Is a subcontractor's sale of building materials to a construction manager acting as the owner's agent exempt from sales tax on a capital-improvement project?

Plain-English summary

An attorney (Richard P. Dyer, Esq., of New York City) asked the Department whether building materials to be incorporated as an integral component of a capital-improvement construction project for a non-tax-exempt organization are subject to sales tax when a subcontractor sells them to a construction manager who is acting as the owner's agent — rather than as an independent general contractor.

The Department ruled the sale is exempt.

• Tax Law § 1115(a)(17) exempts tangible personal property sold by a contractor, subcontractor or repairman to a person (other than an organization described in § 1116(a)) for whom he is adding to or improving real property by a capital improvement, if the property is to become an integral component part of the structure, building or real property.
• An agent's actions are deemed those of the principal. A sale to an agent, in the agent's capacity as agent, is a sale to the principal. So the subcontractor's sale to the construction manager acting as the owner's agent is treated as a sale to the owner — and qualifies for the § 1115(a)(17) exemption.
• But the subcontractor still pays tax on its own materials. The subcontractor must pay the appropriate sales or use tax on its own purchase or use of the property incorporated into the improvement, because it is the ultimate consumer of that property.

What this means for you

Selling through an owner's agent doesn't lose the capital-improvement exemption. When a construction manager is genuinely the owner's agent, a subcontractor's sale of integral-component materials to that manager is treated as a sale to the owner and is exempt under § 1115(a)(17) — the same as selling directly to the owner. The agency relationship, not the label "construction manager," is what matters.

Agency has to be real. The result depends on the construction manager acting as agent for the owner, not as an independent general contractor buying on its own account. If the manager is really an independent contractor, the analysis changes.

The exemption doesn't erase the subcontractor's own tax. Section 1115(a)(17) addresses the sale from the subcontractor to the owner (or its agent). The subcontractor is still the ultimate consumer of the materials it incorporates and owes sales or use tax on its own purchase of them.

Common questions

Q: Our construction manager buys materials as the owner's agent — is the subcontractor's sale to it taxable?
A: No. Because a sale to the owner's agent is a sale to the owner, the subcontractor's sale of integral-component materials for a capital improvement is exempt under § 1115(a)(17), just as a direct sale to the owner would be.

Q: Does it matter that the owner is not a tax-exempt organization?
A: No. Section 1115(a)(17) applies to capital-improvement sales to owners other than § 1116(a) exempt organizations — so it covers a non-exempt owner. (Sales to exempt organizations are handled under different provisions.)

Q: Who ends up paying sales tax on the materials?
A: The subcontractor. It's the ultimate consumer of the property it incorporates into the improvement, so it pays sales or use tax on its own purchase or use of that property.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1115(a)(17) — exempts tangible personal property sold by a contractor, subcontractor or repairman that becomes an integral component part of a capital improvement for an owner other than a § 1116(a) exempt organization
• Tax Law § 1116(a) — describes the exempt organizations excluded from § 1115(a)(17)
• Common-law agency principle — an agent's authorized acts are deemed those of the principal, so a sale to an agent as agent is a sale to the principal

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_44s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-81(44)S
Sales Tax
March 4, 1981

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

PETITION NO. S801117C

On November 17, 1980 a Petition for Advisory Opinion was received from
Richard P. Dyer, Esquire, 16th Floor, 909 Third Avenue, New York, New York 10022.
The issue raised is whether tangible personal property, to be incorporated
as an integral component part of a capital improvement construction project for
a non-tax-exempt organization, is subject to sales tax when sold by a
subcontractor to a construction manager acting as the owner's agent and not as
an independent general contractor.
Section 1115(a)(l7) of the Tax Law exempts from sales and use taxes:
"Tangible personal property sold by a contractor, subcontractor or repairman to
a person other than an organization described in subdivision (a) of section
eleven hundred sixteen, for whom he is adding to, or improving real property,
property or land by a capital improvement, or for whom he is about to do any of
the foregoing, if such tangible personal property is to become an integral
component part of such structure, building or real property...."
Where an individual acts as agent for another his actions are deemed to
constitute those of his principal. A sale to an agent in his capacity as agent
constitutes a sale to his principal. Accordingly, tangible personal property
incorporated into a capital improvement construction project as an integral
component part thereof for a non-tax-exempt organization is exempt from tax when
sold by a subcontractor to a construction manager acting as the owner's agent.
It should be noted that the subcontractor is required to pay the appropriate
sales or use tax on its purchase or use of the tangible personal property
incorporated into the capital improvement inasmuch as it is the ultimate consumer
with respect to such property.

DATED: February 18,1981

TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

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