In a bond-financed sale-leaseback structure with a city industrial development agency (IDA), are a corporate tenant's affiliate's purchases, leases, and maintenance contracts -- made as the IDA's disclosed agent -- exempt from state and local sales and use tax?

Subject

Whether the purchase, lease, installation and entering into of contracts for the maintenance, servicing and repair of the Leasehold Improvements and Project Facilities by MS Financing, as agent for and on behalf of the IDA, are exempt from Sales and Use Taxes by virtue of the IDA's statutory exemption from tax; and whether payments under the related leases are similarly exempt.

What this means for you

To induce Morgan Stanley to keep its offices in New York City, the City arranged a bond-financing benefit through the New York City Industrial Development Agency (IDA). Under a multi-step sale-leaseback: the building owner conveys the leased office space's title to the IDA; the IDA leases it back to the landlord for a nominal rent (who subleases to Morgan Stanley as before); Morgan Stanley then leases the same space to the IDA, which leases it to Morgan Stanley's finance affiliate (MS Financing); the IDA issues bonds (largely bought by Morgan Stanley itself) to finance the leasehold improvements and equipment; and MS Financing -- acting as the IDA's AGENT -- purchases, installs, and arranges maintenance/repair contracts for those improvements and equipment, holding them under a lease from the IDA. After 10 years, the bonds mature, the IDA leases terminate, and ownership reverts to MS Financing.

Because IDAs are public corporations statutorily exempt from tax on property they own or control, this structure lets Morgan Stanley's affiliate buy and maintain property tax-free -- AS LONG AS the IDA is genuinely the owner/lessor/lessee throughout, and every purchase invoice, contract, and lease clearly names the IDA as the actual purchaser/lessor/lessee with MS Financing disclosed as its agent. But the opinion draws a real limit, following a 1992 court decision (the Wegmans case) that read the IDA exemption narrowly: it covers maintenance/repair that preserves the STRUCTURAL integrity of the property or repairs equipment with a useful life over a year -- not routine consumable parts, materials, or supplies that must be replaced every time they're used up (the classic example being something like disposable operating supplies), which stay taxable no matter who buys them. And if a single maintenance invoice bundles both exempt structural/equipment maintenance and non-exempt consumable-replacement charges together, the WHOLE invoice becomes taxable unless the two are separately stated or reasonably allocated. Finally, the lease payments themselves flowing through the whole chain (IDA to MS Financing, MS Financing back to IDA, IDA to Morgan Stanley and its affiliates) are all exempt under the IDA's own statutory tax exemption.

Q&A

Q: Our company entered an IDA bond-financing sale-leaseback, and our finance affiliate buys equipment "as agent for the IDA" -- are those purchases tax-exempt?
A: Yes, per this opinion -- PROVIDED the IDA is genuinely the owner/lessor/lessee of the property, and every purchase invoice, contract, and lease document names the IDA as the actual purchaser/lessor/lessee with your affiliate disclosed as its agent, not hidden.

Q: We also enter maintenance/repair contracts for the IDA-owned equipment as its agent -- are those exempt too?
A: Generally yes for genuine maintenance/repair of the structure or of equipment with a useful life of a year or more, per this opinion -- but NOT for consumable parts, materials, or supplies that must be replaced whenever used up during day-to-day operation; those stay taxable regardless of the IDA structure.

Q: A single maintenance invoice covers both exempt structural repair work and non-exempt consumable-supply replacement -- how is that taxed?
A: Per this opinion, the ENTIRE invoice becomes taxable unless the exempt portion is separately stated from the non-exempt portion (or reasonably allocated) -- don't bundle the two without a clear breakdown.

Q: Are the actual lease/rent payments flowing between the IDA and our company (or our finance affiliate) subject to sales tax?
A: No, per this opinion -- payments under these leases, at every step of the chain, are exempt from sales and use tax by virtue of the IDA's own statutory tax exemption.

Citations

• Tax Law § 1105 -- imposes sales tax on retail sales of tangible personal property and specifically enumerated services, including installing/maintaining/repairing tangible and real property.
• Tax Law § 1107, § 1109 -- impose additional local sales taxes (NYC, MCTD) that incorporate § 1105's exemptions.
• Tax Law § 1110 -- imposes a parallel compensating use tax.
• Tax Law § 1116(a)(1) -- exempts New York governmental entities/public corporations from sales/use tax as purchaser, user, or consumer.
• 20 NYCRR § 529.2(a) -- confirms Industrial Development Agencies are public corporations that may purchase tangible personal property exempt from sales and use tax.
• 20 NYCRR § 541.3(a) -- provides that a signed contract with a governmental entity (including IDAs) is sufficient proof of exempt purchaser status.
• General Municipal Law § 874 -- exempts an IDA and its property from taxes/assessments as a public-purpose governmental function.
• Wegmans Food Markets, Inc. v. Department of Taxation and Finance, 126 Misc. 2d 144, aff'd 115 A.D.2d 962, lv. denied 67 N.Y.2d 606, and Wegmans Food Market, Inc. v. Dep't of Taxation and Finance (Sup. Ct., Monroe County, Jan. 10, 1992) -- held the IDA tax exemption covers ownership/structural-maintenance functions but not ordinary business operating expenses (utilities, window washing) unrelated to the financing arrangement; central to this opinion's consumable-supplies limitation.
• Prudential Securities, Incorporated, Adv. Op. Comm. T&F, April 28, 1993 -- prior opinion applying the same consumable-parts limitation and separately-stated-charges rule; followed here.

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_70s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (70) S
Sales Tax
August 2, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930208B

On February 8, 1993 a Petition for Advisory Opinion was received from Morgan Stanley
Group Inc., 1251 Avenue of the Americas, New York, New York.
The issues raised by Petitioner, Morgan Stanley Group Inc., are:
1.
Whether the purchase, lease, installation and entering into of contracts for the
maintenance, servicing and repair of the Leasehold Improvements and Project Facilities by MS
Financing, as agent for and on behalf of the IDA, are exempt from Sales and Use Taxes by virtue of
the IDA's statutory exemption from tax.
2.
Whether payments under the leases of the Leasehold Improvements and Project
Facilities from the IDA to MS Financing, from MS Financing back to the IDA, and from the IDA
to MS & Co. and the Eligible Affiliates are not subject to Sales and Use Taxes by virtue of the IDA's
statutory exemption from tax.
Petitioner has requested this Advisory Opinion on behalf of its wholly-owned subsidiaries,
Morgan Stanley & Co. Incorporated (hereafter MS & Co.), MS Financing Inc. (hereafter MS
Financing), and Morgan Stanley Trust Company, Morgan Stanley Realty Incorporated and Morgan
Stanley Asset Management Inc. (hereafter the Eligible Affiliates) with respect to the application of
New York State and New York City Sales and Compensating Use Taxes to the purchase, lease,
installation and/or maintenance of certain eligible property under the circumstances described below.
To induce MS & Co. to maintain its offices in the City of New York (the, City"), the City has
proposed to extend, and the City and Petitioner have entered into an understanding with regard to,
certain benefits including Sales and Compensating Use Tax benefits (as more fully described herein,
the "Project"). This ruling request, as noted above, relates only to the Sales and Compensating Use
Tax benefits offered by the City.
MS & Co. leases office space at 1251 Avenue of the Americas (the "Exxon Building"). MS
& Co. also leases space at various other locations throughout the City (collectively, the "Other
Locations").
For regulatory reasons, MS Financing (rather than MS & Co. or the Eligible Affiliates)
purchases, leases, installs, and will enter into maintenance, service and repair contracts with respect
to, as applicable, (i) leasehold improvements in the Exxon Building, and (ii) machinery, equipment,
furnishings and other items of personal property for use by MS & Co. and the Eligible Affiliates both
in the Exxon Building and at Other Locations. Currently, MS Financing leases the leasehold
improvements and the personalty to MS & Co. and the Eligible Affiliates pursuant to the terms of
an operating lease or leases.

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August 2, 1993
In order to make available the benefits offered by the City, the City and the New York City
Industrial Development Agency ("IDA") have proposed the following structure:
o
The owner of the Exxon Building (the "Landlord") will condominiumize the Exxon
Building and will convey to the IDA title to the condominium units leased to MS & Co. (the "Leased
Space").
o
The IDA will lease the Leased Space back to the Landlord for a nominal rental, and
the Landlord will sublease the Leased Space to MS & Co. pursuant to the terms of the existing space
lease between Landlord and MS & Co.
o
MS & Co. will lease the Leased Space to the IDA, and the IDA will lease the Leased
Space back to MS Financing (this lease from the IDA to MS Financing is hereinafter referred to as
the "Financing Lease").
o
The IDA will issue bonds from time to time, presently contemplated to be purchased
by Petitioner or by an affiliate of Petitioner, to finance purchases and leases of leasehold
improvements and equipment and other personalty, as well as the costs of installing the same. MS
Financing will purchase and install, and will enter into maintenance contracts with respect to,
leasehold improvements in the Exxon Building as agent for the IDA (such leasehold improvements,
together with replacements, enhancements and additions thereto, collectively, the "Leasehold
Improvements"). MS Financing will also purchase, lease, and enter into service, repair and
maintenance contracts with respect to, machinery, equipment, personal property and other items as
agent for the IDA (such personal property, whether used in the Exxon Building or in any of the Other
Locations, and together with any replacements, enhancements and additions thereto, collectively, the
"Project Facilities"). The IDA will hold title to, or a leasehold or license interest in, the Leasehold
Improvements and the Project Facilities and will lease the same to MS Financing pursuant to the
terms of the Financing Lease. Rents paid by MS Financing to the IDA under the Financing Lease
will be in an amount equal to principal and interest on the bonds, i.e., in an amount sufficient to
repay the bonds.
o
MS Financing will lease the Leased Space, the Leasehold Improvements and the
Project Facilities to the IDA, and, lastly, the IDA will sublease the Leased Space, the Leasehold
Improvements and the Project Facilities to MS & Co. and the Eligible Affiliates pursuant to an
operating lease. The Eligible Affiliates may be substituted or added to as parties to the operating
lease. Rents paid by MS & Co. and the Eligible Affiliates to the IDA under the operating lease will
be assigned by the IDA to MS Financing.
o
A project agreement and guaranty ("Project Agreement") among the IDA, MS & Co.,
Petitioner and MS Financing will provide that MS Financing will purchase or lease the Leasehold
Improvements and Project Facilities as agent for the IDA. The Project Agreement will also provide
that, during the ten (10) years of the Project, the IDA will be the owner of the Leased Space,
Leasehold Improvements and Project Facilities and that MS Financing, as agent for the IDA, may
enter into contracts for maintenance, repair and service functions with respect to the Leasehold
Improvements and Project Facilities.

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August 2, 1993
o
At the conclusion of the Project (in ten (10) years), the bonds will mature and be paid
off, the Financing Lease (and the other IDA leases) will terminate, title to the Project Facilities and
the Leasehold Improvements will be reconveyed to MS Financing, and title to the Leased Space will
revert to the Landlord.
Section 1105 of the Tax Law provides, in relevant part:
Imposition of sales tax ..... there is hereby imposed and there shall be paid a tax of
four percent upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
(3) Installing tangible personal property ... or maintaining, servicing or repairing
tangible personal property ... not held for sale in the regular course of business,
whether or not the services are performed directly ... or by any other means, and
whether or not any tangible personal property is transferred in conjunction therewith
...
(5) maintaining, servicing or repairing real property, property or land, as such terms
are defined in the real property tax law, whether the services are performed in or
outside of a building, as distinguished from adding to or improving such real
property, property or land, by a capital improvement as such term ... is defined in
paragraph 9 of subdivision (b) of section eleven hundred one of this chapter ....
Section 1107 of the Tax Law provides, in relevant part:
(a) General. On the first day of the first month following the month in which a
municipal assistance corporation is created under article ten of the public authorities
law for a city of one million or more, in addition to the taxes imposed by sections
eleven hundred five and eleven hundred ten, there is hereby imposed ..., within the
territorial limits of such city, and there shall be paid, additional taxes, at the rate of
four percent, which except as provided in subdivision (b) of this section, shall be
identical to the taxes imposed by sections eleven hundred five and eleven hundred
ten. Such sections and the other sections of this article, including the definition and
exemption provisions, shall apply for purposes of the taxes imposed by this section
in the same manner and with the same force and effect as if the language of those
sections had been incorporated in full into this section and had expressly referred to
the taxes imposed by this section.

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Section 1109 of the Tax Law provides, in relevant part:
(a) General. In addition to the taxes imposed by sections eleven hundred five and
eleven hundred ten of this article, 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 five and eleven hundred ten of this article ....
Section 1110 of the Tax Law provides, in relevant part:
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 ..., (A) of any tangible personal property purchased at retail,
(B) of any tangible personal property manufactured, processed or assembled by the
user, (i) if items of the same kind of tangible personal property are offered for sale
by him in the regular course of business or (ii) if items are used as such or
incorporated into a structure, building or real property by a contractor, subcontractor,
or repairman 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, if items of the same kind are not offered for sale as such by such contractor,
subcontractor or repairman or other user in the regular course of business, (C) of any
of the services described in paragraph (1) of subdivision (c) of section eleven
hundred five, and (D) of any tangible personal property ... not acquired for purposes
of resale, upon which any of the services described under paragraphs (2) and (3) of
subdivision (c) of section eleven hundred five have been ,performed ....
Section 1116 of the Tax Law provides, in relevant part:
(a) ... any sale ... by or to any of the following or any use ... by any of the following
shall not be subject to the sales and compensating use taxes imposed under this
article:
(1) The State of New York, or any of its agencies, instrumentalities, public
corporations ... 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 ....
Section 529.2(a) of the New York State Sales and Use Tax Regulations provides, in relevant
part:
(2) A public, corporation as used in this section means any corporation created by
an act of the Legislature for a public purpose ...

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Example:

... Industrial Development Agencies are public
corporations and may purchase tangible personal
property exempt from the sales and use taxes.

Section 541.3(a) of the Sales and Use Tax Regulations provides, in relevant part:
" ... When a contractor's customer is a governmental entity described in section
1116(a)(1) ... 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) ... (c) industrial development authorities ...."
Section 874 of the General Municipal Law provides, in relevant part:
Tax exemptions
(1) It is hereby determined that the creation of the agency and the carrying out of its
corporate purposes is in all respects for the benefit of the people of the state of New
York and is a public purpose, and the agency shall be regarded as performing a
governmental function in the exercise of the powers conferred upon it by this title
and shall be required to pay no taxes or assessments upon any of the property
acquired by it or under its jurisdiction or control or supervision or upon its activities.
(2) Any bonds or notes issued pursuant to this title, together with the income
therefrom, as well as the property of the agency, shall be exempt from taxation,
except for transfer and estate taxes.
Section 917-a of the General Municipal Law establishes the New York City Industrial
Development Agency as an industrial development agency in general having the powers of industrial
development agencies under Article 18-A of the General Municipal Law.
In Wegmans Food Market, Inc. v The Department of Taxation and Finance of the State of
N.Y., (Sup Ct, Monroe County, Jan. 10, 1992, Galloway, J.) the issues presented concerned generally
the scope and applicability of the tax exemption established by section 874 of the General Municipal
Law and more specifically, whether that tax exemption applied to operational expenses incurred by
plaintiff in the day-to-day operation of several projects in western New York State developed as its
supermarkets. Those markets were constructed and equipped under agreements made with various
municipal industrial development agencies pursuant to Article 18-A of the General Municipal Law,
and accordingly their construction was financed by industrial development bonds (IDBs) issued by
the various local industrial development agencies. The projects were technically owned by the
respective agencies as security for the bonds, but were under "lease back" arrangements with the
plaintiff. In an earlier action, Wegmans Food Markets v Department of Tax

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August 2, 1993
& Finance of the State of N.Y., 126 Misc 2d 144, affd 115 AD2d 962, lv to app den 67 NY2d 606,
the section 874 tax exemption was held to be broader that the exemption provided by Section 1116
of the Tax Law.
The court in its January 10, 1992, opinion stated in part:
The IDAs are not authorized to engage in supermarket businesses, or any
other businesses per se. Their functions are limited to the acquisition, construction,
reconstruction, leasing, improving, maintaining, equipping, and furnishing of projects
as security for the repayment of industrial development bonds, in the nature of a
mortgage. Although there is a project lease arrangement between an IDA and the
private developer it is a financing lease with the "rent" paid thereunder consisting
only of amortized costs and expenses related to the project financing and the IDBs.
The IDAs do not pay the costs of utilities or other operational expenses; nor do the
leases suggest that the ,rent" has been adjusted so as to account for the developer's
payment of operational expenses. The lease is simply a financing tool, designed to
secure tax-exempt IDBs, which are part of an overall plan benefitting, financially, the
private developer and IDB purchasers. Of course, if IDAs are not authorized to
operate a business then it would have no authority to designate agents to do that
which they could not do themselves.
Although some of the numerous expenses listed by plaintiff in their complaint
may be exempt (such as expenses necessary to preserve or repair project property),
not all of the claimed expenses would be exempt. Many of these expenses bear no
relationship to the purchase, repair or replacement of project property per se but
instead represent costs of supermarket business operations ....
Because all the expenses involved in this action do not have the same
relationship to the IDA's ownership of the project and authorized functions under the
financing scheme, the expenses must be individually examined to determine what,
if any, relationship each bears to the authorized and lawful functions of an IDA,
particularly the "maintenance" function. The exemption shall be applicable only to
those expenses properly within such function and authority. In this regard, it should
be noted that tax-exempt maintenance would be that needed to maintain the structural
integrity of the structures constructed or rehabilitated to house the various
supermarkets, or to repair equipment used as part of the project.
The use of utilities and washing of windows and other such operating
expenses have nothing to do with the underlying financing scheme and should not be
tax-exempt under the law. If one business is able to operate indefinitely without
paying taxes on its operating expenses simply because at one time its structures were
financed with IDBs, that business would have an apparently unintended, open-ended
economic advantage over competitors, thereby flying in the face of the fundamental
purpose of the law - - i.e., the development of economically sound commerce.

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August 2, 1993
This decision is not inconsistent with Wegmans (supra), where the tax
exemption of section 874 was held applicable to the purchase of tangible personal
property acquired and owned by the IDA, as security for the IDBs. Ownership of
property, real and personal-- as distinguished from operation of the business--was
clearly within the express, contemplated function and authority of IDAs under the
GML.
In accordance with the sections of law and regulations cited above and the decisions in
Wegmans Food Markets, Inc. v. Department of Taxation and Finance (126 Misc 2d 144, aff'd 115
AD2d 962, iv to app den 67 NY2d 606) and Wegmans Food Markets, Inc. v. The Department of
Taxation and Finance of the State of N.Y., (Sup Ct, Monroe County, Jan. 10, 1992, Galloway, J.)
supra, and provided that all the terms and conditions of the relevant documents are complied with,
in the instant matter receipts from purchases made by MS Financing as agent for and on behalf of
the IDA whether made as a purchase or lease of tangible property or a purchase of a service of
maintaining, repairing or servicing the Leasehold Improvements and Project Facilities will be exempt
from the taxes imposed under Sections 1105, 1107, 1109 and 1110 of the Tax Law, provided that
the IDA is the owner, lessor or lessee of the property and that the purchase invoices, statements and
contracts with vendors and suppliers provide that the IDA is the purchaser, lessor or lessee and that
MS Financing is the disclosed agent of the IDA. However, in any instance where the maintenance,
repair or servicing results in the replacement of parts, materials or supplies that are consumed in the
daily ongoing operation of equipment, etc., where such parts, materials or supplies must be replaced
whenever consumed, the portion of the charges applicable to such parts, materials or supplies will
be subject to the tax imposed under Sections 1105, 1107, 1109 and 1110 of the Tax Law as indicated
in Wegmans Food Market, Inc, v. The Department of Taxation and Finance of the State of N.Y.
(Sup. Ct., Monroe County, Jan. 10, 1992, Galloway, J.) supra. Prudential Securities, Incorporated.
Adv Op Comm T&F, April 28, 1993.
However, it is noted that in any transaction where the charges are for maintenance services,
in addition to exempt maintenance services, the total charges will be subject to the tax imposed
under Sections 1105(c)(3) or (5) of the Tax Law unless the charges applicable to the exempt
maintenance services are separately stated from the other charges or otherwise reasonably allocated.
Prudential Securities, Incorporated. Adv Op Comm T&F, April 28, 1993.
Payments under the leases of the Leasehold Improvements and Project Facilities from the
IDA to MS Financing, from MS Financing back to the IDA, and from the IDA to MS & Co. and the
Eligible Affiliates are not subject to sales or compensating use tax by virtue of the IDA's statutory
exemption from tax.

DATED: August 2, 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.