For an excavating contractor whose heavy equipment is both rented out and used on its own capital-improvement jobs, what is taxable — the equipment purchases, repairs, parts, and its rentals?

Plain-English summary

A. Tomassi Co., Inc. is an excavating contractor. It owns heavy equipment that it both uses on its own capital-improvement contracts and rents to others — about 90% of the use is rental. It raised six sales-tax questions.

The Department answered each:

• (1) Are its equipment purchases taxable? Yes. A purchase is excluded from "retail sale" only if bought purely for resale or for use in performing certain taxable services (§ 1101(b)(4)(i)). Because Tomassi also uses the equipment to perform its own capital-improvement work (not a taxable service and not resale), the purchases are taxable retail sales.
• (2) Can it pay tax on only a percentage? No. The Tax Law has no partial-resale exclusion for property used for both rental and other purposes. Tomassi pays tax on the entire cost of the equipment.
• (3) What about major repairs and replacement parts? Taxable. Repair services are taxed under § 1105(c)(3), and the phrase "not held for sale in the regular course of business" means not held exclusively for sale — so renting the equipment doesn't exempt the repairs. Replacement parts are taxable under § 1105(a). The production-equipment exemptions (§ 1105-B, § 1115(a)(12)) don't help because they cover equipment used to produce tangible personal property for sale, which excavating equipment is not.
• (4) Must it collect tax when it subcontracts a capital improvement for a general contractor? No. Performing a capital improvement is not a taxable service, so no tax is collected from the GC.
• (5) What about a capital improvement for a homeowner or building owner? Same answer — no tax to collect on capital-improvement receipts.
• (6) Must it collect tax when it rents machinery to others? Yes. A rental is a "sale" (§ 1101(b)(5)), so Tomassi's equipment rentals are taxable retail sales and it must collect tax on the rental receipts.

What this means for you

Mixed-use equipment is taxed on the whole purchase price. If you buy gear that you'll both rent out and use on your own jobs, New York gives you no partial-resale break — you pay sales tax on 100% of the cost, even if rental is the dominant use. (You then charge tax on the rentals; the tax paid at purchase isn't recovered through a resale exclusion here.)

Capital-improvement work is on the non-taxable side of the line. A contractor doesn't collect sales tax on capital-improvement receipts, whether the customer is a general contractor, a homeowner, or a building owner. The contractor is instead the taxable consumer of the materials and equipment it uses.

Your rentals to others are taxable — collect the tax. The moment you rent machinery out, you're making a taxable sale under § 1101(b)(5) and must collect sales tax on the rental charge.

The production-equipment exemptions are narrow. Section 1105-B and § 1115(a)(12) are for machinery and parts used to manufacture goods for sale. Construction and excavating equipment doesn't qualify, so its repairs and parts stay taxable.

Common questions

Q: I mostly rent the equipment out — can I pay tax on just my own-use share?
A: No. New York has no partial-resale exclusion for dual-use property. Because you also use it on your own capital-improvement jobs, you owe tax on the full purchase price.

Q: Do I charge my general contractor sales tax on a capital-improvement subcontract?
A: No. Capital-improvement work isn't a taxable service, so you don't collect tax from the GC — or from a homeowner or building owner — on those receipts.

Q: My equipment is sometimes rented — are repairs to it exempt like production-equipment repairs?
A: No. The production-equipment exemptions apply only to equipment used to make goods for sale. Excavating equipment doesn't qualify, so both the repair service and replacement parts are taxable, even though the equipment is also rented.

Q: Do I collect tax when I rent machinery to a builder?
A: Yes. A rental is a taxable sale under § 1101(b)(5); collect sales tax on the rental receipts.

Citations and references

Statutes and authority:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property (including replacement parts)
• Tax Law § 1101(b)(4)(i) — defines "retail sale"; a purchase escapes tax only if for resale or for use in certain taxable services
• Tax Law § 1105(c)(3) — tax on installing, maintaining, servicing or repairing tangible personal property not held exclusively for sale
• Tax Law § 1101(b)(5) — a "sale" includes a rental, lease or license to use
• Tax Law § 1105-B and § 1115(a)(12) — exemptions for parts and machinery used to produce tangible personal property for sale (inapplicable to excavating equipment)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (15) S
Sales Tax
September 1, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810401E

On April 1, 1981 a Petition for Advisory Opinion was received from A. Tomassi Co., Inc.,
9 Valley Road, Port Washington, New York 11050.
Petitioner is an excavating contractor which owns heavy equipment which is both used by
it in the performance of capital improvement contracts and rented to others. Ninety per cent of its
use is by such leases.
Petitioner raises a number of issues with respect to the application of the Tax Law to its
purchase and use of the equipment here referred to. Each issue will be dealt with in turn.
(1) Are Petitioner's purchases of heavy equipment subject to sales tax?
Section 1105(a) of the Tax Law imposes a tax on
"The receipts from every retail sale of tangible personal property, except as otherwise
provided in this article . . . . "
Section 1101(b)(4)(i) of the Tax Law defines the term "retail sale" as follows:
". . . 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) and (5) of subdivision
(c) of section 1105 . . . "
Inasmuch as the equipment in question is used not only for rental purposes but also for the
provision by Petitioner of capital improvement services not subject to the sales tax, the sale of the
equipment to Petitioner constitutes a retail sale the receipts from which are subject to tax.
(2) May Petitioner use some type of percentage breakdown to determine if it is liable for
sales tax on only a portion of the cost of the equipment which it purchases?
The Tax Law contains no provision for a partial resale exclusion where tangible personal
property is used for both rental and other purposes. Petitioner must therefore pay sales tax on the
entire cost of the heavy equipment it purchases.

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-A-81 (15) S
Sales Tax
September 1, 1981

(3) What is Petitioner's sales tax liability for the cost of major repairs to the equipment and
the cost of replacement parts which have a useful life of more than one year?
Section 1105(c)(3) of the Tax Law imposes a tax on receipts from the sale of the following
service:
"Installing tangible personal property, or maintaining, servicing or repairing tangible personal
property not held for sale in the regular course of business . . . . "
While the equipment repaired is at times rented by Petitioner, the phrase "not held for sale
in the regular course of business" means not held exclusively for such sale. Accordingly, the repairs
to Petitioner's equipment constitute a service, described in section 1105(c)(3) of the Tax Law, the
receipts from which are subject to tax. The receipts from the sale to Petitioner of replacement parts
are subject to tax pursuant to section 1105(a) of the Tax Law, quoted above. It is to be noted that
while the Tax Law contains certain exemption with respect to repairs to and the purchase of parts
for production equipment, these exemptions are applicable to equipment used in the production of
tangible personal property for sale. Tax Law §§1105-B,1115(a)(12). Petitioner's equipment is not
so used for production and such exemption provisions are accordingly not applicable.
(4) When Petitioner is hired as a sub-contractor to perform a capital improvement, must
Petitioner collect sales tax from the general contractor?
The service of performing capital improvements is not subject to sales tax. Accordingly,
Petitioner need not collect sales tax from a general contractor when performing a capital
improvement contract for it.
(5) Must Petitioner collect sales tax when performing a capital improvement for a
homeowner or the owner of a building?
The answer here is the same as in the situation where Petitioner performs a capital
improvement for a general contractor. Petitioner does not have to collect sales tax on its receipts for
performing capital improvements for owners of homes or other buildings.
(6) When Petitioner rents machinery to the owner of a tract of land who is building a number
of homes to sell to the public, is Petitioner liable for collecting sales tax on the rental?
Section 1101(b)(5) defines the term "sale" as "Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume . . . . "Rentals of property thus
constitute sales of property for purposes of the sales tax. Petitioner's rentals of machinery to builders
are therefore retail sales of tangible personal property, and Petitioner must collect sales tax on the
receipts from these rentals.
DATED: August 14, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau