When a parent company's own payroll employees do maintenance work for its subsidiaries and the subsidiaries reimburse the parent, are those charges taxable services?

Plain-English summary

Chapin & Fagin Division, GCF Inc. carries maintenance employees on its central payroll who perform maintenance for both the parent and its subsidiaries; the companies share common facilities in Buffalo. Each employee keeps a time sheet showing hours and for whom they were worked; the maintenance payroll is allocated among the companies; and a monthly intercompany invoice bills each subsidiary its allocated share, reimbursing the parent. The company asked whether those reimbursements are taxable receipts from the sale of services.

The Department held the intercompany maintenance charges are taxable.

• The employees belong to the parent. Because the maintenance employees are paid from the parent's payroll, they are considered the parent's employees, not employees of the subsidiaries.
• So the parent is selling a service to separate companies. The parent's charges to its subsidiaries for that maintenance work are therefore charges for a taxable service, not internal cost-sharing among one employer's own operations.
• Which taxing provisions apply. The charges are subject to State and local sales tax under § 1105(c)(3) (installing, maintaining, servicing or repairing tangible personal property not held for sale) and/or § 1105(c)(5) (maintaining, servicing or repairing real property).

What this means for you

Affiliated companies are still separate taxpayers. New York treats a parent and its subsidiaries as distinct persons. When one affiliate provides a taxable service to another and bills for it, that charge is a taxable sale — the corporate relationship doesn't make it exempt internal activity.

Who signs the paycheck matters. The Department keyed on the fact that the workers were on the parent's payroll, making them the parent's employees. Had each subsidiary employed and paid its own maintenance staff, the analysis would differ. If you want to avoid a taxable intercompany service charge, consider how the workforce is actually employed and paid.

Watch cost-allocation and shared-service arrangements. Time-sheet allocations and monthly intercompany invoices for maintenance labor look like ordinary internal accounting, but here they were taxable service charges. Review shared-services and management-fee structures for embedded taxable services like maintenance and repair.

Common questions

Q: It's just cost-sharing among related companies — why is it taxable?
A: Because the maintenance employees are on the parent's payroll, they're the parent's employees. When the parent bills its subsidiaries for their work, it's selling a taxable maintenance/repair service between separate companies under § 1105(c)(3) and/or (c)(5).

Q: Which services are covered?
A: Maintaining, servicing or repairing tangible personal property not held for sale (§ 1105(c)(3)) and maintaining, servicing or repairing real property (§ 1105(c)(5)).

Q: Would it be taxable if each subsidiary employed its own maintenance staff?
A: The Department's conclusion turned on the workers being the parent's payroll employees. If a subsidiary employed and paid its own workers to maintain its own property, there would be no intercompany service charge to tax — but confirm the specific facts and current law.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(c)(3) — taxes installing, maintaining, servicing or repairing tangible personal property not held for sale in the regular course of business
• Tax Law § 1105(c)(5) — taxes maintaining, servicing or repairing real property, property or land

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_104s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-81(104)S
Sales Tax
May 25, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801119A

On November 19, 1980 a Petition for Advisory Opinion was received from
Chapin & Fagin Division, GCF Inc., 105 Dorothy Street, Box 246, Buffalo, New York
14240.
The issue raised is whether payments from certain subsidiaries to
Petitioner (their parent corporation) for maintenance work performed by employees
carried on Petitioner's central payroll account constitute receipts from the sale
of services taxable under Article 28 of the Tax Law.
Maintenance employees on Petitioner's payroll perform maintenance functions
for both Petitioner and Petitioner's subsidiaries. Petitioner and its
subsidiaries share common facilities in Buffalo, New York. Each maintenance
employee maintains a time sheet upon which he sets forth his hours and for whom
those hours were expended. At the end of each payroll period the amount of the
maintenance payroll is broken down to reflect the charges properly allocated to
each company. At the end of each month an inter-company invoice is prepared which
sets forth all the maintenance information, i.e., labor, rates, etc. to be
allocated to each company. Petitioner is reimbursed for amounts allocable to each
subsidiary.
Section 1105 of the Tax Law imposes a tax on the receipts from the service
of "(c)...Installing tangible personal property or maintaining, servicing or
repairing tangible personal property not held for sale in the regular course of
business....(5) Maintaining, servicing or repairing real property, property or
land...."
Inasmuch as the maintenance employees are paid from Petitioner's payroll,
they are considered to be Petitioner's employees and not employees of
Petitioner's subsidiaries. Accordingly, Petitioner's charges to its subsidiaries
for work performed by Petitioner's maintenance employees are subject to state and
local sales taxes pursuant to the provisions of Section 1105(c)(3) and/or Section
1105(c)(5) of the Tax Law.

DATED: May 6,1981

s/ LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR