Does a gas utility owe sales tax when it reimburses a city's contractors for taking precautions to protect its gas mains during city capital improvement work?

Plain-English summary

Brooklyn Union Gas Company distributes natural gas through underground piping in New York City. When the City hires a private contractor to do capital improvement work on water mains and sewers near the utility's gas lines, the utility studies the site and, if damage to its pipes is possible, arranges for the City's contractor to take precautions. The utility reimburses the contractor for the cost of those precautions:

1. exercising general caution to avoid damaging the gas lines;
2. using hand tools instead of heavy machinery during parts of the excavation; and
3. providing support and/or protective sheeting for the gas mains.

It asked whether those reimbursements are subject to sales tax.

The Department held the reimbursements are not taxable.

• The rule for services to real property. Section § 1105(c)(5) taxes "maintaining, servicing or repairing real property," but distinguishes that from adding to or improving real property by a capital improvement (defined in § 1101(b)(9)), which is not taxable.
• The "end result" test. Under 20 NYCRR § 527.7(b)(4), whether a service to real property is taxable "depends on the end result": if the end result is repair or maintenance, it's taxable; if it's a capital improvement, it's not.
• These precautions are incidental to a capital improvement. The precautionary services the utility pays for are incidental to the City's capital improvement work on its water mains and sewers. Because that underlying work is a nontaxable capital improvement, the reimbursed precautions are not taxable either (citing Building Contractors Association, Inc. v. Tully (1982) and Carl A. Morse, Inc., TSB-H-80(144)S).

What this means for you

The "end result" test controls work on real property. Whether a service to real property is taxable turns on what the overall job accomplishes — a repair (taxable) or a capital improvement (not taxable) — not on the individual task in isolation.

Incidental precautions ride along with the main job's character. Protective steps taken as part of a capital improvement project — hand-digging, sheeting, shoring, careful excavation — share the nontaxable character of that capital improvement, even when a third party pays for them.

Who pays doesn't change the analysis. Here a utility (not the city) reimbursed the precautions, yet the result followed from the character of the underlying capital improvement work, not from who footed the bill.

Common questions

Q: We pay a contractor to protect our utility lines during someone else's construction. Is that taxable?
A: Not where the precautions are incidental to nontaxable capital improvement work. Under the end-result test (20 NYCRR § 527.7(b)(4)), they take on the capital improvement's nontaxable character.

Q: What's the difference between a repair and a capital improvement here?
A: A service whose end result is repairing or maintaining real property is taxable; a service that is part of adding to or improving real property by a capital improvement (§ 1101(b)(9)) is not.

Q: Does it matter that we, not the city, paid for the precautions?
A: No. The Department focused on the end result of the underlying work — a capital improvement — not on which party paid.

Citations and references

Statutes:

• Tax Law § 1105(c)(5) — tax on maintaining, servicing, or repairing real property, as distinguished from a capital improvement
• Tax Law § 1101(b)(9) — definition of "capital improvement"

Regulations:

• 20 NYCRR § 527.7(b)(4) — the "end result" test for taxability of services performed on real property

Authority cited:

• Building Contractors Association, Inc. v. Tully (1982)
• Carl A. Morse, Inc., State Tax Commission (June 18, 1980), TSB-H-80(144)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(36)S
Sales Tax
October 18, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820625A

On June 25, 1982 a Petition for Advisory Opinion was received from the Brooklyn Union
Gas Company, 195 Montagne Street, Brooklyn, New York 11201.
The issue raised herein is whether certain reimbursement payments made by Petitioner to
construction contractors are subject to sales tax.
Petitioner distributes natural gas through a network of underground piping in its franchised
territory, all of which is located in New York City. This piping is subject to real estate taxes. The
City will, at times, hire a private contractor to perform capital improvement work on City water
mains and sewers which often are in close proximity to Petitioner's gas lines. In these instances the
City, for safety reasons, will notify Petitioner. Petitioner's policy is to study the work site to
determine whether the use of heavy excavating equipment by the City's contractor may damage
Petitioner's pipelines. If it is determined that damage could occur, Petitioner will arrange with the
City's contractor to take necessary precautions to avoid causing such damage. Petitioner reimburses
the City's contractor for the expense incurred in taking such precautions. Reimbursements are made
by Petitioner in connection with the following precautions taken by the City's contractors:

1. exercising caution in general in performing work for the City to avoid damaging
   Petitioner's gas lines;
2. using hand tools instead of heavy machinery during certain parts of excavation and
   construction;
3. providing support and/or protective sheeting for Petitioner's gas mains while
   working around them.
   Section 1105(c)(5) of the Tax Law imposes a tax on the receipts from the following services:
   "Maintaining, servicing or repairing real property, property
   or land, as such terms are defined in the real property tax law,
   whether the services are performed in or outside of a building, as
   distinguished from adding to or improving such real property,
   property or land, by a capital improvement as such term capital
   improvement is defined in paragraph nine of subdivision (b) of
   section eleven hundred one of this chapter, . . . "
   Section 527.7(b)(4) of the Sales and Use Tax Regulations provides as follows:

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82(36)S
Sales Tax
October 18, 1982

"The imposition of tax on services performed on real property
depends on the end result of such service. If the end result of the
services is the repair or maintenance of real property such services are
taxable. If the end result of the same service is a capital improvement
to the real property such services are not taxable." 20 NYCRR
527.7(b) (4).
The services for which the City's contractors are reimbursed by Petitioner are incidental to
the capital improvement work being performed by the contractors for the City. Under the "end result"
test set forth in 20 NYCRR 527.7(b)(4), the receipts from these services are not taxable. Building
Contractors Association, Inc. v. Tully, _ A.D. 2d _ (1982); Carl A. Morse, Inc., State Tax
Commission, June 18, 1980, TSB-H-80(144)S. Accordingly, Petitioner is not required to pay sales
tax upon its reimbursement to the City's contractors for performance of these services described
above.

DATED: September 24, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau