Are an insurance group's affiliated companies' equipment purchases and leases, made as an agent of a city industrial development agency (IDA) under a bond-financing job-retention deal, exempt from sales and use tax?

Subject

Whether purchases and leases of personal property made by Petitioner, American International Realty Corporation, American International Facilities Management, Inc., A.I. Credit Corp., and Additional Lessees, as agent for the New York City Industrial Development Agency, are exempt from New York State and New York City sales and use tax.

What this means for you

A group of affiliated insurance companies (all filing a consolidated federal return, with American International Group, Inc. as parent) entered a bond-financing arrangement with the New York City Industrial Development Agency (IDA) to encourage keeping a set level of employment in the City through mid-2003. Under the deal, the IDA authorized the group's companies (and future affiliates that are majority-owned or controlled) to purchase or lease equipment AS THE IDA'S AGENT, with maintenance/service/repair charges also intended to be tax-exempt. The companies initially pay for purchases themselves, then get reimbursed from bond proceeds; the property is then leased/subleased back from the IDA, with title reverting to the companies once the arrangement ends. For its own financial/tax accounting, the group treats the deal as a straightforward financing arrangement and books the property as if it owned it directly. The IDA issued the group a "Sales Tax Letter" confirming its agent status, which the group presents to vendors, and every contract/invoice/lease is required to state the acquisition is on the IDA's behalf.

Because IDAs are exempt public corporations, purchases and leases made genuinely as the IDA's agent are exempt from state and city sales and use tax -- as long as the IDA is the actual owner of the property throughout. Following the same 1992 Wegmans precedent as similar IDA-financing opinions, the maintenance/repair exemption is limited: it covers repair of, or parts replacement for, equipment with a useful life of a year or more, but does NOT cover routine consumable parts/materials/supplies that get replaced every time they're used up (the opinion gives a toner cartridge as its own example of a non-exempt consumable). And just like other IDA-agent rulings, if one invoice mixes exempt maintenance charges with non-exempt ones, the whole charge is taxable unless the exempt piece is separately stated or reasonably allocated. Debt-service payments the group makes to the IDA, and lease payments under the personal-property leases, are both exempt under the IDA's own statutory exemption.

Q&A

Q: Our affiliated group buys and leases equipment as an IDA's disclosed agent under a bond-financing job-retention deal -- are those purchases and lease payments tax-exempt?
A: Yes, per this opinion -- as long as the IDA is the genuine owner of the property throughout and your purchases/leases are properly documented as made on the IDA's behalf, both the purchases and the ongoing lease payments are exempt from sales and use tax.

Q: What about maintenance/repair contracts on the IDA-owned equipment -- fully exempt too?
A: Only partially, per this opinion -- exempt maintenance covers repair of equipment with a useful life of a year or more; parts/materials/supplies that get consumed and must be replaced every time they're used up (the opinion's own example: a toner cartridge) stay taxable regardless of the IDA arrangement.

Q: One of our maintenance invoices covers both exempt equipment-repair work and non-exempt consumable-replacement charges together -- how is that taxed?
A: Per this opinion, the ENTIRE invoice is taxable unless the exempt maintenance charges are separately stated from the other charges (or otherwise reasonably allocated) — don't combine them without a clear breakdown.

Q: We also make debt-service payments to the IDA under the bond arrangement -- are those taxable?
A: No, per this opinion -- debt-service payments by the taxpayer to the IDA are not subject to sales or use tax.

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) incorporating § 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 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_71s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (71) S
Sales Tax
September 1, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930302D

On March 2, 1993 a Petition for Advisory Opinion was received from American International
Group, Inc., 70 Pine Street, 24th Floor, New York, New York 10270.
The issue raised by Petitioner, American International Group, Inc., is whether purchases and
leases of personal property made by Petitioner, American International Realty Corporation,
American International Facilities Management, Inc., A. I. Credit Corp., and Additional Lessees as
an agent for the New York City Industrial Development Agency are exempt from New York State
and New York City sales and use tax.
The parties involved in this transaction are all members of an affiliated group which files a
consolidated income tax return for federal purposes. The parent of this group is Petitioner. The
Equipment Lessees under the agreements are the Petitioner as well as the following corporations:
American International Realty Corporation
American International Facilities Management, Inc.
A. I. Credit Corp.
In addition to these companies, affiliates of Petitioner are entitled to be added as Additional
Lessees under the agreements and have not yet been identified at this time. The additional lessees
must be controlled by, or 50% owned by Petitioner.
The Equipment Lessees and Additional Lessees referred to above are hereinafter referred to
as "Taxpayer"
Taxpayer and the New York City Industrial Development Authority (hereinafter "IDA")
entered into a bond financing arrangement in order to induce Taxpayer to maintain a certain level
of employment in New York from January 14, 1993 to July 1, 2003. Pursuant to that arrangement
the IDA authorized Taxpayer to purchase or lease certain personal property as agent for the IDA.
Charges for maintenance, installation, service and repair of the property were also intended to be tax
exempt. The purchase price or rent would initially be paid by Taxpayer and then reimbursed to
Taxpayer with the proceeds of the bonds. Taxpayer will then lease or sublease the property from the
IDA. Title to the property wilt- revert to Taxpayer at the termination of the agreement. For financial
and tax purposes the Taxpayer intends to treat this transaction as a financing arrangement and
account for the property as if owned by Taxpayer. Petitioner has only made tax exempt purchases
and leases of property since entering into its relationship with the IDA on January 14, 1993.

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Taxpayer has been provided with a "Sales Tax Letter" which is on IDA letterhead and signed
by the IDA. It intends to present the Sales Tax Letter when acquiring the property. The letter advises
that the Taxpayer is the IDA's agent and exempt from state and local sales and compensating use tax
levied by the State and City of New York. In addition, the lease agreement requires specific language
stating that the acquisition is on behalf of the IDA be included in each contract, invoice, bill,
purchase order or lease.
Section 1101(b)(5) of the Tax Law defines "sale, selling or purchase" as: "Any transfer of
title or possession or both, exchange or barter, rental, lease or license to use or consume, conditional
or otherwise, in any manner or by any means whatsoever for a consideration, or any agreement
therefor, including the rendering of any service, taxable under this article, for a consideration or any
agreement therefor."
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

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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.
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 tax 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 there
from, 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 agency 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 applies 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"

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arrangements with the plaintiff. In an earlier action, Wegmans Food Markets v Department of Tax
& Finance of the State of N.Y., 126 Misc 2d 144, affd 115 AD2d 962, iv to app den 67 NY2d 606,
the section 874 tax exemption was held to be broader than 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 expense 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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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 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, and provided that all the terms and conditions of the relevant documents are complied with,
in the instant matter all amounts paid by Taxpayer to make purchases and leases of personal property
as agent of the IDA will be exempt from the sales and use taxes imposed under Sections 1105, 1107,
1109 and 1110 of the Tax Law provided that the IDA is the owner of the property. Payments made
by the Taxpayer as agent of the IDA, which represent costs for maintenance, installation, service and
repair contracts, where the contracts provide for the replacement of parts, other than parts that
contain materials or supplies that are consumed in the operation of project equipment, (e.g., a toner
cartridge) where such parts must be replaced whenever the supply is consumed, and repair of or with
respect to equipment, which equipment has a useful life of one year or more (exempt maintenance
services), will be exempt from the sales and use taxes imposed under Sections 1105, 1107, 1109 and
1110 of the Tax Law to the extent that such services under such contracts are necessary to maintain
or repair the IDA equipment used as part of the project 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.

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Debt service payments by the Taxpayer to the IDA will not be subject to sales and use taxes
imposed under Sections 1105, 1107, 1109 or 1110 of the Tax Law. Payments under the leases of the
personal property from the Taxpayer to the IDA are not subject to state and local sales or
compensating use tax by virtue of the IDA's statutory exemption from tax.

DATED: September 1, 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.