How is New York sales tax applied when a railroad buys cross ties in New York for various uses — shipped out of state, used on government contracts, used on its own in-state projects, or held as inventory for a supplier to reclaim?

Plain-English summary

Consolidated Rail Corporation ("Conrail") buys treated railroad cross ties from GCL, Inc. under a 1979 agreement (a minimum of 400,000 ties a year), delivered FOB GCL's plant in Bethlehem, New York. The ties go to four different uses, and Conrail asked how New York sales and use tax applies to each. The Department answered use-by-use.

1. Ties shipped out of state for out-of-state use — taxable, but a bulk-purchase refund is available.

• A sale is taxable where the property is delivered (20 NYCRR 526.7(e)(1)). Because delivery occurs in New York, the receipts are taxable under § 1105(a) — whether Conrail ships the ties as a common carrier or as owner.
• But under § 1119(a)(2), tax paid on property purchased in bulk, stored and not used in New York, then reshipped out of state for out-of-state use, is refundable/creditable. The ties are "loose loaded," so Conrail buys in bulk and qualifies. Holding a Direct Payment Permit, Conrail may issue it to GCL (relieving GCL of collecting) and pay tax directly to the Tax Commission only on transactions with no refund right.

2. Ties used in New York on DOT and MTA contracts — depends on who owns the property being repaired.

• DOT and MTA are exempt organizations under § 1116(a)(1). Section § 1115(a)(16) exempts property sold to a contractor/repairman for maintaining, servicing or repairing the real property of a § 1116(a) organization, provided the property becomes an integral component.
• Where DOT/MTA own the real property repaired, the tie purchase is exempt under § 1115(a)(16); Conrail may use a Direct Payment Permit or a Contractor's Exempt Purchase Certificate.
• Where DOT/MTA hold the property under a 99-year lease, their interest is personal property, so § 1115(a)(16) does not apply. Conrail pays tax, but may claim a § 1119(c) credit/refund because the ties are used in performing a taxable § 1105(c)(3) repair service.
• Conrail is not DOT/MTA's purchasing agent (it buys with its own funds, with no express agency authorization), so it does not inherit their exempt status.

3. Ties used in New York on Conrail's own (non-DOT/MTA) projects — taxable on purchase, with a § 1119(c) refund.

• These ties go into taxable § 1105(c)(3) or (5) repair services (which Conrail must collect on), so Conrail pays sales tax on the tie purchase and may claim a § 1119(c) credit/refund, or use its Direct Payment Permit.

4. Untreated "green" ties under the supplemental inventory agreement — not taxable at all.

• Conrail buys ~133,000 untreated ties to hold in inventory; GCL later pulls ties to treat and sell back to Conrail, replacing them and taking title. Conrail acquires the untreated ties intending to transfer them back to GCL, so its purchase is a purchase for resale (not a retail sale). GCL's re-acquisition is also a purchase for resale. Both are therefore exempt.
• Each side must give the other a properly completed Resale Certificate (Form ST-120) (20 NYCRR 526.6(c)(2)). And mere storage of property held for resale is not a taxable "use," so no § 1110 compensating use tax applies.

What this means for you

Delivery point drives the tax — but bulk-purchase refunds can undo it. Property delivered to you in New York is taxable even if you immediately haul it out of state. If you buy in bulk and reship for out-of-state use, § 1119(a) gives back the tax; a Direct Payment Permit lets you skip paying and later refunding.

Government-contract exemptions turn on ownership and integration. Buying materials to repair a tax-exempt government body's real property can be exempt under § 1115(a)(16) — but only if that body actually owns the real property and the material becomes an integral part. If the government only leases the property, the exemption fails and you fall back on a § 1119(c) service-use refund. And buying "for" a government body doesn't make you its agent unless the contract says so.

"Resale" covers inventory you'll hand back to your supplier. Where you buy property intending to transfer it (back) to another party, it's a purchase for resale and not taxable — provided resale certificates change hands both ways. Simply storing resale inventory isn't a taxable use.

Common questions

Q: We took delivery in New York but shipped the goods out of state — is it still taxable?
A: Yes, delivery in New York makes it taxable under § 1105(a). But if you bought in bulk and reship for out-of-state use, § 1119(a)(2) allows a refund or credit, and a Direct Payment Permit lets you pay the state directly only on truly taxable transactions.

Q: We're repairing property for a tax-exempt government agency — are our material purchases exempt?
A: Only if the agency owns the real property and the material becomes an integral part of it (§ 1115(a)(16)). If the agency merely leases the property, the exemption doesn't apply; you pay tax but can seek a § 1119(c) credit because the materials go into a taxable repair service.

Q: Do we owe tax on inventory we buy just to transfer back to our supplier?
A: No. Buying property intending to transfer it (back) to another is a purchase for resale, exempt if both parties exchange resale certificates (Form ST-120), and mere storage of that inventory isn't a taxable use under § 1110.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — defines "retail sale," including the rule for contractors/repairmen
• Tax Law § 1115(a)(16) — exempts property sold to a contractor/repairman to maintain, service or repair the real property of a § 1116(a) organization, where it becomes an integral component
• Tax Law § 1116(a)(1) — exempt status of New York State, its agencies, instrumentalities, public corporations and political subdivisions
• Tax Law § 1119(a) — refund/credit for tax on bulk property stored and not used in New York, then reshipped out of state for out-of-state use
• Tax Law § 1119(c) — refund/credit where purchased property is later used in performing a taxable § 1105(c) service
• Tax Law § 1105(c)(3) — taxes maintaining, servicing or repairing tangible personal property not held for sale
• Tax Law § 1110 — compensating use tax (mere storage of resale property is not a taxable use)
• 20 NYCRR 526.7(e)(1) — a sale is taxable where the property is delivered/possession transferred (with a common-carrier example)
• 20 NYCRR 526.6(c) — purchase for resale; resale recognized only with a properly completed resale certificate (Form ST-120)

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_98s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(98)S
Sales Tax
May 15, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801124A

On November 24, 1980 a Petition for Advisory Opinion was received from
Consolidated Rail Corporation, Six Penn Center Plaza, Philadelphia, Pennsylvania
19104.
Petitioner inquires as to the applicability of the sales and use taxes
imposed under Article 28 of the Tax Law to various aspects of a proposed
operation, as described below.
Petitioner, Consolidated Rail Corporation (hereinafter "Conrail"), is a
corporation organized and operating under the General Business Corporation Law
of the Commonwealth of Pennsylvania, pursuant to the Regional Rail Reorganization
Act of 1973. Conrail is a common carrier subject to the jurisdiction of the
Interstate Commerce Commission and is engaged in the railroad business in several
states, including the State of New York.
GCL, Inc. (hereinafter "GCL") is a corporation organized and operating
under the Business Corporation Law of the State of New York. GCL wishes to engage
in the business of providing treated railroad ties to Conrail and other
railroads. To this end, Conrail and GCL entered into an agreement on November 16,
1979 (hereinafter the "1979 agreement") under the terms of which GCL would sell,
and Conrail would purchase, a minimum of 400,000 treated railroad cross ties per
year for five years (and up to 15 per cent of Conrail's total tie requirements
in each of such years).
The 1979 agreement provides, at paragraph 6, that the treated ties are to
be delivered FOB GCL's plant in Bethlehem, New York. Upon taking delivery,
Conrail will immediately transport approximately 60 per cent of the treated ties
to points outside the State of New York for use outside the State of New York,
while 7 per cent will be used to fulfill Conrail's contractual obligations with
the New York State Department of Transportation (hereinafter "DOT") and the
Metropolitan Transportation Authority (hereinafter "MTA") under the terms of
which contracts ownership of the ties will reside in DOT or MTA, as the case may
be. The remaining 33 per cent of the purchased cross ties are to be used in New
York by Conrail on projects other than those funded by MTA and DOT.
Conrail and GCL propose to enter into a supplemental agreement under the
terms of which Conrail would purchase from GCL the initial inventory requirements
of green (untreated) railroad cross ties with a value of approximately $1.1
million, to be stored at GCL's plant. The proposed supplemental agreement would
provide that GCL may remove ties from Conrail's tie inventory for the sole
purpose of treating the ties for sale to Conrail pursuant to the 1979 agreement.
GCL would become the owner of the ties it removed upon placing an equal number
of untreated ties in Conrail's tie inventory.
Conrail requests an Advisory Opinion to the effect that:
(1)

TP-8 (4/80)

Conrail is not subject to sales tax with respect to those railroad
cross ties used by Conrail outside of New York regardless of whether
such railroad ties are acquired by Conrail pursuant to the 1979
agreement or the proposed supplemental agreement, and regardless of
whether those ties are shipped by Conrail in its capacity as a
common carrier or as the owner of the ties;

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

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TSB-H-81(98)S
Sales Tax
May 15, 1981

(2)

Conrail is exempt from sales tax pursuant to Section 1116(a)(1) of
the Tax Law with respect to those railroad cross ties which are used
in New York pursuant to contracts with DOT and MTA, under the terms
of which title to the railroad cross ties is to reside in DOT or
MTA;

(3)

Conrail is subject to New York State sales tax at the time of
delivery to it of treated railroad cross ties which are to be used
in the State of New York on projects other than those under
contracts with DOT and MTA;

(4)

Conrail is not subject to New York sales or compensating use taxes
with respect to those untreated ties which are acquired pursuant to
the proposed supplemental agreement.

Section 1105(a) of the Tax Law imposes the State sales tax on the
"...receipts from every retail sale of tangible personal property, except as
otherwise provided in this article."
The term "retail sale" is defined in section 1101(b)(4)(i) of the Tax Law,
in relevant part, as:
"(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) and (5) 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."

The term "sale" is defined in section 1101(b)(5) of the Tax Law, in
relevant part, as "Any transfer of title or possession or both...for a
consideration...." The Sales and Use Tax Regulations provide that:
"A sale is taxable at the place where the tangible personal property...is
delivered or the point at which possession is transferred by the vendor to
the purchaser or his designee.
...
Example 4: A common carrier purchases tangible personal property in New
York, takes delivery of it in New York and transports it out of State for use at
its out of State location. The receipt from the sale is taxable in New York, as
delivery occurred in the State, but the carrier may be eligible for a refund or
credit under section 1119(a) of the Tax Law." 20 NYCRR 526.7(e)(1).

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Sales Tax
May 15, 1981

Accordingly, where Conrail purchases cross ties, pursuant to the 1979
agreement, for shipment and use out of State, the receipts from such sales are
subject to the tax imposed under section 1105(a) of the Tax Law. This is so
irrespective of whether the ties are shipped by Conrail in its capacity as a
common carrier or as the owner of the ties. However, section 1119(a)(2) of the
Tax Law provides for a refund or credit of tax paid pursuant to section
1105(a) "...on the sale...of tangible personal property purchased in bulk, or any
portion thereof, which is stored and not used by the purchaser...within this
state if that property is subsequently reshipped by such purchaser...to a point
outside this state for use outside this state...." According to paragraph 6 of
the 1979 agreement, "all ties loaded into railroad cars shall be loose loaded",
while ties shipped by truck may be banded in a manner acceptable to Conrail.
Conrail may therefore be said to purchase cross ties in bulk, thus satisfying the
terms of the statutory refund provision. See Feldstein v. Fusco, 205 App Div 806
(1923).
Inasmuch as Conrail has been issued a Direct Payment Permit, as an
alternative to making payment of tax to GCL and thereafter applying for a credit
or refund, Conrail may issue a copy of its Permit to GCL, thereby relieving GCL
of its responsibility to collect tax, and may thereafter make payment of tax
directly to the Tax Commission solely with respect to taxable transactions to
which no right to a refund or credit attaches; e.g., with respect to cross ties
used in New York and not otherwise exempt from tax. Inasmuch as Conrail is not
liable for tax on its purchase under the supplemental agreement, as discussed
below, the question of destination does not arise with respect thereto.
Petitioner next inquires whether it is exempt from sales tax with respect
to those cross ties used within New York in the performance of contracts between
Conrail, on the one hand, and DOT and MTA on the other. These contracts are joint
service agreements under which Conrail is to operate certain commuter lines. Such
operations include the service of track repair, and the cross ties at issue
herein are to be purchased for the purpose of making such repairs, being used to
replace existing ties.
Section 1115(a)(l6) of the Tax Law provides for an exemption from sales tax
with respect to:
"(16) Tangible personal property sold to a contractor, subcontractor or
repairman for use in maintaining, servicing or repairing real
property, property or land of an organization described in
subdivision (a) of section eleven hundred sixteen, as the terms real
property, property or land are defined in the real property tax law;
provided, however, no exemption shall exist under this paragraph
unless such tangible personal property is to become an integral
component part of such structure, building or real property."
Subdivision one of section 1116(a) of the Tax Law, referred to in the
foregoing quoted statutory provision, provides for an exemption from sales tax
with respect to charges by or to:
"(1)

The state of New York, or any of its agencies, instrumentalities,
public corporations (including a public corporation created pursuant
to agreement or compact with another state or Canada) or political
subdivisions where it is the purchaser, user or consumer, or where
it is a vendor of services or property of a kind not ordinarily sold
by private persons;"

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Sales Tax
May 15, 1981

Both DOT and MTA come with the ambit of the terms of section 1116(a)(1) of the
Tax Law.
The cross ties in question are used to make repairs to property some of
which is owned by MTA or DOT, and some of which is held by MTA or DOT under a 99
year lease. In the former case the ties are purchased by Conrail for use in
"maintaining, servicing or repairing real property, property or land of an
organization described in" section 1116(a) of the Tax Law, and such purchase is
accordingly exempt from tax pursuant to section 1115(a)(16) of the Tax Law. See
Real Property Tax Law, §102, subd. 12(c). Conrail may utilize either its Direct
Payment Permit or a Contractor's Exempt Purchase Certificate to avoid the
necessity of making an initial payment of tax and thereafter claiming a credit
or refund. Where the property maintained, serviced or repaired is held by DOT or
MTA under a lease, its interest therein constitutes personal property, and
section 1115(a)(16) is not applicable. Matter of Earl Hamilton Manor V. Boyland,
4 N.Y. 2d 192; cf., Advisory Opinion of the State Tax Commission issued to
Consolidated Rail Corporation on March 20, 1981 (Petition Number S801112E).
Conrail must therefore pay tax on the cross ties to be so used. However, Conrail
may thereafter claim a credit or refund under section 1119(c) of the Tax Law,
which provides, in relevant part, that:
"(c)

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 paragraphs (1), (2), (3) or (5) 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 last
sentence of subparagraph (i) of paragraph (4) of subdivision (b) of
section eleven hundred one."

Section 1105(c)(3) of the Tax Law, referred to in the foregoing, imposes a tax
on receipts from the service of "installing tangible personal property, or
maintaining, servicing or repairing tangible personal property not held for sale
in the regular course of business...."
As an alternative to making payment of tax and thereafter claiming a refund
or credit, Conrail may use its Direct Payment Permit to avoid the necessity of
making an initial payment of tax and thereafter claiming a refund or credit.
It should be noted that Conrail, in purchasing cross ties to be used on DOT
and MTA projects, may not be said to make such purchases as agent for DOT and
MTA, and thus does not itself become clothed with their exempt status. This
conclusion derives from the terms of the agreements between Conrail and DOT and
MTA. Under such contracts Conrail is to purchase the cross ties with its own
funds. Conrail is required to submit quarterly income statements to MTA in one
case, and to MTA and the Connecticut Transportation Authority in the other, and
to remit net income, if any, to such other party or parties, or to receive
reimbursement for net losses, if any. Title to the cross ties so used is said by
Petitioner to vest in MTA and DOT. It may fairly be concluded from the foregoing
that Conrail, in purchasing the cross ties in question, does not purchase them

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Sales Tax
May 15, 1981

as agent for MTA or DOT. It purchases them from GCL, from which it receives
title, and thereafter uses the cross ties in fulfillment of its contractual
obligations pursuant to which it subsequently transfers title to the cross ties
to MTA and DOT. Significant in this regard is the fact that nowhere in the
agreements in question is there any express authorization for Conrail to act as
agent for either MTA or DOT in making purchases of tangible personal property.
Petitioner next inquires as to its sales tax liabilities with respect to
cross ties purchased for use, within New York, on projects other than those for
MTA and DOT. Inasmuch as such ties are used in maintaining, servicing or
repairing either tangible personal property or real property, property or land,
services the receipts for which are subject to tax under either section
1105(c)(3) or (5) of the Tax Law, respectively (which tax must be collected by
Conrail), Conrail must pay sales tax on the purchase of the cross ties to be so
used and may subsequently claim a credit or refund pursuant to section 1119(c)
of the Tax Law. Alternatively, Conrail may utilize its Direct Payment Permit, as
described above.
Finally, Petitioner inquires as to whether it is subject to sales or
compensating use tax with respect to the untreated ties acquired pursuant to the
supplemental agreement.
Under the supplemental agreement Conrail is to purchase from GCL
approximately 133,000 untreated, green ties, to be stored at GCL's location in
a fenced-in Conrail Inventory Yard. It is anticipated that GCL will thereafter
remove ties from inventory for the purpose of treating them so as to render them
saleable, to Conrail, under the 1979 agreement. Untreated ties in an amount equal
to those so removed will be thereafter placed in Conrail's inventory, at which
point the ties so removed become the property of GCL. GCL, upon treating such
ties, is to sell them to Conrail. During the last 7 months of the 5 year contract
term GCL is obligated to purchase the tie inventory from Conrail, pursuant to a
schedule set forth in the supplemental agreement. According to Petitioner, the
purpose of the supplemental agreement is to enable Conrail to assist GCL in
satisfying its initial financing requirements.
It is here concluded that Conrail is not required to pay sales tax on its
purchase of the untreated cross ties from GCL pursuant to the supplemental
agreement. Under section 1105(a) of the Tax Law, only retail sales of tangible
personal property are subject to tax. Pursuant to section 1l01(b)(4)(i)of the Tax
Law, sales for resale do not constitute retail sales. Receipts from sales for
resale are therefore not subject to the sales tax. The Sales and Use Tax
Regulations define the term "purchase for resale" as follows:
"Where a person, in the course of his business operations, purchases tangible
personal property or services which he intends to sell,...the property or
services which he has purchased will be considered as purchased for resale and
therefore not subject to tax until he has transferred the property to his
customer." 20 NYCRR 526.6(c)(1)
The supplemental agreement provides that GCL may remove untreated ties from
Conrail's inventory in order to fulfill GCL's obligations under the 1979
agreement. Title to the untreated ties so removed will be transferred to GCL from
Conrail when GCL replenishes the ties in Conrail's inventory. Conrail thus
acquires untreated ties from GCL with the intention of conveying possession of,
and title to, these ties to GCL. Conrail's initial acquisition of untreated ties
is therefore a purchase for resale and not subject to the sales tax.

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TSB-H-81(98)S
Sales Tax
May 15, 1981

The sale of the untreated ties back to GCL is also not subject to the sales
tax. GCL acquires the untreated ties with the intention of treating them and
selling them to Conrail pursuant to the 1979 agreement. GCL's acquisition of the
untreated ties from Conrail is thus a purchase for resale. Such acquisition is
therefore exempt from sales tax.
Conrail must give a properly completed resale certificate to GCL upon its
acquisition of untreated ties from GCL if it is to avoid the necessity of paying
sales tax on such acquisition. Similarly, GCL must similarly present a resale
certificate to Conrail when title to the untreated ties is transferred back to
GCL, in order to avoid the necessity of paying sales tax on such transfer. 20
NYCRR 526.6(c)(2).
Finally, Conrail is not subject to the compensating use tax with respect
to the cross ties stored on GCL's property. Mere storage of property acquired for
the purpose of resale does not constitiute a use subject to the compensating use
tax imposed under section 1110 of the Tax Law.

DATED: April 30,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau