After a corporate reorganization splits a natural-gas compression business into equipment-owning partnerships and customer-facing service entities, is the customer's charge a taxable equipment rental or an exempt service, and are the internal compressor transfers taxable sales?

Plain-English summary

Universal Compression, Inc. assembles compressors used in natural gas exploration, production, and transportation, and historically either sold them or rented them to customers who used them at their own sites. It reorganized into four entities: itself plus two new "Lease Partnerships" that will own compressors and lease them internally, and a third "Service Business" entity — Universal Compression and the third entity provide compression services directly to unrelated customers under a Master Compression Services Agreement.

The Department addressed three questions from this restructuring:

1. Is the customer agreement a service or a taxable equipment rental? New York's dominion-and-control test decides this: if the equipment provider (rather than the customer) keeps control over the equipment — hiring/firing the operating personnel, handling maintenance/insurance/repairs, and bearing the risk of loss — the arrangement is an exempt service, not a taxable rental. Here, the Service Business's own employees install, operate, maintain, and repair the compressors at the customer's site, the Service Business bears all operating costs and risk of loss, and it even reduces its fee if it can't deliver the contracted compression level. That's a service, not a rental. (One narrow exception: if the Service Business separately charges a monthly fee for optional add-on equipment like inlet separators without providing operating personnel or retaining control, THAT charge is a taxable equipment rental.)

2. Are the internal transfers of compressors to the new Lease Partnerships taxable? Partnerships count as "persons" for sales tax purposes even though they're tax-disregarded for federal income tax. If the compressors were contributed purely in exchange for a partnership interest, that transfer is excluded from sales tax entirely as a nontaxable partnership-formation transfer. If it wasn't purely for a partnership interest, it could instead qualify as an exempt "sale for resale" — but only if the Lease Partnerships are registered New York vendors and hold the compressors exclusively to resell or lease them (not use them themselves).

3. Is the compression service itself taxable? No. Natural gas isn't treated as "tangible personal property" for New York sales tax purposes (apart from the separate gas-and-gas-service utility tax), so compressing someone else's gas doesn't count as taxable "producing, fabricating, or processing" tangible personal property, and it isn't any other enumerated taxable service either.

What this means for you

Oilfield services, equipment-with-operator businesses, and similar service providers

The dominion-and-control test is the single most important fact pattern to document: who employs and directs the operating personnel, who bears operating costs and risk of loss, and whether the fee adjusts based on service performance (not equipment availability). Get this right in your contracts and you can structure equipment-plus-personnel arrangements as exempt services rather than taxable rentals.

Companies reorganizing into holding/leasing and operating entities

Contributing equipment to a new partnership purely in exchange for a partnership interest is a clean, exempt transfer. If the consideration isn't purely a partnership interest, make sure the receiving entity is registered to issue a resale certificate and holds the equipment exclusively for resale/lease if you want to preserve an exemption on that internal transfer.

Accountants and tax professionals

This ruling is a useful three-part template: (1) apply 20 NYCRR 541.2(p)'s dominion-and-control factors to any equipment-with-personnel arrangement; (2) separately analyze whether an intercompany equipment transfer during a reorganization is genuinely for a partnership interest (nontaxable under § 1101(b)(4)(iv)) versus a taxable sale needing its own resale-certificate analysis; (3) remember that natural gas (and similarly, other utility commodities) sits outside the ordinary "tangible personal property" definition except for the specific gas/electric/steam utility tax under § 1105(b).

Common questions

Q: When is providing equipment along with an operator a taxable rental versus an exempt service?
A: It's a service (not a taxable rental) when the equipment owner retains dominion and control — keeping the right to hire/fire operators, bearing operating costs and risk of loss, using its own discretion in performing the work, and adjusting its fee based on performance rather than mere equipment availability.

Q: Are compressors contributed to a new partnership during a reorganization taxable?
A: Not if contributed solely in exchange for a partnership interest — that's excluded from the definition of a taxable retail sale. If other consideration is involved, the transfer might still be exempt as a sale for resale, provided the receiving partnership is a registered vendor holding the equipment exclusively for resale or lease.

Q: Is compressing a customer's natural gas a taxable service in New York?
A: No. Natural gas isn't "tangible personal property" for purposes of the sales tax article (apart from the separate utility tax on gas/gas service), so compressing it for a customer doesn't fall under the taxable "producing, fabricating, or processing tangible personal property" service or any other enumerated taxable service.

Q: Can another compression or oilfield-services company rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to Universal Compression, Inc. and the specific facts and contractual terms it described. A different contract structure — one that shifts more operational control to the customer — could reach a different result on the rental-versus-service question.

Citations and references

Statutes and regulations:

• Tax Law § 1101(a) (definition of "person," including partnerships)
• Tax Law § 1101(b)(4) (definition of retail sale; corporate/partnership reorganization exclusions)
• Tax Law § 1101(b)(5) (definition of sale, including rentals and leases)
• Tax Law § 1101(b)(6) (definition of tangible personal property)
• Tax Law § 1105(a) (imposition of sales tax on retail sales)
• Tax Law § 1105(b)(1)(A) (tax on gas, electricity, refrigeration, and steam service)
• Tax Law § 1105(c)(2) (producing, fabricating, or processing tangible personal property)
• 20 NYCRR 526.6, 526.7, 541.2(p)

Prior authority cited:

• Matter of Modern Disposal Services Inc., Dec Tax App Trib, May 23, 1996, DTA No. 812565
• Waste Management of New York, Inc., Dec Tax App Trib, March 21, 1991, DTA No. 7805791, aff'd 185 AD2d 479 (3d Dept 1992)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_25s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-07(25)S
Sales Tax
August 29, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S060725A

On July 25, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Universal Compression, Inc., 4444 Brittmoore Road, Houston, Texas
77041. Petitioner, Universal Compression, Inc., submitted additional information pertaining to
the Petition on October 17, 2006.
The issues raised by Petitioner relate to the application of sales tax to Petitioner’s
reorganization and changes in business practices. Petitioner asks:

1. Whether its Master Services Agreement will be construed to be a service agreement
   rather than a rental of compressors.
2. Whether the sales tax resale exemption will apply to the transfer of Petitioner’s existing
   assets to the Lease Partnerships created as a result of Petitioner’s reorganization.
3. Whether charges for compression services are subject to sales tax.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner assembles compressors in Texas that are used in connection with natural gas
   exploration, production, processing, and transportation. Historically, the assembled compressors
   were either sold to third-party customers or Petitioner retained ownership and the compressors
   were used at customer locations to provide compression for a fee. Most of Petitioner's
   contractual agreements with its customers where Petitioner retained ownership of the
   compressors were structured to be rental agreements for the compressors.
   As the result of a recent reorganization, Petitioner has four primary entities, including
   Petitioner itself, involved in the compression business in New York State. The new entities are
   UCLP Leasing, L.P., and UCI Compressor Holding, L.P. (collectively "Lease Partnerships"), and
   UC Operating Partnership, L.P. (collectively with Petitioner "Service Businesses"). Petitioner is
   a partner in the three new partnerships.
   Petitioner will contribute a portion of its current fleet of compressors, subject to certain
   liabilities representing security interests in the transferred compressors, to each of the Lease
   Partnerships upon their inception. Petitioner states that these contributions are considered tax
   free for federal income tax purposes, and the Lease Partnerships are disregarded entities for
   federal income tax purposes. The Lease Partnerships will lease the compressors to the Service

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Businesses. Petitioner may sell compressors to third-party customers on occasion. The Service
Businesses may sometimes obtain compressors from third parties.
Petitioner and each partnership are separate and distinct entities that operate
independently of each other. Petitioner and each partnership have names that are different from
each other; hold themselves out to the public as separate entities; enter into business relationships
and contractual obligations in their own names; maintain their own books, records, and bank
accounts; and have their own officers, who overlap with each other. The Lease Partnerships are
sole owners of the contributed equipment and are the sole owners of all rights under all related
warranties.
A Service Business will enter into a Master Compression Services Agreement
(“Agreement”) with customers under which the Service Business will compress a customer’s
product (generally, gas) to a specified number of pounds per square inch of gage pressure in field
or pipeline applications used to transport the product from one point to another. Under the
provisions of the agreement:
•

A Service Business agrees to provide to customers specified gas compression
services as detailed on the schedules to the Agreement.

•

A Service Business, or its affiliates or a third party other than the customer
(under an agreement whereby such affiliates or third party lease the compressors
to the Service Business) maintain ownership or possession and control of the
compressors located at the customer’s premises. The Service Companies are
responsible for all operating expenses such as insurance, maintenance, repair,
and the fuel or electricity to run the equipment.

•

Risk of loss will be with the Service Business rather than the customer.

•

The Service Business is not required to use any particular compressor model to
perform the service as specified; rather it is stipulated that compression will be
provided based on certain agreed-upon parameters.

•

Ad valorem taxes are the responsibility of the Service Business.

•

The fee charged for compression services is substantially higher than the cost of
renting a compressor.

•

The contract term is typically for a period of approximately 3 years, which
period is less than 15 percent of a compressor's economic life.

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•

To the extent that the Service Business is unable to provide the stipulated
compression to a customer, the Service Business will reduce the fee it charges
the customer.

•

The Service Business does not own the gas at any point in the process; it merely
compresses the gas for its customers, which typically sell the gas to third parties.

The Service Businesses retain dominion and control of the compressors at customer
locations and assume all operating expenses of the equipment, including costs related to the
personnel installing, operating, servicing, maintaining, and repairing the equipment. Petitioner
has its own employees and retains the right to hire and fire its employees. The other Service
Business, UC Operating Partnership, L.P., does not have its own employees but pays Petitioner
for the use of its employees. Each Service Business bills customers based on the pressure
parameters specified by the Agreement. In general, charges to the customer also reflect the type
of compressors used and the cost of personnel to monitor, service, and maintain such equipment.
The compressors run 24 hours a day, 7 days a week while at a customer location. In some
instances, the Service Business will charge customers a monthly fee for miscellaneous
equipment, such as inlet separators.
Applicable law and regulations
Section 1101 of the Tax Law provides, in part:
(a) When used in this article the term “person” includes an individual, partnership,
limited liability company, society, association, joint stock company, corporation, estate,
receiver, trustee, assignee, referee, and any other person acting in a fiduciary or
representative capacity, whether appointed by a court or otherwise, and any combination
of the foregoing.
(b) 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:
*

*

*

(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

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transferred to the purchaser of the service in conjunction with the performance of the
service subject to tax . . .
*

*

*

(iv) The term retail sale does not include:
(A) The transfer of tangible personal property to a corporation, solely in
consideration for the issuance of its stock, pursuant to a merger or consolidation effected
under the law of New York or any other jurisdiction.
(B) The distribution of property by a corporation to its stockholders as a
liquidating dividend.
(C) The distribution of property by a partnership to its partners in whole or partial
liquidation.
(D) The transfer of property to a corporation upon its organization in
consideration for the issuance of its stock.
(E) The contribution of property to a partnership in consideration for a partnership
interest therein.
(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.
(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam. . . .
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.

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(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; . . .
*

*

*

(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.
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
(a) The term retail sale or sale at retail means the sale of tangible personal
property to any person for any purpose, except as specifically excluded.
*

*

*

(c) Resale exclusion. (1) Where a person, in the course of his business operations,
purchases tangible personal property or services which he intends to sell, either in the
form in which purchased, or as a component part of other property or services, the
property or services which he has purchased will be considered as purchased for resale,
and therefore not subject to tax until he has transferred the property to his customer.
(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate . . .
(3) Receipts from the sale of property purchased under a resale certificate are not
subject to tax at the time of purchase by the person who will resell the property. The
receipts are subject to tax at the time of the retail sale.
*

*

*

(d) Exclusions relating to corporate and partnership transactions.(1) The following
transfers of property are not retail sales:
*

*

*

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(iv) The transfer of property to a corporation upon its organization in
consideration for the issuance of its stock.
(v) The contribution of property to a partnership in consideration for a partnership
interest therein.
*

*

*

(6) Mergers and consolidations.
*

*

*

(iv) Where a corporation purchases another corporation’s assets in consideration
of issuance of stock of the purchasing corporation, or the parent of the purchasing
corporation, such as under section 368(a)(1)(C) of the Internal Revenue Code, the
transaction does not qualify as a merger or consolidation, even if the selling corporation
is subsequently liquidated.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any transaction in
which there is a transfer of title or possession, or both, of tangible personal property for a
consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
*

*

*

(c) Rentals, leases, licenses to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer for a consideration of possession of
tangible personal property without a transfer of title to the property. Whether a
transaction is a “sale” or a “rental, lease or license to use” shall be determined in
accordance with the provisions of the agreement. . . .
*

*

*

(e) Transfer of possession. (1) . . . a sale is taxable at the place where the tangible
personal property or service is delivered, or the point at which possession is transferred
by the vendor to the purchaser or his designee.

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*

*

*

(4) Transfer of possession with respect to a rental, lease or license to use, means
that one of the following attributes of property ownership has been transferred:
(i) custody or possession of the tangible personal property, actual or constructive;
(ii) the right to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property.
Section 541.2(p) of the Sales and Use Tax Regulations provides, in part:
Rental, lease and license to use. (1) The terms rental, lease and license to use
refer to all transactions in which there is a transfer of possession of tangible personal
property without a transfer of title to the property.
(2) For the purposes of this Part, when a rental, lease or license to use a vehicle or
equipment includes the services of a driver or operator, such transaction is presumptively
the sale of a service, rather than the rental of tangible personal property, where dominion
and control over the vehicle or equipment remain with the owner or lessor of the vehicle
or equipment. Dominion and control remain with the owner or lessor of the vehicle or
equipment when pursuant to an agreement or contract the lessor:
(i) does not transfer possession, control and/or use of the equipment or vehicle to
the lessee during the term of the agreement or contract;
(ii) maintains the right to hire and fire the drivers and operators;
(iii) uses his own discretion in performing the work (even though the lessee may
designate the area where material is to be picked up and delivered) and
generally selects his own routes;
(iv) retains responsibility for the operation of the equipment or vehicle; and
(v) directs the work, pays all operating expenses, including drivers' and/or
operators' wages, insurance, tolls and fuels.
Whether a transaction is a sale (license to use, rental or lease) of a vehicle or
equipment or is the sale of a service, such as a transportation service, must be determined

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in accordance with the facts and circumstances of the particular transaction and
provisions of the agreement between the contractor and his customer.
Opinion
Petitioner recently reorganized its structure and changed its business practices. As a
result, Petitioner is a partner in three partnerships, two of which own compressors and lease them
to Petitioner and the third partnership. Petitioner and the third partnership are Service
Businesses that provide compression services to unrelated third parties pursuant to the Master
Compression Services Agreement.
Issue 1
The Master Compression Services Agreement (“Agreement”) indicates that ownership or
possession and control of the compressors remains with the Service Business, or its affiliates or
third parties that lease compressors to the Service Business. The Agreement also indicates that
the Service Business is responsible for all operating expenses such as insurance, service,
maintenance, repair, and the fuel or electricity to run the equipment. The Service Business
personnel install, operate, service, maintain, and repair the equipment at the customer’s premises.
The Service Business bills customers based on the pressure parameters specified by the
Agreement.
The threshold question in regard to the application of the sales and use tax to the
transactions between each Service Business and its customers is whether these transactions
constitute a lease or a license to use the compressors or whether these transactions are properly
viewed as the sale of a service. The key factor is whether the Service Business, in providing the
equipment along with the technical expertise of personnel, is maintaining dominion and control
over the equipment or relinquishing dominion and control to its customers. The terms of the
Agreement respecting the nature of these transactions must also support the practical aspects of
the transactions. See section 541.2(p) of the Sales and Use Tax Regulations.
Under the Agreement, the Service Business is responsible for all costs of operating and
maintaining the compressors, including insurance, maintenance, repair, and fuel. The Service
Business bears the costs of salaries and other compensation to its personnel who operate and
monitor the performance of the equipment. Such personnel are employees of Petitioner and
Petitioner retains the right to hire and fire its employees. The other Service Business, UC
Operating Partnership, L.P., does not have its own employees but pays Petitioner for the use of
its employees. Accordingly, the Service Business maintains dominion and control of equipment
while it is on the customer’s premises. The Agreement also provides that the fee charged by the
Service Business will be reduced if the Service Business is unable to provide the compression
specified in the Agreement. Therefore, for sales tax purposes, the Service Business is providing

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a service rather than the lease or rental of the equipment. However, to the extent that the Service
Business provides optional equipment (e.g., inlet separators) for a monthly fee and does not
provide personnel to operate the equipment or retain dominion and control over the equipment,
such charges are for the rental of equipment.
Issue 2
Partnerships are persons for sales tax purposes even if they are disregarded entities for
federal income tax purposes. See section 1101(a) of the Tax Law. Therefore, any transfers of
compressors by Petitioner to the Lease Partnerships for consideration would be sales of tangible
personal property subject to sales tax under section 1105(a) of the Tax Law, unless otherwise
exempt.
Petitioner reorganized itself into four entities. Petitioner states that its contributions of
compressors to the newly created partnerships were tax free transfers for federal income tax
purposes. Certain transfers as part of a business reorganization and restructuring, including
transfers of property to partnerships in exchange for a partnership interest, are not considered to
be sales at retail and are thus not subject to New York State sales and use tax. (See section
1101(b)(4)(iv) of the Tax Law). However, not every tax free reorganization for federal income
tax purposes is a nontaxable transfer for New York State sales and use tax purposes. (See section
526.6(d)(6)(iv) of the Sales and Use Tax Regulations). If Petitioner’s transfers of compressors to
the Leasing Partnerships were in exchange for a partnership interest, then the transfers are
nontaxable pursuant to section 1101(b)(4)(iv). If the transfers of the compressors were not in
exchange for a partnership interest but for some other consideration, the transfers may qualify as
sales for resale the receipts from which are not subject to tax under section 1105(a) of the Tax
Law. To qualify as a sale for resale, the Lease Partnerships must purchase the compressors
exclusively for the purpose of reselling or leasing them. See section 1101(b)(4)(i)(A) of the Tax
Law and section 526.6(c) of the Sales and Use Tax Regulations. The Lease Partnerships must
register for New York State sales tax purposes in order to issue a Resale Certificate (Form
ST-120).
Issue 3
Except for purposes of the tax imposed by section 1105(b) of the Tax Law on sales of gas
and gas service (utilities), the natural gas compressed by the Service Businesses is not otherwise
considered to be tangible personal property for the purposes of the sales and use taxes imposed
by Article 28 of the Tax Law (see section 1101(b)(6) of the Tax Law). Therefore, the
compression service provided by the Service Businesses is not the producing, fabricating, or
processing of tangible personal property for purposes of the tax imposed by section 1105(c)(2)
of the Tax Law and is not any of the other enumerated services upon which tax is imposed

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pursuant to section 1105 of the Tax Law. Therefore, Petitioner’s charges for the services of
compressing natural gas for its customers are not subject to sales tax.

DATED: August 29, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to
the person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued
or for the specific time period at issue in the Opinion.