Are materials a developer's contractors buy to build and maintain buildings on land owned by a public authority (Battery Park City) exempt from sales tax when title to the materials vests immediately in the authority?

Plain-English summary

Olympia & York Battery Park Co., a New York partnership, planned a major project at Battery Park City in lower Manhattan. It would lease land from the Battery Park City Authority (BPCA) — land owned by a subsidiary of the New York State Urban Development Corporation (UDC) — and, under the lease and two related agreements, would construct, maintain and repair non-residential buildings plus a set of infrastructure "Civic Facilities" (utility mains, streets, sidewalks, a public esplanade, plaza, pedestrian bridges, and supporting foundations). Critically, the contracts provided that title to all materials incorporated into the buildings and facilities would vest in BPCA immediately upon purchase. Olympia & York asked whether the materials, fixtures and equipment — and the design services — would be taxable.

The Department held the incorporated materials are exempt, and the design services are not taxable.

• Contractor purchases are normally taxable retail sales. Section § 1105(a) taxes retail sales, and § 1101(b)(4)(i) treats a sale of tangible personal property to a contractor for use in erecting or improving real property as a retail sale, "regardless of whether the . . . property is to be resold as such before it is so used or consumed."
• But building for an exempt organization is exempt. BPCA is a public corporation, and UDC and its subsidiaries are exempt under § 1116(a)(1) (the State, its agencies, instrumentalities and public corporations). Because title vested in BPCA, Olympia & York would be erecting buildings of, and improving the real property of, an exempt organization. So the materials are exempt under § 1115(a)(15) (construction and capital improvements) — provided the property becomes an integral component part of the building or improvement. (The same applies to later additions, alterations and improvements only where they are in fact capital improvements.)
• Maintenance and repair materials are likewise exempt. Property bought to maintain, service or repair those buildings and improvements is exempt under § 1115(a)(16), again provided it becomes an integral component part.
• Architectural and engineering services are not taxable. Receipts from preparing plans and blueprints and offering technical advice are not subject to tax under § 1105(c), so buying those services is not taxable.
• The result carries across the other taxes too. The same conclusions apply to the State compensating use tax (§ 1110), the New York City and Yonkers taxes (§§ 1107, 1108), the MCTD tax (§ 1109), and local taxes under Article 29.

What this means for you

Building on or for an exempt government owner can make your materials exempt — but only if they're built in. The exemptions in §§ 1115(a)(15)–(16) apply to tangible personal property that becomes an integral component part of the exempt organization's structure or real property. Tools, equipment and consumables that don't become part of the building generally stay taxable.

"Integral component part" is the recurring condition — watch it on every line. The exemption tracks materials that are incorporated into the building or improvement; the opinion repeats that condition for construction, capital improvements, restoration, and maintenance/repair alike.

Title vesting in the exempt owner is what drives the analysis. Here the contracts vested title to incorporated materials in BPCA immediately on purchase, so the developer was building and improving the exempt organization's real property — not its own.

Later work only qualifies if it's a genuine capital improvement or covered maintenance. Additions and alterations for subtenant space qualify only where they actually constitute capital improvements (and note the developer's carve-out for improvements a subtenant makes at its own expense unless the sublease vests title in BPCA).

Design services stand on separate ground. Architectural and engineering services aren't taxed under § 1105(c), so those fees weren't at risk regardless of the materials analysis.

Common questions

Q: Are all of a developer's construction purchases exempt just because the project is on public land?
A: No. The exemption is for property that becomes an integral component part of the exempt organization's building or improvement, where title runs to the exempt owner. Materials that don't get built in — and equipment or tools the contractor keeps — are not covered.

Q: Do maintenance and repair materials qualify too?
A: Yes, under § 1115(a)(16), if they become an integral component part of the exempt organization's real property.

Q: Is the use tax or the New York City tax different here?
A: No. The Department said the same conclusions apply to the State use tax and to the New York City, Yonkers, MCTD and local taxes.

Q: Are the architect's and engineer's fees taxable?
A: No. Preparing plans and blueprints and giving technical advice are not taxable services under § 1105(c).

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — contractor purchases treated as retail sales
• Tax Law § 1115(a)(15) — exemption for property becoming an integral component part of an exempt organization's structure/improvement
• Tax Law § 1115(a)(16) — exemption for property becoming an integral component part in maintaining/servicing/repairing an exempt organization's real property
• Tax Law § 1116(a)(1) — exempt organizations (State, agencies, public corporations, political subdivisions)
• Tax Law § 1105(c) — architectural and engineering services not taxable
• Tax Law § 1110 (use tax); §§ 1107, 1108 (New York City, Yonkers); § 1109 (MCTD); Article 29 (local taxes)

Also cited in the opinion:

• McKinney's Unconsol. Laws §§ 6254(1), 6262(2), 6272 (UDC exemption); Public Authorities Law § 1973 (BPCA)
• Opinion of Counsel, April 18, 1966 (architectural/engineering services not taxable)

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_5s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(5)S
Sales Tax
January 29, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S811026A

On October 27, 1981 a Petition for Advisory Opinion was received from Olympia & York
Battery Park Co., 245 Park Avenue, New York, NY 10167.
Petitioner inquires as to the sales and use tax liabilities involved in connection with a major
construction project, as described below.
Petitioner is a New York partnership. Petitioner proposes to lease from the Battery Park City
Authority (hereinafter "BPCA") certain parcels, plots and pieces of land located in lower Manhattan.
These properties are owned by BPC Development Corporation (hereinafter "Development"), a
subsidiary of the New York State Urban Development Corporation (hereinafter "UDC").
Development has leased the land to BPCA for a term expiring in 2069. The proposed lease to
Petitioner will extend through June 17, 2069.
Under the terms of the proposed lease, Petitioner will be required to construct various non­
residential buildings, structures and improvements and to maintain and repair such buildings,
structures and improvements, keeping the same in good and safe condition. The lease will provide
that title to all materials which are to be incorporated into the buildings are to vest in BPCA upon
the purchase of such materials. Petitioner will be required to include a provision to similar effect in
all contracts it enters into in connection with construction of the buildings and in connection with
any subsequent improvements made to the buildings. BPCA will at all times have title to the
buildings and improvements to be erected by Petitioner under the lease. Petitioner will have no
interest in the buildings other than as tenant under such lease. At the expiration of BPCA's lease with
Development, title to all buildings and improvements to the land will vest in Development.
It is anticipated that during construction and following completion of the buildings, Petitioner
may from time to time engage in additional construction work with respect to the buildings,
including additions, alterations and capital improvements undertaken in connection with the leasing
of space to subtenants of Petitioner. The lease will provide that title to all materials used in
constructing such additions, alterations and improvements to the buildings shall vest in BPCA
immediately upon purchase by Petitioner, its contractors, subcontractors, and materialmen, in the
same manner as materials used in the initial construction of the buildings. The proposed lease
contemplates that Petitioner's subleases with its subtenants may provide that title to all additions and
improvements to the buildings made by or at the expense of such subtenants will vest immediately
in BPCA.

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

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

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On the last day of the lease term, or upon any earlier termination thereof, Petitioner will be
required to surrender the buildings and underlying property to the BPCA. Petitioner is also required
to repair and rebuild damaged property. In the event that the whole or substantially all of a parcel of
land subject to the lease is taken by eminent domain, the lease shall terminate and expire on the date
of taking. Petitioner shall receive that portion of the condemnation award, if any, which is
attributable to the buildings. If less than substantially all of any parcel subject to the lease shall be
taken by eminent domain, the lease shall continue without abatement of rental, and Petitioner must,
at its own cost and expense, proceed to restore any remaining part of the buildings not taken, so that
the latter shall be complete, rentable, self-contained architectural units in good condition and repair.
If the amount of the condemnation award exceeds the cost of such restoration, Petitioner may retain
such excess.
Upon entering the lease described above, Petitioner will enter into two other agreements with
BPCA, the Civic Facilities Construction Agreement and the Civic Facilities Maintenance
Agreement. The Construction agreement provides for the design and construction by Petitioner, at
the cost and expense of BPCA, of various improvements on, over, under, through and adjacent to
the buildings and improvements to be constructed by Petitioner under the Lease. These
improvements (hereinafter referred to as "Civic Facilities") consist of all infrastructure improvements
necessary to service the buildings and other portions of Battery Park City, and include such items
as
(i)

electrical, gas, water and telephone mains and branches, sanitary and storm sewers,
fire hydrants and street fire alarms, street lighting, access improvements and
landscaping;

(ii)

streets, curbs and sidewalks;

(iii)

a landscaped public esplanade and a plaza (with amenities such as fountains and
reflecting pools);

(iv)

two pedestrian bridges (including, without limitation, the entrances, terminals,
supports, heating, ventilating and air-conditioning systems thereof, and the steps,
escalators and elevators leading thereto; and

(v)

foundations, piles, platforms and supports required for the foregoing improvements.

Under the terms of the Civic Facilities Construction Agreement, title to all materials, fixtures,
and equipment purchased by Petitioner, its contractors, subcontractors, and materialmen, to be
incorporated into the Civic Facilities shall, immediately upon purchase of the same and at all times
thereafter, become and constitute the property of BPCA, free and clear of all liens, claims, security
interests and encumbrances.

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The Construction Agreement requires Petitioner to include in all of its contracts and
agreements for the construction of the Civic Facilities language reciting that all materials, fixtures,
and equipment purchased for incorporation in the Civic Facilities shall upon purchase become the
property of the BPCA. Under the Maintenance Agreement, Petitioner, as contractor, will agree to
operate the Civic Facilities, to put, keep and maintain the Civic Facilities in good and safe condition,
and to make all repairs thereto, structural and non-structural, ordinary and extraordinary, necessary
to keep the same in good and safe condition.
Finally, it is anticipated that Petitioner will incur certain costs for architectural and
engineering services in connection with the design, construction and alteration of the subject
buildings and civic facilities.
Petitioner requests an Advisory Opinion to the effect that materials, fixtures, and equipment
purchased, whether directly or through contractors, subcontractors, and materialmen for use:
(1) in constructing the buildings to be erected at Battery Park City under the terms of the
Lease;
(2) in adding to, altering or improving said buildings following their substantial completion,
including additions, alterations and improvements undertaken in connection with space
leased to subtenants (but excluding improvements undertaken by or at the expense of a
subtenant of Petitioner, unless the subtenant's sublease specifically provides for the vesting
of title to the improvements in BPCA);
(3) in restoring and reconstructing the Buildings and improvements in the event of damage
or destruction due to fire or other casualty or resulting from a partial taking by condemnation
or eminent domain;
(4) in maintaining, servicing or repairing the Buildings over the terms of the Lease,
(5) in constructing the Civic Facilities under the Construction Agreement; and
(6) in maintaining, servicing, repairing, restoring and reconstructing the Civic Facilities
pursuant to the Maintenance Agreement shall be exempt from sales and use tax under
Articles 28 and 29 of the Tax Law, provided that the property so purchased becomes an
integral component part of the Buildings or the Civic Facilities, as the case may be.
Petitioner also requests an Advisory Opinion to the effect that the architectural and
engineering services purchased by Petitioner in connection with the design, construction and
alteration of the Buildings to be erected under the Lease and the Civic Facilities to be constructed
under the Civic Facilities Construction Agreement shall not be subject to sales and use tax under
Articles 28 and 29 of the Tax Law.

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Sales Tax
January 29, 1982

Section 1105(a) of the Tax Law imposes the State sales tax on the" . . . receipts from every
retail sale of tangible personal property, except as otherwise provided in this article." Section
1101(b)(4)(i) defines the term "retail sale" to include "a sale of any tangible 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, . . . regardless of whether the tangible personal property is to be resold as such before it is
so used or consumed."
However, paragraphs (15) and (16) of subdivision (a) of section 1115 of the Tax Law provide
exemptions from the sales and compensating use taxes with respect to the following classes of
tangible personal property:
"(15) Tangible personal property sold to a contractor, subcontractor or repairman for use in
erecting a structure or building of an organization described in subdivision (a) of section
eleven hundred sixteen, or adding to, altering or improving real property, property or land
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.
"(16) Tangible personal property sold to a contractor, subcontractor or repairman for use in
maintaining, servicing or repairing real property, property or land of an organization
described in subdivision (a) of section eleven hundred sixteen, 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(a)(1) of the Tax Law provides for an exemption from sales and compensating
use taxes with respect to 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." The UDC and its
subsidiaries, such as Development, are exempt from sales and compensating use taxes pursuant to
Section 1116(a)(1) of the Tax Law. Mck. Unconsol. Laws §§6254(1), 6262(2), 6272. BPCA is
similarly exempt, as a public corporation. Public Authorities Law, § 1973.
Under the proposed lease agreement and the Civic Facilities Construction Agreement
Petitioner will construct (or in the event of damage or certain takings by eminent domain,
reconstruct) buildings and make capital improvements upon the real property leased to it by BPCA.
Title to all buildings constructed by Petitioner pursuant to these agreements, and to all capital
improvements to such buildings, will vest in BPCA. In constructing buildings and performing capital

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January 29, 1982

improvements, title to which vests in BPCA, Petitioner will be erecting buildings of, or making
capital improvements on the real property of, an organization described in subdivision (a) of section
1116 of the Tax Law. The underlying property upon which Petitioner will perform its construction
work is owned by Development. Capital improvements to the underlying property made by Petitioner
under its agreements with BCPA will therefore be improvements to real property of an organization
described in subdivision (a) of section 1116 of the Tax Law. Accordingly, tangible personal property
purchased by Petitioner, its contractors, subcontractors, and materialmen to be used in performance
of the construction work contemplated in Petitioner's proposed agreements with BPCA will be
exempt from sales and compensating use taxes pursuant to sections 1115(a)(15) and (16) of the Tax
Law, provided such tangible personal property becomes an integral component part of the building
or capital improvement involved. The foregoing is also applicable to additions, alterations and
improvements to the completed buildings, including those undertaken in connection with space
leased to subtenants, but only where the same in fact constitute capital improvements.
Under the terms of the proposed lease and the Civic Facilities Maintenance Agreement,
Petitioner will be required to maintain the buildings and capital improvements it constructs in good
and safe condition, and to make repairs to this end. Title to these buildings and capital improvements
will vest in BPCA. In maintaining and repairing them, therefore, Petitioner will be maintaining and
repairing real property of an organization described in subdivision (a) of section 1116 of the Tax
Law. Accordingly, tangible personal property purchased by Petitioner, its contractors, subcontractors
or materialmen, for purposes of maintaining and repairing these buildings and capital improvements
will be exempt from sales and compensating use taxes under section 1115(a)(16) of the Tax Law,
provided such tangible personal property becomes an integral component part of the buildings and
capital improvements.
Finally, receipts from the provision of architectural and engineering services, consisting of
the preparation of plans and blueprints and the offering of technical advice and information, is not
subject to the sales tax imposed under section 1105(c) of the Tax Law. Opinion of Counsel, April
18, 1966. The purchase of such services by Petitioner in connection with the performance of its
contracts with BPCA will therefore not be subject to such tax.
The conclusions expressed above with reference to the State sales taxes imposed under
Section 1105 of the Tax Law are applicable also to the State compensating use tax imposed under
section 1110 of the Tax Law, the New York City and Yonkers sales and compensating use taxes
imposed under sections 1107 and 1108 of the Tax Law, respectively, the sales and compensating use
taxes for the Metropolitan Commuter Transportation District imposed under section 1109 of the Tax
Law and local sales and compensating use taxes imposed pursuant to the authority of Article 29 of
the Tax Law.

DATED: January 13, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau