Does a defense contractor owe sales tax on the materials and services it buys to maintain and caretake Navy-owned facilities under a cost-reimbursement government contract?

Plain-English summary

Northrop Grumman holds "caretaker maintenance" contracts with the U.S. Navy for two New York facilities: a largely vacant former assembly plant in Calverton, and a fully operational "Government Owned Contractor Operated" complex in Bethpage where Northrop Grumman runs much of its aircraft-manufacturing business. Under these cost-plus-fixed-fee contracts, Northrop Grumman provides (directly or through subcontractors) everything needed to keep the Navy-owned land, buildings, and runway in working order -- security, grounds maintenance, window and plumbing repair, lighting, heating/cooling systems, pest control, waste disposal, and utilities procurement. Northrop Grumman buys the needed supplies and services in its own name, pays the vendors itself, and then submits vouchers to the Navy for reimbursement of its costs plus a fixed fee.

The Navy, as a federal agency, is generally exempt from New York sales tax on its own purchases. But that exemption doesn't automatically extend to a contractor performing work for the Navy -- it only passes through if the contractor is genuinely acting as the government's purchasing agent. Applying the established agency test (from Hooper Holmes v. Wetzler and Kern-Limerick v. Scurlock), the Department found no agency relationship here: the caretaker contract doesn't confer agent status on Northrop Grumman, doesn't make the government responsible to vendors for the purchase price, and Northrop Grumman -- not the government -- advances its own credit and funds, later seeking reimbursement. Without genuine consent and control establishing an agency relationship, Northrop Grumman's purchases are ordinary taxable retail purchases, not exempt government purchases.

That leaves one specific carve-out: materials that actually become a permanent, integral part of the Navy's real property -- paint and spackling used in painting, window parts, wiring, and installed electrical/heating/plumbing components -- can be bought tax-free under the exemption for contractor materials incorporated into an exempt organization's real property, but only with a timely Form ST-120.1 Contractor Exempt Purchase Certificate. Everything else the contractor buys or uses up performing the contract -- paint brushes, drop cloths, grass-cutting supplies, light bulbs, fuel, and taxable services like electricity, guard services, pest control, and waste disposal -- remains fully taxable, because the contractor (not the government) is the actual purchaser-consumer of those items and services.

What this means for you

Defense and government facilities contractors

Being reimbursed by a tax-exempt government agency for your costs doesn't itself exempt your own purchases -- you need either a genuine agency relationship (rare, and requires explicit contractual agent status plus the government being on the hook to vendors) or a specific statutory exemption. Materials that become a permanent part of the government's real property qualify for a narrower exemption, but only with a timely Contractor Exempt Purchase Certificate (Form ST-120.1); everything you merely consume performing the work remains taxable.

Facilities-maintenance and caretaker-services companies working with government clients

Structure your contract carefully if you want agency treatment -- vague "on behalf of" language isn't enough. The Department looks for explicit agent designation, government responsibility to vendors, and government (not contractor) credit backing the purchases.

Accountants and tax professionals

This ruling applies the same Hooper Holmes/Kern-Limerick agency framework used in other government-contractor rulings (compare the Air Force support-contractor and West Valley Nuclear Services precedents) -- always check for the same four hallmarks: explicit agent designation, government consent/control, government (not contractor) credit, and genuine fiduciary authorization, before assuming a pass-through exemption applies.

Common questions

Q: Does working under a cost-reimbursement government contract make a contractor's purchases exempt?
A: Not by itself. Exemption requires either a genuine agency relationship with the government or a specific statutory exemption (like the integral-component-part exemption for materials incorporated into government real property).

Q: What does a contractor need to buy materials for a government project tax-free?
A: The materials must actually become a permanent, integral part of the government-owned real property, and the contractor must give its supplier a properly completed Form ST-120.1 within 90 days of delivery.

Q: Are services like electricity, guard services, and pest control the contractor buys for the project taxable?
A: Yes -- the contractor is the purchaser-consumer of these services in performing its contract, so it can't buy them for resale and must pay tax on them.

Q: Can another government contractor rely on this ruling?
A: No. It binds the Department only as to this petitioner's contracts and facts. Other contractors should review their own contract language against the agency-relationship factors before assuming the same result.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a), (b), (c)(5), (c)(8) (tax on tangible personal property, utility service, real-property maintenance, and protective services)
• Tax Law § 1115(a)(16) (exemption for contractor materials that become an integral part of an exempt organization's real property)
• Tax Law § 1116(a)(2) (exemption for the United States and its agencies/instrumentalities)
• 20 NYCRR § 528.17 (contractor materials incorporated into exempt-organization real property)
• 20 NYCRR § 541.2(c) (definition of "agency contract")
• 20 NYCRR § 541.3(d) (contracts with exempt organizations)

Prior rulings and cases referenced:

• Matter of Hooper Holmes v Wetzler, 152 AD2d 871
• Kern-Limerick v. Scurlock, 347 US 110
• Matter of MGK Constructors, Dec Tax App Trib, Mar. 5, 1992, TSB-D-92(23)S
• Matter of West Valley Nuclear Services Co., Inc., Dec Tax App Trib, Nov. 13, 1998, TSB-D-97(37)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(11)S
Sales Tax
February 29, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990608A

On June 8, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Northrop Grumman Corporation, Tax Department, A12-025, South Oyster Bay Road,
Bethpage, NY 11714. Petitioner, Northrop Grumman Corporation, provided additional information
pertaining to the Petition on June 16, 1999 and on June 25, 1999.
The issue raised by Petitioner is whether its purchases of repair items and services used in
the performance of its caretaker maintenance contracts with the United States Government are
subject to sales and compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner designs, develops and manufactures aircraft and aircraft subassemblies. Much of
its work is done under United States Government contracts. In the past, when it was fully
operational, the United States naval facility located in Calverton, New York, was the site of final
assembly and testing by Petitioner of large aircraft parts manufactured for the Department of the
Navy (Navy). Today, the Calverton plant is basically vacant, and Petitioner has entered into a
contractual agreement with the Navy to maintain the facility by providing all of the services and
supplies needed to preserve the property and keep it in a full state of readiness. The facility consists
of land, buildings and a runway, all of which are wholly owned by the Navy.
Petitioner has a similar contract with the Navy for a portion of the naval facility at Bethpage,
NY, and has submitted a copy of this contract for “Caretaker Maintenance at the Naval Industrial
Reserve Plant # 464, Bethpage, New York” as part of its Petition. The contract describes the
Bethpage facility as a “Government Owned Contractor Operated (GOCO) complex.” Unlike
Calverton, the Bethpage facility is Petitioner’s fully operational “program site” which houses the
accounting, engineering, laboratory, human resource and research and development divisions of
Petitioner’s aircraft manufacturing business. Petitioner employs approximately twenty-three hundred
people here. Also unlike Calverton, Petitioner owns most of the land and buildings located at the
Bethpage plant, and what property it does not own it leases from the Navy.
Petitioner’s contract for the Bethpage facility calls for it to provide services to operate,
maintain, preserve and protect the facility. This includes security services, general maintenance of
grounds and buildings, grass cutting, window repair, maintenance of outside and inside lighting,
plumbing, electrical connections, heating and cooling systems, pest control, waste disposal, painting
and anything else necessary to maintain the facility in proper working order. It also includes
operation of the facility’s boilers and heating systems, water distribution and electrical distribution

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systems, and fuel oil and utilities procurement to ensure the continuous operation of the
systems/equipment and to satisfy the demand and consumption requirements of caretaker operations.
In Petitioner’s performance of its contracts for both the Calverton and Bethpage facilities,
certain services are performed by Petitioner’s employees and others are subcontracted out to third
parties. When Petitioner buys supplies such as light bulbs, fuel, wiring and other repair items, and
services such as electricity, security service, or repair service, which are required for Petitioner to
perform services under the contracts, Petitioner makes such purchases in its own name and pays its
supplier or service provider for the goods or services. Petitioner then submits vouchers to the Navy
to be reimbursed for its expenses. In cases where work is subcontracted out, the subcontract is
between Petitioner and the third party; and the Navy is not a party to such a subcontract.
Petitioner’s contracts are cost plus fixed fee contracts where the fixed fees cannot change.
Costs incurred by Petitioner in the performance of the contracts are reimbursed by the government.
If the negotiated cost is exceeded, it must be renegotiated. The fixed fee represents Petitioner’s
profit.
Applicable Law and Regulations
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. – . . . there is hereby imposed and there shall be paid
a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
(b) The receipts from every sale, other than sales for resale, of gas, electricity,
refrigeration and steam, and gas, electric, refrigeration and steam service of whatever
nature. . . .
(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(5) 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. . . .
*

*

*

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(8) Protective and detective services, including, but not limited to, all services
provided by or through alarm or protective systems of every nature, including, but not
limited to, protection against burglary, theft, fire, water damage or any malfunction
of industrial processes or any other malfunction of or damage to property or injury
to persons, detective agencies, armored car services and guard, patrol and watchman
services of every nature other than the performance of such services by a port
watchman licensed by the waterfront commission of New York harbor, whether or
not tangible personal property is transferred in conjunction therewith.
Section 1115(a) of the Tax Law exempts from the sales tax imposed by Section 1105(a) of
the Tax Law and from the compensating use tax imposed under Section 1110:
*

*

*

(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.
Section 1116(a) of the Tax Law provides, in part:
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:
*

*

*

(2) The United States of America, and any of its agencies and
instrumentalities, insofar as it is immune from taxation where it is the purchaser, user
or consumer. . . .
Section 528.17 of the Sales and Use Tax Regulations provides:
Tangible personal property sold to a contractor, subcontractor or repairman
for use in maintaining, servicing or repairing real property of an organization
described in Part 529 of this Title is exempt if it is to become an integral component
part of such structure, building or real property.

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Example:

A painting contractor uses masking tape on a contract for an
organization described in Part 529 of this Title. The tape is subject
to tax since it will not become an integral component part of the real
property.

Part 529 of the Sales and Use Tax Regulations provides, in part, for exemption from sales
and compensating use taxes with respect to the United States of America and any of its agencies and
instrumentalities.
Section 541.2(c) of the Sales and Use Tax Regulations defines agency contract as:
. . .an agreement which permits a contractor and subcontractor to act as an
agent of, that is, in the place of the principal, his customer. Purchases made by the
agent-contractor or agent-subcontractor on behalf of the principal are treated in the
same manner as if the purchases were made by the principal. All purchases
(including rentals of contractor’s tools, supplies, machinery and equipment) made by
the agent-contractor or agent-subcontractor on behalf of the principal are treated in
the same manner as if the purchases were made by the principal.
Section 541.3 of the Sales and Use Tax Regulations provides, in part:
(d) Contracts with exempt organizations. (1) Tangible personal property
incorporated into real property owned by a governmental entity or by 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.
*

*

*

(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.
*

*

*

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(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 tax.
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;
(c) contractors’ supplies, tools, and miscellaneous equipment, whether
purchased or rented, including materials to make forms and scaffolding;
(d) any other items purchased or rented by a contractor for his use in
performing the contract and not incorporated into the realty. (Emphasis added)
Opinion
Petitioner has entered into contracts with the Navy to provide caretaker services for certain
naval facilities which include land, buildings and a runway. Section 1116(a)(2) of the Tax Law
designates agencies and instrumentalities of the United States of America as exempt organizations
exempt from the payment of sales tax. The Navy is an agency of the United States and is therefore
exempt from direct taxation on its purchases. Purchases of materials and services by a contractor
for use in performing a maintenance contract for an exempt organization are not exempt merely
because the contractor has an agreement with the exempt organization. Purchases for such a contract
are exempt from sales and use taxes only if the property and services are purchased by the contractor
or subcontractor as agent for the exempt organization, or if some statutory exemption applies, such
as Section 1115(a)(16) of the Tax Law which exempts tangible personal property purchased by a
contractor that is used to perform repair services to the exempt organization’s real property, if the
tangible personal property is actually incorporated into (becomes part of) the real property of the
exempt organization (see Village of East Aurora, Adv Op Comm T&F, April 8, 1999,
TSB-A-99(24)S).
Petitioner’s purchases, therefore, of tangible personal property for use in repairing or
maintaining the naval facilities, which do not become part of the facilities, are subject to sales and
compensating use taxes, as are Petitioner’s purchases of services contemplated under the contracts,
unless Petitioner makes such purchases as the government’s agent. In Matter of MGK Constructors,

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Dec Tax App Trib, March 5, 1992, TSB-D-92(23)S, the Tribunal held that since no regulation sets
forth criteria for establishing whether an agency relationship exists with an exempt organization
identified in Section 1116(a)(2) of the Tax Law, the general rule of agency as cited in Matter of
Hooper Holmes v Wetzler, 152 AD2d 871, lv den, 75 NY2d 706, must be applied. In that decision,
the court stated “to establish an agency or representative relationship there must be a manifestation
that petitioners consented to act as agent on behalf of their clients, subject to the latter’s control, and
that the clients authorized this fiduciary relationship.”
Applying this principle in Petitioner’s case, several factors lead to the conclusion that there
is no agency relationship between Petitioner and the United States Government. The Caretaker
Maintenance Contract submitted by Petitioner does not contain any language which expressly
confers agency status on Petitioner; nor does the contract provide that Petitioner accepts its status
as such an agent. It does not provide that Petitioner is to act as the purchasing agent of the
government, nor is the government obligated to the vendors for the purchase price of the property
or service purchased, which factors were found significant for the establishment of an agency
relationship in Kern-Limerick v. Scurlock (347 US 110). Rather, it is Petitioner’s credit, not the
credit of the government, that is bound on the purchases, as purchase orders are in Petitioner’s name
and the purchase orders do not provide that purchases are being made by the government. Petitioner
advances its own funds to pay vendors and subcontractors, and then must submit vouchers, invoices
and supporting documentation to the government to obtain reimbursements of its costs. These
elements indicate a lack of consent by the government and Petitioner to create an agency relationship
with respect to Petitioner’s purchases (see Matter of West Valley Nuclear Services Co., Inc., Dec
Tax App Trib, November 13, 1998, TSB-D-97(37)S). Therefore, it cannot be shown that Petitioner
is acting on behalf of the United States government as its purchasing agent, subject to the
government’s control, and that the government has authorized this fiduciary relationship. Thus,
Petitioner’s purchases are not exempt on the basis that it is acting as an agent for an exempt
organization under Section 1116(a)(2) of the Tax Law.
Petitioner, rather than the government, is making the purchases required under the contracts.
Sales of tangible personal property to Petitioner, as a contractor, for use in performing its caretaker
services, are retail sales as defined under Section 1101(b)(4)(i) of the Tax Law, subject to the tax
imposed under Section 1105(a) or 1110 of the Tax Law. Accordingly, Petitioner must pay sales or
use tax on its purchase or use of such property. However, under the provisions of Section
1115(a)(16) of the Tax Law, Petitioner may purchase tangible personal property which it uses to
maintain or repair Navy owned property, provided that the tangible personal property is incorporated
as an integral component part of a structure, building or real property owned by the Navy. For
example, Petitioner could purchase exempt from tax paint or spackling used for painting, window
parts, wiring, and certain electrical, heating, cooling and plumbing apparatus, provided that such
items become an integral component part of Navy realty. See Section 528.17 of the Sales and Use
Tax Regulations. See also Bedford Hills Supply, Inc., Adv Op Comm T&F, July 23, 1997,
TSB-A-97(46)S. When purchasing the qualifying property from a supplier, Petitioner or its

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subcontractor must issue Form ST-120.1, Contractors Exempt Purchase Certificate, to the supplier
within 90 days after delivery of the property. See Section 1132(c) of the Tax Law and Section
541.3(d)(2)(v) of the Sales and Use Tax Regulations.
Supplies purchased by Petitioner are not considered to become an integral component part
of the government’s real property. Supplies are considered to be used or consumed by Petitioner in
the performance of its contracts. No tax exemption applies to supplies purchased for Petitioner’s
own use. Therefore, Petitioner must pay tax on paint brushes, drop cloths, grass cutting supplies,
light bulbs, fuel and any other items purchased for use in complying with its contractual obligations
which are not incorporated into the realty of the Navy (see Suffolk County Department of Parks, Adv
Op Comm T&F, July 11, 1994, TSB-A-94(29)S; Sullivan Humes Painting, Adv Op Comm T&F,
August 31, 1987, TSB-A-87(31)S; Bedford Hills Supply, Inc., supra).
Likewise, Petitioner’s purchases of taxable services for use in complying with its contractual
obligations, such as electric, utility, pest control, waste disposal or guard services, are subject to tax.
These services are used by Petitioner in the completion of its contracts. Since Petitioner is the
purchaser-consumer of these services, Petitioner cannot purchase them for resale and they are subject
to tax (West Valley Nuclear Services Co., Inc., supra; MGK Constructors, supra).

DATED: February 29, 2000

NOTE:

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

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