When a landlord reimburses a commercial tenant for the cost of building out the leased space, does the landlord owe sales or use tax on that reimbursement?

Plain-English summary

A landlord owns a New York City building and leases bare space (stripped to the concrete and steel) to a commercial tenant. The lease sets up a "Tenant Fund" — the landlord agrees to reimburse the tenant, up to roughly $1 million, for the cost of the Initial Alterations the tenant makes to fit out the space. The build-out becomes the landlord's property when the lease ends, though the tenant uses it during the term. The landlord asked whether its reimbursement payments to the tenant are subject to sales or use tax.

The answer: no — the reimbursement isn't a taxable sale.

• For the disbursements to be taxable, they would have to be receipts from a sale by the tenant to the landlord of tangible personal property or a taxable service (§ 1105(a), (c)). Here the landlord isn't buying anything from the tenant.
• When a landlord reimburses a tenant for improvements that (1) benefit the tenant during a substantial part of the lease but (2) become the landlord's property afterward, the reimbursement is not a taxable transaction between landlord and tenant.

The tenant's own purchases are a separate question:

• The tenant's purchases of uninstalled tangible personal property are taxable retail purchases (§ 1105(a)).
• The tenant's purchases of property and installation from contractors are not taxable if the Initial Alterations qualify as a capital improvement (§ 1105(c)(3)(iii), § 1115(a)(17)).
• If the installed items remain tangible personal property, the tenant's purchases are taxable (§ 1105(a), (c)(3)).

What this means for you

A tenant improvement allowance is not, by itself, a taxable sale. If you're a landlord funding a tenant's build-out and the improvements revert to you at lease-end, paying the tenant that money doesn't mean you bought goods or services from the tenant — there's no sales or use tax on the reimbursement.

The tax lives in the construction purchases, not the reimbursement. Whoever actually buys materials and hires contractors needs to look at the capital-improvement rules. If the work is a capital improvement, the tenant's payments to contractors for the installed property generally aren't taxed; but buying loose materials, or installing things that stay personal property, is taxable.

Document the capital-improvement status. Whether the build-out is a capital improvement drives the tenant-side result, so keep the contracts and capital-improvement paperwork that support it.

Common questions

Q: Does a landlord owe use tax on a tenant improvement allowance?
A: No. Reimbursing a tenant for build-out that becomes the landlord's property at lease-end is not a purchase of goods or services from the tenant, so no sales or use tax applies to the reimbursement.

Q: Does the tenant owe any tax on the build-out?
A: Possibly. The tenant's purchases of uninstalled materials are taxable, and contractor charges are taxable unless the work qualifies as a capital improvement. Items that remain tangible personal property after installation are taxable.

Q: Who was this opinion issued to?
A: The building owner; the taxpayer's identity is redacted. Like all advisory opinions, it binds the Department only as to that taxpayer and the facts described.

Citations and references

Statutes:

• Tax Law § 1105(a) — taxes sales of tangible personal property
• Tax Law § 1105(c) — taxes enumerated services
• Tax Law § 1105(c)(3)(iii) — installation that qualifies as a capital improvement is not taxable
• Tax Law § 1115(a)(17) — exempts tangible personal property installed as a capital improvement

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a09_64s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(64)S
Sales Tax
December 2, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S090309A

On March 9, 2009, the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted.
The issue raised by Petitioner is whether disbursements made by Petitioner to a tenant in accordance
with provisions included in a lease agreement, as described below, are subject to sales or use tax. It is
concluded that these disbursements are not payments for the sale of tangible personal property or services,
and are not subject to sales or use tax.
Facts
Petitioner owns a building in New York City. Petitioner leases space in the building to a commercial
tenant (Tenant). The leased premises have been stripped bare, to the concrete subfloor and steel beams.
Tenant is authorized under the lease agreement to make “alterations, installations, improvements,
additions or other physical changes” (Alterations) to the leased premises, subject to Petitioner’s prior
consent. Alterations must be made in accordance with the plans and specifications approved by Petitioner.
Alterations that require Petitioner’s consent must be performed under the supervision of an architect
approved by Petitioner, and must be performed by contractors and subcontractors either designated or
approved by Petitioner. For “Initial Alterations” (i.e., Alterations made to prepare the leased premises for
Tenant’s initial occupancy), the lease identifies an architect and a number of contractors that Petitioner
approves.
Petitioner is required under the lease agreement to contribute to a “Tenant Fund” that is intended to
reimburse Tenant for certain costs incurred by Tenant in performing Initial Alterations. The lease sets up a
mechanism for Petitioner to pay or make disbursements of the Tenant Fund to Tenant for these costs, which
disbursements are not to exceed a specified amount of approximately $ 1 million, with Tenant paying “the
amount of any excess of the cost of the Initial Alterations over the Tenant Fund.” The Initial Alterations to
the leased space will be the property of Petitioner to the extent that the Tenant Fund is used by Tenant to
perform the alterations, subject to Tenant’s right to use the alterations during the lease term. We are not
asked, and do not opine, about the tax treatment of Initial Alterations paid for by Tenant.
Analysis
In order for the disbursements from the Tenant Fund in this case to be subject to sales tax, the
disbursements must constitute receipts from the sale by Tenant to Petitioner of tangible personal property or
enumerated taxable services. See Tax Law §1105(a) and (c). On the basis of the facts Petitioner provides,
Petitioner is not purchasing any property or services from Tenant as a result of making the disbursements.
When, as in the present case, (1) a landlord reimburses a tenant for the cost of making improvements to the
leased premises, and (2) the improvements contribute significantly to the tenant’s comfort and convenience
during a substantial portion of the lease term, but become the landlord’s property after expiration of the lease,
the reimbursement does not constitute a taxable transaction between the landlord and tenant for sales tax

TSB-A-09(64)S
Sales Tax
December 2, 2009

-2-

purposes. Accordingly, the disbursements in the present case are not receipts from the sale of property or
services to Petitioner, and are thus not taxable.
It should be noted that Tenant’s purchases of tangible personal property on an uninstalled basis to be
incorporated into the Initial Alterations are purchases at retail subject to sales tax under Tax Law §1105(a).
Tenant’s purchases of tangible personal property and installation services from contractors who construct the
Initial Alterations for Tenant are not subject to tax if the Initial Alterations qualify as capital improvements.
See Tax Law §§1105(c)(3)(iii), 1115(a)(17). If the Initial Alterations remain tangible personal property after
installation, then Tenant’s purchases of tangible personal property and installation services from contractors
for that property are subject to tax under Tax Law §§1105(a) and 1105(c)(3).

DATED: December 2, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.