When several commonly-owned single-member LLCs each own a building and pay their own cleaning/maintenance staff through a shared managing agent, are those wages exempt from sales tax even though the LLCs are 'disregarded' for federal income tax purposes and use combined payroll-tax reporting?

Plain-English summary

A New York limited partnership (P) wholly owns six single-member LLCs (SMLLCs), each of which owns and, through a common managing agent (R), operates one commercial office building in New York City. R's management agreements say the building workers are employees of the SMLLC that owns their building, not of R or of P. Each SMLLC has its own sales tax registration, its own union contract, pays its own workers from that building's own rental income (funneled through R as agent), and directs the work performed at its own building. A small group of workers occasionally helps out at other buildings, but they're still treated as employees of their "home" SMLLC.

For federal and state income tax purposes, the SMLLCs are "disregarded" — their income flows up to P's own returns, since they never elected to be taxed as separate entities. And for state unemployment insurance, New York's Department of Labor will only let the group file as one combined "common payer" if the parent (P) is shown to actually control substantially all the workers — which would require P and the SMLLCs to sign a new agreement giving P that formal control, purely to satisfy DOL's paperwork requirements.

The sales tax question: does the wages-paid-to-employees exemption (which excludes wages from the tax on taxable building cleaning/maintenance services) survive this disregarded-entity, common-payer structure? The Department said yes. New York had already held, in earlier rulings involving similar management-agent arrangements, that indicia like having its own union contract, paying its own workers from its own funds, and directing its own work are hallmarks of a real employer-employee relationship — regardless of the entity's income-tax classification. Signing a new state-unemployment-insurance agreement wouldn't necessarily change that conclusion either, since such an agreement would be only one factor among several in determining who's the real employer; the Department wouldn't treat the DOL paperwork as conclusively shifting employer status to P for sales tax purposes. However, the Department flagged one wrinkle: because the occasional cross-building workers are really employees of their home SMLLC, any work they do at a different SMLLC's building is a taxable exchange of services between two separate entities (not covered by the wages exemption) — unless that too is treated consistently as employment by the SMLLC where the work occurs.

What this means for you

Real estate owners using single-member LLCs to hold buildings

Being "disregarded" for income tax purposes doesn't automatically collapse your SMLLCs into one taxpayer for sales tax purposes. If each SMLLC genuinely controls its own workers, pays them from its own funds, and has its own union contract, the wages-to-employees exclusion can still apply building-by-building.

Owners considering a "common payer" agreement for unemployment insurance

Signing a DOL-driven common-payer agreement to simplify payroll administration doesn't, on its own, convert your parent entity into the "real" employer for sales tax purposes — the Department looks at the whole fact pattern, not just what one administrative agreement says.

Property managers moving staff between buildings

If workers regularly cross between commonly-owned buildings, treat that carefully: services one entity's employee performs at a different entity's building can be a taxable inter-company transaction, even within a wholly-owned group.

Accountants and tax professionals

This is a useful precedent for any commonly-owned multi-entity real estate structure using a shared managing agent: the controlling factors are direct payment of wages from each entity's own funds, its own union contract, and its own direction/control of the work — not the entities' income-tax classification.

Common questions

Q: Does disregarded-entity status for income tax purposes affect sales tax treatment of employee wages?
A: No — sales tax exemption for employer-employee wages turns on the real substance of the employment relationship (who directs the work, who pays from whose funds, whose union contract applies), not on federal or state income tax classification.

Q: If we sign a "common payer" agreement for state unemployment insurance, does that make the parent company the employer for sales tax too?
A: Not necessarily — such an agreement would be only one factor in a broader facts-and-circumstances determination, not conclusive on its own.

Q: What happens when an employee helps out at a sister building?
A: That worker's services performed for a different SMLLC's building can be treated as a taxable service between two separate entities, since it's the "home" SMLLC that's really the employer, not the one receiving the occasional help.

Citations and references

Statutes and regulations:

• Tax Law § 1101(a) (definition of "person"); § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1101(b)(8) (definition of "vendor")
• Tax Law § 1105(c)(5) (tax on maintaining/servicing/repairing real property; employee-wages exclusion)
• 20 NYCRR § 527.7(c)(2) (employee wages not subject to tax)

Prior rulings and cases referenced:

• Matter of 107 Delaware Associates et al. v. New York State Tax Commn., 99 AD2d 29, revd on dissenting opn below, 64 NY2d 935
• Maintenance Service Resources, Inc., TSB-A-98(22)S
• D'Agostino, Hoblock, Greisler & Siegel, P.C., TSB-A-95(17)S
• Building Owners and Managers Association of Greater New York, TSB-A-93(52)S
• Skyline Golf and Country Club, TSB-A-89(26)S
• IRS Notice 99-6 (Payment of Employment Taxes with Respect to Disregarded Entities)

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_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(44)S
Sales Tax
September 18, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010226A

On February 26, 2001, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Mark H. Levin, CPA, H.J. Behrman & Company, LLP, 215 Lexington
Avenue, New York, NY 10016. Petitioner, Mark H. Levin, CPA, provided additional information
pertaining to the Petition on May 2, 2001 and July 12, 2001.
The issue raised by Petitioner is whether the exclusion from sales tax provided under Section
1105(c) of the Tax Law for compensation paid by an employer to an employee for otherwise taxable
building cleaning and maintenance services is applicable to the following set of facts submitted by
Petitioner as the basis for this Advisory Opinion.
P, a domestic New York State limited partnership, is the sole member of L1, L2, L3, L4, L5,
and L6, existing domestic New York State single member limited liability companies (each entity
is hereinafter referred to individually as “SMLLC” and collectively as “SMLLCs”). Each SMLLC
possesses a sales tax registration number. L1, L2, L3, L4, L5, and L6 each own and operate, through
R, their managing agent, a commercial office building located in New York City. The use of a
managing agent is common in the real estate industry. P and R are 100% owned by the same family
group. R has a management agreement with each SMLLC. The management agreement states that
the workers are the employees of the SMLLC. R, as agent for each SMLLC, is directed to distribute
all net rents collected to P, the 100% owner of the SMLLCs. R receives agency fees based on a
percentage of rents collected.
Generally, each employee performs cleaning and maintenance services at one building for
a particular SMLLC. All union contracts are between each SMLLC individually and the union. R,
as agent of each of the SMLLCs, pays the employees out of the SMLLC’s funds. No invoices, bills
or charge statements are issued by any entity for these services, and no sales taxes are collected or
paid. Each SMLLC, either through R acting as its agent, or independently, exercises the right to
control and direct all work performed, including the manner in which it is to be achieved.
A small class of employees may occasionally perform services at more than one building.
Those individuals are treated as employees of the SMLLC for which those services are being
performed. Time is recorded on the books and records of the SMLLC that employs each respective
worker. Each employee is paid from the funds of that SMLLC. Therefore, no SMLLC is paying
for services performed for another SMLLC and no reimbursements for these payroll costs are
necessary or required. Employees receive payroll checks drawn by R on an agency account with
funds generated by SMLLC building operations.

-2­
TSB-A-02(44)S
Sales Tax
September 18, 2002

All funds required to pay the employees, including their respective employment taxes, are
derived from the collection of rents. All funds are accounted for on the books of the SMLLC. P
makes no payments. There is no formal agreement between P and the SMLLCs. However, P, as
the 100% owner of each of the SMLLCs, reports all payroll taxes for each of the SMLLCs. The
SMLLC pays for all of its payroll taxes, related taxes and other taxes through R, its agent, from
funds generated by the SMLLC’s building operations.
For federal tax purposes, the SMLLCs have not elected to be treated as separate entities and
are therefore disregarded as entities separate from P. SMLLCs do not file separate federal or NYS
income tax returns; their operations and income tax attributes are included in the income tax returns
of P.
Pursuant to Internal Revenue Service Notice 99-6, Payment of Employment Taxes with
Respect to Disregarded Entities, P and the SMLLCs file all federal employment obligations
and payroll tax reporting in one combined filing under the taxpayer identification number of P.
New York State withholding is reported in the same manner. The purpose of combined federal and
state reporting is to reduce administrative burdens and costs.
For State Unemployment Insurance (SUI) purposes, the New York State Department of
Labor (DOL) will only permit combined reporting by a ‘common payer’ if substantially all of the
workers’ activities are under the control of P, thus satisfying the common law definitions and criteria
of an employer and employee relationship. Also, the DOL requires that the parties obtain a
memorandum covering this relationship. To facilitate ‘common payer’ reporting for state
employment and SUI purposes, P and SMLLC are considering a proposal to draft and execute a
written agreement which will allow them to comply with the DOL reporting requirements. Under
the proposed agreement, the regular cleaning and maintenance services performed by SMLLC
employees will continue in the identical manner as previously described. In this Opinion, Petitioner
seeks to establish that payments for these services qualify for sales tax exemption for wages paid
to employees, notwithstanding the creation of the proposed written agreement necessary to satisfy
the DOL procedures.
Applicable Law and Regulations
Section 1101(a) of the Tax Law provides, in part:
When used in this article the term “person” includes an individual,
partnership, limited liability company. . . .
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
TSB-A-02(44)S
Sales Tax
September 18, 2002

*

*

*

(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.
*

*

*

(8) Vendor. (i) The term “vendor” includes:
(A) A person making sales of tangible personal property or services, the
receipts from which are taxed by this article. . . .
Section 1105 of the Tax Law imposes sales tax, in part, upon:
(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(5) Maintaining, servicing or repairing real property, property or land . . .
whether the services are performed in or outside of a building. . . .
*

*

*

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 527.7(c)(2) of the Sales and Use Tax Regulations provides:
Where repair and maintenance services are rendered by an employee for his
employer, the wages, salaries and other compensation paid to the employee are not
receipts subject to tax for the performance of such services.
Opinion
P is the sole member and 100% owner of each of six single member limited liability
companies (SMLLCs), each the owner of a commercial building in New York City. The exchange

-4­
TSB-A-02(44)S
Sales Tax
September 18, 2002

of building cleaning and maintenance services between two separate entities is subject to
the imposition of sales tax under Section 1105(c)(5) of the Tax Law. See Matter of 107 Delaware
Associates et al v. New York State Tax Commn., 99 AD2d 29, revd on dissenting opn below
64 NY2d 935. However, Section 1105(c) provides that wages paid by an employer to an employee
for the performance of enumerated taxable services are not receipts subject to sales tax.
Each union contract is between the SMLLC and the union. Each management agreement
with R, acting as agent of the SMLLC, states that the workers are the employees of the SMLLC.
Each SMLLC is responsible for the payment of its workers’ wages and each worker is paid from the
funds of the respective SMLLC through R, its agent. Each SMLLC pays its own payroll taxes,
related costs, and other taxes through R, from funds generated by its building operations. Each
SMLLC exercises control, either through R acting as its agent, or independently, over the work
performed at its building. These factors have been identified as indicia of an employer-employee
relationship (see Maintenance Service Resources, Inc., Adv Op Comm T&F, March 24, 1998,
TSB-A-98(22)S; D’Agostino, Hoblock, Greisler & Siegel, P.C., Adv Op Comm T&F, June 1, 1995,
TSB-A-95(17)S; Building Owners and Managers Association of Greater New York, Adv Op Comm
T&F, October 14, 1993, TSB-A-93(52)S; Skyline Golf and Country Club, Adv Op Comm T&F,
July 17, 1989, TSB-A-89(26)S ). Accordingly, the workers are employees of the SMLLCs, and the
wages paid to them by R as agent of each SMLLC for the performance of their services are not
receipts subject to sales tax.
The conclusion in this Opinion would not necessarily be affected by an agreement entered
into by P and the SMLLCs to satisfy the DOL procedures which provided that P would exercise
control over the workers. A determination of the effect of such an agreement would not be based
solely on the provisions of the agreement, which would only be one factor in determining the
existence of an employer-employee relationship.
It is noted that since the workers are employees of the SMLLC for the building in which they
usually work, it appears that the occasional services provided by that small class of workers to other
SMLLCs would be subject to sales tax under Section 1105(c)(5) of the Tax Law.

DATED: September 18, 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.