Is a subcontractor's charge to a general contractor for temporary protective pedestrian walkways at a capital-improvement construction site subject to New York sales tax?

Plain-English summary

Shroid Construction is a general contractor whose exterior/interior wall installations generally qualify as capital improvements to real property. On its jobs, Shroid often needs temporary protective pedestrian walkways, and it contracts with an unrelated third party to install, rent, and later dismantle the walkway once the capital improvement job is finished.

New York has a specific regulation exempting "charges for installation of materials and the labor to provide temporary heat, temporary electric service, temporary protective pedestrian walkways, and temporary plumbing by a subcontractor" when that temporary facility is a necessary prerequisite to a capital improvement — treating those charges as a constituent part of the improvement itself, not a separate taxable transaction. But that exemption is written for temporary services, not for renting equipment.

The Department drew a sharp line based on how Shroid's actual agreement with the subcontractor is structured:

If it's a rental of the walkway equipment — meaning the subcontractor is renting tangible personal property (the walkway) to Shroid, with installation and later dismantling wrapped into that rental — then the entire charge is taxable as an equipment rental, at the combined state and local rate for the jurisdiction where the equipment is used, whether or not the installation/dismantling fee is separately stated on the bill. The temporary-facilities services exemption doesn't apply to equipment rentals.

If it's a service arrangement — meaning the subcontractor is providing and maintaining the temporary walkway as an ongoing service for the duration of the project, not simply renting Shroid the equipment — then the charge (including the materials and labor to provide it) is treated as a constituent part of the capital improvement and is exempt from sales tax. The subcontractor, however, still owes sales tax on its own purchase of the materials it uses to provide that exempt service — the exemption travels with the labor/service charge to the general contractor, not with the subcontractor's own underlying material purchases.

What this means for you

General contractors using temporary walkways, fencing, or similar facilities

Whether your temporary-facility charge is taxable turns on the legal substance of the arrangement — a straight equipment rental is fully taxable, while a genuine maintained service tied to a capital improvement project can be exempt. Draft your subcontracts to reflect which one you actually intend.

Subcontractors providing temporary construction-site facilities

If you're providing a maintained service (not simply renting equipment) that's a prerequisite to a capital improvement, your charge to the general contractor can be exempt — but you're still on the hook for sales tax on the materials you buy to provide that service, so build that cost into your pricing.

Accountants and tax professionals

This is a clean illustration of a recurring tax distinction in construction: 20 NYCRR § 541.9 (equipment rentals to contractors, fully taxable) versus § 541.8 (temporary facilities as services, exempt when tied to a capital improvement) — the same underlying activity can land on either side depending purely on how the contract characterizes the transaction.

Common questions

Q: Is renting temporary walkways, fencing, or scaffolding for a construction site always taxable?
A: If it's structured as an equipment rental, yes — the entire charge (including installation/dismantling) is taxable regardless of separate billing. If it's structured as a maintained service that's a prerequisite to a capital improvement, it can be exempt instead.

Q: Does separately stating the installation and dismantling charges change the answer?
A: No — for an equipment rental, all related charges (setup, installing, dismantling) are part of the taxable receipt whether or not they're separately billed.

Q: If the service charge is exempt, does the subcontractor pay no tax at all?
A: No — the subcontractor still owes sales tax on the materials it purchases to provide the exempt service; only its labor/service charge to the general contractor is exempt.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(1), (3), (4), (9) (definitions: purchase at retail, receipt, retail sale, capital improvement)
• Tax Law § 1105(c)(3) (installation/maintenance/repair services tax; capital improvement exception)
• 20 NYCRR § 526.5(e) (vendor expenses not deductible); § 526.6 (retail sale; contractor purchases)
• 20 NYCRR § 527.1(b) (taxable/exempt items sold as a single unit)
• 20 NYCRR § 541.2(p) (rental, lease, license to use); § 541.5(b) (capital improvements contracts); § 541.8 (temporary facilities at construction sites); § 541.9 (construction equipment rentals)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(30)S
Sales Tax
July 12, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010716A

On July 16, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Shroid Construction, Inc., 46-10 11th Street, Long Island City, New York, 11101.
The issue raised by Petitioner, Shroid Construction, is whether charges for the rental,
including installation and dismantling, of temporary protective pedestrian walkways in a capital
improvement project are subject to sales and compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a general contractor primarily engaged in the business of installing or building
exterior and interior walls. These installations generally qualify as capital improvements to real
property for sales tax purposes. In the course of the performance of its contracts, Petitioner is often
required to install temporary protective pedestrian walkways. Petitioner contracts with unrelated
third parties to install, rent and dismantle the walkway. Upon completion of the capital
improvement job the temporary protective pedestrian walkway is dismantled by the third party.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section
eleven hundred ten, the following terms shall mean:
(1) Purchase at retail. A purchase by any person for any purpose other than
those set forth in clauses (A) and (B) of subparagraph (i) of paragraph (4) of this
subdivision.
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(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article . . . valued in money, whether received in
money or otherwise, including any amount for which credit is allowed by the vendor
to the purchaser, without any deduction for expenses or early payment discounts and
also including any charges by the vendor to the purchaser for shipping or delivery
. . . regardless of whether such charges are separately stated in the written contract,
if any, or on the bill rendered to such purchaser and regardless of whether such
shipping or delivery . . . is provided by such vendor or a third party, but excluding

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any credit for tangible personal property accepted in part payment and intended for
resale. . . .
(4) Retail sale. (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), (5), (7) and (8) 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, except that a sale of a new mobile home to a contractor,
subcontractor or repairman who, in such capacity, installs such property is not a
retail sale. . . .
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
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(9) Capital improvement. (i) An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article
itself; and
(C) Is intended to become a permanent installation.
Section 1105 of the Tax Law provides, in part:

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Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
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(c) The receipts from every sale, except for resale, of the following services:
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(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith, except:
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(iii) for installing property which, when installed, will constitute an addition
or capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital
improvement is defined in paragraph nine of subdivision (b) of section
eleven hundred one of this chapter. . . .
Section 526.5(e) of the Sales and Use Tax Regulations provides, in part:
Expenses. All expenses, including telephone and telegraph and other service
charges, incurred by a vendor in making a sale, regardless of their taxable status and
regardless of whether they are billed to a customer are not deductible from the
receipts.
Example: 1: A photographer contracts with a customer to furnish
photographs at $50 each in addition to expenses.
The customer is billed as follows:
Photographs (2)
Model fees
Meals
Travel
Props (Flowers)
Total due
Receipt subject to tax is $200

$100
60
10
25
5
$200

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Section 526.6 of the Sales and Use Tax Regulations provides, in part:
(a) The term retail sale or sale at retail means the sale of tangible personal
property to any person for any purpose, except as specifically excluded.
(b) Special rule--sales specifically included as retail sales.
(1) A sale of any tangible personal property to a contractor, subcontractor or
repairman for use or consumption in erecting structures or buildings or adding to,
altering, improving, maintaining, servicing or repairing real property, property or
land, is deemed to be a retail sale, regardless of whether the tangible personal
property is to be resold as such before it is used or consumed. (See Part 541 of this
Subchapter.)
Section 527.1(b) of the Sales and Use Tax Regulations provides, in part:
Taxable and exempt items sold as a single unit. When tangible personal
property, composed of taxable and exempt items is sold as a single unit, the tax shall
be collected on the total price.
Section 541.2(p) of the Sales and Use Tax Regulations states, in part:
Rental, lease and license to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer of possession of tangible personal
property without a transfer of title to the property.
(2) For the purposes of this Part, when a rental, lease or license to use a
vehicle or equipment includes the services of a driver or operator, such transaction
is presumptively the sale of a service, rather than the rental of tangible personal
property, where dominion and control over the vehicle or equipment remain with the
owner or lessor of the vehicle or equipment. . . .
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Whether a transaction is a sale (license to use, rental or lease) of . . .
equipment or is the sale of a service . . . must be determined in accordance with the
facts and circumstances of the particular transaction and provisions of the agreement
between the contractor and his customer.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:

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Capital improvements contracts. (1) Purchases. All purchases of tangible
personal property (excluding qualifying production machinery and equipment
exempt under section 1115(a)(12) of the Tax Law) which are incorporated into and
become part of the realty or are used or consumed in performing the contract are
subject to tax at the time of purchase by the contractor or any other purchaser. A
certificate of capital improvement may not be validly given by any person or
accepted by a supplier to exempt the purchase of these materials.
Section 541.8 of the Sales and Use Tax Regulations provides, in part:
Charges for temporary facilities at construction sites. (Tax Law,
§1105(c)(3), (5))
(a) General. Subcontracts to provide temporary facilities at construction
sites, which are a necessary prerequisite to the construction of a capital improvement
to real property, are considered a part of the capital improvement to real property.
Charges for installation of materials and the labor to provide temporary heat,
temporary electric service, temporary protective pedestrian walkways, and temporary
plumbing by a subcontractor are therefore not subject to tax provided the
subcontractor receives a copy of the properly completed certificate of capital
improvement issued by the customer to the contractor.
Example: A subcontractor agrees to furnish to the prime contractor the
materials and labor necessary to furnish temporary light and electrical
facilities throughout a building under construction so that the various trades
may have light, communication and power facilities necessary for them to
perform their work and operate their tools. The charges are a constituent part
of the capital improvement and are not subject to tax.
(b) The subcontractor is liable, however, for the tax on the purchase of the
materials used to provide the temporary facilities at construction sites described in
subdivision (a) of this section.
Example 1: A subcontractor agrees to furnish temporary site plumbing
service to the prime contractor engaged in the construction of an office
building. The subcontractor must purchase a quantity of pipes, pumps, and
fittings in order to provide the temporary service. The service is a constituent
part of the capital improvement, thus, the subcontractor's charge for the
temporary plumbing services are not subject to tax. However, the
subcontractor is liable for the tax due on his purchase of all materials needed
to provide the temporary plumbing service.

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Section 541.9(a) of the Sales and Use Tax Regulations provides, in part:
General. The purchase, rental, lease or license to use construction equipment
. . . by a contractor is subject to sales and use tax.
Section 541.9(c)(1) of the Sales and Use Tax Regulations provides, in part:
Rentals and leases of equipment to contractors.
(i) Where a contractor leases equipment, the contractor is liable for the
combined State and local sales and use tax on the total charges at the highest rate in
effect in any jurisdiction in which the equipment is used during the lease payment
period, (e.g., daily, weekly, monthly, depending on the frequency of payment).
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(iv) All expenses incurred by a lessor in determining the amount charged for
rental of tangible personal property to a contractor, such as: setting up, assembling,
installing and/or dismantling, are elements of the total receipt subject to tax,
regardless of their taxable status and whether they are separately billed to the lessee.
Opinion
Receipts from contractor rentals of equipment used in construction activities which result
in a capital improvement to real property are subject to the combined State and local sales and use
tax at the rate in effect in the jurisdiction in which such equipment is used. See Section
541.9(c)(1)(i) of the Sales and Use Tax Regulations. Expenses incurred by a vendor in making a
sale are not deductible from the receipt subject to tax. See Section 1101(b)(3) of the Tax Law and
Section 526.5(e) of the Sales and Use Tax Regulations. Section 541.8(a) of the Sales and Use Tax
Regulations provides an exclusion from tax for “. . . (c)harges for installation of materials and
the labor to provide temporary heat, temporary electric service, temporary protective pedestrian
walkways, and temporary plumbing by a subcontractor . . .”, where the temporary heat, electric
service, pedestrian walkway or plumbing is a necessary prerequisite to the construction of a capital
improvement to real property (emphasis added). The provisions of this section of the regulations,
however, do not apply to the subcontract here regarding the rental of tangible personal property.
Rentals of tangible personal property described in Section 541.9(c)(1)(i) of the Sales and Use Tax
Regulations are distinguishable from the provision of services described in Section 541.8(a) of such
Regulations. Accordingly, because the agreement between Petitioner and the subcontractor is for
the rental of tangible personal property used by Petitioner to provide temporary pedestrian
walkways, the subcontractor is required to collect the tax on the total receipts from such equipment
rentals. Where the subcontractor charges for installation or installation and subsequent removal of

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the rented pedestrian walkways, whether or not such charges are separately stated, the entire charge
is subject to tax. See Section 541.9(c)(1)(iv) of the Sales and Use Tax Regulations.
Where the agreement between Petitioner and the subcontractor calls for the subcontractor
to perform a service of providing and maintaining temporary pedestrian walkways for the capital
improvement project, rather than the mere rental of the walkways described above, the charge for
such service, including any expenses for the materials and labor necessary to provide the walkways,
would be a constituent part of the capital improvement project not subject to sales tax. However,
the subcontractor would be liable for tax on the materials purchased for use in performing the
nontaxable service. See Section 541.8 of the Sales and Use Tax Regulations.

DATED: July 12, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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