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Hawkins, Delafield & Wood I. Statutory and Regulatory Basis for Sales Tax Exemption A. Section 874(1) of the New York State Industrial Development Agency Act (within the New York General Municipal Law) "§ 874. Tax exemptions. (1) It is hereby determined that the creation of the agency and the carrying out of its corporate purposes is in all respects for the benefit of the people of the state of New York and is a public purpose, and the agency shall be regarded as performing a governmental function in the exercise of the powers conferred upon it by this title and shall be required to pay no taxes or assessments upon any of the property acquired by it or under its jurisdiction or control or supervision or upon its activities (emphasis supplied)." B. Section 1116(a)(1) of the New York Tax Law "§ 1116. Exempt organizations. (a) Except as otherwise provided in this section, any sale or amusement charge by or to any of the following or any use or occupancy by any of the following shall not be subject to the sales and compensating use taxes imposed under this article: (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 (emphasis supplied);" C. Section 1115(a)(15) of the New York Tax Law "§ 1115. Exemptions from sales and use taxes. (a) Receipts from the following shall be exempt from the tax on retail sales imposed under subdivision (a) of section eleven hundred five and the compensating use tax imposed under section eleven hundred ten: . . . (15) Tangible personal property sold to a contractor, subcontractor or repairman for use in erecting a structure or building of an organization described in subdivision (a) of section eleven hundred sixteen [ie., an exempt organization], or adding to, altering or improving real property, property or land of such an organization, 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." (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 [i.e., an exempt organization], 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." D. Section 529.2(a) of the New York Code of Rules and Regulations (interpreting Section 1116(a)(1) of the New York Tax Law) "§ 529.2 New York State, agencies, instrumentalities, public corporations, and political subdivisions thereof. [Tax Law, § 116(a)(1)] (a) Governmental entities. (1) Agencies and instrumentalities of the State as used in this section means any authority, commission or independent board created by an act of the Legislature for a public purpose.
Example: Urban Development Corporations and Industrial Development Agencies are public corporations and may purchase tangible personal property exempt from the sales and use taxes (emphasis supplied)." E. Section 541.3 of the New York Code of Rules and Regulations "§ 541.3 Contracts with exempt organizations. [Tax Law, §§ 1115(a)(15), (16), 1116(a); Canal Law, § 30, subd. 7(e); Highway Law, § 38, subd. 7(f)] (a) Governmental entities. When a contractor's customer is a governmental entity described in section 1116(a)(1) or (2) of the Tax Law, the constract signed by the government representative and the prime contractor is sufficient proof of the exempt status of purchases made for such contract. (1) Such governmental entities include: (i) Pursuant to section 1116(a)(1) of the Tax Law [of] 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. This group includes, but is not limited to: . . . (c) industrial development authorities . . . (d) Contracts with exempt organizations. (1)
Effective September 1, 1974 all tangible personal property incorporated into
real property owned by a governmental entity or an exempt organization is
exempt, whether the contract is on a lump sum, time and material, cost?plus, or
other basis. (2) Purchase for contracts (other than agency contracts). (i) Tangible personal property sold to a contractor, subcontractor, or repairman for use in erecting, repairing, adding to, or altering a structure or building owned by an exempt organization, described in section 1116(a) of the Tax Law, is exempt when it is to become an integral component part of such structure or building. Example 1: An exempt organization contracts to have a building erected on its land. Purchases by its contractor of tangible personal property, such as nails, sheetrock, and plywood that become part of the structure are exempt. Example 2: A building is being erected for an exempt organization. Glass in the windows is broken and a glazier is engaged by the general contractor to repair the windows. The charges for such repairs are exempt and the purchase of the new glass is exempt. Example 3: A contractor builds a structure on speculation and subsequently sells the structure to an exempt organization. The contractor is not entitled to the tax exemption on the purchase of tangible personal property incorporated into the structure. Example 4: The owner of real property enters into a contract to erect a building to be leased, under a long-term lease, to an exempt organization. The contractor's purchases are not exempt as the owner of the building is not an exempt organization.
(ii) Purchases of tangible personal property incorporated into the real property of an exempt organization by subcontractors and repairmen are accorded the same treatment as purchases by the prime contractor. (iii) Tangible personal property purchased by a contractor, which remains tangible personal property after installation, is exempt from the tax when purchased for and sold to an exempt organization. Example 6: An exempt organization contracts to have a new wing built onto their existing building. The new wing includes the addition of a cafeteria. The contractor may purchase, exempt from the tax, the tangible personal property that becomes part of the capital improvement to real property and the tangible personal property which remains tangible personal property. (iv) Except for agency contracts, contractors' purchases of construction supplies which do not become part of an exempt organization's real property and are used or consumed by the contractor, as well as purchases of taxable services, such as electricity used by the contractor, are subject to the tax. Cross-reference: For purchases under an agency contract, see paragraph (4) of this subdivision. The following types of property and services are representative, but not intended to be all-inclusive, of contractor's purchases which are subject to tax, irrespective of whether the contractor has a time and material, lump sum, or other type of contract (except agency contract), with an exempt organization: (a) construction machinery and equipment, including rentals and repair parts; (b) contractors' office supplies;
(d) any other items purchased or rented by a contractor for his use in performing the contract and not incorporated into the realty. Example 7: Lumber and other materials which are used to build forms are not exempt since they do not become a component part of the structure. Example 8: Equipment rentals under the dominion and control of the contractor, such as rentals of cranes, bulldozers, backhoes, etc. for use in building a structure for an exempt organization are subject to tax. (v) Documents. (a) If the customer is a governmental entity, copies of signed contracts and government purchase orders are sufficient evidence to establish the exempt status of the job between the governmental entity and the prime contractor. With respect to the documents required between a prime contractor and the subcontractors, a signed document between them which identifies the project, location, and exempt owner, will form the basis for tax exemption of tangible personal property purchased for incorporation into the exempt project. When purchasing such tangible personal property for the exempt project, the contractor or subcontractor will issue a properly completed contractor exempt purchase certificate to the supplier. . . . .
II. Administrative and Judicial Interpretations of IDA Sales Tax Exemption A. In response to a private letter ruling request, the Commissioner of Taxation and Finance on November 3, 1977 opined that the lease by an IDA of machinery and equipment to a project company is not exempt from the sales and use tax except to the extent that the machinery and equipment is otherwise independently exempt from such tax as production equipment. It was the position of the Commissioner that the amount of the lease rentals (i.e., the bond debt service payments) which constitute receipts from the rental of machinery and equipment would not be exempt from the sales and use tax; and that the imposition of such tax would not be contrary to Section 874 of the New York State Industrial Development Agency Act since the tax would not be imposed on the IDA but instead on the receipts from the lease rentals. B. In a letter ruling issued by the Commissioner on November 8, 1978, the Commissioner set forth the following conditions which must be met for the exemption of the purchase of building materials for an IDA project: 1. Prior to the start of construction, the IDA must acquire legal title to the land. 2. The IDA must at all times be the owner of the improvements to be built on the land. 3. The IDA Lease must require that the project company include language in all construction contracts and subcontracts that, immediately upon the purchase of any building materials to become incorporated in the improvements, such materials shall become the sole property of the IDA. 4. The signed contract between the prime contractor and the subcontractor must identify the project, its location and the exempt owner. 5. Payment for the building materials must be from funds of the IDA (i.e., bond proceeds). C. On May 29, 1981, the New York State Economic Development Council submitted a Sales Tax Memorandum to the Commissioner in opposition to the following two positions taken by the Commissioner: 1. First, that lease payments to an IDA are subject to sales tax for all non?production tangible personal property leased; and 2. Second, that projects not 100% financed through IDA bonds would not be entitled to a sales tax exemption for the portion not financed from IDA bond proceeds. A copy of the EDC submission is attached. D. In Wegmans Food Markets, Inc. v. Department of Taxation and Finance of the State of New York, 126 Misc. 2d 144 (Sup. Ct. Monroe County 1984), affirmed, 115 A.D. 2d 962 (App. Div. 1985), leave to appeal denied 67 N.Y. 2d 606 (1986), the New York courts first considered whether purchases of tangible personal property made for the purpose of installing or using such property upon or within projects financed by IDA bonds were exempt from the sales or use tax. It was determined by the courts (y) that no sales or use tax should be imposed on lease payments to an IDA with respect to non-production tangible personal property leased by the IDA to the project company, and (z) that purchases of tangible personal property on behalf of an IDA effected from funds other than IDA bonds can also enjoy the IDA sales tax exemption. A copy of the 1984 Wegmans decision is attached. E. In response in part to the Wegmans decision, the New York State Department of Taxation and Finance issued on April 1, 1987 TSB?M-87(7)S by which the Department set forth its policy on IDA sales tax exemptions. The policy statement noted the following as requirements for obtaining a sales tax exemption for IDA projects: 1. The contractor must be appointed an agent of the IDA. 2. The IDA should issue a letter on its letterhead signed by a responsible officer identifying the contract, the project and the purchaser, and authorizing the purchaser to make purchases for the project as agent of the IDA. 3. In effecting sales tax exempt purchases, the purchaser must provide the supplier with a copy of the IDA sales tax exemption letter. 4. Each bill and invoice must identify the project and indicate that the purchaser is acting as agent for the IDA. 5. Property purchased by an IDA or by an agent for an IDA will be exempt from sales taxes whether or not the funds for such purchase are IDA funds. A copy of TSB-M-87(7)S is attached. F. On May 23, 1989, the Commissioner issued an Advisory Opinion (TSB-A-89(28)S, August 8, 1989) to the effect that "[m]aintenance and service contracts for maintaining, repairing and servicing machinery, equipment and computer software comprising a part of the Project, whether entered into by the IDA or by Petitioner as agent for and on behalf of the IDA, will also be exempt from such sales and use taxes provided that the IDA is the owner of such machinery, equipment and computer software and that under the agreement between the IDA and Petitioner, the IDA is responsible for maintaining, repairing and servicing such items.
H. In an Advisory Opinion issued on August 15, 1991 (TSB-A-91(56)S), the Commissioner determined that replacement equipment purchased by an IDA project company as agent for the IDA will also be exempt from sales taxes. I. On January 10, 1992, Wegmans Food Markets, Inc. returned to the courts in Wegmans Food Markets, Inc. v. The Department of Taxation and Finance of the State of New York (Sup. Ct. Monroe County 1992). At issue was whether the IDA sales tax exemption can be made applicable to operational expenses incurred by a project company in the day-to-day operation of an IDA-owned project (e.g., utilities, refuse removal, outside and inside maintenance, lease payments, rentals, the purchase of cleaning supplies, etc.). The court, in rendering its opinion that these operational expenses were not able to be sales tax exempted by the IDA, noted the distinction between property-acquisition expenses necessary to establish a project (i.e., to acquire, construct, renovate, equip, etc.), and subsequent operating expenses, and further determined that IDAs lack the statutory power to "operate" a business. "If IDAs are not authorized to operate a business then it would have no authority to designate agents to do that which they could not do themselves." The court further drew a distinction between "maintenance of properties", which is within the power of an IDA to grant a sales tax exemption, and "maintenance of business operations", which it is not. "Tax-exempt maintenance would be that needed to maintain the structural integrity of the structures constructed or rehabilitated to house the various supermarkets, or to repair equipment used as part of the project." A copy of this second Wegmans decision is attached. J. On April 28, 1993, the Commissioner in an Advisory Opinion (TSB-A-93(68)S), clarified the nature of those maintenance contracts which can be the subject of an IDA sales tax exemption - - "where the maintenance contracts provide for the replacement of parts, other than parts that contain materials or substances that are consumed in the operation of the equipment (e.g., a toner cartridge) where such parts must be replaced whenever the substance is consumed, and repair of or with respect to [IDA owned] equipment, which equipment has a useful life of one year or more, will be exempt from the sales and use taxes . . . . since such contracts are necessary to maintain or repair the IDA machinery and equipment used as part of the project . . . ."
III. Statutory and Regulatory Reporting Requirements A. Section 874(8) of the New York State Industrial Development Agency Act (being part of the New York General Municipal Law) requires that agents and project operators of an IDA project who claim sales and use tax exemptions on behalf of an IDA must file an annual report (Form ST-340, a copy of which is attached) with the New York State Department of Taxation and Finance of the value of all sales and use tax exemptions claimed. Section 874(8) provides as follows: "§ 874 Tax Exemptions. "(8) Agents of an agency and project operators shall annually file a statement with the state department of taxation and finance, on a form and in such a manner as is prescribed by the commissioner of taxation and finance, of the value of all sales and use tax exemptions claimed by such agents or agents of such agents or project operators, including, but not limited to, consultants or subcontractors of such agents or project operators, under the authority granted pursuant to this section. The penalty for failure to file such statement shall be the removal of authority to act as an agent of an agency or a project operator." B. The Department of Taxation and Finance has promulgated rules and regulations implementing the annual sales tax exemption filing requirement of IDA agents and project operators in 20 NYCRR §542.1. In brief, these regulations require the following: 1. Every agent or project operator of an IDA project authorized by the IDA to make tax-exempt purchases must file annually with the Department of Taxation and Finance (the "Department") a report (Form ST-340, a copy of which is attached) which shall include the value of sales and use tax exemptions claimed by or on behalf of such agent or project operator, including those claimed by any consultants, subcontractors or agents of such entities. 2. The reports must be filed annually on a calendar year basis by the last day of February of the next succeeding year. 3. Each project will require a separate report, and each report must state, among other matters, (a) the type of project facility; (b) the commencement and ending date of the project; (c) the date construction commenced and was completed; and
4. Every agent or project operator must maintain records for a period of 3 years necessary to substantiate the information set forth in the report. 5. The failure of an agent or project operator to file the mandated report, or the filing of a report which is not substantially complete, may result in the removal of authority to act as agent or project operator for the IDA. 6. If, within 30 days of the due date for the report, an agent or project operator has failed to file the report, the Department shall notify such entity of its failure. If the agent or project operator fails to file the required report within 30 days of receipt of the Department's notice, the Department will notify such entity and the IDA that continued failure to file the same within 60 days of this second notice will result in the removal of the authority of such entity to act as agent or project operator for the IDA. The failure of the Department to receive such report within 60 days as above-stated will result in such removal of authority. 7. An entity whose authority to act as an agent or project operator has been removed: (i) is not entitled to the sales and use tax exemptions under the IDA Act, (ii) will not be eligible to act as an agent or project operator until all reports are properly completed and filed to the Department's satisfaction, and (iii) may be liable for any sales or use taxes, plus applicable penalties or interest, which accrued during the time such removal of authority was in effect, and shall not be entitled to any refund or credit of any such tax, penalty or interest even after restoration of such authority. A copy of 20 NYCRR §542.1 is attached.
"§ 874 Tax Exemptions. (9) Within thirty days of the date that the agency designates a project operator or other person to act as agent of the agency for purposes of extending a sales tax exemption to such person, the agency shall file a statement with the Department of Taxation and Finance relating thereto, on a form and in such manner as is prescribed by the Commissioner of Taxation and Finance, identifying each such agent so named by the agency, setting forth the taxpayer identification number of each such agent, giving a brief description of the goods and/or services intended to be exempted from sales taxes as a result of such appointment as agent, indicating the agency's rough estimate of the value of the goods and/or services to which such appointment as agent relates, indicating the date when such designation as agent became effective and indicating the date upon which such designation as agent shall cease."
IV. Procedures for Monitoring Compliance by Agents with Sales Tax Exemptions A. What is the role of the IDA? - policeman, bystander or somewhere in the middle? B. Suggested Provisions to Include in a Sales Tax Exemption Letter (see sample form attached) A. Identify agent, project and location B. State expiration date C. Indicate nature of property intended to be exempted - e.g., construction materials, equipment, leased property, etc. C. Suggested Provisions to Include in Lease Agreement or Installment Sale Agreement. 1. The Company should include language in every purchase contract or bill indicating that the Company is acting as agent of the IDA and that the IDA shall have no liability thereunder. 2. The Company should surrender the Sales Tax Exemption Letter to the IDA for cancellation upon completion of the project or earlier default. 3. Consequences of misuse of Sales Tax Exemption Letter by the Company - repayments? - interest or penalties? - to whom paid? 4. Annual reporting to the IDA of uses of Sales Tax Exemption Letter. 5. Ability of IDA to access records, invoices, etc. with respect to use of Sales Tax Exemption Letter and to require an accounting or audit if necessary. D. Monitoring Practices and Administrative Capabilities of IDA will vary among IDAs. E. Use by IDAs of Sales Tax Exemptions in Exchange for Job Commitments - a Recapture and Reduction of Exemptions Taken or to be Taken as a Remedy. F. Misuses and Abuses - or, What to do when the Yacht Broker calls the IDA inquiring as to whether he can rely on the Sales Tax Exemption Letter? 1. Sales Tax Exemption Letters can be misused, and a company acting in bad faith or prepared to make false reports may escape the notice of an IDA - but this is the exception to the rule.
3. Nature of IDA responsibility upon notice of a potential misuse or abuse of the Sales Tax Exemption Letter - suggested course of action. 4. The misuse may occur at a level below that of the good faith project operator - - e.g., the subcontractor who uses the Sales Tax Exemption Letter to purchase building materials for the IDA project, and for all of his other jobs. 5. IDAs have a strong self-interest to protect against project operators wrongfully or erroneously taking sales tax exemptions - lest their project be made part of the record in the State Legislature as the basis for more restrictive IDA legislation. 6. Potential risks in the issuance of "preliminary" sales tax exemption letters in the absence of project commitments and indemnifications usually found in later-to-be-executed documents.
A. Other statutory provisions may apply to exempt the purchase of tangible personal property from sales taxes without having to utilize the IDA's sales tax exemption. 1. For example, the sales and use tax will not be imposed on: "§ 1115(a) (10) of the New York Tax Law "(10) Tangible personal property purchased for use or consumption directly and predominantly in research and development in the experimental or laboratory sense. Such research and development shall not be deemed to include the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising, promotions or research in connection with literary, historical or similar projects (emphasis supplied)." "§ 1115(a) (12) of the New York Tax Law "(12) Machinery or equipment for use or consumption directly and predominantly in the production of tangible personal property, gas, electricity, refrigeration or steam for sale, by manufacturing, processing, generating, assembling, refining, mining or extracting, or telephone central office equipment or station apparatus or comparable telegraph equipment for use directly and predominantly in receiving at destination or initiating and switching telephone or telegraph communication, but not including parts with a useful life of one year or less or tools or supplies used in connection with such machinery, equipment or apparatus. This exemption shall include all pipe, pipeline, drilling rigs, service rigs, vehicles and associated equipment used in the drilling, production and operation of oil, gas, and solution mining activities to the point of sale to the first commercial purchaser." "§ 1115(a) (17) of the New York Tax Law. "(17) 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 [i.e., exempt organizations], 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;... (emphasis supplied)" It should be noted that the statutory framework
underlying the exemption from sales taxes of tangible personal property
constituting part of the "capital improvement" is that the contractor,
subcontractor or repairman paid the applicable sales tax when he purchased such
tangible personal property. B. It is to the advantage of IDAs to encourage
project operators to not rely on the IDA sales tax exemption if alternate bases
of exemption can be utilized - and thereby reduce the aggregate dollar amount of
state-wide IDA sales tax exemptions when the Legislature re-visits the
"loss of sales tax revenues" generated by IDA sales tax exemptions. |
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