Are a tenant's contractors exempt from sales tax on materials built into a building whose title vests in the tax-exempt Port Authority?

Plain-English summary

Salomon, Inc. leased office space in 7 World Trade Center and planned major structural improvements — converting single floors to double-height floors and adding electrical, technological, and elevator capacity. The building sits on land leased from the Port Authority of New York and New Jersey, a public corporation exempt from sales and use tax under Tax Law § 1116(a)(1). Critically, under the ground lease, legal title to all building construction, improvements, and fixtures vests in the Port Authority immediately upon erection or affixation.

The Department held that the materials Salomon's contractors buy for the work are exempt:

• The improvements belong to an exempt owner. Because title to everything affixed to the building passes to the Port Authority on affixation, the tangible personal property the contractors and subcontractors build in becomes an integral component part of real property owned by an exempt organization (§ 1116(a)).
• That triggers the contractor exemption. Materials sold to a contractor, subcontractor, or repairman that become an integral component of an exempt organization's real property are exempt under Tax Law § 1115(a)(15) (erecting/improving) and § 1115(a)(16) (maintaining/repairing). Normally a sale of materials to a contractor is a taxable retail sale (§ 1101(b)(4)(i)), but this exemption overrides that when the owner is exempt and the property is integrated into the realty.
• The form of the contract is irrelevant. Under 20 NYCRR § 528.16, it doesn't matter how the construction contract is structured; what matters is that the property becomes an integral component of the exempt owner's real property.
• How to claim it: the contractors and subcontractors give their suppliers a completed Form ST-120.1 (Contractor Exempt Purchase Certificate), and Salomon and the contractor keep the relevant lease provisions on file to substantiate the exempt-owner status (§ 541.3).

What this means for you

The exemption follows ownership of the finished improvement

The contractor exemption for exempt-organization projects turns on who owns the real property the materials become part of, not on who hired the contractor or who occupies the space. Here a private tenant hired the contractors, but because title to the improvements vested in the exempt Port Authority on affixation, the materials qualified.

Only integral components qualify

The exemption reaches property that becomes an integral component part of the exempt owner's structure. Removable trade fixtures, furniture, and equipment that stay the tenant's property (and can be removed without damaging the building) aren't built into the realty the same way, so don't assume everything on the job is covered.

Use ST-120.1 and keep the paperwork

Contractors and subcontractors claim the exemption by giving suppliers a Form ST-120.1 Contractor Exempt Purchase Certificate. Keep copies of the lease provisions showing the exempt owner takes title, so you can substantiate the exemption if the Department asks.

Common questions

Q: A private tenant is paying for our work — how can the materials be exempt?
A: Because title to the improvements vests in the exempt owner (here the Port Authority) on affixation, the materials become an integral component of exempt-organization real property and qualify under § 1115(a)(15)/(16).

Q: What certificate do we give our suppliers?
A: Form ST-120.1, the Contractor Exempt Purchase Certificate; keep the relevant lease provisions on file as substantiation.

Q: Does the way the construction contract is written affect the exemption?
A: No. Under 20 NYCRR § 528.16 the form of the contract is not relevant; what matters is that the property becomes an integral component of the exempt owner's real property.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(15) — materials for erecting/improving an exempt organization's real property, if they become an integral component part
• Tax Law § 1115(a)(16) — materials for maintaining/servicing/repairing an exempt organization's real property, if they become an integral component part
• Tax Law § 1116(a)(1) — exemption for the State of New York, its agencies, instrumentalities, public corporations, and political subdivisions
• Tax Law § 1101(b)(4)(i) — a sale of property to a contractor for use in improving real property is a retail sale
• 20 NYCRR § 541.3 — contracts with exempt organizations; documentation
• 20 NYCRR § 528.16 — materials for structures of tax-exempt organizations; form of contract is not relevant

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (46)S
Sales Tax
November 20, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890717A

On July 17, 1989, a Petition for Advisory Opinion was received from Salomon, Inc., 1221
Avenue of the Americas, New York N.Y.
The issue raised is whether purchases of tangible personal property by contractors or
subcontractors, for use in constructing improvements to real property at 7 World Trade Center, New
York, New York owned by Port Authority of New York and New Jersey, (hereinafter referred to as
Port Authority) which is exempt from New York State and Local Sales and Use Tax under Tax Law
Section 1116(a)(1), are exempt from such sales and use tax under Tax Law Section 1115(a)(15),
where such tangible personal property will be incorporated into such real property pursuant to a lease
agreement between Petitioner, Salomon, Inc., and 7 World Trade Company.
Petitioner entered into a lease dated November 23, 1988 with the 7 World Trade Company
to lease office space in the building known as 7 World Trade Center. The lease is to commence on
October 1, 1990 and end September 30, 2010. Under the terms of the lease, Petitioner received a
license to commence work on November 23, 1988. Pursuant to a lease dated December 31, 1980,
the land upon which 7 World Trade Center has been constructed is leased from the Port Authority
to 7 World Trade Company.
Section 4.12 of the December 31, 1980 lease states, "Legal title to the Tower building
construction, including improvements, appurtenances and fixtures shall vest in the Port Authority
immediately upon erection or affixation of all or any part on or to the premises."
Section 15.01 of the November 23, 1988 lease between Petitioner and 7 World Trade
Company states, in part: "Landlord's Property. All Initial Work and Alterations, other than Tenant's
Property, shall be deemed the property of Landlord and shall be surrendered to Landlord upon
expiration or sooner termination of the Term, subject to Tenant's restoration obligations set forth in
Section 15.03. The preceding sentence shall in no way restrict or limit Tenant's right to perform
Initial Work and Alterations (including without limitation, the modification or alteration of previous
installations made by Tenant) pursuant to Exhibit B and Article 14, respectively. ..."
Section 15.02 of such lease states, in part: "Tenant's Property. All movable partitions, special
cabinet work, other business and trade fixtures, machinery and equipment, communications
equipment and office equipment which can be removed without jeopardizing the structural integrity
of the Building or irreparable damage to, or adverse affect upon, the Building systems, and all
furniture, furnishings and other articles of movable personal property owned by Tenant and located
TP-9 (9/88)

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Sales Tax
November 20, 1989
in the Demised Premises (all of which are sometimes referred to as "Tenant's Property"), shall be and
shall remain the property of Tenant and may be removed by it at any time during the Term; ..."
Petitioner and its subsidiaries plan to make significant structural improvements to the
building, including converting single floors to double height floors and adding electrical capacity,
technological capacity and elevators.
Section 1105(a) of the Tax Law imposes a sales tax on "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(4)(i) of the Tax Law defines the term "retail sale" to include:
... [A] sale of any tangible personal property to a contractor, subcontractor or
repairman for use or consumption in erecting structures or buildings, or building on,
or otherwise adding to, altering, improving, maintaining, servicing or repairing real
property, property or land, as the terms real property, property or land are defined in
the real property tax law... regardless of whether the tangible personal property is to
be resold as such before it is so used or consumed....
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 or 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.
(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.
Section 1116(a)(1) of the Tax Law provides for an exemption from sales and compensating
use taxes with respect to 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

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TSB-A-89 (46)S
Sales Tax
November 20, 1989
state or Canada) or political subdivisions 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". The Port Authority
constitutes such a public corporation exempt from sales and compensating use taxes.
Section 528.16 of the Sales and Use Tax Regulations states:
Tangible personal property sold to contractors for use in erecting structures of tax exempt
organizations. [Tax Law, §1115(a)(15)]
Form of Contract. (1) The form of contract entered into between an exempt
organization and its contractor is not relevant.
Section 541.3 of the Sales and Use Tax Regulations states:
Contracts with exempt organizations. [Tax Law, 1115(a)(15), (16), 1116(a);...]
(a) When a contractor's customer is a governmental entity described
in section 1116(a)(1) or (2) of the Tax Law, the contract signed by the
government representative and the prime contractor is sufficient proof
of the exempt status of purchases made for such contract.
(1) such governmental entities include:
(i) Pursuant to section 1116(a)(1) of the Tax Law 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. This group includes, but is not limited
to:
*
*
*
(h) any authority ... created by act of the Legislature for a public
purpose.
*
*
(d) Contracts with exempt organization.

*

(2) Purchase for contracts (other than agency contracts).
(i)

Tangible personal property sold to a
contractor, subcontractor, or repairman for use
in erecting, repairing, adding to, or altering a
structure or building owned by an exempt
organization, described in section 1116(a) of

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Sales Tax
November 20, 1989

(ii)

the Tax Law, is exempt when it is to become
an integral component part of such structure or
building.
Purchases of tangible personal property
incorporated into the real property of an
exempt organization by subcontractors and
repairmen are accorded the same treatment as
purchases by the prime contractor.
*

(v)

*

*

Documents. (a) If the customer is a
governmental entity, copies of signed
contracts and government purchase orders are
sufficient evidence to establish the exempt
status of the job between the governmental
entity and the prime contractor. With respect
to the documents required between a prime
contractor and the subcontractors, a signed
document between them which identifies the
project, location and exempt owner, will form
the basis for tax exemption of tangible
personal property purchased for incorporation
into the exempt project. When purchasing
such tangible personal property for the exempt
project, the contractor or subcontractor will
issue a properly completed contractor exempt
purchase certificate to the supplier.

Under the lease agreement between Petitioner and 7 World Trade Company, "[a]ll Initial
Work and Alterations, other than Tenant's Property shall be deemed the property of the Landlord."
However, the lease between 7 World Trade Company and Port Authority provides that "legal title
to the Tower building construction, including improvements, appurtenances and fixtures shall vest
in the Port Authority immediately upon erection or affixation of all or any part on or to the
premises." Accordingly, title to all improvements to 7 World Trade Center constructed by
Petitioner's contractors and subcontractors vest in Port Authority.
Where tangible personal property purchased by Petitioner's contractors or subcontractors
becomes an integral component part of 7 World Trade Center, such tangible personal property is
considered to be incorporated into improvements to real property of an organization described in
Section 1116(a) of the Tax Law. Accordingly, because such tangible personal property purchased
by Petitioner's contractors or subcontractors for use in performance of the construction work
contemplated in Petitioner's agreement with 7 World Trade Company will become integral

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Sales Tax
November 20, 1989
components of real property owned by Port Authority and because Port Authority will take title to
such tangible personal property upon erection or affixation of all or any part on or to the premises
the purchases of such tangible personal property will be exempt from sales and compensating use
tax as provided under Section 1115(a)(15) and 1115(a)(16) of the Tax Law.
Petitioner's contractors and subcontractors may purchase tangible personal property which
will be incorporated as integral components of the real property owned by Port Authority tax exempt
provided they furnish the building material supplier with a properly completed form ST-120.1,
Contractor Exempt Purchase Certificate. Petitioner and the contractor should keep on file a copy of
the relevant portions of the lease between Petitioner and 7 World Trade Company along with a copy
of the relevant portions of the lease between 7 World Trade Company and Port Authority as
substantiation that the construction performed was exempt from sales and use tax under Section
1115(a)(15) and 1115(a)(16) of the Tax Law.

DATED: November 20, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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