Are labor charges billed under a fleet maintenance agreement taxable service, or exempt employee wages, when the mechanics are on the customer's payroll?

Plain-English summary

Coca-Cola Bottling Company of New York distributes soft drinks through route salespeople who lease their trucks from Soft Drink Leasing Corporation (SDLC) and garage them on Coke's premises. Coke had a maintenance agreement with SDLC to service its fleet and fork-lift equipment. To staff that work, auto mechanics on Coke's own payroll were made available to SDLC: Coke billed SDLC for the mechanics' total payroll, while SDLC billed Coke for the maintenance (including labor) on Coke's own vehicles. Coke argued its payments were employee wages, exempt under § 1105(c).

The Department held the labor charges are taxable maintenance service, not exempt wages.

• Servicing property is a taxed service. Section 1105(c)(3) taxes maintaining, servicing or repairing tangible personal property, and buying a maintenance or service contract is a taxable transaction (20 NYCRR 527.5(c)(1)).
• Wages of your own employees are excluded — but only if they stay yours. Section 1105(c) excludes "wages, salaries and other compensation paid by an employer to an employee" for performing those services as an employee.
• There were two separate transactions. Coke sold the services of its mechanics to SDLC — relinquishing dominion and control over the workers — and then bought a taxable maintenance service from SDLC. Once Coke gave up control of the mechanics, its payments weren't wages, and weren't paid to employees acting as its employees, so the exclusion doesn't apply.
• You're taxed on the structure you chose. That Coke could have arranged things to avoid the tax "does not change this result. Petitioner chose its form of business operation and must bear the tax consequences of that decision" (citing Ormsby Hauler v. Tully; Sverdlow v. Bates; 107 Delaware Associates v. State Tax Commission).

What this means for you

"It's just payroll" depends on who controls the workers. New York's wage exclusion protects compensation an employer pays its own employees for services. The moment you hand dominion and control of those workers to another company, you've sold a service — and buying the result back can be taxable maintenance. Control, not the payroll listing, is what the Department follows.

How you paper a deal can create the tax. The same economic outcome can be taxable or not depending on the transactions you set up. Here, running the mechanics' labor through the leasing company as a maintenance service made it taxable. Model the sales-tax consequences of an intercompany or staffing structure before you sign it — you're bound by the form you pick.

Fleet and equipment maintenance is a taxable service. Charges for maintaining, servicing or repairing vehicles and equipment are taxable under § 1105(c)(3), and buying a maintenance contract is taxable too. Build that into pricing on fleet-service arrangements.

Common questions

Q: My workers are on my payroll — aren't their wages exempt from sales tax?
A: Only while they're performing as your employees under your control. If you loan them to another company and give up dominion and control, your payments are treated as the sale of a service, not exempt wages.

Q: Why was Coca-Cola taxed when it was essentially maintaining its own trucks?
A: Because it structured the work as two transactions — selling its mechanics' services to SDLC, then buying maintenance back from SDLC. The purchased maintenance is taxable under § 1105(c)(3), and the wage exclusion no longer fit.

Q: Could a different structure have avoided the tax?
A: The Department acknowledged Coke could have operated so as not to be taxed, but held that it must bear the consequences of the form it chose. The lesson is to plan the structure in advance.

Citations and references

Statutes and regulation:

• Tax Law § 1105(c)(3) — taxes maintaining, servicing or repairing tangible personal property
• Tax Law § 1105(c) — excludes wages, salaries and other compensation paid by an employer to an employee for performing the listed services as an employee
• 20 NYCRR 527.5(c)(1) — the purchase of a maintenance or service contract is a taxable transaction

Cases cited:

• Ormsby Hauler v. Tully, 72 A.D.2d 845; Sverdlow v. Bates, 283 App. Div. 487; 107 Delaware Associates v. State Tax Commission, 64 N.Y.2d 935 — a taxpayer bears the tax consequences of the transactional form it chooses

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_16s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(16)S
Sales Tax
April 25, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S831207A

On December 7, 1983, a Petition for Advisory Opinion was received from the Coca-Cola
Bottling Company of New York, 20 Horseneck Lane, Greenwich, Connecticut 06836.
The issues raised are (1) whether automobile mechanics hired by and on the payroll of
Petitioner, but made available to a vehicle leasing company are employees of the Petitioner, (2)
whether the labor costs billed to the Petitioner in connection with its vehicle maintenance agreement
with the leasing company should be excluded from sales tax in accordance with regulation Section
527.5(b)(7) of the Tax Law.
Petitioner distributes soft drinks in the New York metropolitan area through route salesmen
who are either employees of Petitioner or independent distributors in an assigned territory. Petitioner
owns a truck fleet, but requires its distributor's to lease their trucks from Soft Drink Leasing
Corporation (hereinafter "SDLC") and to garage the vehicles on Petitioner's premises.
Petitioner entered into a maintenance agreement with SDLC for the periodic servicing of all
its vehicles and fork lift equipment. Conditions of the agreement provide, in part, for Petitioner to
pay for maintenance according to an established rate schedule and for SDLC to submit monthly
invoices to Petitioner for services rendered. The agreement further states that Petitioner "will furnish
to SDLC without charge . . . shop space . . . and facilities. . . ."
The Maintenance and Services Schedule attached to the agreement requires SDLC to supply all fuel,
oil, lubricants, tires, tubes and manpower necessary to operate and properly maintain the fleet. The
schedule then lists various services to be performed by SDLC and continues: "So long as the
aggregate number of vehicles leased to distributors together with the vehicles maintained for the
Coca-Cola Bottling Company is not reduced below 580, SDLC will employ a work force of not less
than 44 men . . . . SDLC will maintain on-premise management of one capable fleet administrator,
one maintenance superintendent, and two assistant maintenance superintendents."
To provide SDLC with the workforce needed to perform the maintenance labor, automobile
mechanics in Petitioner's employ are made available to SDLC. SDLC is billed by Petitioner for the
total payroll expenses incurred by Petitioner for these workers, who under direct supervision by
SDLC employees, service Petitioner's vehicles and equipment, and the distributor's trucks. Upon
completion of that work, the mechanics are available for work on other vehicles leased by SDLC.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

-2­
TSB-A-86(16)S
Sales Tax
April 25, 1986

SDLC bills Petitioner only for the maintenance service (including labor charges) applicable
to the company owned vehicles. However, it is presumed that this charge includes the cost of fuel,
oil, lubricants, tires and tubes.
Petitioner contends that its payments for the labor charges represent wages, salaries and other
compensation paid by an employer to his employees.
Section 1105(c) of the Tax Law imposes a tax on "the receipts from every sale, except for
resale, of the following services:. . . (3) . . . maintaining, servicing or repairing tangible personal
property . . .".
Section 1105(c) of the Tax Law also states: "Wages, salaries and other compensation paid
by an employer to an employee for performing as an employee the services described in paragraphs
(1) through (5) of this subdivision (c) are not receipts subject to the taxes imposed under this
subdivision."
Sales and Use Tax Regulations Section 527.5(c)(1) of the Tax Law states that the purchase
of a maintenance or service contract is a taxable transaction.
The facts described and the documents supplied by Petitioner indicate that two separate and
distinct financial transactions have taken place. Petitioner sold the services of its vehicle mechanics
to SDLC and then purchased from SDLC a maintenance service taxable under section 1105(c)(3)
of the Tax Law. When Petitioner sold the services of its vehicle mechanics to SDLC, it relinquished
dominion and control of its employees to SDLC. Thus, the amounts paid by Petitioner were not
wages; nor were they paid to employees for performing as employees. Rather, they were payments
to SDLC for maintenance services. As such, they cannot qualify for the exclusion from tax under
section 1105(c) of the Tax Law. The fact that Petitioner could have conducted business in such a
manner that it would not have been subject to tax does not change this result. Petitioner chose its
form of business operation and must bear the tax consequences of that decision. (See: Matter of
Ormsby Hauler v Tully, 72 AD2d 845); (Matter of Sverdlow v Bates, 283 App. Div. 487, 491, 129
N.Y.S. 2d 88, 91) and 107 Delaware Associates v. State Tax Commission, 64 NY2d 935.

-3­
TSB-A-86(16)S
Sales Tax
April 25, 1986

Accordingly, the labor costs billed by SDLC to Petitioner are not "wages, salaries, or other
compensation" within the meaning and intent of the exclusion provided in Section 1105(c) of the
Tax Law, but charges for maintenance service, taxable pursuant to Section 1105(c)(3) of the Tax
Law.

DATED: April 25, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.