When an asbestos-removal contractor buys disposable plastic bags, poly sheeting, and protective clothing for a job at a tax-exempt organization's property, does the contractor owe sales tax on those supplies, and can it get that tax back?

Plain-English summary

Certified Asbestos Corp. removes asbestos from real property owned by organizations that are exempt from New York sales tax under Tax Law § 1116(a). Because of EPA, state, and NYC environmental rules, the job requires plastic bags, polyethylene sheeting ("plastic poly"), and protective clothing -- the poly protects the work area, the removed asbestos and contaminated poly/clothing all go into the bags, and everything is eventually hauled to a licensed landfill by an independent, insured hauler that the exempt property owner approves. Certified Asbestos buys these disposable supplies itself and bills the exempt organization for them.

The Department worked through three separate questions. First, is the asbestos-removal service itself taxable? Yes, under § 1105(c)(5) (maintaining/servicing real property) -- unless it's part of a capital improvement -- but here the customer is a § 1116(a) exempt organization, so the Department's fee to that customer isn't taxed regardless. Second, are Certified Asbestos's own purchases of the bags, poly, and clothing taxable? Yes -- buying supplies to use in performing a service is an ordinary retail purchase, and a contractor generally can't buy its work supplies tax-free just because the end customer is tax-exempt. Third -- and this is the interesting part -- can Certified Asbestos get that tax back? The Department said yes, under Tax Law § 1119(c), which refunds tax paid on property that's later "actually transferred" to the customer in connection with a taxable service. Once the bags, poly, and clothing are contaminated by the asbestos, they're no longer usable by Certified Asbestos -- they become part of the waste itself, and both the contractor and the exempt organization share legal responsibility for that waste under environmental law. The Department treated that as the same kind of "actual transfer" it recognized in an earlier ruling involving contaminated radioactive-waste liners (Chem-Nuclear Systems). The one catch: if the underlying asbestos-removal job is part of an exempt capital improvement (rather than ordinary maintenance/repair), there was never a taxable service to tie the refund to, so no refund is available in that scenario.

What this means for you

Asbestos-abatement and environmental-remediation contractors

Your disposable, single-use supplies that get contaminated and disposed of along with the hazardous waste aren't necessarily a sunk tax cost -- if they're consumed by the job and effectively "transferred" to the customer along with the waste, you may be able to file for a refund or credit of the sales tax you paid on them under § 1119(c). But you still pay tax up front on the purchase; the refund is a separate, affirmative claim you must make.

Nonprofits and governmental exempt organizations hiring remediation contractors

Your own exemption under § 1116(a) means your contractor's service fee to you isn't taxed -- but that doesn't automatically make the contractor's own supply purchases tax-free; those follow the ordinary contractor-purchase rules.

Accountants and tax professionals

This is a clean three-layer analysis worth keeping as a template for any "contractor doing taxable work with consumable supplies for an exempt customer" fact pattern: (1) is the underlying service taxable in the abstract, (2) is the contractor's own purchase of materials taxable (usually yes, per § 1101(b)(4)(i)'s contractor rule), and (3) does § 1119(c) allow a refund because the materials are "actually transferred" to the customer -- available only if the underlying service is taxable in nature (capital-improvement work breaks the refund chain because there's no taxable service to tie it to).

Common questions

Q: Does the exempt organization pay sales tax on the asbestos-removal bill?
A: No -- its exemption under Tax Law § 1116(a) means the contractor's service fee to it isn't taxed.

Q: Does the contractor pay sales tax when it buys the disposable bags, poly, and protective clothing?
A: Yes, in the first instance -- these are ordinary retail purchases by the contractor.

Q: Can the contractor get that tax back?
A: Yes, via a refund or credit claim under § 1119(c), because the contaminated supplies are effectively transferred to the customer along with the waste -- as long as the removal work is a taxable service and not part of an exempt capital improvement.

Q: What if the asbestos removal is done as part of a capital improvement instead of ordinary maintenance?
A: Then there's no taxable service in the first place, and the § 1119(c) refund for the disposable supplies doesn't apply.

Citations and references

Statutes, regulations, and prior rulings:

• Tax Law § 1101(b)(4)(i) (retail sale, contractor materials rule)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(5) (tax on maintaining, servicing or repairing real property)
• Tax Law § 1116(a) (exemption for governmental and nonprofit exempt organizations)
• Tax Law § 1119(c) (refund/credit for tax paid on property later transferred in performing a taxable service)
• Chem-Nuclear Systems, Inc., TSB-D-89(2)S (contaminated liners "actually transferred" to customer)
• Waste Management of New York, Inc., TSB-D-91(19)S
• Modern Management Group, Inc. d/b/a Modern Environmental Service, TSB-A-98(78)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_33s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(33)S
Sales Tax
June 24, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990121A

On January 21, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Certified Asbestos Corp., 360 A West Merrick Road, Valley Stream, NY
11580.
The issue raised by Petitioner, Certified Asbestos Corp., is whether the purchase of plastic
bags, plastic poly and protective clothing to be used in performing asbestos removal service for
exempt organizations is subject to State and local sales and use taxes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a contractor that provides the service of asbestos removal. Petitioner performs
asbestos removal on real property owned by organizations exempt under Section 1116(a) of the Tax
Law.
Due to regulatory requirements of the Environmental Protection Agency, the New York State
Department of Environmental Conservation and the New York City Department of Environmental
Protection regarding the removal and disposal of asbestos materials, plastic bags, polyethylene
("plastic poly") and protective clothing must be used to remove all asbestos. The plastic bags, plastic
poly and protective clothing are delivered directly to the exempt property site for exclusive use at
the site. Petitioner purchases the plastic bags, plastic poly and protective clothing and submits the
invoices to the exempt organization.
The plastic poly is used to protect the asbestos removal area. The asbestos is removed and
placed in the plastic bags. All the contaminated plastic poly and protective clothing from the work
areas are also placed in plastic bags.
Everything must be disposed of in a landfill licensed to accept asbestos materials. The plastic
bags, plastic poly and protective clothing remain on the facility site and are then transported by
independent haulers licensed and insured to perform this service. Even if the bags and plastic are
not used, they must be disposed of by the independent hauler.
The hauling of the asbestos to the landfill is performed by an independent subcontractor.
Petitioner submits a list of the haulers to the owner of the property for the owner’s approval. Once
the approval is granted, the chosen hauler is hired to dispose of the asbestos. Petitioner does not
participate in the approval process. The exempt organization assumes the liability for the safe
storage of the material at the site until it is disposed of by the independent hauler.

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TSB-A-99(33)S
Sales Tax
June 24, 1999
Applicable Law
Section 1101(b)(4)(i) of the Tax Law defines a "retail sale," in part, as follows:
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, 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....
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 1116(a) of the Tax Law provides for exemption from the sales and compensating use
taxes with respect to New York State governmental entities, United States governmental entities,
certain nonprofit organizations and other entities who have received New York State exempt
organization status.

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TSB-A-99(33)S
Sales Tax
June 24, 1999

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 return shall be
deemed to be part of the application for credit. The procedure for granting or
denying such applications for refund or credit and review of such determinations
shall be as provided in subdivision (e) of section eleven hundred thirty-nine.
Opinion
The service of asbestos removal is subject to tax under Section 1105(c)(5) of the Tax Law,
unless the service is performed as a constituent part of a capital improvement to real property,
property or land. Where an asbestos removal service is performed for an organization that is exempt
from tax under Section 1116(a) of the Tax Law, receipts from the sale of such service to the exempt
organization are not taxable.
Sales of tangible personal property to Petitioner, as a contractor, for use in performing its
asbestos removal service are retail sales subject to tax under Section 1105(a) of the Tax Law.
However, Petitioner may be entitled to a refund or credit equal to the amount of tax paid on these
sales where Petitioner purchases the tangible personal property and later transfers the property to a
client in conjunction with performing a service subject to tax.(Tax Law, §1119(c)).

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TSB-A-99(33)S
Sales Tax
June 24, 1999

In Chem-Nuclear Systems, Inc. (Tax App Trib, January 12, 1989, TSB-D-89(2)S), the Tax
Appeals Tribunal determined that liners used in the processing of radioactive waste were "actually
transferred" to customers in conjunction with the performance of a taxable service. Once exposed
to the radioactive waste and contaminated, the liners were no longer usable by Chem-Nuclear, but
were effectively consumed in the processing of the waste. In addition, under state and federal law,
the customers had a continued legal responsibility for the liners as well as the radioactive waste.
(See, also, Waste Management of New York, Inc., Tax App Trib, March 21, 1991, TSB-D-91(19)S.)
The plastic bags, plastic poly and protective clothing used by Petitioner in performing its
asbestos removal service when exposed to asbestos become contaminated and therefore part of the
asbestos waste. These items are no longer usable by Petitioner, but are transferred from Petitioner
to its clients in the same manner as were the liners in Chem-Nuclear. Petitioner and the exempt
organizations are responsible for the proper disposal of the waste, including the items in question,
pursuant to applicable federal and state laws and regulations. Accordingly, the plastic bags, plastic
poly and protective clothing are considered actually transferred by Petitioner to the exempt
organization. Consequently, Petitioner is eligible for a refund or credit under Section 1119(c) of
the Tax Law equal to the amount of sales tax paid on these items, provided such items are transferred
by Petitioner in connection with the performance of a service that is subject to sales tax. If, however,
the asbestos removal service is performed in conjunction with a capital improvement to real
property, property or land, and thus is not subject to tax, Petitioner would not be entitled to this
refund or credit. See Modern Management Group, Inc., d/b/a Modern Environmental Service, Adv
Op Comm T&F, November 13, 1998, TSB-A-98(78)S.

DATED: June 24, 1999

NOTE:

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

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