.
Section 541.9 (c)(1) of the Sales and Use Tax Regulations provides, in
part:
*
*
*
(ii) When dominion and control of equipment supplied with an
operator or driver remains with the lessor, there is no rental or
lease of equipment to the contractor, but the service performed may
be subject to the tax pursuant to section 1105(c)(3) and (5) of the
Tax Law. The method of payment (for example, a rate per hour, day,
week, month, or job or trip) is not relevant in determining whether
the transaction is a service or a taxable rental or lease of
equipment.
If the service performed constitutes a capital
(a)
improvement to real property, for example, a foundation excavation,
the charge for such service is not taxable.
If the service performed constitutes a repair,
(b)
maintenance or service to tangible personal property or to real
property, the service is subject to the tax.
However, the owner-operator of the equipment must pay
(c)
tax on the equipment used to perform the forgoing services.
(iii) When dominion and control of equipment supplied with an
operator or driver transfers to the contractor, there is a rental or
lease of tangible personal property and the charge is subject to the
tax. If the operator’s or driver’s wages are separately stated and
reasonable in relation to prevailing wage rates, such wages may be
excluded from the receipts subject to the tax. If the operator’s or
driver’s wages are not reasonable in relation to prevailing wage
rates, the "wages" must be included in the receipts subject to the
tax until the contractor satisfies his burden, under section 1132(c)
of the Tax Law, of proving that the taxable receipts are less than
the total charge.

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Sales Tax

(iv) All expenses incurred by a lessor in determining the
amount charged for rental of tangible personal property to a
contractor, such as: setting up, assembling, installing and/or
dismantling, are elements of the total receipt subject to tax,
regardless of their taxable status and whether they are separately
billed to the lessee.
Section 541.9(b)(1) of the Sales and Use Tax Regulations provides, in part:
Contractor owned equipment.
(i) The purchase of equipment, other
than motor vehicles such as trucks, by a contractor is subject to
tax on the total purchase price at the combined State and local tax
rate in effect in the jurisdiction where the equipment is delivered
to the contractor.
(ii) Purchases of equipment for both use and rental by the
contractor are taxable on the total purchase price. The contractor
is liable for tax on the equipment purchased by him and must collect
tax on equipment rented by him to others without credit for any tax
paid on the purchase.
Only that equipment which is purchased
exclusively for rental purposes qualifies for the resale exclusion.
(Emphasis supplied)
Opinion
A joint venture is considered to be a partnership for sales tax purposes.
Aberthaw-Cowper - Joint Venture, Det St Tx Comm, July 18, 1980, TSB-H-80(161)S.
A partnership may be treated as an entity separate and distinct from its members
for sales tax purposes and, as such, transactions occurring between the
partnership and its members may or may not be subject to sales tax depending upon
the facts surrounding the transactions.
See Matter of Great Lakes DunbarRochester, A Joint Venture v. The State Tax Commission (65 NY2d 339). It was
held in Great Lakes - Dunbar-Rochester that a taxable rental of tangible personal
property occurred between a partner and the partnership. However, in AberthawCowper - Joint Venture, supra, it was held that:
[A]pplicant, Aberthaw-Cowper, received certain equipment from John
W. Cowper Company as its contribution to the joint venture or
partnership. No consideration was exchanged or paid, and no lease
or sale incident thereto occurred or can be inferred, and
accordingly, no sales or use tax can be imposed on such a
transaction since such affairs fall within the parameters of the
exclusion set forth at section 1101(b)(4)(ii)(E) of the Tax Law.
Accordingly, the taxation of equipment provided by the partners to the
joint venture depends on the circumstances of each transaction. If the equipment
is a contribution of capital, it is not subject to sales tax; however, if the
equipment is part of a lease or rental agreement, it is subject to sales tax.
See Great Lakes-Dunbar-Rochester, supra.

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TSB-A-98(4)S
Sales Tax

The four scenarios described above are discussed below in the order that
they were presented by Petitioner.

1. Since the contribution of property to a partnership in consideration for
   a partnership interest is not a retail sale, the fact that the joint venture
   agreement divides the profit equally among its members does not, by itself, make
   the provision of the equipment to the joint venture subject to sales or use tax.
   See Section 1101(b)(4)(iv)(E) of the Tax Law. If, however, the agreement also
   prescribes a rate schedule for payments that must be made by the joint venture
   to the partners for the use of the equipment, the transfer of equipment to the
   joint venture may be considered to be a rental of tangible personal property that
   is subject to sales tax under Section 1105(a) of the Tax Law.
2. If the joint venture hires each corporation (partner) as a
   subcontractor, it is hiring an entity separate from itself, for purposes of the
   sales and use tax, for the performance of services and any payments made by the
   joint venture for the partners’ services may be subject to sales tax.
   The
   taxation of any transaction between them depends upon the nature of the services
   performed. Thus, if the contract the joint venture has bid on is for a capital
   improvement, no tax would be due. However, if the contract is one for repair and
   maintenance, the subcontractor (partner) may be required to collect sales tax
   from the joint venture. See Sections 541.5(d)(1) and 541.9 (c)(1)(ii)(a) and (b)
   of the Sales and Use Tax Regulations.
   3., 4. Where the equipment operators will be instructed by the
   corporations’ employees when and where to report to work, what hours to work, and
   which equipment is to be used and how it is to be used, and the corporations
   through their supervisory personnel have the right to hire and fire the equipment
   operators at any time, dominion and control of that equipment is retained by the
   corporations, regardless of whether the equipment operators are on the joint
   venture’s payroll or the corporations’ payrolls. Under these circumstances, the
   corporations are considered to be performing a service for the joint venture
   rather than renting equipment to the joint venture. See Section 541.9(c)(1)(ii)
   of the Sales and Use Tax Regulations. The taxation of the transaction depends
   upon the service performed.
   That is, if the service results in a capital
   improvement, no tax is due. However, if the service is a repair, sales tax may
   be due on the entire charge to the joint venture as stated above.
   The corporations will not be allowed any credit for sales tax paid on
   equipment unless such equipment was purchased exclusively for resale purposes as
   provided in Section 541.9(b)(1)(ii) 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.