When a Canadian company designs, engineers, and fabricates structural steel and sells the finished steel to a New York vendor for use in a NY construction project, is New York use tax based on the whole price, or can the design/engineering portion be carved out?

Plain-English summary

Corporation X is a non-U.S. (Canadian) company that provides integrated structural steel design, engineering, and fabrication for large construction projects across North America. Its New York subsidiary, Y, is a registered New York vendor that contracts with clients to erect steel structures in New York, then subcontracts the design/engineering/fabrication work to X. X purchases the raw steel directly from the mill, does all the drafting/engineering (using a large team of draftspeople and engineers) and fabrication work in Canada, and charges Y a single price covering the steel plus the design, engineering, and fabrication costs. Y then uses the fabricated steel in New York and pays compensating use tax.

Deloitte & Touche, on behalf of this arrangement, asked the Department to analyze four scenarios:

Basic scenario (single combined price). Use tax applies to the entire amount Y pays X, including the design and engineering costs baked into that single price, because the whole transaction is treated as one integrated sale of a finished product (fabricated steel).

Scenario 1 (steel and services separately priced, same seller). Same result — even if X separately states or separately contracts for the steel versus the design/engineering services, the design and engineering are still integral expenses of X's sale of the fabricated steel, and expenses incurred in making a sale aren't excludable from the taxable receipt just because they're itemized.

Scenario 2 (Y buys steel from the mill directly, buys only fabrication services from X). Here Y owes use tax on the steel it separately imports from the mill, and separately owes tax on X's fabrication charge for work done outside New York — and again, the design/engineering costs are treated as part of X's fabrication expenses, taxable whether or not they're broken out.

Scenario 3 (Y does the design/engineering/fabrication itself with its own employees). This is the only scenario that meaningfully changes the outcome: Y would owe tax only on its purchase of the raw steel (state or use tax depending on where it's bought), and none of the value its own employees add through in-house design, engineering, and fabrication is taxed at all.

The throughline: pure design/engineering/project-management services aren't independently taxable in New York, but once they're bundled into someone else's sale of a finished, fabricated product, they become part of that product's taxable price — labeling or separately contracting for the services doesn't carve them back out. The only way to keep that value untaxed is to have it added by your own workforce rather than purchased from an outside vendor.

What this means for you

General contractors and fabricators sourcing structural steel from out-of-state vendors

If you buy finished, fabricated steel (or any custom-fabricated product) from an outside vendor, expect compensating use tax on the entire price, including any design/engineering costs — separately itemizing or separately contracting for those services doesn't reduce your taxable base.

Companies deciding whether to in-house or outsource fabrication design work

There's a real tax difference between paying an outside fabricator (whose design/engineering costs get folded into a taxable sale) and having your own employees perform that design/engineering/fabrication work — only the latter escapes tax on the value added.

Accountants and tax professionals

This opinion is a useful multi-scenario template for structuring (or auditing) out-of-state fabrication arrangements: the controlling question is always whether design/engineering is an expense embedded in someone else's taxable sale of tangible personal property, or work performed by the taxpayer's own employees.

Common questions

Q: Can I avoid use tax on design and engineering costs by getting a separate invoice for them?
A: No — as long as the design/engineering is an integral part of an outside vendor's sale of a fabricated product to you, it's included in the taxable price whether billed together or separately.

Q: Does it matter where the fabrication actually happens?
A: It affects which use-tax provision applies (in-state purchase vs. out-of-state fabrication brought into New York), but the design/engineering costs are taxable either way when purchased from an outside vendor as part of the finished product.

Q: What's the one way to keep design/engineering value out of the tax base?
A: Perform the design, engineering, and fabrication with your own employees rather than purchasing it from an outside company — value added by your own workforce isn't taxed.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3)-(4) (definitions: receipt, retail sale)
• Tax Law § 1105(a) (retail sales tax); § 1105(c)(2) (fabricating/processing services)
• Tax Law § 1110 (compensating use tax)
• 20 NYCRR § 526.5(e) (vendor expenses not deductible)
• 20 NYCRR § 531.3(b)(2)(iv) (use tax basis for out-of-state fabricated property); § 541.5(b) (capital improvements contracts); § 541.11 (fabrication and manufacturing; contractor-fabricators)

Cases referenced:

• Artex Systems, Inc. v. Michael Urbach, 252 AD2d 750

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_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(31)S
Sales Tax
July 22, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S001002C

On October 2, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Deloitte & Touche LLP, Two World Financial Center, New York,
New York 10281.
The issue raised by Petitioner, Deloitte & Touche LLP, is whether purchases of steel and of
design, engineering and fabrication services in connection with construction projects as described
below are subject to sales and compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation X (“X”) is an alien (i.e., non-U.S.) corporation that provides integrated complex
structural steel design, engineering and fabrication services to general contractors, project owners
and engineering firms involved in the construction of non-residential facilities in North America.
X operates through a number of subsidiary corporations including Corporation Y (“Y”), a New York
corporation that is responsible for the sale and erection of projects in New York. Y is a vendor
registered to collect sales tax in New York pursuant to Section 1134 of the Tax Law.
Once a client awards a contract to Y, Y subcontracts with X for the design, engineering and
fabrication of the structural steel components required under the client’s contract with Y. X appoints
an outside contractor as project manager. The project manager is responsible for the design,
engineering and fabrication of the structural steel components of the project. Specifically, the
manager is responsible for the commencement and coordination of the drawings and engineering
works, production planning and the hiring of subcontractors, if any, as well as the planning of the
resources required for erection. The project manager performs the drawing and design of structural
steel in close collaboration with Y’s client’s professionals in order to identify and resolve any
potential issues as quickly as possible. X purchases the steel directly from the mill and performs all
fabrication. X performs all of this work in Canada.
The structural components of the project are developed with the assistance of a three­
dimensional software application that enables X to achieve significant gains in productivity by
providing better management of the production costs and by assisting the draftsperson in the creation
of the complete structure including each of the individual components of the design. The drawing
of structural steel components and connections is done by a group of approximately 60 draftspeople
and 28 engineers. Pursuant to service agreements with four companies specializing in the drafting
of structural steel components, the services of the draftspeople and engineers are provided to X on
an exclusive basis. X has also entered into a priority services agreement with an engineering
consulting firm providing X with engineering services on a priority basis.

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Y purchases the fabricated components from X and then uses them in the erection of the
particular project in New York. X charges Y a single price for the fabricated steel that includes X’s
cost of the steel and the costs of design, engineering and fabrication of the steel in accordance with
project specifications. Y pays compensating use tax to New York State on the purchase price of the
fabricated components.
Petitioner presented the following additional scenarios:
1) Assume the facts as stated above except that Y separately purchases from X (a) the steel
for the project and (b) the services of design, engineering and fabrication.
2) Assume the facts as stated above except that Y (a) separately purchases the steel from the
mill and (b) purchases from X the services of design, engineering and fabrication of the steel which
Y purchased separately from the mill.
3) Assume that Y enters the contract for the erection of the project with its client and (a)
separately purchases the steel for the project and (b) uses its own employees for the design,
engineering, fabrication and erection of the project.
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:
*

*

*

(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article . . . without any deduction for expenses. . . .
(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,

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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. . . .
Section 1105 of the Tax Law provides, in part:
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:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(2) Producing, fabricating, processing, printing or imprinting tangible
personal property, performed for a person who directly or indirectly furnishes the
tangible personal property, not purchased by him for resale, upon which services are
performed.
*

*

*

Wages, salaries and other compensation paid by an employer to an employee
for performing as an employee the services described in paragraphs (1) through (9)
of this subdivision (c) are not receipts subject to the taxes imposed under such
subdivision.
Section 1110 of the Tax Law provides, in part:
Imposition of compensating use tax. (a) Except to the extent that property
or services have already been or will be subject to the sales tax under this article,
there is hereby imposed on every person a use tax for the use within this state on and
after June first, nineteen hundred seventy-one except as otherwise exempted under
this article, (A) of any tangible personal property purchased at retail, (B) of any
tangible personal property (other than computer software used by the author or other
creator) manufactured, processed or assembled by the user, (i) if items of the same
kind of tangible personal property are offered for sale by him in the regular course
of business or (ii) if items are used as such or incorporated into a structure, building
or real property by a contractor, subcontractor or repairman in erecting structures or

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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, if items of the same kind are
not offered for sale as such by such contractor, subcontractor or repairman or other
user in the regular course of business . . . (D) of any tangible personal property,
however acquired, where not acquired for purposes of resale, upon which any of the
services described in paragraphs (2), (3) and (7) of subdivision (c) of section eleven
hundred five of this part have been performed. . . .
(b) For purposes of clause (A) of subdivision (a) of this section, the tax shall
be at the rate of four percent of the consideration given or contracted to be given for
such property, or for the use of such property, including any charges for shipping or
delivery as described in paragraph three of subdivision (b) of section eleven hundred
one, but excluding any credit for tangible personal property accepted in part payment
and intended for resale.
(c) For purposes of subclause (i) of clause (B) of subdivision (a) of this
section, the tax shall be at the rate of four percent of the price at which items of the
same kind of tangible personal property are offered for sale by the user, and the mere
storage, keeping, retention or withdrawal from storage of tangible personal property
by the person who manufactured, processed or assembled such property shall not be
deemed a taxable use by him; provided, however, that if the user uses such an item
itself on its own premises (not including making a gift of such tangible personal
property), solely in the conduct of the user’s own business operations, and the item
retains its characteristic as tangible personal property when so used, the tax shall be
at the rate, and on the consideration, described in subdivision (d) of this section.
(d) For purposes of subclause (ii) of clause (B) of subdivision (a) of this
section, the tax shall be at the rate of four percent of the consideration given or
contracted to be given for the tangible personal property manufactured, processed or
assembled into the tangible personal property the use of which is subject to tax,
including any charges for shipping or delivery as described in paragraph three of
subdivision (b) of section eleven hundred one.
(e) Notwithstanding the foregoing, provisions of this section, for purposes of
clause (B) of subdivision (a) of this section, there shall be no tax on any portion of
such price which represents the value added by the user to tangible personal property
which he fabricates and installs to the specifications of 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, over and above the prevailing normal
purchase price prior to such fabrication of such tangible personal property which a
manufacturer, producer or assembler would charge an unrelated contractor who

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similarly fabricated and installed such tangible personal property to the specifications
of an addition or capital improvement to such real property, property or land.
(f) For purposes of clauses (C), (D), and (E) of subdivision (a) of this section,
the tax shall be at the rate of four percent of the consideration given or contracted to
be given for the service, including the consideration for any tangible personal
property transferred in conjunction with the performance of the service and also
including any charges for shipping and delivery of the property so transferred and
of the tangible personal property upon which the service was performed as such
charges are described in paragraph three of subdivision (b) of section eleven hundred
one.
Section 526.5(e) of the Sales and Use Regulations provides:
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)................................................................................ $100
Model fees........................................................................................
60
Meals................................................................................................
10
Travel...............................................................................................
25
Props (Flowers)................................................................................
5
Total due.................................................................. $200
Receipt subject to tax is $200
Example 2: An appliance repairman charges $10 per hour plus expenses
when on a service call. The customer is billed as follows:
3 hrs. at $10 ................................................................................... $ 30
Travel..............................................................................................
15
Parts................................................................................................
20
Meals..............................................................................................
5
Total due................................................................. $ 70
Receipt subject to tax is $70
Section 531.3(b)(2)(iv) of the Sales and Use Tax Regulations provides:

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(iv) Where tangible personal property is purchased out of state to be
fabricated and installed to the specifications of a capital improvement in New York
State, and the fabrication of such property is done by the user, the value added to the
property as a result of the fabrication is not included in the basis on which
compensating use tax is computed. The use tax in such case is based on the
consideration given or contracted to be given for the property, as provided in
subdivision (a) of this section, including any charges by the seller to the user for
shipping or delivery of the property to be fabricated to the user. If the user does not
fabricate the property but purchases fabrication services performed on the property
out of state, the consideration given or contracted to be given for such fabrication
service will be included in the basis on which compensating use tax is computed, as
provided in paragraphs (2) and (3) of subdivision (c) of this section, including any
charges by the seller to the user for shipping or delivery of the property to the user.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:
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 541.11 of the Sales and Use Tax Regulations provides, in part:
Fabrication and manufacturing. [Tax Law, §§ 1105(c)(2), 1110, 1111(a)]
(a) Fabricators and manufacturers who install their fabricated or
manufactured product into real property are contractors.
(b) Fabricators as contractors. (1) When a contractor-fabricator purchases
tangible personal property which he fabricates and installs to the specifications of a
capital improvement, the value added by such fabrication is not subject to the use
tax.
Example 1: A contractor-fabricator purchases steel beams from a
manufacturer and pays the sales tax on his cost. His employees fabricate the
beams to job specifications and install the beams in a capital improvement
job. The contractor-fabricator is not subject to a use tax on the value added
by his fabrication.
(2) However, where a contractor fabricates tangible personal property of
others, without installation, he is required to collect the tax on his total charges even

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if the property is to be installed by another to the specifications of a capital
improvement. If he fabricates tangible personal property and sells the tangible
personal property, the total charge for the tangible personal property and services
performed thereon is subject to tax.
Example 2: A contractor purchases steel beams which must be fabricated
before they can be installed. The work is subcontracted out for fabrication.
The fabricator’s charge to the contractor for the fabrication of the steel beams
which the contractor will install is subject to the tax.
Opinion
Design, engineering, and project management services, per se, are not among the enumerated
services that are subject to sales and compensating use tax. However, where a contract provides that
a person shall design, engineer and fabricate a product and then sell the finished product to the
customer, the seller’s receipts from the sale of the product will generally be considered as receipts
from a single transaction pursuant to Section 1101(b)(3) of the Tax Law and Section 526.5(e) of the
Sales and Use Tax Regulations, whether or not the charges are separately stated. See Artex Systems,
Inc. v. Michael Urbach, 252 AD2d 750. Such receipts will be subject to tax under Section 1105(a)
of the Tax Law as receipts from the sale of tangible personal property if such property is purchased
in New York. If the tangible personal property is purchased outside New York and then used in
New York the compensating use tax will apply based on the consideration paid for the tangible
personal property, including any charges for design and engineering services. See Section
1110(a)(A),(b) of the Tax Law.
Basic Scenario
Under the facts presented in this opinion, where Y purchases the fabricated steel components
from X in Canada for Y’s use in a construction project in New York, and X charges Y a single price
for the fabricated steel, compensating use tax is due upon Y’s use of the fabricated steel in
New York. The use tax in this case would be based upon the entire amount that Y paid X for the
fabricated steel, including the cost of design, engineering, and fabrication of the steel.
Additional Scenario 1
Under this scenario the compensating use tax due upon the fabricated steel purchased by Y
in Canada would also be based upon the entire amount that Y paid X for the fabricated steel,
including the cost of design, engineering, and fabrication of the steel. This would be true despite
the fact that the charges for design and engineering were separately stated in the billing or invoice
presented to Y or that Y’s contract with X provided separately for the sale of design and engineering
services and the sale of fabricated steel. In accordance with the above discussion, the design and
engineering services which go into the sale of fabricated steel by X are considered expenses incurred
by X in making the sale. These expenses are included in the taxable receipts from the sale of the

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steel whether or not the expenses are separately stated. Nothing in the facts submitted by Petitioner
indicates that the sale of fabricated steel by X to Y is not an integrated transaction in which the
design and engineering services are integral components of the sale that are part of X’s expenses.
Additional Scenario 2
Where Y enters a contract for the erection of the project with the customer, separately
purchases the steel from the mill, and purchases from X the services of design, engineering and
fabrication, the purchase of steel from outside the State is subject to compensating use tax as
provided in Section 1110(a) of the Tax Law. The charge to Y by X for the fabrication performed
outside the State is also subject to tax. See Section 1110(a)(D) of the Tax Law and Section
531.3(b)(2)(iv) of the Sales and Use Tax Regulations. As discussed above, the design and
engineering services are part of the expenses incurred by X in fabricating the steel for Y.
Charges for the design and engineering services are subject to tax whether or not such charges are
separately stated or the contract between X and Y provides separately for such services.
Additional Scenario 3
Where Y enters into a contract with a client for the erection of a project and Y purchases the
steel for the project and uses its own employees for the design, engineering, and fabrication of the
steel, Y would owe sales or use tax on its purchase of the steel depending on whether the steel is
purchased within or outside New York. The design, engineering, and fabrication services performed
by Y’s own employees in New York, as well as any value added to the steel by such services, are
not subject to sales and use tax. See Section 1105(c) of the Tax Law and Section 541.11(b)(1) of
the Sales and Use Tax Regulations.

DATED: July 22, 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.