Must a village collect sales tax on the sewer user charges it bills residents, when it hires a private firm to run the treatment plants?

Plain-English summary

The Village of East Aurora owns and maintains a wastewater treatment plant and contracted with a private firm to operate it — and to build and run a new sewage treatment plant. Under the arrangement, the private firm bills the Village for operation and maintenance, and the Village bills individual users a "user charge" (sewer rent), authorized by General Municipal Law 450-454. The Village asked whether it must collect sales tax on those user charges.

The Department held the Village need not collect sales tax on its sewer-rent charges.

• The government-sales exemption. Tax Law 1116(a)(1) provides that sales by New York State or any of its agencies, instrumentalities, public corporations, or political subdivisions are not subject to sales or compensating use tax where the entity is the purchaser/user/consumer or where it is a vendor of services or property of a kind not ordinarily sold by private persons.
• The Village is an instrumentality. As an instrumentality of the State, the Village is not liable to collect sales tax on a service not ordinarily offered for sale by private persons.
• Waste treatment isn't "ordinarily" private. While waste treatment services may sometimes be sold by private persons, they are not ordinarily sold by private persons within the meaning of 1116(a)(1) (Opinion of Counsel, NYS Tax Bulletin 1965-3).
• Hiring a private operator doesn't change the result. The fact that the Village initially purchases the waste-treatment service from a private company does not alter its exempt status.
• Result. The Village is not required to collect sales tax on its sewer-rent charge to property owners.

What this means for you

Municipal charges for core public services generally aren't subject to sales tax. When a village, town, or other subdivision bills residents for a service that private companies don't ordinarily sell — like sewage treatment — the government-sales exemption applies, and the charge isn't taxable.

"Sometimes private" is not the test — "ordinarily private" is. The exemption doesn't evaporate just because some private firm somewhere offers a comparable service. What matters is whether such services are ordinarily sold by private persons.

Outsourcing operations doesn't forfeit the exemption. A municipality can hire a private contractor to run the plant and still bill residents tax-free. The Village's purchase of the operator's service is a separate transaction from its own exempt charge to users.

Common questions

Q: Does a village have to charge sales tax on sewer or water user fees?
A: Generally no. Sewer/waste-treatment charges billed by a municipal instrumentality are exempt, because such services aren't ordinarily sold by private persons.

Q: We hired a private company to run our treatment plant. Does that make our resident charges taxable?
A: No. Buying the operating service from a private firm doesn't change the Village's exempt status when it bills residents for sewer rent.

Q: Some private firms do offer waste treatment — doesn't that defeat the exemption?
A: No. The exemption turns on whether the service is ordinarily sold by private persons. Waste treatment isn't, so the municipal charge remains exempt.

Citations and references

Tax Law:

• 1116(a)(1) — sales by the State and its subdivisions/instrumentalities are exempt, including where the entity is a vendor of services not ordinarily sold by private persons

Other authority:

• General Municipal Law 450-454 — a village's authority to impose sewer rent
• Opinion of Counsel, NYS Tax Bulletin 1965-3 — waste treatment services are not ordinarily sold by private persons

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_26s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85(26)S
Sales Tax
July 8, 1985

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

PETITION NO. S840712A

On July 12, 1984, a Petition for Advisory Opinion was received from the Village of East
Aurora, 571 Main Street, East Aurora, New York 14052.
The issue raised is whether "user charges" billed by the Village of East Aurora for sewage
treatment services are subject to the sales tax.
Petitioner currently owns and maintains a wastewater treatment plant. Petitioner has
contracted with a private firm to assume the responsibility for operation of this facility as well as for
the construction and operation of a new sewage treatment plant. Pursuant to the agreement between
the parties, the private firm will bill Petitioner for operation and maintenance costs in connection
with its operation of these plants; the Village in turn will bill the individual users a user charge.
Petitioner states that its authorization to impose this user charge is found in section 450-454 of the
General Municipal Law which refers to this charge as sewer rent.
Section 1116(a)(1) of the Tax Law provides that any sales by the State of New York or any
of its agencies, instrumentalities, public corporations or political subdivisions shall not be subject
to the sales and compensating use tax 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.
Petitioner is an instrumentality of the State of New York, and as such is not liable for the
collection of sales tax on the sale of any service which is not ordinarily offered for sale by private
persons.
While waste treatment services may sometimes be sold by private persons, they are not
ordinarily sold by private persons within the meaning and intent of section 1116(a)(1) of the Tax
Law. (Opinion of Counsel, New York State Tax Bulletin 1965-3). Accordingly, Petitioner is not
required to collect sales tax on its charge to property owners for sewer rent. The fact that petitioner
initially purchases waste treatment services from a private company does not alter its exempt status.

DATED: June 10, 1985

s/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