Are construction materials that become part of real property owned by New York City or the Transit Authority — including land the Authority holds only by a permanent easement — exempt from sales tax?

Plain-English summary

Citibank, N.A. plans to build an office tower in Queens. To obtain the City Planning Commission's required certification of mandatory lot improvements, it must construct extensive improvements to the New York City Transit System — on its own land, the Transit Authority's, and the City's — and grant the Authority and City a permanent and perpetual easement over parts of its property, with title to the affixed materials vesting in the Transit Authority. Citibank asked whether the materials are exempt from sales/use tax.

The Department held the materials are exempt — including those going into the easement land.

• The government-property exemption. Both the Transit Authority and the City are § 1116(a)(1) organizations (New York State and its political subdivisions). Under Tax Law § 1115(a)(15) and (16), tangible personal property sold to a contractor, subcontractor, or repairman for use in erecting/improving — or maintaining/servicing/repairing — the real property of a § 1116(a) organization is exempt, provided the property becomes an integral component part of that structure or real property.
• An easement counts as "real property." "Real property" includes an easement in land. This permanent, perpetual, exclusive-possession subway easement leaves Citibank as merely the title owner, while for all practical purposes the property belongs to and is possessed by the Authority and the City. So the easement land is treated as the Authority's/City's property for these exemptions.
• Easement vs. lease/license. The Department distinguished an easement (a permanent, assignable, irrevocable interest amounting to an estate in the land) from a lease (landlord-tenant, reverting to the owner) or a license (a mere revocable authority to use another's land).
• Result. Materials bought by Citibank, its contractors, subcontractors, or repairmen that become integral components of the Authority's or City's real property — including the easement land, with title vesting in the Authority or City — are exempt under § 1115(a)(15) and (16).

What this means for you

Building or improving property that belongs to a government entity can make your materials sales-tax-exempt. When a contractor, subcontractor, or repairman buys materials that become an integral component of the real property of an exempt § 1116(a) organization — like the City or the Transit Authority — those materials are exempt under § 1115(a)(15) (erect/improve) and (16) (maintain/service/repair).

A permanent, perpetual easement can put the land on the government's side of the line. You don't necessarily need the government to hold fee title. Where a public entity holds a permanent, perpetual, exclusive easement that leaves the private owner as a bare titleholder, New York treats that land as the government's property for these exemptions. A mere lease or revocable license would not carry the same result.

Watch the "integral component" requirement. The exemption only covers materials that actually become an integral component part of the structure or real property — not equipment or supplies that don't become part of it.

Common questions

Q: We're building improvements on City/Transit Authority property. Are our materials exempt?
A: Yes, if they become integral components of that government real property. Materials sold to a contractor, subcontractor, or repairman to erect/improve or maintain/service/repair a § 1116(a) organization's real property are exempt under § 1115(a)(15) and (16).

Q: The government only holds a permanent easement over the land, not title. Does the exemption still apply?
A: Yes. "Real property" includes an easement, and a permanent, perpetual, exclusive easement that leaves the private owner as a bare titleholder is treated as the government's property for these exemptions.

Q: Would a lease or license produce the same result?
A: No. The Department distinguished an easement (a permanent, irrevocable interest amounting to an estate in the land) from a lease or a revocable license, which wouldn't carry the same treatment.

Q: Does every material we buy for the project qualify?
A: Only those that become an integral component part of the government's structure or real property. Items that don't become part of it aren't covered.

Citations and references

Statute and authority:

• Tax Law § 1115(a)(15) — exempts tangible personal property sold to a contractor, subcontractor, or repairman for erecting a structure/building of, or improving the real property of, a § 1116(a) organization, if it becomes an integral component part
• Tax Law § 1115(a)(16) — exempts such property used to maintain, service, or repair the real property of a § 1116(a) organization, if it becomes an integral component part
• Tax Law § 1116(a)(1) — lists New York State and its agencies, instrumentalities, public corporations, and political subdivisions among exempt organizations (the Transit Authority and the City of New York)
• Mittnacht v. Montana, 205 A.D. 643; Borough Bill Posting Co. v. Levy, 144 A.D. 784; Pierrepont v. Barnard, 6 N.Y. 279 — "real property" includes an easement in land, distinguished from a lease or a license

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_9s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88 (9) S
Sales Tax
January 15, 1998

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870504A

On May 4, 1987, a Petition for Advisory Opinion was received from Citibank, N.A., 153 East
53rd Street, New York, New York 10043.
The issue raised is whether the purchase of materials by Petitioner, its contractors,
subcontractors or repairmen are exempt from the New York sales and use tax where the materials
will be permanently affixed to real property either (a) owned by the New York City Transit Authority
or the City of New York directly or (b) held by the Transit Authority or by the City under a
permanent and perpetual easement.
Petitioner will own certain real property located in Queens County, New York. Petitioner
intends to construct a new office tower on the premises which construction requires Petitioner to
obtain certification of mandatory lot improvements by the New York City Planning Commission.
To obtain this certification, Petitioner must construct extensive improvements to the New York City
Transit System on Petitioner's, the Transit Authority's and the City's property and must grant a
permanent and perpetual easement to the Authority and the City with respect to certain portions of
Petitioner's property on which the improvements will be constructed.
Both the Transit Authority and the City of New York are organizations described in section
1116(a)(1) of the Tax Law.
All of the materials which will become affixed to the real property in the easement areas will
be owned by the Transit Authority since title to such materials will vest in the Transit Authority upon
purchase pursuant to the provisions of the agreement granting the easement.
Section 1115(a) of the Tax Law exempts from the sales tax imposed under section 1105(a)
of the Tax Law and from the compensating use tax imposed under section 1110:
*

*

*

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, 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.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-88 (9) S
Sales Tax
January 15, 1998

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.
Among the organizations described in subdivision (a) of section eleven hundred sixteen are:
(1) 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 ....
Accordingly, materials which are purchased by Petitioner, its contractors, subcontractors or
repairmen and used in adding to, altering, improving, maintaining, servicing or repairing real
property owned by the Transit Authority or the City of New York and which become integral
components of such real property are exempt from sales and compensating use tax under section
1115(a)(15) and (16) of the Tax Law.
Moreover, it is well established that the term "real property" includes an easement in land.
Mittnacht v. Montana, 205 A.D. 643, 200 N.Y.S. 82 (lst Dept. 1923); Klugewicz v. State 259 A.D.
755, 18 N.Y.S.2d.
The easement granting the Transit Authority the use of Petitioner's land as a subway requires
exclusive possession by the Transit Authority of a part of Petitioner's land in perpetuity. The
easement appropriated by the Transit Authority has left Petitioner as merely the title owner of the
land. For all practical purposes, the property belongs to and is possessed by the Transit Authority and
the City of New York. Since the easement for a subway is permanent and perpetual, the land subject
to the easement will be considered the property of the Transit Authority for purposes of sections
1115(a)(15) and (16) of the Tax Law.
It is noted that the easement here at issue is significantly different from a lease or license to
use. A lease is an agreement creating a landlord and tenant relationship entitling the tenant to
possession for a specific term with reversion to the landlord-lessor. A license is merely the consent
or authority to do an act upon or use the land of another without having an interest or estate in such
property.
The marked and leading distinctions between [an easement and a license] are, that
in the former there is a permanent interest in the land for some specified period,
amounting to an estate in the land, which is assignable, is irrevocable, and gives a
right at all times to enter and remain in possession, during its continuance; while [a
license] is a mere authority to enter upon the land of another for a temporary purpose

-3­
TSB-A-88 (9) S
Sales Tax
January 15, 1998

and to do a particular act or series of acts upon the land. Borough Bill Posting Co. v.
Levy, 144 A.D. 784, 129 N.Y.S. 740 (1911); citing Pierrepont v. Barnard, 6 N.Y. 279
(1852).
Accordingly, materials which are purchased by Petitioner, its contractors, subcontractors, or
repairmen and used in adding to, altering, improving, maintaining, servicing or repairing real
property subject to the easement of the Transit Authority or the City of New York, which become
integral components of such real property and title to which vests in the Transit Authority or the City
are exempt from sales and compensating use tax under sections 1115(a)(15) and (16) of the Tax
Law.

DATED: January 15, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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