Is a landlord's separate charge to a commercial tenant for heated and chilled water used to heat and cool the space taxable?

Plain-English summary

Robert M. Markham, P.C. intends to rent commercial space in New York City. Besides base rent, the landlord will separately invoice the tenant for heated and chilled water used to heat and cool the premises. The charge is based on the greater of the square footage occupied or the gross tonnage of the heating/cooling equipment installed, and the water system is closed (no water is removed). Markham asked whether that charge is subject to sales tax.

The Department said yes — it is taxable.

• What § 1105(b) taxes. Section 1105(b) imposes tax on the receipts from every sale (except for resale) of gas, electricity, refrigeration and steam and gas, electric, refrigeration and steam service of whatever nature.
• Substance: this is heating and cooling, not water. The landlord is, for all practical purposes, charging for heat and air conditioning, not for the water itself. The heated and chilled water is of no use to the tenant until it is acted upon to produce heating and cooling.
• Long-standing policy confirms it. Where separate charges are made for heating, air conditioning and elevator service in addition to rent, the heating and air-conditioning charges are taxable under § 1105(b) as steam and refrigeration service (New York State Tax Bulletin No. 1966-3).
• Result: The charge for heated and chilled water used to heat and cool the premises is taxable as refrigeration and steam service under § 1105(b).

What this means for you

Separately billed heating and cooling is a taxable utility service. If a landlord charges a tenant for heat or air conditioning as a line item apart from rent, New York treats it as taxable steam and refrigeration service — even when the medium delivered is "water" in a closed loop.

Substance beats the label on the invoice. Calling the charge "heated and chilled water" does not make it a non-taxable sale of water. The Department asks what the tenant is really paying for: the heating and cooling that the water produces.

Base rent is different from service charges. Rent for the premises is not what this opinion taxes; it is the separate charge for the conditioning service. Landlords billing these services separately should collect tax on them.

Common questions

Q: The invoice says "water." Isn't the sale of water non-taxable?
A: Not here. The Department looks at substance — the tenant is paying for heat and air conditioning, which the heated and chilled water produces. That is taxable refrigeration and steam service under § 1105(b).

Q: Does it matter that the system is closed and no water is removed?
A: No. Because no water is actually delivered for the tenant's use, the charge is even more clearly for the heating and cooling service, not for water.

Q: Is my base rent taxable too?
A: This opinion addresses the separate charge for heating and cooling, not the rent for the premises. It holds that the separately billed conditioning service is taxable under § 1105(b).

Citations and references

Statute:

• Tax Law § 1105(b) — taxes receipts from sales of gas, electricity, refrigeration and steam and related service of whatever nature

Department guidance cited:

• New York State Tax Bulletin No. 1966-3 — separate charges for heating and air conditioning are taxable under § 1105(b)

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_63s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-85(63)S
Sales Tax
December 4, 1985

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

PETITION NO. S850212B

On February 12, 1985, a Petition for Advisory Opinion was received from Robert M.
Markham, P.C., 638 Meadow Court, Westbury, New York 11590.
The issue raised is whether charges made by the landlord to the tenant for heated and chilled
water, normally used by the tenant in heating and cooling the premises, are subject to sales tax.
Petitioner intends to rent real property located within the City of New York. The landlord will
charge Petitioner (tenant) rent for the premises. In addition to this basic rent, the landlord will
invoice the Petitioner for heated and chilled water. The charge is based upon the greater of the square
footage occupied or the gross tonnage of the heating/cooling equipment installed. The water system
is closed and no water is removed from the system.
Section 1105(b) of the Tax Law imposes a tax on the receipts from every sale, except for
resale, "of gas electricity, refrigeration and steam and gas, electric, refrigeration and steam service
of whatever nature. . . ."
The landlord for all practical purposes is charging the tenant for heat and air conditioning,
not for the water that is being heated and chilled. This heated and chilled water is of no use to the
tenant until it is acted upon to produce heat and air conditioning.
"Where separate charges are made for heating, air conditioning and elevator service, in
addition to rent, whether on regular time or overtime, there would be a tax on the heating and air
conditioning charges under section 1105(b) of the Tax Law which imposes a tax on steam and
refrigeration service." New York State Tax Bulletin, Department of Taxation and Finance No. 1966­
3.
Accordingly, the charge for heated and chilled water used to heat and cool Petitioner's
premises is taxable as refrigeration and steam service under Section 1105(b) of the Tax Law.

DATED: November 18, 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