When a heating contractor rents mobile boilers to supply temporary heat to an exempt organization's building while installing a permanent system, does the contractor owe sales or use tax on the boiler rental?

Plain-English summary

A heating contractor was installing a permanent heating system in a New York City Housing Authority building — an exempt organization. While the permanent system was being installed, the contractor was under contract to keep the building heated, so it rented mobile boilers from a leasing company (paying no tax to the lessor) and used them to supply temporary heat to the building's occupants. The contractor asked whether it owed sales or use tax on the rented boilers.

The Department drew a clean line between the service and the equipment. Providing temporary heat at a construction site is treated as part of a capital improvement to the exempt organization's real property, so that service is not taxable. But the exemption for contractors buying property for an exempt organization (Tax Law § 1115(a)(15)) applies only to property that becomes an integral component part of the building — nails, sheetrock, wiring that stays in the structure. Rented equipment that the contractor takes away when the job is done never becomes part of the building.

Because the mobile boilers were equipment "under the dominion and control of the contractor" — the regulations expressly list equipment rentals like cranes and bulldozers as taxable even on an exempt-organization job — the contractor owes sales or use tax on the boiler rental. The Department also rejected a second possible exemption: § 1115(a)(12) exempts machinery used to produce steam for sale, but the contractor was not selling the steam, so that exemption did not apply either.

What this means for you

Contractors working on tax-exempt jobs

An exempt customer (a government body, school, church, or other § 1116 organization) does not make everything on the job tax-free. Materials that become a permanent part of the building are exempt, but the tools and equipment you rent or buy to do the work — scaffolding, cranes, temporary boilers, generators — are taxable to you, the contractor. Budget for tax on rentals even when the ultimate customer is exempt.

Equipment rental and leasing companies

A lease or rental of tangible personal property is a taxable "sale" in New York (Tax Law § 1101(b)(5)). The fact that the renter is using the equipment on an exempt organization's site does not by itself relieve the transaction of tax; the exemption follows property that becomes part of the exempt building, not equipment that comes and goes.

Accountants and tax professionals

This opinion is a useful illustration of the § 1115(a)(15) "integral component part" test working alongside the § 541.8 temporary-facilities rule: the labor/service to provide temporary heat rides along with the capital improvement and is not taxed, while the contractor remains liable for tax on the materials and equipment used to provide it. The steam-production exemption in § 1115(a)(12) requires an actual sale of the steam, which was missing here.

Common questions

Q: Is the temporary heating service itself taxable?
A: No. The Department treated providing temporary heat during construction as part of the capital improvement to the exempt organization's real property, so the service charge is not subject to sales or use tax.

Q: Then why does the contractor owe tax?
A: Because the tax falls on the contractor's own purchase or rental of the equipment used to provide that service. The rented boilers do not become a permanent part of the building, so they are not covered by the exempt-organization exemption.

Q: Would it matter that the lessor charged no sales tax?
A: The contractor still owes the tax. If a lessor does not collect sales tax on a taxable rental, the contractor is liable for the corresponding use tax on the rental charge.

Q: Could the steam-for-sale exemption apply?
A: No. Section 1115(a)(12) exempts machinery and equipment used to produce steam for sale. Here the contractor produced heat for the building's occupants and did not sell the steam, so that exemption did not apply.

Q: Can I rely on this ruling for my own project?
A: No. An advisory opinion binds the Department only as to the taxpayer who requested it and the exact facts described. It is a strong guide to how the Department reasons, but your situation may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law § 1101(b)(5) (definition of "sale" includes any rental or lease)
• Tax Law § 1115(a)(15) (exemption for property that becomes an integral component of an exempt organization's building)
• Tax Law § 1115(a)(12) (exemption for machinery used predominantly and directly to produce steam for sale)
• 20 NYCRR § 528.16(a)(1) (property sold to contractors for exempt-organization structures; equipment rentals taxable)
• 20 NYCRR § 541.3(d) (contracts with exempt organizations; taxable contractor purchases)
• 20 NYCRR § 541.8 (temporary facilities at construction sites)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_29s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (29)S
Sales Tax
April 21, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930127A

On January 27, 1993, a Petition for Advisory Opinion was received from Dierks Heating
Company, Inc., 43-32 33rd Street, Long Island City, New York 11101.
The issue raised by Petitioner, Dierks Heating Company, Inc., is whether sales or use tax is
owed by a contractor when it leases temporary boilers to provide heat to exempt organizations'
buildings during the period that it is installing a permanent heating systems in said buildings.
Petitioner installs heating, air conditioning and ventilation systems. While in the process of
installing boilers, Petitioner is under contract to provide temporary heat to the occupants of a
building. Petitioner leases mobile boilers from a lessor for this purpose. No sales tax is charged by
the lessor. The mobile boilers are used in an existing building owned by the New York City Housing
Authority, an exempt organization, to provide heat to its occupants.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided. Section 1101(b)(5) of the Tax Law defines
the term "sale" to include "[a]ny... rental, lease .... "
Section 1115 of the Tax Law provides, in part, as follows:
Sec. 1115. Exemptions from sales and use taxes.- - (a) Receipts from the
following shall be exempt from the tax on retail sales imposed under subdivision (a)
of section eleven hundred five and the compensating use tax imposed under section
eleven hundred ten:
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(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.
(emphasis added)
Section 528.16(a)(1) of the Sales and Use Tax Regulations provides, in part, as follows:

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TSB-A-93 (29)S
Sales Tax
April 21, 1993
Reg. Sec. 528.16. Tangible personal property sold to contractors for use in
erecting structures of tax exempt organizations.- - (Tax Law, Sec. 1115(a)(15)). (a)
Exemption. (1) Tangible personal property sold to a contractor, subcontractor or
repairman for use in erecting a structure or building of an organization described in
Part 529 of this Title, is exempt when it is to become an integral component part of
such structure or building.
Example 1: An exempt organization contracts to have a building erected on
its land. Purchases by its contractor of tangible personal property, such as nails, sheet
rock and plywood that become part of the structure are exempt.
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Example 5: Lumber and other materials that are used to build forms are not
exempt since they do not become a component part of the structure.
Example 6: Equipment rentals such as cranes, bulldozers, back hoes, etc. for
use in building a structure for an exempt organization are subject to tax. (emphasis
added)
Section 541.3(d) of the Sales and Use Tax Regulations provides, in pertinent part, as follows:
(d) Contracts with exempt organizations. (1) Effective September 1, 1974
all tangible personal property incorporated into real property owned by a
governmental entity or an exempt organization is exempt, whether the contract is on
a lump sum, time and material, cost-plus, or other basis.
(2) Purchases 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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(iv) Except for agency contracts, contractors' purchases of construction
supplies which do not become part of an exempt organization's real property and are
used or consumed by the contractor, as well as purchases of taxable services, such
as electricity used by the contractor, are subject to the tax.
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TSB-A-93 (29)S
Sales Tax
April 21, 1993
The following types of property and services are representative, but not intended to
be all inclusive, of contractors' 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;
(b) contractors' office supplies;
(c) contractors' supplies, tools, and miscellaneous equipment, whether
purchases or rented, including materials to make forms and scaffolding; and
(d) any other items purchased or rented by a contractor for his use in
performing the contract and not incorporated into the realty.
Example 7: Lumber and other materials which are used to build forms are not
exempt since they do not become a component part of the structure.
Example 8: Equipment rentals under the dominion and control of the
contractor, such as rentals of cranes, bulldozers, backhoes, etc. for use in building a
structure for an exempt organization are subject to tax. (emphasis added)
Section 541.8 of the Sales and Use Tax Regulations provides, in part, that:
Reg. Sec. 541.8. Charges for temporary facilities at constructions sites.- ­
(Tax Law, Sec. 1105(c)(3), (5)). (a) General. Subcontracts to provide temporary
facilities at construction sites, which are a necessary prerequisite to the construction
of a capital improvement to real property, are considered a part of the capital
improvement to real property. Charges for installation of materials and the labor to
provide temporary heat, temporary electric service, temporary protective pedestrian
walkways, and temporary plumbing by a subcontractor are therefore not subject to
tax provided the subcontractor receives a copy of the properly completed certificate
of capital improvement issued by the customer to the contractor.
Example 1: A subcontractor agrees to furnish to the prime contractor the
materials and labor necessary to furnish temporary light and electrical facilities
throughout a building under construction so that the various trades may have light,
communications and power facilities necessary for them to perform their work and
operate their tools. The charges are a constituent part of the capital improvement and
are not subject to tax.
(b) The subcontractor is liable, however, for the tax on the purchase of the
materials used to provide the temporary facilities at construction sites described in
subdivision (a) of this section.

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TSB-A-93 (29)S
Sales Tax
April 21, 1993
Example 2: A subcontractor agrees to furnish temporary site plumbing
service to the prime contractor engaged in the construction of an office building. The
subcontractor must purchase a quantity of pipes, pumps, and fittings in order to
provide the temporary service. The services is a constituent part of the capital
improvement, thus, the subcontractor's charge for the temporary pluming services are
not subject to tax. However, the subcontractor is liable for the tax due on his
purchase of all materials needed to provide the temporary plumbing service.
(emphasis added)
Therefore in accordance with Sections 1105(a), 1105(b) and 1115(15) of the Tax Law and
Sections 526.16(a)(1), 541.3(d) and 541.8 of the Sales and Use Tax Regulations, while the service
of providing the temporary heat to an exempt organization is not subject to sales and use taxes, the
rental of the mobile boilers by the Petitioner is taxable since such boilers do not become an integral
component part of the structure, building or real property of the exempt organization. Therefore, in
the instant case, Petitioner is liable for sales or use tax on the rental of the mobile boilers needed to
provide the temporary heating service.
It is also noted that the leasing of the temporary boilers by the Petitioner is not exempt from
sales tax pursuant to Section 1115(a)(12) of the Tax Law which provides an exemption for
machinery and equipment used predominantly and directly in the production of steam for sale, since
the Petitioner does not sell the steam produced by the temporary boilers to the exempt organizations.

DATED: April 21, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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