Can a property owner get a New York sales tax refund on building materials used to rehabilitate a building that's part qualifying commercial space and part nonqualifying residential space in an Empire Zone?

Plain-English summary

Abeles Building Company LLC rehabilitated a building at 681-685 South Avenue in Rochester, located in a state-designated Empire Zone since 2003. After the 2006 rehab, the building held a grocery store and coffee shop on the first floor and four residential apartments on the second floor. The contractor had already allocated the building materials between the commercial first floor and the residential second floor.

New York's Empire Zone incentive (§ 1119(a)(6)) refunds or credits sales tax paid on building materials that become an integral part of industrial or commercial real property being constructed, expanded, or rehabilitated in an Empire Zone — but explicitly does NOT cover residential real property, and doesn't cover property used exclusively by retailers. The statute doesn't say what to do with a mixed-use building that's part qualifying and part not. The Department filled that gap: since the first floor (grocery store, coffee shop) is commercial and isn't used exclusively by retailers, it qualifies; the second floor (apartments) is residential and doesn't. The fix is proportional allocation — split the sales tax paid on materials between the qualifying and nonqualifying portions using any reasonable method. If rehab costs were roughly similar throughout the building, the Department suggested a straightforward formula: multiply the total sales tax paid by (square feet of commercial space ÷ total square feet of the building) to find the refundable/creditable amount.

The refund or credit is only available to whoever actually bore the sales tax liability on the materials — the property owner or tenant if they bought the materials themselves (even if they hired a contractor for labor), or the contractor if the contractor was the one who purchased the materials.

What this means for you

Property owners and developers rehabbing mixed-use buildings in an Empire Zone

You can still claim a sales tax refund/credit on your rehab materials even if part of the building is residential — you just need to allocate the refund to the qualifying commercial portion only, using a reasonable method like a square-footage ratio (assuming costs were roughly uniform per square foot across the building).

Contractors purchasing materials for Empire Zone rehab projects

Whoever is legally liable for the sales tax on the materials at the time of purchase — you or the property owner/tenant, depending on who bought the materials — is the one eligible to file for the refund or credit, not automatically the property owner.

Accountants and tax professionals

Watch for three things: (1) the property must be genuinely "rehabilitated" (restoring habitability/code compliance), not just renovated or given minor repairs, which don't qualify; (2) exclusively retail-use property is disqualified entirely, even if otherwise commercial; and (3) for mixed qualifying/nonqualifying uses, document a reasonable allocation method (square footage is the Department's suggested default) since the statute itself is silent on mixed-use buildings.

Common questions

Q: Does a mixed commercial/residential building qualify for the Empire Zone sales tax refund?
A: Only the commercial portion qualifies. The residential portion is excluded, so you need to allocate the refund proportionally between the two.

Q: How do I allocate the refund between commercial and residential space?
A: Any reasonable method is acceptable. If rehab costs were roughly uniform throughout the building, a square-footage ratio (commercial square feet ÷ total square feet) is a reasonable approach the Department itself suggested.

Q: Who can actually file for the refund — the property owner or the contractor?
A: Whoever bore the sales tax liability on the building materials at the time of purchase — the property owner/tenant if they bought the materials directly (even using a hired contractor for labor), or the contractor if the contractor purchased the materials itself.

Q: Does routine maintenance or minor repair work qualify for this refund?
A: No. The refund applies only to genuine construction, expansion, or rehabilitation — not to renovations, general maintenance, or minor repairs (examples given include patching walls, replacing faucets, and similar small fixes).

Q: Can another Empire Zone property owner rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to Abeles Building Company LLC and the facts it described. Your own building's use mix, cost allocation, and purchase structure would need their own review.

Citations and references

Statutes and guidance:

• Tax Law § 1119(a)(6) (Empire Zone sales tax refund/credit for construction materials)
• A Guide to Sales and Use Tax Incentives within Empire Zones, Publication 30 (2/01)

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_29s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(29)S
Sales Tax
November 15, 2007

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

PETITION NO. S060920A

On September 20, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Abeles Building Company LLC, 75 Thruway Park Drive, West
Henrietta, NY 14586.
The issue raised by Petitioner, Abeles Building Company LLC, is whether a refund or
credit is allowed for sales tax paid on building materials used to rehabilitate a mixed-use
retail/residential building located in an Empire Zone.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
The property in question (the "Property") is located at 681-685 South Avenue in
Rochester, New York. The Property was designated by the Empire State Development
Corporation as property located in an Empire Zone in 2003. Petitioner states that the Property
was rehabilitated in 2006 and currently consists of a grocery store and a coffee shop on the first
floor and four residential apartments on the second floor. The contractor that performed the
rehabilitation allocated the building materials incorporated into the Property between the first
floor commercial space and the second floor residential space.
Applicable law and regulations
Section 1119(a) of the Tax Law provides, in part:
Subject to the conditions and limitations provided for herein, a refund or credit
shall be allowed for a tax paid pursuant to subdivision (a) of section eleven hundred five
or section eleven hundred ten . . . (6) on the sale of tangible personal property
purchased for use in constructing, expanding or rehabilitating industrial or commercial
real property (other than property used or to be used exclusively by one or more
registered vendors primarily engaged in the retail sale of tangible personal property)
located in an area designated as an empire zone pursuant to article eighteen-B of the
general municipal law, but only to the extent that such property becomes an integral
component part of the real property. . . .
A Guide to Sales and Use Tax Incentives within Empire Zones, Publication 30 (2/01),
explains the Tax Law and regulations applicable to the sales tax refund or credit available for
construction activities in an Empire Zone ("EZ"). The publication also lists the criteria that must
be met to qualify for the refund or credit of sales tax paid on building materials used in
construction within an EZ. The publication provides, in part:

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First, the building materials must be physically incorporated into real property
located in an EZ. This means that a refund or credit is allowed only for the sales or use
tax paid on those building materials that become an integral component part of the
structure.
*

*

*

Second, the real property on which the construction is performed must be
classified as industrial or commercial real property. Commercial real property is any
income producing real property, other than residential real property. Commercial real
property includes hotels (nonresidential), restaurants, nightclubs, beauty salons, travel
agencies, movie theaters, banks, automobile repair shops, clothing stores, food stores,
office buildings, and so forth.
Industrial real property is real property that is used primarily for the
manufacturing, processing, generating, assembling, refining, mining, or extracting of
goods. Industrial real property includes factories, manufacturing plants and facilities,
refineries, assembly plants, and so forth.
Constructing, expanding, or rehabilitating residential real property does not
qualify. For these purposes, residential real property is real property that consists of a
building or structure containing one or more dwelling units that are used or to be used as
the permanent home or residence of one or more persons. Residential real property
includes apartment hotels, apartment buildings, apartment houses, condominiums,
cooperative housing, townhouses, private homes, and facilities that contain multiple
dwellings (such as two- and three-family homes).
*

*

*

Third, the completed construction must result in either the construction of new
industrial or commercial real property, or the rehabilitation or expansion of existing
industrial or commercial real property.
The term construction means the act of building a new structure. For example,
erecting a building on a vacant lot, or razing an old structure and erecting a new structure
in its place are examples of constructing.
The term expansion means the addition of entire rooms or floors to existing
buildings to increase the available space. Adding another floor to a building by raising
the building's roof and installing supporting walls is an example of expansion.
The term rehabilitation means performing activities necessary to restore real
property to an acceptable condition of fitness and safety for habitation, as required by all

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applicable governmental building codes, laws, and regulations. The replacement or
repair of heating, plumbing, and electrical systems to bring them up to code is an
example of rehabilitation.
*

*

*

The terms construction, expansion, and rehabilitation do not include renovations,
general maintenance, or minor repairs. Examples are replacing through-the-wall mounted
air conditioning units, replacing damaged bricks, repairing or replacing faucets, patching
and painting walls, sanding and shellacking floors, repairing or replacing door frames,
repairing or replacing electrical switches and wiring, removal of debris, replacing missing
roof tiles, replacing toilet seals and seats, repairing termite damage, repairing dry rot and
replacing window frames and panes.
Fourth, the real property cannot be used exclusively, or be intended for use
exclusively, by one or more vendors whose primary business is the retail sale of tangible
personal property. For example, property that is constructed exclusively as retail space,
such as a shopping mall, is not qualifying property. Thus, even though property may
qualify as industrial or commercial real property, its exclusive use by retailers
disqualifies the property for purposes of the EZ refund or credit.
*

*

*

For purposes of the EZ refund or credit, exclusively means 100% of the real
property is used or is intended to be used in the retail sale of tangible personal property
by one or more vendors. Thus, if a building is constructed, expanded, or rehabilitated in
an EZ, and the building is going to be used partly as retail space and partly as commercial
or industrial space, the credit or refund is allowed on the total tax paid on the building
materials used in constructing, expanding, or rehabilitating the entire building.
*

*

*

The person who is eligible to claim a refund or credit for sales tax paid on the
purchase of qualifying tangible personal property (building materials, fixtures, plumbing
components, heating components, and so forth) used in constructing, expanding, or
rehabilitating real property in an Empire Zone is the person who, under the Tax Law, has
the liability for payment of the sales tax due on the purchase of the tangible personal
property.
When the construction, expansion, or rehabilitation results in a capital
improvement, and the property owner or tenant purchases the tangible personal property
and performs the labor, the property owner or tenant is liable for the sales tax, that must
be paid to the supplier at the time the tangible personal property is purchased. In this

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situation, then, the property owner or tenant is the person who is eligible to file for a
refund or credit of the sales tax paid on the purchase of that tangible personal property
which becomes an integral component part of the real property. The same is true if the
property owner or tenant purchases the tangible personal property and hires a contractor
to perform the labor.
If the property owner or tenant hires a contractor, and the contractor purchases the
tangible personal property, then the contractor is liable for the sales tax, which must be
paid to the supplier at the time the tangible personal property is purchased. In this
situation, the contractor is the person who is eligible to file for a refund or credit of the
sales tax paid on the purchase of that tangible personal property that becomes an integral
component part of the real property.
A capital improvement is any addition or alteration to real property that meets all
three of the following conditions: (1) it substantially adds to the value of the real
property or appreciably prolongs the useful life of the real property; and (2) it becomes
part of the real property or is permanently affixed to the real property so that removal
would cause material damage to the real property or to the property that was affixed to
the real property; and (3) it is intended to become a permanent installation.
When a building is being constructed, expanded, or rehabilitated, and the
construction, expansion, or rehabilitation does not result in a capital improvement to the
real property, if the property owner or tenant purchases the tangible personal property and
performs the labor, the property owner or tenant is liable for the sales tax due on the
purchase of the tangible personal property. In this situation, the property owner or tenant
is the person eligible to file for a refund or credit of the sales tax paid on the purchase of
that tangible personal property that becomes an integral component part of the real
property. This is also true in cases where the property owner or tenant purchases the
materials and hires a contractor to perform the labor.
Opinion
Section 1119(a)(6) of the Tax Law allows a refund or credit for the sales and
compensating use tax paid "on the sale of tangible personal property purchased for use in
constructing, expanding or rehabilitating industrial or commercial real property (other than
property used or to be used exclusively by one or more registered vendors primarily engaged in
the retail sale of tangible personal property) located in an area designated as an empire zone
pursuant to article eighteen-B of the general municipal law, but only to the extent that such
property becomes an integral component part of the real property." However, the statute does
not define the phrase "industrial or commercial real property" and does not address the
application of the refund or credit to mixed-use properties. The refund or credit may only be
claimed by the person who is liable for the tax due on the purchase of the qualifying tangible
personal property.

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It is assumed for purposes of this Opinion that the Property was rehabilitated as required
by section 1119(a)(6). It should be noted that for purposes of section 1119(a)(6) of the Tax Law,
rehabilitating industrial or commercial real property means performing activities necessary to
restore real property to an acceptable condition of fitness and safety for habitation, as required by
all applicable governmental building codes, laws, and regulations. Rehabilitation does not
include renovations, general maintenance, or minor repairs. See Publication 30, supra, at 8.
As the Legislature did not define the phrase "industrial or commercial real property," the
phrase may be interpreted in light of its commonly used meaning. When determining the
commonly used meaning of a term, the general method is to use the dictionary definition. The
dictionary defines industrial as relating to industry, while commerce is defined as buying and
selling of commodities. (Merriam-Webster's Collegiate Dictionary 231, 594 (10th ed 1993])
One might consider how a property is zoned in determining how to classify it for purposes of
section 1119(a)(6) of the Tax Law, although the zoning classification would not necessarily be
the sole determining factor.
Publication 30, supra, defines commercial real property and industrial real property as
follows:
Commercial real property is any income producing real property, other than residential
real property. Commercial real property includes hotels (nonresidential), restaurants,
nightclubs, beauty salons, travel agencies, movie theaters, banks, automobile repair
shops, clothing stores, food stores, office buildings, and so forth.
Industrial real property is real property that is used primarily for the manufacturing,
processing, generating, assembling, refining, mining, or extracting of goods. Industrial
real property includes factories, manufacturing plants and facilities, refineries, assembly
plants, and so forth.
In the present case, the Property is divided between a grocery store and coffee shop on
the first floor and four residential apartments on the second floor. Since the first floor is
commercial in nature and is not used exclusively by vendors primarily engaged in the retail sale
of tangible personal property, the first floor is qualifying commercial real property for purposes
of section 1119(a)(6) of the Tax Law. See Publication 30, supra. The second floor is
nonqualifying residential space. While section 1119(a)(6) is silent as to how to treat mixed-use
real property for purposes of this refund or credit, it is reasonable to allow the amount spent for
tangible personal property incorporated into rehabilitated mixed-use property to be allocated in a
reasonable manner between tangible personal property, such as building materials, that is
incorporated into the part of the building used in a qualifying manner and the part of the building
not used in a qualifying manner.
Thus, with respect to the refund or credit under section 1119(a)(6) of the Tax Law, when
real property has been rehabilitated and the rehabilitated property has a mixed use (here,

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qualifying commercial use and nonqualifying residential use), the amount of sales tax paid on the
building materials used to rehabilitate the commercial space may be determined by any
reasonable method. If costs to rehabilitate the commercial and residential spaces were
substantially the same, a reasonable method would be to multiply the total sales tax by a fraction,
the numerator of which is the number of square feet of commercial space and the denominator of
which is the total number of square feet in the building.

DATED: November 15, 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.