In a chain of landlord, tenant, and sub-tenant manufacturers sharing one electric meter, who owes sales tax on the electricity, and does any of it qualify for the manufacturing production exemption?

Plain-English summary

A landlord ("Company A") leases a 125,000 square foot building to a manufacturing tenant ("Company B"), which sub-leases part of the space to another manufacturer ("Company C") and a medical equipment supplier ("Company D"). One master meter measures the whole building's electricity, billed to Company A with sales tax included; Company B pays that entire bill. Company C's usage is separately tracked with its own sub-meter, and Company B bills Company C accordingly. Company D isn't sub-metered at all — Company B just estimates its share based on square footage and bills it as part of a lease clause covering "rent plus a proportionate share of insurance, maintenance, and utilities."

New York taxes utility sales only when they're a genuine, separately identifiable transaction based on real usage. Since Company B pays Company A's full metered bill, that's a straightforward taxable purchase of electricity by Company B (with Company A required to register as a vendor and collect tax, though it can buy the electricity itself tax-free from Con Ed as a purchase for resale). Company B's resale to Company C is also taxable, since the sub-meter accurately measures Company C's real usage — making Company B a vendor too. But Company B's charge to Company D is different: because it's just a proportionate, non-metered estimate folded into the lease's rent formula, it's not a separate sale of electricity at all — it's treated as additional rent, meaning Company B doesn't collect tax on it, but also can't treat that portion as a tax-free purchase for resale (since D isn't really "buying" utilities from B in the tax sense). Layered on top of all this is the manufacturing production exemption: whatever electricity Company B or Company C can prove was used directly and exclusively in actually manufacturing goods for sale is exempt, while electricity for ordinary building heating, lighting, or ventilation never qualifies — and since Company D just supplies medical equipment rather than manufacturing anything, none of its electricity gets that exemption regardless of how it's billed.

What this means for you

Commercial landlords and master tenants sub-leasing space

Whether you owe sales tax on your resale of utilities to a tenant hinges entirely on whether you separately measure and bill their actual usage. Sub-metering plus usage-based billing = taxable resale, requiring you to register as a vendor and collect tax (with a resale certificate letting you buy the underlying electricity tax-free). A flat or square-footage-based utility charge folded into rent = not a separate taxable sale, but you can't buy that portion of the electricity tax-free either, since you're not really reselling it.

Manufacturing tenants and sub-tenants

Don't assume all your facility's electricity is exempt just because you're a manufacturer. Only the portion used directly and exclusively in the actual production process (running machinery, creating necessary production conditions) qualifies for the exemption — electricity for heating, lighting, or general building operation is fully taxable regardless of your industry, and you need records (an engineering survey or documented allocation formula) to support any exemption or refund claim.

Non-manufacturing tenants in a mixed-use building

If your business isn't manufacturing, processing, assembling, or similar production activity, none of your electricity qualifies for the production exemption — even if you share a building and a landlord with manufacturers who do qualify for part of theirs.

Common questions

Q: If I sub-meter a tenant's electricity and bill them for actual usage, do I have to charge sales tax?
A: Yes — that's a genuine resale of a taxable utility service, and you must register as a vendor and collect tax on those charges (while being able to buy the underlying electricity tax-free from your utility as a purchase for resale).

Q: Is a pro-rata utility charge based on square footage instead of a sub-meter taxable?
A: No — when utilities aren't separately metered or measured by actual usage and are instead billed as an estimated share folded into rent, that's treated as additional rent, not a separate taxable utility sale.

Q: Can a manufacturer claim the production exemption on all the electricity used in its facility?
A: No — only the portion used directly and exclusively in the actual production process is exempt. Electricity for general heating, lighting, ventilation, or storage is always taxable, and the manufacturer must keep records substantiating the exempt/nonexempt split.

Q: Does a company have to be a "manufacturer" by industry label to get any exemption, or does it depend on the actual activity?
A: It depends on the actual activity — a company that merely supplies or sells (rather than manufactures/processes/assembles) products for sale, like a medical equipment supplier here, doesn't qualify for the production exemption regardless of how its lease or utility charges are structured.

Citations and references

Statutes and rules:

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

Case law and prior advisory opinions relied on:

• Mutual Redevelopment Houses, Inc. v Roth, 307 AD2d 422 (2003) (sub-metered utility resale presumption)
• Ascension Sheet & Metal Fabrication, Inc., TSB-A-04(24)S (non-metered utility charges as rent)
• Debevoise & Plimpton v New York State Taxation & Finance, 80 NY2d 657; Empire State Building Co. v New York Dept. of Taxation & Finance, 81 NY2d 1002 (rent characterization)
• MOD-PAC Corp., TSB-A-85(20)S; Weber-Knapp Company, TSB-A-85(15)S; Fancher Chair Co., Inc., TSB-A-83(11)S (heating/lighting electricity not production-exempt)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(10)S
Sales Tax
April 4, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S001018A

On October 18, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from RSM McGladrey, Inc., 800 Liberty Building, Buffalo, NY 14202-3508.
Petitioner, RSM McGladrey, Inc., provided additional information pertaining to the Petition on
November 10, 2003.
The issues raised by Petitioner are:
1,
Whether the electric utilities consumed by Company B, a manufacturer
tenant leasing a building from Company A, and those consumed by Company C, a
manufacturer tenant subleasing a portion of the building from Company B,
qualify for exemption from sales tax.
2.
Whether Company B, as tenant of the property owner Company A and
sub-lessor to tenants Company C and Company D, may purchase electricity
without the payment of sales tax for resale to its tenants.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company A, which is not registered for sales tax purposes, owns real property that it
leases to Company B. Company B uses a portion of the leased property in its business activities.
Company B in turn sub-leases a portion of the space to Company C and Company D. The real
property leased is a 125,000 square foot building. Companies B and C are both manufacturers
and Company D is a medical equipment supplier. A single meter from the utility company
measures the total electrical consumption by all of the tenants at such facility. A sub-meter was
installed which measures the electrical consumption by Company C.
The utility bill for the entire building is in the name of Company A and sales tax is
charged by the utility company on the full electrical consumption of the entire leased space.
Company B pays the amount of the entire electric bill, including the amount of sales tax as
charged by the utility company to Company A, without mark up. Company B bills Company C
for its utility usage as determined by the separate sub-meter. After deducting the sub-metered
usage of Company C, Company B bills Company D for its estimated utility consumption based
upon the square footage of Company D’s rented space.
The terms of the lease agreement between Company B and Company D provide that the
rent for the space Company D is occupying shall be a monetary amount plus the proportionate
share of Company D’s cost of insurance, maintenance and utilities related to ownership, operation
and leasing of the demised premises.

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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.
Section 1132(c)(1) of the Tax Law provides, in part:
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. Except as provided in subdivision (h) or (k) of this section, 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, amusement charge or rent is not taxable hereunder shall be solely upon the
customer. . . .

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Section 526.8 of the Sales and Use Tax Regulations provides, in part:
Tangible personal property. (a) Definition. The term tangible personal
property means corporeal personal property of any nature having a material existence and
perceptibility to the human senses. . . .
*

*

*

(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; or
(vii) extracting.
(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.
*

*

*

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(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:
(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.

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(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.
Example 2: A producer of electricity purchases fuel oil in bulk. The oil is used
both to create steam to operate turbines which produce electricity and to heat
buildings. The oil used for steam to operate the turbines is used directly in
production while the oil used to heat buildings is not used in production.
Example 3: 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.
Example 4: A food processor packages and ships t.v. dinners to a flash freezing
plant to process the dinners. The flash freezing of the dinners is refrigeration used
in production. The frozen dinners are then moved to a refrigerated warehouse for
storage to await sale and delivery. The refrigerated storage is not refrigeration
used in production.
Opinion
The utility bill is in the name of Company A and it includes sales tax on the full electrical
consumption of the entire leased space. Company B pays the entire electric bill, including sales
tax. A sub-meter is installed which measures the electrical consumption by Company C.
Company B bills Company C for the actual utilities consumed by Company C as measured by
the separate meter. Company B bills Company D for its estimated utility consumption based on
the square footage of the rented space.
Section 1105(b) of the Tax Law imposes the sales tax on utility services when furnished
as a separate identifiable sales transaction. If individual tenants have their utility consumption
accurately measured through the use of sub-meters so that the landlord's charges to the tenants
for utility consumption reflect the tenant's actual usage, the landlord is making a separate sale of
such utility service, and the landlord must register as a vendor for sales tax purposes. Unless the
sale of the utility service is otherwise exempt, the landlord must collect and remit tax on its
charges to the tenants for the utility services billed to such tenant. See Mutual Redevelopment
Houses, Inc.v Roth, 307 AD 2d 422 [2003].
If the electrical consumption by individual tenants is not separately metered or otherwise
accurately measured and the landlord bills the tenants for their share of the electricity usage
based upon the square footage rented or some other method for determining the tenants’ pro rata
share of the utility costs, such charges are in the nature of additional rent. The landlord is

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considered to be providing the utility service as an incident to the lease of real property and there
is no separate sale of such service to the tenant. In such case, the charges to the tenant are not
subject to sales tax as the sale of a utility service and the landlord is responsible for paying sales
tax on its purchases of the utility service. See Ascension Sheet & Metal Fabrication, Inc., Adv
Op Comm T & F, September 28, 2004, TSB-A-04(24)S.
Under the facts set forth in this Advisory Opinion, a single meter determines the total
amount of electric service provided to the entire building by the utility company. Company B’s
payment of the total bill (including sales tax) for the electric service provided to the building by
the utility company is clearly a separate purchase of electric services subject to the sales tax
imposed by section 1105(b) of the Tax Law. If Company B is paying such amount to Company
A directly or is paying Company A’s bill directly to the utility company (which payment releases
Company A from its debt to the utility company), the payments represent a purchase by
Company B of the electric services from Company A.
As a seller of electric services subject to tax, the landlord (Company A) should be
registered as a vendor pursuant to section 1134 of the Tax Law and is required to collect the sales
tax due on its sales of electric service to Company B. Assuming that all of the electricity
purchased by Company A is resold to Company B, Company A may purchase such electricity
from the utility company exempt from sales tax as a purchase for resale. Company A should
furnish the utility company with a properly completed Resale Certificate (Form ST-120) when
making exempt purchases for resale.
Company B’s purchases of electricity from Company A are subject to sales tax except to
the extent that such electricity is used or consumed in the production of tangible personal
property for sale or resold, as discussed below.
Company B accurately determines Company C’s individual usage of electricity by the use
of the separate sub-meter. Company B bills Company C for such usage based upon the sub­
metered consumption. This constitutes a sale of electric service by Company B to Company C
and such sale is subject to sales tax. Company B is, therefore, if not already registered for sales
tax purposes by virtue of its sales of tangible personal property as a manufacturer, required to be
registered to make sales of electricity to Company C.
The terms of the lease agreement between Company B and Company D provides that the
rent for the space occupied by Company D is a fixed monetary amount plus a proportionate share
of the cost of insurance, maintenance and utilities related to ownership, operation and leasing of
the demised premises. Company D’s electric consumption is not accurately determined by meter
or otherwise, and Company D is not billed for its electric usage. Accordingly, the charges by
Company B as sub-lessor to its sub-lessee, Company D, are not subject to sales tax. The pro rata
share of electric service based upon Company D’s proportionate square footage of leased space
which is billed to Company D is considered to be incident to Company D’s lease of real property
and is not a separately identifiable sale of electric service. Those charges are in the nature of

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additional rent and are not charges for the separate sale of a taxable service. See Debevoise &
Plimpton v New York State Taxation & Finance, 80 NY2d 657, 661; Empire State Building Co. v
New York Dept. of Taxation & Finance 81 NY2d 1002 aff’g 185 AD2d 201. Therefore, the
electric services provided by Company B to Company D are not purchased by Company B for
resale.
Section 1115(c) of the Tax Law provides for an exemption from sales and use tax on
purchases of electricity of whatever nature for use or consumption directly and exclusively in the
production of tangible personal property for sale by manufacturing. Company B has purchased
electricity some of which is consumed by Company B in the production of tangible personal
property for sale by Company B. To the extent that Company B can produce records
substantiating that it purchased electricity which was used by it directly and exclusively in the
production of tangible personal property for sale, Company B is eligible for the exemption from
sales and use tax with respect to such usage. Similarly, Company C as a manufacturer may be
eligible to claim an exemption with respect to the portion of the electricity purchased by it from
Company B to the extent such electricity is consumed directly and exclusively by Company C in
the production of tangible personal property for sale. See section 528.22 of the Sales and Use
Tax Regulations.
Company D, as a supplier of medical equipment, does not appear to be engaged in the
production of tangible personal property for sale. Thus, the purchase of electricity by Company
B for consumption by its sub-lessee, Company D, will not qualify for the exemption provided in
section 1115(c) of the Tax Law for utilities consumed in the production of tangible personal
property for sale.
Electricity consumed by Company B, Company C and Company D in the general
heating, lighting, ventilation and operation of the building is not considered to be consumed
directly and exclusively in the production of tangible personal property for sale and the purchase
of electricity consumed in this manner is not eligible for exemption from tax. See MOD-PAC
Corp., Adv Op St Tax Comm, June 12, 1985, TSB-A-85(20)S; Weber-Knapp Company, Adv Op
St Tax Comm, May 29, 1985, TSB-A-85(15)S; Fancher Chair Co., Inc., Adv Op St Tax Comm,
March 15, 1983, TSB-A-83(11)S. Charges by Company B to Company C for electricity so
consumed, and charges paid by Company B to Company A for such electricity, are subject to
sales tax.
Since Company B consumes a portion of the electricity supplied to the building and does
not resell the portion of the electricity supplied to and consumed by Company D, Company B
may not purchase the electricity supplied to the building tax exempt as a purchase for resale.
However, Company B does in fact resell a portion of the electricity to Company C and uses a
sub-meter to separately determine Company C’s usage. Company B, in filing its sales and use tax
return, may take a credit for sales tax it paid to Company A with respect to the electricity sub­
metered and resold by it to Company C, and may also take a credit for sales tax paid on

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electricity which it uses directly and exclusively in the production of tangible personal property
for sale.

DATED: April 4, 2005

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.