If a New York government agency owns a building that will have both public (school) and private (residential/retail) uses, is the developer's construction still exempt from sales tax on materials?

Plain-English summary

The New York City Educational Construction Fund, a state governmental entity exempt from sales tax, planned to build a mixed-use building on its own land: schools on some floors, plus residential co-op units, rental apartments, and retail space on others. A private developer would pay for and construct the private-use portion, the Fund would pay for the public-use portion, and both would split the cost of shared elements like the foundation. The Fund would keep ownership of the entire building — including the private-use floors, which it planned to lease out.

The Department ruled that materials incorporated into the building are sales-tax exempt across the board, for both the public and private portions, because the exemption under Tax Law § 1115(a)(15) turns on who owns the finished structure, not on how each part is used. Since the Fund — a tax-exempt governmental entity — would own the whole building, the developer and its subcontractors could buy construction materials tax-free using a Contractor Exempt Purchase Certificate (Form ST-120.1).

But that exemption only covers property that becomes a permanent part of the building. Equipment the developer rents or buys for its own use (cranes, bulldozers, scaffolding materials, tools) and never installs in the structure remains fully taxable — the developer, not the Fund, consumes that property, so ownership by an exempt entity doesn't help it.

What this means for you

Developers and contractors building on exempt-organization land

If you're building on land owned by a tax-exempt government entity or nonprofit, materials that get built into the structure are exempt regardless of whether the finished space will ultimately be used for private, revenue-generating purposes (like leased retail or apartments) — what matters is that the exempt organization retains ownership. Get a properly completed Form ST-120.1 from the property owner and keep it in your records; without it, you carry the burden of proving the exemption applies.

Contractors' own equipment and supplies

Don't assume everything on an exempt-organization job site is tax-free. Machinery and equipment you rent or own (cranes, forms, scaffolding, office supplies) and consume in performing the work — rather than permanently installing — remain taxable, even on an otherwise fully exempt project.

Government agencies and public-private partnerships

Structuring a mixed-use project so the public agency retains ownership of the whole building (even the privately-leased floors) is what preserves the exemption for the private developer's construction materials. If ownership of the private portion were instead transferred to the developer or a private entity, this analysis would likely come out differently.

Common questions

Q: Does the sales-tax exemption depend on how each part of the building will be used?
A: No — it depends on who owns the building. Because the exempt government entity retains ownership of the entire structure, both the public-school portion and the privately-leased portion qualify, as long as the property becomes an integral component of the building.

Q: Do the developer's tools and rented equipment get the exemption too?
A: No. Only tangible personal property that becomes part of the real property is exempt. Equipment used or consumed by the contractor in performing the work — construction machinery, tools, forms and scaffolding materials, office supplies — stays taxable.

Q: What paperwork does the developer need?
A: A properly completed Contractor Exempt Purchase Certificate (Form ST-120.1) for materials being incorporated into the exempt organization's building, and (per the regulations discussed in the opinion) documentation such as signed contracts identifying the project, location, and exempt owner between the prime contractor and subcontractors.

Q: Does this apply to any government-owned building?
A: This is a fact-specific Advisory Opinion binding only on the petitioner. It shows how the Department reasons about ownership-based exemptions on mixed-use exempt-organization projects, but another taxpayer's facts — especially around who ultimately owns each portion of a building — could change the outcome.

Citations and references

• Tax Law § 1101(b)(4)(i) (retail sale; contractor purchases deemed retail sales)
• Tax Law § 1105(a) (imposition of sales tax)
• Tax Law § 1115(a)(15) (exemption for property incorporated into an exempt organization's building)
• Tax Law § 1116(a)(1) (exemption for New York governmental entities)
• 20 NYCRR § 541.3(d) (contracts with exempt organizations)
• 20 NYCRR § 541.9(a), (c)(1) (contractor equipment rentals)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_25s.pdf

Original ruling text

New York State Department of Taxation and Finance
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Sales Tax
June 6, 2008

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

PETITION NO. S071227C

On December 27, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Jamie Smarr, New York City Educational Construction Fund, 30-30
Thomson Avenue, Suite 4021, Long Island City, NY 11101.
The issue raised by Petitioner, Jamie Smarr, is whether tangible personal property sold to
a contractor for use in erecting a building on the property of a sales tax exempt organization
remains exempt from sales tax when the completed building will be used for both public and
private purposes.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is Executive Director of an organization that is a governmental entity exempt
from sales tax under section 1116(a)(1) of the Tax Law. The exempt organization is the owner
of real property situated in New York on which it intends to construct a building. Petitioner has
entered into contracts with a private developer to construct a mixed-use building on the exempt
organization’s property. The building will have both public (schools) and private (residential
cooperative units, residential rental units, and retail units) uses. The developer will pay for the
construction of the private-use portion of the building, and the exempt organization will pay for
the construction of the public-use portion of the building. Construction costs for certain portions
of the building, for example the common foundation, will be shared by the exempt organization
and the private developer. The exempt organization will retain ownership of the entire building
and will lease the private-use portion of the building to the developer or to another private third
party.
Applicable law and regulations
Section 1101(b)(4)(i) of the Tax Law defines the term retail sale, in part, to mean:
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 transferred to the purchaser of
the service in conjunction with the performance of the service subject to tax.
Notwithstanding the preceding provisions of this subparagraph, a sale of any tangible

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personal property to a contractor, subcontractor or repairman for use or consumption in
erecting structures or buildings, or building on, or otherwise adding to, altering,
improving, maintaining, servicing or repairing real property, property or land, as the
terms real property, property or land are defined in the real property tax law, is deemed to
be a retail sale regardless of whether the tangible personal property is to be resold as such
before it is so used or consumed, except that a sale of a new mobile home to a contractor,
subcontractor or repairman who, in such capacity, installs such property is not a retail
sale. . . .
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. 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.
Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the compensating use tax
imposed under section eleven hundred ten:
*

*

*

(15) Tangible personal property sold to a contractor, subcontractor or repairman
for use in (i) erecting a structure or building (A) of an organization described in
subdivision (a) of section eleven hundred sixteen . . . or (ii) adding to, altering or
improving real property, property or land (A) of such an organization . . . as the terms
real property, property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such tangible personal
property is to become an integral component part of such structure, building or real
property.
Section 1116 of the Tax Law provides, in part:
Exempt organizations. (a) Except as otherwise provided in this section, any sale
or amusement charge by or to any of the following or any use or occupancy by any of the
following shall not be subject to the sales and compensating use taxes imposed under this
article:

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(1) The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement or compact
with another state or Canada) or political subdivisions where it is the purchaser, user or
consumer, or where it is a vendor of services or property of a kind not ordinarily sold by
private persons;
Section 541.3(d) of the Sales and Use Tax Regulations provides, in part:
Contracts with exempt organizations. (1) Tangible personal property incorporated
into real property owned by a governmental entity or by an exempt organization is
exempt, whether the contract is on a lump sum, time and material, cost-plus, or other
basis.
(2) Purchases for contracts (other than agency contracts).
(i) Tangible personal property sold to a contractor, subcontractor, or repairman for
use in erecting, repairing, adding to, or altering a structure or building owned by an
exempt organization, described in section 1116(a) of the Tax Law, is exempt when it is to
become an integral component part of such structure or building.
Example 1: An exempt organization contracts to have a building erected on its
land. Purchases by its contractor of tangible personal property, such as nails, sheetrock,
and plywood that become part of the structure are exempt.
*

*

*

(ii) Purchases of tangible personal property incorporated into the real property
of an exempt organization by subcontractors and repairmen are accorded the same
treatment as purchases by the prime contractor.
(iii) Tangible personal property purchased by a contractor, which remains tangible
personal property after installation, is exempt from the tax when purchased for and sold
to an exempt organization.
*

*

*

(iv) Except for agency contracts, contractors’ purchases of construction supplies
which do not become part of an exempt organization’s real property and are used or
consumed by the contractor, as well as purchases of taxable services, such as electricity
used by the contractor, are subject to the tax.

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The following types of property and services are representative, but not intended
to be all-inclusive, of contractor’s purchases which are subject to tax, irrespective of
whether the contractor has a time and material, lump sum, or other type of contract
(except agency contract), with an exempt organization:
(a) construction machinery and equipment, including rentals and repair parts;
(b) contractors' office supplies;
(c) contractors' supplies, tools, and miscellaneous equipment, whether purchased
or rented, including materials to make forms and scaffolding; and
(d) any other items purchased or rented by a contractor for his use in performing
the contract and not incorporated into the realty.
Example 7: Lumber and other materials which are used to build forms are not
exempt since they do not become a component part of the structure.
Example 8: Equipment rentals under the dominion and control of the contractor,
such as rentals of cranes, bulldozers, backhoes, etc. for use in building a structure for an
exempt organization are subject to tax.
(v) Documents. (a) If the customer is a governmental entity, copies of signed
contracts and government purchase orders are sufficient evidence to establish the exempt
status of the job between the governmental entity and the prime contractor. With respect
to the documents required between a prime contractor and the subcontractors, a signed
document between them which identifies the project, location, and exempt owner, will
form the basis for tax exemption of tangible personal property purchased for
incorporation into the exempt project. When purchasing such tangible personal property
for the exempt project, the contractor or subcontractor will issue a properly completed
contractor exempt purchase certificate to the supplier.
Section 541.9(a) of the Sales and Use Tax Regulations provides, in part:
The purchase, rental, lease or license to use construction equipment . . . by a
contractor is subject to sales and use tax.
Section 541.9(c)(1) of the Sales and Use Tax Regulations provides, in part:
Rentals and leases of equipment to contractors.

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(i) Where a contractor leases equipment, the contractor is liable for the combined
State and local sales and use tax on the total charges at the highest rate in effect in any
jurisdiction in which the equipment is used during the lease payment period, (e.g., daily,
weekly, monthly, depending on the frequency of payment).
Opinion
Petitioner is Executive Director of an organization that is a governmental entity exempt
from payment of sales tax under section 1116(a)(1) of the Tax Law. The exempt organization
will enter into contracts with a private developer to construct a mixed-use building on real
property owned by the exempt organization. The exempt organization will pay for the
construction of the public-use portion of the building, the developer will pay for the construction
of the private-use portion, and both parties will share the cost of the common areas of the
building, such as the shared foundation. The exempt organization will retain ownership of the
real property and building and will lease the private-use portion of the building to the developer
or to another private third party.
Section 1116(a)(1) of the Tax Law provides that purchases made by New York
governmental entities are exempt from sales tax. Therefore, all purchases made by Petitioner’s
organization that are related to the construction of the building, including purchases or leases of
construction machinery and equipment, are exempt from sales tax.
Section 1115(a)(15) of the Tax Law provides that tangible personal property incorporated
into a structure, building, or real property owned by a governmental entity, or by an organization,
exempt from tax under section 1116(a) is exempt, whether the construction contract is on a
lump-sum, time-and-material, cost-plus, or other basis. See section 541.3 of the Sales and Use
Tax Regulations. Therefore, in the present case, the developer’s purchases of tangible personal
property that are incorporated into the exempt organization’s building or real property are not
subject to sales tax. The exemption is granted because of the exempt organization’s ownership
of the building and real property and applies to purchases made for both the public and private­
use portions of the building. The developer and its subcontractors may purchase the property
exempt from tax by presenting vendors with a properly completed Form ST-120.1, Contractor
Exempt Purchase Certificate.
Equipment leased or purchased and supplies purchased by the developer do not become
an integral component part of the exempt organization’s real property. Equipment and supplies
are considered to be used or consumed by the developer in the performance of its contracts. No
tax exemption applies to such equipment leased or purchased and supplies purchased for the
developer’s own use. Therefore, the developer must pay sales tax under section 1105(a) of the
Tax Law on equipment, supplies, and any other property purchased for use in complying with its
contractual obligations (other than agency contracts) that are not incorporated into the realty of

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the exempt organization. See section 1101(b)(4)(i) of the Tax Law and section 541.3(d)(2) of
the Sales and Use Tax Regulations.

DATED: June 6, 2008

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.