Are materials and rented tools a tenant's contractors use to build out leased space at 7 World Trade Center exempt from New York sales and use tax?

Plain-English summary

Insurance Services Office, Inc. leased space at 7 World Trade Center and hired contractors to build it out. It asked two questions: (1) are the materials its contractors buy that become part of the space exempt from sales and use tax, and (2) are the tools and equipment they rent to do the installation also exempt?

The key fact is who owns the building. Under a 1980 ground lease, legal title to the tower's construction, improvements and fixtures vests immediately in the Port Authority of New York and New Jersey the moment they are affixed. The Port Authority is a public corporation exempt under § 1116(a)(1). So work that becomes part of the building is really work on an exempt organization's real property.

The Department ruled:

• Materials that become an integral component of the building are EXEMPT under § 1115(a)(15) and (16). The contractors and subcontractors buy them tax-free by giving the supplier a properly completed Form ST-120.1 (Contractor Exempt Purchase Certificate), and should keep copies of the relevant lease provisions on file as proof.
• The improvements count as permanent. Under TSB-M-83(17)S, a lease saying title vests in the landlord immediately and the work stays with the premises shows an intention of permanence. The landlord's right to require removal of "Special Tenant Installations" does not destroy that permanence.
• But items that stay tangible personal property after installation do NOT qualify. The Department specifically excluded raised computer floors (citing Raised Computer Floors, Inc. v. Chu), auditorium/theater seats, cafeteria and dining-room furniture, free-standing fixtures, and appliances like refrigerators and stoves (20 NYCRR § 541.5(d)). The full charge — materials and labor — for installing those items is taxable.
• Rented tools and equipment are taxable. Because they are used up by the contractors and never become part of the Port Authority's real property, they fall under 20 NYCRR § 541.3(d)(2)(iv) and are taxable under §§ 1105(a), 1109 and 1110.

What this means for you

Building out space in a government-owned building can be tax-exempt — if title passes to the exempt owner

The exemption here did not come from the tenant's status; it came from the Port Authority owning the improvements. When a lease makes the landlord (an exempt public corporation) the immediate owner of everything built in, contractors installing permanent improvements can buy the materials exempt with an ST-120.1. Keep the lease language proving who takes title.

"Integral component" is the dividing line

Materials that fuse into the building — walls, permanent systems, structural work — are exempt. Things that merely sit in the space and could be unplugged or unbolted and carried out — computer-access floors, seating, furniture, kitchen appliances — are taxable in full, including the labor to install them. Contractors should separate these categories when bidding and billing.

Your own tools and rented equipment are always taxable

Even on a fully exempt job, the cranes, tools, and rented equipment a contractor uses to perform the work are taxable. The exemption follows the material that ends up in the building, not the contractor's means of getting it there.

Common questions

Q: Why was this exempt when the tenant is a private company?
A: Because the Port Authority — an exempt public corporation under § 1116(a)(1) — takes immediate legal title to the improvements. The work is treated as improving an exempt organization's real property under § 1115(a)(15)/(16).

Q: Does the landlord's right to make the tenant remove installations ruin the exemption?
A: No. Under TSB-M-83(17)S, a removal-on-demand clause does not negate the intended permanence of leasehold improvements when title otherwise vests in the landlord.

Q: What specifically stayed taxable?
A: Raised computer floors, auditorium/theater seating, cafeteria and dining furniture and free-standing fixtures, and appliances (refrigerators, stoves) — plus all tools and equipment the contractors rented for the job.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1115(a)(15), (16) — exemption for materials integrated into an exempt organization's real property
• Tax Law § 1116(a)(1) — exempt status of the State and its public corporations (Port Authority)
• Tax Law §§ 1105(a), 1109, 1110 — sales tax, MCTD tax, compensating use tax
• 20 NYCRR § 541.3 (contracts with exempt organizations; ST-120.1); § 541.5(d) (items retaining TPP identity)
• TSB-M-83(17)S — taxable status of leasehold improvements; Salomon, Inc., TSB-A-89(46)S
• Raised Computer Floors, Inc. v. Chu, 116 AD2d 958

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (23)S
Sales Tax
February 22, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S901114A

On November 14, 1990 a Petition for Advisory Opinion was received from Insurance
Services Office, Inc., 160 Water Street, New York, N.Y. 10038.
The issues raised by Petitioner, Insurance Services Office, Inc., are whether:
1.
Tangible personal property purchased by Petitioner's contractors and subcontractors
which becomes an integral component of leased premises at 7 World Trade Center will be exempt
from sales and use taxes under Sections 1115(a)(15) and 1115(a)(16) of the Tax Law.
2.
The rental of tools and equipment by Petitioner's contractors and subcontractors for
use in installing such tangible personal property into the leased premises at 7 World Trade Center
is similarly exempt from sales and use taxes.
Petitioner entered into a lease dated January 25, 1990 (and amended October 1, 1990) for
space at 7 World Trade Center pursuant to which Petitioner received a license to commence work
on the premises. Pursuant to a lease dated December 31, 1980, between 7 World Trade Company
and the Port Authority the land upon which 7 World Trade Center has been constructed has been
leased from the Port Authority of New York and New Jersey (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 13.11 of the lease between Petitioner and 7 World Trade Company states: "Tenant
has informed Landlord that Initial Tenant's Changes may include interconnecting stairwells and
elevators between floors of the Demised Premises, raised floors to accommodate computer facilities,
auditoriums, cafeterias, dining rooms, lunch rooms, vertical mail systems and security systems
(hereinafter called 'Special Tenant Installations'), and Landlord hereby approves, in concept, Special
Tenant Installations subject to all applicable provisions of this Article governing the performance
of Tenant's Changes and Landlord's approval of plans and specifications therefor (which consent
shall not be unreasonably withheld or delayed) and further subject, in the case of auditoriums,
cafeterias, dining rooms and lunch rooms, to any restrictions contained in this lease relating to the
use and operation thereof. Landlord may, at its option and at Tenant's expense (such expense to be
limited to the Direct Cost thereof), make final connections into the Building security system of any
security systems to be installed by Tenant in the Demised Premises. All Special Tenant Installations
shall remain upon and be surrendered with the Demised Premises unless Landlord, by notice to

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Tenant, no later than sixty (60) days prior to the stated Expiration Date of this lease (or thirty (30)
days after sooner termination of this lease) shall require all or any portion of the Special Tenant
Installations to be removed from the Demised Premises prior to the expiration of the Term, at
Tenant's expense, provided, however, notwithstanding anything to the contrary contained herein, in
the event that at such time a lease executed by Landlord and a succeeding tenant of all or any part
of the Demised Premises provides for use by such tenant of Special Tenant Installations (for
example, if the Demised Premises are leased on a multi-floor basis and the succeeding tenant will
use interior stairs that constitute Special Tenant Installations), then Tenant shall not be required to
remove such Special Tenant Installations. Tenant shall repair, to Landlord's satisfaction and at
Tenant's expense, any damage to the Demised Premises caused by the removal of Special Tenant
Installations. The term Special Tenant Installations shall exclude Tenant's property."
Section 14.01 of such lease provides:
"All fixtures, equipment, improvements and appurtenances attached to or built into
the Demised Premises at the commencement of or during Term, whether or not by
or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall
be deemed the property of Landlord and shall not be removed by Tenant, except as
hereinafter in this Article expressly provided."
Section 14.02 of such lease provides:
"All movable partitions, special cabinet work, other business and trade fixtures,
machinery and equipment, card key readers, communications equipment and office
equipment, whether or not attached to or built into the Demised Premises, which are
installed in the Demised Premises or on the roof pursuant to Article 43 by Tenant,
and can be removed without structural damage to the Building, and all furniture,
furnishings and other articles of movable personal property owned by Tenant and
located 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; provided that if any of Tenant's Property is removed,
Tenant or any party or person entitled to remove same shall repair to Landlord's
reasonable satisfaction or pay the Direct Cost of repairing any damage to the
Demised Premises or to the Building resulting from such removal."
Section 7.01 of such lease provides:
"Subject to the provisions of this Article, this lease, and all rights of Tenant
hereunder, are and shall be subject and subordinate in all respects to the Underlying
Lease, all ground leases, overriding leases and underlying leases of the Land and/or
the Building now or hereafter existing and to all mortgages which may now or
hereafter affect the Land and/or the Building and/or any of such leases, whether or

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February 22, 1991

not such mortgages shall also cover other lands and/or buildings, to each and every
advance made or hereafter to be made under such mortgages, and to all renewals,
modifications, replacements and extensions of such leases and such mortgages and
spreaders and consolidations of such mortgages. This Section shall be self-operative
and no further instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall promptly execute and deliver any instrument that
Landlord, the lessor of any such lease or the holder of any such mortgage or any of
their respective successors in interest may reasonably request to evidence
subordination, provided such instrument includes the nondisturbance provisions of
this Article. The leases to which this lease is, at the time referred to, subject and
subordinate pursuant to this Article are hereinafter sometimes referred to as 'superior
leases' and the mortgages to which this lease is, at the time referred to, subject and
subordinate are hereinafter sometimes referred to as 'superior mortgages' and the
lessor of a superior lease or its successor in interest at the time referred to is
sometimes hereinafter referred to as a 'lessor'. . . ."
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 1110 of the Tax Law states, in part:
Imposition of Compensating Use Tax.
Except to the extent that property or services have already been or will be subject to
the sales tax under this article, there is hereby imposed on every person a use tax for
the use within this state..., except as otherwise exempted under this article, (A) of any
tangible property purchased at retail, (B) of any tangible personal property
manufactured, processed or assembled by the user, . . . (ii) if items are used as such
or incorporated into a structure, building or real property by a contractor,
subcontractor . . . in erecting structures or buildings, or building on or otherwise
adding to, altering, improving maintaining, servicing or repairing real property, . .
.property or land...
Section 1109(a) of the Tax Law states, in part that:
. . .there is hereby imposed within. . .the metropolitan commuter transportation
district. . .and there shall be paid, additional taxes, at the rate of one-quarter of one
percent, which shall be identical to the taxes imposed by sections eleven hundred

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five and eleven hundred ten of 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
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.

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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)

*

*

*

Contacts 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 the Tax Law, is exempt when it is to become an
integral component part of such structure or building

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(ii)

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.

Section 1101 of the Tax Law states, in part:
(b)
When used in this article for the purposes of the taxes imposed by
subdivisions (a)(b)(c) and (d) of section eleven hundred five and by eleven hundred
ten, the following terms shall mean:
(9)

Capital improvement. (i) An addition or alteration to real property

which:
(A)
Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B)
Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article itself;
and
(C)

Is intended to become a permanent installation:...

A memorandum issued by Technical Services Bureau, TSB-M-83(17)S, dated June 15, 1983,
titled Taxable Status of Leasehold Improvements For or By Tenants, states, in part:
Additions or alterations to real property for or by a tenant of such property will be
presumed to be temporary in nature..., unless a contrary intention is demonstrated.
A specific lease provision which states that: 1) immediately upon installation, title
to such installation vests in the lessor, and 2) the addition or alteration becomes part

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of and remains with the premises after the termination of the lease, will be
recognized as a demonstration of contrary intention (i.e., an intention of
permanence). A provision granting the lessor the right to require removal of the
improvement will not negate this demonstration of intention of permanence; nor will
a provision which states that the improvement becomes the property of the lessor
upon expiration of the lease or upon termination of the tenancy.
Under the lease agreement between Petitioner and 7 World Trade Company, "[a]ll fixtures,
equipment, improvements and appurtenances attached to or built into the Demised Premises at the
commencement of or during Term. . .shall be and remain a part of the Demised Premises, shall be
deemed the property of Landlord and shall not be removed by Tenant, except as expressly provided".
Such lease defines "interconnecting stairwells and elevators between floors..., raised floors
to accommodate computer facilities, auditoriums, cafeterias, dining rooms, lunch rooms, vertical
mail systems and security systems" as "Special Tenant Installations" and states that "[a]ll Special
Tenant Installations shall remain and be surrendered with the Demised Premises unless Landlord by
notice to Tenant,. . .shall require all or any portion of the Special Tenant Installations to be moved
from the Demised Premises prior to the expiration of the Term, at Tenant's expense.
Such lease also provides that "[a]ll movable partitions, special cabinet work, other business
and trade fixtures, machinery and equipment, card key readers, communications equipment and
office equipment, whether or not attached to or built into the Demised Premises, which. . .can be
removed without structural damage to the Building, and all furniture. furnishings and other articles
of movable personal property owned by Tenant and located in the Demised Premises (all of which
are sometimes referred to as 'Tenant's Property') shall be and remain the property of Tenant and may
be removed by it at any time during the Term. . . .
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."
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)(1) of the Tax Law. Accordingly, in those instances where the items of 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 become
integral components of real property owned by Port Authority and where Port Authority will take
title to such tangible personal property and such tangible personal property shall be and remain a part
of the demised 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.

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Salomon, Inc., Adv Op, Comm T & F, November 20, 1989, TSB-A-89(46)S. The provision in
Section 13.11 of the lease between Petitioner and 7 World Trade Company, whereby Landlord may
require all or any portion of the Special Tenant Installations to be removed from the demised
premises prior to expiration of the Term does not negate the intention of permanence of the leasehold
improvements (See: Technical Services Bureau Memorandum, TSB-M-83(17)S, June 15, 1983) nor
preclude the contractor's or subcontractor's purchases of tangible personal property for incorporation
into such leasehold improvements from the exemption provided under Section 1115(a)(15) and
1115(a)(16) of the Tax Law.
However, it is noted that certain of Petitioner's Special Tenant Installations or portions
thereof constitute items which, generally, are not considered to be installed in such a manner
whereby they become an integral component part of real property but retain their identity as tangible
personal property after installation. Included within such Special Tenant Installations which will not
qualify for the exemption under Section 1115(a)(15) or (16) are the raised floors to accommodate
computer facilities, Raised Computer Floors, Inc. vs Chu, 116 AD2d 958. Also in accordance with
Section 541.5(d) of the Sales and Use Tax Regulations included in items not qualifying for the
exemption will be, if applicable, seating for the auditorium (theater seats), cafeteria fixtures such as
free standing shelves, bars, appliances (refrigerators and stoves) and furniture (tables and chairs), and
dining room and lunch room furniture and free standing fixtures. Accordingly, as such items will
not become integral component parts of the Demised Premises at 7 World Trade Center but will
retain their identity as tangible personal property after installation, the installation of such items will
not qualify for the exemption provided under Section 1115(a)(15) and (16) of the Tax Law. The
total charges to Petitioner for the installation (materials and labor) of such items will be subject to
State and local sales tax.
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.
Section 541.3 of the Sales and Use Tax Regulations, states in part:
Contracts with exempt organizations. [Tax Law, §§1115(a)(15), (16). . .
(d)

Contracts with exempt organizations.
(2)

Purchase for contracts (other than agency contacts).

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(iv)
Except for agency contracts, contractor's purchases of
construction supplies, which do not become part of an exempt
organization's real property and are used or consumed by the
contractor. . .are subject to the tax.
The following types of property. . .are representative, but not intended
to be all-inclusive, of contractor's purchases which are subject to tax,
irrespective of whether the contractor has a time and material, lump
sum, or other type of contract (except agency contract), with an
exempt organization:
(a)
construction machinery and equipment, including
rentals and repair parts;
(c)
contractors' supplies, tools and miscellaneous
equipment, whether purchased or rented. . .; and
(d)
any other items purchased or rented by a contractor for
use in performing the contract and not incorporated in the realty.
Since the tools and equipment rented by Petitioner's contractors and subcontractors for use
in installing tangible personal property into the leased premises at 7 World Trade Center will not
become a part or integral component of Port Authority's real property and will be considered to be
used or consumed by the contractors or subcontractors, such purchases fall within the types of
property enumerated within Section 541.3(d)(2)(iv) of the Sales and Use Tax Regulations.
Accordingly, such purchases do not qualify for the exemption provided under Sections 1115(a)(15)
and (16) of the Tax Law and thus are subject to the taxes imposed under Sections 1105(a), 1109 and
1110 of the Tax Law.

DATED: February 22, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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