When two commonly owned manufacturers share one unmetered facility and one pays 'rent' to the other for a share of the electric bill, is that charge a taxable utility resale, and does the manufacturing exemption still apply?

Plain-English summary

Two commonly owned manufacturing companies (Company A and Company B) share a two-building facility, jointly occupying both buildings rather than keeping to separate spaces. A single meter — installed under a subsidized energy program — measures electricity for the entire facility, billed each month to Company A, which acts as the "landlord" and bills Company B "rent" that includes a share of the electric and gas bill. The lease promised separate sub-meters would eventually be installed for Company B's actual usage, but they never were; even though sub-meters technically exist in each building, they can't isolate each company's usage since the companies share space within both buildings. So Company A instead bills Company B for 80%–91% of the total electric charge based on Company B's proportionate floor-space use — an estimate, not a real measurement. Both companies use most of that electricity to run welding machines and other production machinery.

New York only taxes a utility charge as a separate "sale" when it's a genuine, individually metered, usage-based transaction — a landlord's charge based merely on a tenant's proportionate square footage (not real metering) is legally just "additional rent," per controlling Court of Appeals precedent, not a taxable resale of electricity. That means Company A's charges to Company B aren't subject to sales tax as a utility sale, but it also means Company A can't treat its own purchase from the utility company as a tax-free "purchase for resale" to Company B — since there's no real metered resale happening, Company A itself remains the taxable purchaser of the whole facility's electricity. The silver lining: because both companies are manufacturers consuming most of that electricity directly to run production machinery (not just heating/lighting the buildings), Company A can seek a refund or credit for the tax it pays on whatever portion of the electricity — whether consumed by Company A itself or resold in substance to Company B — is used directly and exclusively in each company's actual manufacturing process, as long as it keeps adequate records (an engineering survey or documented allocation method) substantiating that split.

What this means for you

Commonly owned or affiliated companies sharing an unmetered facility

A tenant's share of a landlord's utility bill, calculated by square footage rather than an actual sub-meter reading isolated to that tenant, is treated as nontaxable additional rent — but that comfort comes at a cost: the landlord can't buy the underlying electricity tax-free as a "resale" purchase, since there's no genuine metered resale happening.

Manufacturers in a shared or landlord-tenant facility

Don't assume being unable to meter usage separately locks you out of the production exemption. Even where utility billing between affiliated companies is structured as rent rather than a metered sale, the entity actually paying the utility company can still claim a refund/credit for whatever share of that electricity — whoever consumes it — goes directly and exclusively into manufacturing, using an engineering survey or other documented allocation method instead of direct metering.

Landlords billing tenants a square-footage-based utility estimate

If you want your utility charges to a tenant to be treated as a genuine taxable resale (which lets you buy the electricity tax-free for resale), you need real, individually isolated metering of that tenant's actual usage — an estimate based on floor space, even a carefully calculated one, doesn't qualify, regardless of what the lease originally promised about future metering.

Common questions

Q: If a landlord bills a tenant for utilities based on square footage rather than a meter reading, is that a taxable sale of electricity?
A: No — without genuine, individually isolated metering of the tenant's actual usage, the charge is legally just additional rent, not a separately identifiable taxable utility sale.

Q: Can the landlord buy its electricity tax-free from the utility company if it's technically passing the cost on to a tenant?
A: No — without a genuine metered resale, the landlord is the taxable purchaser of the whole facility's electricity and can't claim a resale exemption on that purchase.

Q: Does an unmetered, rent-based utility arrangement disqualify the electricity from the manufacturing production exemption?
A: No — the entity that actually pays the utility bill can still claim a refund or credit for whatever portion of the electricity (regardless of which company consumes it) is used directly and exclusively in manufacturing, using records like an engineering survey rather than direct metering to substantiate the split.

Citations and references

Statutes and rules:

• Tax Law § 1105(b)(1) (utility service sales tax)
• Tax Law § 1115(c)(1) (production exemption for energy sources)
• Tax Law § 1132(c)(1) (presumption of taxability; resale/exemption certificates)
• 20 NYCRR 526.8 (tangible personal property; utilities excluded)
• 20 NYCRR 528.22 (production exemption: directly-and-exclusively test)

Case law relied on:

• Empire State Building Co. v New York State Dept. of Taxation and Finance, 81 NY2d 1002 (unmetered rent-inclusion utility charges not a taxable sale)
• Mutual Redevelopment Houses, Inc. v Roth, 307 AD2d 422 (2003) (metered utility resale IS a taxable sale)
• Debevoise & Plimpton v New York State Taxation & Finance, 80 NY2d 657 (non-metered charges as rent)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a04_24s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(24)S
Sales Tax
September 28, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010612E

On June 12, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Ascension Sheet & Metal Fabrication, Inc., 1254 Erie Avenue, North Tonawanda,
New York, 14120.
The issue raised by Petitioner, Ascension Sheet & Metal Fabrication, Inc., is whether, under
the circumstances described below, the purchase of utilities by a landlord is exempt from sales tax
where such utilities are used by the tenant exclusively in the production of tangible personal
property for sale.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner operates two related manufacturing companies under common ownership
(Company A and Company B). Company A and Company B occupy the same facility consisting
of two buildings in both of which they share space. Pursuant to a subsidized energy program in
which Company A and Company B participate, a single modem-based electric meter was installed
in the facility to measure electrical usage for the entire facility. Company A and Company B share
electricity purchases for which this single meter is used.
Company A acts as the facility’s landlord and charges rent to Company B. Company A is
billed by the utility company for the electric usage of the entire facility each month because the
existing metering system is in Company A’s name. Company A bills Company B for rent and real
estate taxes on a monthly basis. The rental agreement states, in part:

1. Tenant has inspected the premises, including all of the structures, equipment,
   facilities, walls, services, lights, overhead cranes and jib cranes, heating, plumbing, sewers,
   electrical services, wiring, water, gas, sprinklers and all other facilities, equipment, fixtures
   and functions, and accepts the same in the present condition, except that Landlord will, with
   all reasonable dispatch, install a separate meter for electrical service, or, at its election, sub­
   meter electrical services and demand loads, and bill Tenant for said electrical usage and
   demand.
2. Tenant, as additional rent, shall pay for gas, electricity, water, sewers, garbage,
   rubbish, trash, scrap, dumpster, and a proportionate share of common area maintenance
   costs, and all other utilities and services including usage, load and demand charges, as well

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as proportionate and equitable increases in real property taxes and assessments levied against
the leased premises over the 1989 base year.
Although the rent agreement provided that Company A would install separate meters to
separately measure Company B’s utility usage, such meters have not been installed. While each
building in the facility had electric sub-meters in place, they were not used to monitor electric usage
by the companies since each company shared space in the two buildings. Separate charges for
electricity and gas appear on Company A’s monthly bill to Company B. Company A bills Company
B for 80% to 91% of the total electric charge it pays each month based on Company B’s floor space
utilization as this was considered a fair approximation of Company B’s overall electric usage.
Company A submitted a copy of a monthly bill to Company B showing separate amounts for gas,
electric, real estate taxes, rent, legal, water, insurance and sales tax. Both entities are manufacturing
entities and utilize the bulk of the electricity purchased in manufacturing processes to operate
welding machines, large machinery, and the like.
Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, 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) (1) The receipts from every sale, other than sales for resale, of the following: (A)
gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam service of
whatever nature; . . .
Section 1115(c)(1) of the Tax Law provides:
Fuel, gas, electricity, refrigeration and steam, and gas, electric, refrigeration and
steam service of whatever nature for use or consumption directly and exclusively in the
production of tangible personal property, gas, electricity, refrigeration or steam, for sale, by
manufacturing, processing, assembling, generating, refining, mining or extracting shall be
exempt from the taxes imposed under subdivisions (a) and (b) of section eleven hundred five
and the compensating use tax imposed under section eleven hundred ten of this article.
(Emphasis added.)
Section 1132(c)(1) of the Tax Law provides, in part:

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For the purpose of the proper administration of this article and to prevent evasion of
the tax hereby imposed, it shall be presumed that all receipts for property or services of any
type mentioned in subdivisions (a), (b), (c) and (d) of section eleven hundred five . . . are
subject to tax until the contrary is established, and the burden of proving that any receipt . . .
is not taxable hereunder shall be upon the person required to collect tax or the customer. . .
unless (i) a vendor, not later than ninety days after delivery of the property or the rendition
of the service, shall have taken from the purchaser a resale or exemption certificate in such
form as the commissioner may prescribe . . . or (ii) the purchaser, not later than ninety days
after delivery of the property or the rendition of the service, furnishes to the vendor: any
affidavit, statement or additional evidence, documentary or otherwise, which the
commissioner may require demonstrating that the purchaser is an exempt organization
described in section eleven hundred sixteen, the sale shall be deemed a taxable sale at retail.
. . . Where such a resale or exemption certificate or such an affidavit, statement or additional
evidence has been furnished to the vendor, the burden of proving that the receipt . . . is not
taxable hereunder shall be solely upon the customer. . . .
Section 526.8 of the Sales and Use Tax Regulations provides, in part:
Tangible personal property. (Tax Law, §1101(b)(6)) (a) Definition. The term
tangible personal property means corporeal personal property of any nature having a
material existence and perceptibility to the human senses. Tangible personal property
includes, without limitation:
(1) raw materials, such as wood, metal, rubber and minerals;
(2) manufactured items, such as gasoline, oil, chemicals, jewelry, furniture,
machinery, clothing, vehicles, appliances, lighting fixtures, building materials;
(3) artistic items, such as sketches, paintings, photographs, moving picture
films and recordings;
(4) animals, trees, shrubs, plants and seeds;
(5) water;
(6) coins and other numismatic items, when purchased for purposes other
than for use as a medium of exchange;
(7) postage stamps, when purchased for purposes other than mailing; and

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(8) precious metals in the form of bullion, ingots, wafers and other forms.
(b) Gas, electricity, refrigeration and steam are not considered tangible personal
property for the purpose of the tax imposed on utility services. . . .
(c) Tangible personal property does not include:
(1) real property; . . .
Section 528.22 of the Sales and Use Tax Regulations provides, in part:
(a) Exemption. (1) Fuel, gas, electricity, refrigeration and steam and gas, electric,
refrigeration and steam service of whatever nature is exempt from the sales and
compensating use tax when used directly and exclusively in the production, for sale, of
tangible personal property, gas, electricity, refrigeration or steam by one of the following
endeavors:
(i) manufacturing;
(ii) processing;
(iii) assembling;
(iv) generating;
(v) refining;
(vi) mining;

(vii) extracting;
(viii) farming;
(ix) agriculture;
(x) horticulture; or
(xi) floriculture.

(2) Fuel, gas, electricity, refrigeration and steam and like services used or consumed
in the heating, cooling or lighting of buildings or in the preparation of food and drink subject
to tax imposed by section 1105(d) of the Tax Law or in the storage of tangible personal
property, are subject to the sales tax.
*

*

*

(4) An exempt use certificate (Form ST-121) is used to make purchases eligible for
this exemption, without payment of sales tax. (See section 532.4(e) of this Title.)
*

*

*

(c) Directly and exclusively. (1) Directly means the fuel, gas, electricity,
refrigeration and steam and like services, and must during the production phase of a process,
either:

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(i) operate exempt production machinery or equipment; or
(ii) create conditions necessary for production; or
(iii) perform an actual part of the production process.
(2) Usage in activities collateral to the actual production process is not deemed to be
use directly in production.
Example 1: A welding shop produces stainless steel railings. In order to carry out
the production, the railings must be welded in an inert atmosphere. The welding shop
purchases an inert gas which is used to create the inert atmosphere. The gas is used directly
in production.
(3) (i) Exclusively means that the fuel, gas, electricity, refrigeration and steam and
like services are used in total (100%) in the production process.
(ii) Because fuel, gas, electricity, refrigeration and steam when purchased by the user
are normally received in bulk or in a continuous flow and a portion thereof is used for
purposes which would make the exemption inapplicable to such purchases, the user may
claim a refund or credit for the tax paid only on that portion used or consumed directly and
exclusively in production.
(iii) In the alternative, an exempt use certificate (Form ST-121) may be used,
providing full liability is assumed for any State and local tax due on any part of purchases
used for other than the exempt purposes described in subdivision (a) of this section. The
taxable portion of these purchases is to be reported as a "purchase subject to use tax" on a
sales and use tax return required to be filed with the Department of Taxation and Finance.
(iv) The user must maintain adequate records with respect to the allocation of fuel,
gas, electricity, refrigeration and steam used directly and exclusively in production and for
nonexempt purposes.
(v) For the purpose of substantiating the allocation of fuel, gas, electricity,
refrigeration and steam and like services used directly and exclusively in production from
that used for nonexempt purposes, the user must, when claiming a refund or credit, submit
an engineering survey or the formulae used in arriving at the amounts used in an exempt
manner.
*

*

*

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Example 4: A manufacturing plant purchases electricity to power its production
machinery and also to light its buildings. Only the electricity used to power the production
machinery is used directly in production.
Opinion
Company A purchases electric service from a utility company. Company A bills Company
B for rent and real estate taxes on a monthly basis. The agreement between Company A and
Company B provides that the charge for electric and gas usage by Company B is collected by
Company A as additional rent. Although separate charges for electricity and gas appear on
Company A’s monthly invoice for rent to Company B, such charge is based upon Company A’s
estimate of Company B’s utility consumption. The estimate that Company B is consuming from
80% to 91% of the total electric charge Company A pays each month is based on Company B’s
percentage of utilization of the total floor space of the facilities. Both entities are manufacturing
entities and utilize the bulk of the electricity purchased in manufacturing to operate welding
machines, large machinery, and the like.
Charges to a tenant for an Electricity Rent Inclusion Factor have been determined to be
charges for an electric service provided only as an incident to the rental of the commercial premises
and not as a “separate transaction having as its primary purpose the furnishing of utilities or utility
services.” Such charges are therefore not considered subject to tax as receipts from the sale of utility
services under section 1105(b) of the Tax Law. See Empire State Building Co. v New York State
Dept. of Taxation and Finance, 81 NY2d 1002. Essentially, this means that such rent inclusion
charges paid by tenants consuming nonmetered electric service are not receipts from the sale of a
utility service by the landlord and thus are not charges which are subject to sales tax.
It has been determined that where individual tenants have meters by which a landlord can
determine the monthly use of electricity and the landlord bills the tenants for the electricity used,
such receipts constitute the sale of a utility service. The landlord must register as a vendor for sales
tax purposes and must collect sales tax on charges for the electric service billed to the tenant. See
Mutual Redevelopment Houses, Inc. v Roth, 307 AD2d 422 (3rd Dept 2003).
In the present case, however, there was not a separate or individual metering of the utility
usage of the tenant. Although separate sub-meters existed which might have been used to measure
utility usage at Petitioner’s facility, since Company A and Company B jointly share the use of the
space in such facility, the sub-meters do not separately measure the landlord’s (Company A) or the
tenant’s (Company B) individual usage. The monthly charges to Company B for its pro rata share
of utility service based upon Company B’s proportionate square footage of leased space occupied,
are considered incident to Company B’s lease of the real property. The charges are in the nature of
additional rent and do not constitute a receipt for the separate sale of a taxable service. See

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Debevoise & Plimpton v New York State Taxation & Finance, 80 NY2d 657, 661; Empire State
Building Co. v New York Dept. of Taxation & Finance, supra.
Accordingly, the charges by Company A to Company B, pursuant to their lease agreement,
for reimbursement by Company B of its estimated portion of the monthly electrical usage of the
facility are considered nontaxable charges for rent rather than charges for electricity subject to tax
under section 1105(b) of the Tax Law. Company A’s purchases of electricity from a utility
company, therefore, are not purchases for resale to Company B. Company A’s purchases of
electricity are subject to sales tax under section 1105(b) of the Tax Law unless otherwise exempt.
Section 1115(c) of the Tax Law provides only that those utilities used directly and
exclusively in the production process will qualify for exemption from sales tax. Section
528.22(c)(1) of the Sales and Use Tax Regulations provides that utilities are used directly in
production when used during the production process to operate exempt production machinery.
Section 528.22(c)(3) of the Sales and Use Tax Regulations defines the term exclusively to mean that
the fuel, gas, electricity, refrigeration and steam and like services are used in total (100%) in the
production process. Section 528.22 further provides that the user must maintain adequate records
with respect to the allocation of fuel, gas, electricity, refrigeration and steam used directly and
exclusively in production and for nonexempt purposes. Where utilities billed from a single meter
are used for mixed taxable purposes (e.g., light, heat, etc.) and exempt purposes, the purchases of
utilities are subject to sales tax, and a refund or credit may be claimed for the tax paid on utilities
used directly and exclusively in production. The purchaser is permitted to show the amounts used
for such taxable and exempt purposes using alternative methods other than direct separate metering.
For the purpose of substantiating the allocation of fuel, gas, electricity, refrigeration and steam and
like services used directly and exclusively in production the user may, in claiming a refund or credit,
submit an engineering survey or other formulae used in arriving at the amounts used in an exempt
manner. See Sales Tax Information For: Manufacturers, Processors, Generators, Assemblers,
Refiners, Miners and Extractors, and Other Producers of Goods and Merchandise, Publication 852
(12/97), Appendix A, for guidance in determining the amount of electricity used exclusively in
production where the production usage is not separately metered.
Company A, a manufacturer, has purchased electricity which it has itself consumed in its
business as a manufacturer of property for sale. In addition, a portion of the electricity purchased
by Company A and consumed by Company B, although not a purchase of electricity which will be
resold by Company A to Company B, will nonetheless be similarly partially consumed by Company
B in the production of tangible personal property for sale by Company B. Section 1115(c) of the
Tax Law provides for an exemption from sales tax on purchases of electricity of whatever nature
which is used or consumed directly and exclusively in the production of tangible personal property
for sale by manufacturing. Provided that Company A can, as required by section 1132(c)(1) of the
Tax Law and section 528.22(c)(3)(iv) of the Sales and Use Tax Regulations, produce records
substantiating the usage of utility services, the tax paid by Company A on charges by the utility

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company for electricity used directly and exclusively in the production of tangible personal property
for sale by Company A and/or Company B is eligible for refund or credit.

DATED: September 28, 2004

NOTE:

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

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