Are the common-area maintenance charges a shopping-plaza owner bills tenants as 'additional rent' subject to sales tax?

Plain-English summary

Northtown Inc. owns a shopping plaza and leases store spaces to various businesses. The common areas — parking lots, driveways, and sidewalks — are not leased to tenants. Under its leases, Northtown is responsible for maintaining and repairing those common areas, using its own employees (it doesn't provide such services to others). Beyond maintenance and repair, the common-area costs include lighting, snow removal, police supervision, real estate taxes, water and sewer charges, and insurance, which Northtown allocates pro rata among its tenants as additional rent. It asked whether those charges are subject to sales tax.

The Department held the common-area charges are not taxable.

• These are real-property rent. Under the Department's policy in TSB-M-84(9)S, common-area charges that are designated as "additional rent" — or similarly provided for by specific lease provisions — are treated as receipts from the rental of real property, which is not subject to sales tax when billed to tenants.
• Result. Northtown's pro rata common-area maintenance charges, billed to tenants as additional rent, are not subject to tax.

What this means for you

Common-area maintenance billed as additional rent isn't a taxable service — it's rent. When a landlord recovers the cost of upkeep for shared areas (lot, sidewalks, lighting, snow removal, and the like) as additional rent under the lease, New York treats it as part of the exempt rental of real property.

The lease language matters. The exemption here rests on the charge being designated as "additional rent" or otherwise fixed by specific lease provisions. Structure and document the charge as rent to keep it on the untaxed side of the line.

Not everything a landlord passes through is rent, though. Contrast a landlord's resale of energy/utilities to a tenant, which New York taxes as a utility sale even when labeled "additional rent." Maintenance of common space is rental income; reselling metered energy is a taxable utility sale — the label alone doesn't decide it.

Common questions

Q: My landlord charges my pro rata share of parking-lot and sidewalk upkeep as 'additional rent.' Is that taxable?
A: No. Common-area maintenance charges designated as additional rent (or set by specific lease provisions) are receipts from real-property rental and are not subject to sales tax.

Q: Does it matter that the charge covers lighting, snow removal, insurance, and taxes?
A: No. Those are all part of maintaining the common area, and when recovered as additional rent they're treated as rental receipts, not a taxable service.

Q: So any 'additional rent' charge is tax-free?
A: Not necessarily. The character of the underlying charge controls. Common-area maintenance recovered as rent is exempt, but a resale of energy/utilities to the tenant is taxable even if the lease calls it additional rent.

Citations and references

Tax Law:

• 1105 — the sales tax reaches enumerated sales and services; the rental of real property is not among them

Departmental guidance applied:

• TSB-M-84(9)S — common-area charges designated as "additional rent," or provided for by specific lease provisions, are receipts from the rental of real property and are not subject to sales tax when billed to tenants

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_21s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85(21)S
Sales Tax
June 12, 1985

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830318A

On March 18, 1983, a Petition for Advisory Opinion was received from Northtown Inc., 3097
Sheridan Drive, Amherst, New York 14226.
Petitioner raises the issue of whether supplemental charges imposed upon Petitioner's tenants
in the form of additional rents pursuant to the terms of a lease agreement are subject to New York
State and local sales taxes where such charges represent the costs associated with maintaining the
common areas of a shopping plaza owned by Petitioner.
Petitioner owns land and buildings which are used as a shopping plaza. Petitioner leases store
spaces within the plaza to various business establishments. The common areas of the plaza, including
parking lots, driveways and sidewalks, are not leased or rented to Petitioner's tenants or others.
Pursuant to its leases with tenants, Petitioner is responsible for the maintenance and repair of
common areas. Petitioner uses its own employees to provide these services, but is not in the business
of providing such services for others. In addition to the maintenance and repair expenses incident
to the upkeep of the common area, maintaining the common area also entails the costs of lighting,
snow removal, police supervision, real estate taxes, water and sewer charges and insurance.
Petitioner distributes the various costs and expenses that derive from the common area on a pro rata
basis among its tenants.
On May 7, 1984 the Department of Taxation and Finance issued a memorandum setting forth
its policy pertaining to charges by mall operators made to tenants for maintenance of the common
areas. Such memorandum states in pertinent part as follows:
"Common area charges which are designated as 'additional rent' or similarly
provided for by specific provisions in the lease agreement are considered to be
receipts from the rental of real property and are not subject to sales tax when billed
to tenants." (TSB-M-84(9)S).
Accordingly, Petitioner's charges made to tenants in the form of additional rents for
maintenance of the common areas are not subject to tax.

DATED: May, 23, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR