New York Advisory Opinion TSB-A-96(36)S: When Viacom finances office build-outs, equipment, and maintenance contracts through the New York City Industrial Development Agency's bond program to stay headquartered in the city, are those purchases, the resulting lease (debt-service) payments, intercompany reimbursements, the $1 buyout option, and an early-removal penalty all exempt from sales and use tax?

Plain-English summary

To induce Viacom Inc. and its many affiliates (the "Viacom Group," including Paramount Pictures, Simon & Schuster, Showtime Networks, Blockbuster Videos, and others) to keep roughly 15 years of operations in New York City, the New York City Industrial Development Agency (IDA) offered a real estate tax abatement plus sales and use tax exemptions on office build-outs and equipment at several Manhattan buildings, including Viacom's headquarters at 1515 Broadway. The deal works the same way as other IDA sale-leaseback financings: the IDA takes title to (or a leasehold interest in) the space and equipment, financed with tax-exempt bonds, while a designated "Agent" or "Group Agent" within the Viacom Group -- acting as the IDA's disclosed agent, including through contractors -- actually places the orders and makes the improvements. The IDA then leases the improved space and equipment back to Viacom Group members for debt-service payments sized to cover the bonds, with a $1 buyout option available at the end of the lease term, and a "Premature Removal Penalty" (equal to the sales tax that would otherwise have applied) if equipment or improvements are pulled out early without a qualifying reason.

The Department ruled the whole structure exempt from state and local sales/use tax -- purchases of both "Improvements" (materials permanently incorporated into the buildings) and "Equipment" (furniture, computers, software, and similar personalty), the debt-service lease payments, intercompany charges among Viacom Group "Users" reimbursing a Group Agent for shared equipment, the $1 option price, and the Premature Removal Penalty -- as long as the IDA is consistently documented as the real purchaser/lessor/lessee and the Viacom entity making the purchase is its disclosed agent. Two caveats stand out. First, an advisory opinion can't resolve factual questions, so the Department couldn't say whether the office build-out work meets the legal definition of a "capital improvement" -- but it didn't matter here, because the exemption applies either way as long as the IDA-agent purchase structure is followed (materials for a true capital improvement are exempt on that basis alone; if not a capital improvement, they're still exempt because the IDA is the purchaser). Second, echoing the Wegmans precedent, the Department was explicit that fuel, energy, and utility purchases are never covered by this kind of IDA maintenance exemption, and any invoice mixing taxable and exempt maintenance items becomes fully taxable unless the exempt portion is separately stated.

What this means for you

Multi-entity corporate groups structuring a relocation/retention deal with a city IDA

The exemption travels with the IDA-agent purchase structure, not with any one entity in your group -- as long as invoices and contracts consistently name the IDA as purchaser/lessor/lessee and your designated Agent or Group Agent as its disclosed agent, purchases, lease payments, and even intercompany cost-sharing charges among group members can all be exempt. Don't assume a build-out is automatically a "capital improvement" -- confirm that classification separately, since the answer changes which exemption theory applies (though, as this opinion shows, the IDA-agent structure can make the result the same either way).

Anyone relying on an IDA exemption for ongoing operating costs

Fuel, energy, and utility charges are consistently treated as outside these IDA maintenance exemptions (per Wegmans) -- budget for sales tax on those regardless of how the rest of your build-out is financed.

Common questions

Q: Does it matter whether the office improvements legally qualify as a "capital improvement"?
A: Not for the exemption outcome here, though the Department couldn't resolve that factual question in an advisory opinion. If the work is a capital improvement, materials are exempt under the capital-improvement rules; if not, they're still exempt because the IDA-agent purchase structure independently makes the IDA (not Viacom) the buyer. Either way the result is the same, but the underlying legal basis differs.

Q: Are intercompany charges between Viacom Group companies taxable?
A: No -- payments a "User" makes to a Group Agent to reimburse it for shared equipment costs, or to settle intercompany charges for equipment use, are exempt as long as the IDA is the owner/lessor/lessee of that equipment and the paying User is itself acting as an agent of the IDA at the time of purchase. The Department cited its own prior Smith Barney opinion, TSB-A-95(35)S, for the same principle.

Q: What's never covered by this kind of exemption?
A: Fuel, energy, and utility purchases -- the Department repeated the Wegmans holding that ordinary operating costs like these have nothing to do with the IDA's financing structure and stay taxable no matter how the underlying equipment or building was financed.

Q: Can another company rely on this exact result?
A: No. This advisory opinion binds the Department only as to Viacom Inc. and the specific facts described; another IDA-financed project should confirm its own agency documentation and lease structure matches this fact pattern before assuming the same exemption.

Citations and references

Statutes and regulations:

• Tax Law §§ 1101(b)(4), 1101(b)(5), 1101(b)(6), 1101(b)(9), 1101(b)(14) (definitions)
• Tax Law §§ 1105, 1107, 1109, 1110 (sales and compensating use tax imposition)
• Tax Law § 1115(o) (computer software service exemption)
• Tax Law § 1116(a)(1) (government exemption)
• 20 NYCRR 526.6(c), 526.7(a), 526.7(c)(2), 526.8(c), 529.2(a), 541.3(a) (Sales and Use Tax Regulations)
• General Municipal Law §§ 858, 862, 874, 917 (industrial development agency powers and exemption)

Prior rulings and cases referenced:

• Wegmans Food Markets v. Department of Taxation and Finance, 126 Misc. 2d 144, aff'd 115 A.D.2d 962, lv. denied 67 N.Y.2d 606 ("Wegmans I")
• Wegmans Food Markets v. Department of Taxation and Finance of the State of N.Y., Sup. Ct., Monroe County, Jan. 10, 1992, Galloway, J. ("Wegmans II")
• Smith Barney Inc., Advisory Opinion, Commissioner of Taxation and Finance, August 18, 1995, TSB-A-95(35)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (36)S
Sales Tax
June 28, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S951205A

On December 5, 1995, a Petition for Advisory Opinion was received from Viacom Inc., 1515
Broadway, New York, New York 10036.
Petitioner, Viacom Inc., presents the following issues (the underlined terms are defined in
Petitioner's statement of facts):

1. Whether expenditures with respect to Improvements at any of I. II. and III by an Agent
   or Group Agent, acting on behalf of and as agent of the IDA (including those expenditures made
   through contractors acting on behalf of and as agent of such Agent or Group Agent, in such Agent's
   or Group Agent's capacity as agent of the IDA), pursuant to the Exemption Letter and the Project
   Agreement will be exempt from New York State and New York City Sales and Use Tax.
2. Whether expenditures with respect to Equipment (including Computer Software) by an
   Agent or Group Agent, acting on behalf of and as agent of the IDA (including those expenditures
   made through contractors acting on behalf of and as agent of such Agent or Group Agent, in such
   Agent's or Group Agent's capacity as agent of the IDA), pursuant to the Exemption Letter and the
   Project Agreement will be exempt from New York State and New York City Sales and Use Tax.
3. Whether payments under Exempt Service Contracts by an Agent or Group Agent acting
   on behalf of and as agent of the IDA will be exempt from New York State and New York City Sales
   and Use Tax.
4. Whether Debt Service Payments by an Agent and/or Group Agent to the IDA under the
   Financing Leases with respect to Improvements and Equipment will be exempt from New York State
   and New York City Sales and Use Tax.
5. Whether payments by the Users acting on behalf of and as agent of the IDA to an Agent
   or Group Agent will be exempt from New York State and New York City Sales and Use Tax.
6. Whether at the time the Option is exercised, the Option Price will be exempt from the
   New York State and New York City Sales and Use Tax.
7. If, at any time, a Premature Removal Penalty is imposed on an Agent or Group Agent by
   the IDA, whether such Premature Removal Penalty shall be deemed to be consideration for a sale
   subject to New York State and New York City Sales and Use Tax.
   Petitioner presents the following facts. This petition for advisory opinion concerns a
   proposed transaction (the "Project") between the New York City Industrial Development Agency (the
   "IDA"), and Petitioner intended to induce Petitioner together with certain affiliates (the "Viacom
   Group") to retain their operations in New York City (the "City") for approximately fifteen (15) years.

-2­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
As part of the Project, the Viacom Group will initially occupy premises in the City in buildings at
1633 Broadway ("Premises I"), owned by MRI Broadway Rental Inc., at 1230 Avenue of the
Americas ("Premises II"), owned by Rockefeller Center Properties, and at 1515 Broadway (the
"Building"), owned by 1515 Broadway Associates, L.P. (the "Owner").
In connection with the Project, the IDA will extend certain economic development benefits
to Petitioner and certain affiliates to reduce the cost of maintaining offices in the City and of
acquiring associated improvements and equipment. Among these benefits are: (i) a real estate tax
abatement on all or a portion of Petitioner's premises in the Building evidenced by Petitioner's
obligation to make certain payments in lieu of real estate taxes ("PILOT") with respect to such
premises pursuant to a PILOT agreement (the "PILOT Agreement"); and (ii) sales and compensating
use tax exemptions pursuant to the Pre-Bond Issuance Sales Tax Letter (November 17, 1994), the
Amended and Restated Pre-Bond Issuance Sales Tax Letter (March 1, 1995), the Second Amended
and Restated Pre-Bond Issuance Sales Tax Letter (April 30, 1995), the Third Amended and Restated
Pre-Bond Issuance Sales Tax Letter (June, 30, 1995), the Fourth Amended and Restated Pre-Bond
Issuance Sales Tax Letter (September 30, 1995), the Fifth Amended and Restated Pre-Bond Issuance
Sales Tax Letter (November 30, 1995) or the Sales Tax Letter (as applicable, the "Exemption
Letter"); and pursuant to a Project Agreement (the "Project Agreement"). The Exemption Letter
applies to all of the property, service contracts and purchases under the Project.
In order to extend the real estate tax benefit to Petitioner, the IDA will take title to that
portion of the Building to be occupied by the Viacom Group, for which Petitioner will seek real
estate tax benefits. Initially, the Viacom Group will occupy approximately nine hundred fifty three
thousand (953,000) rentable square feet in the Building. Petitioner may have expansion options with
respect to additional space in the Building (the space initially to be occupied by the Viacom Group
in the Building together with any additional space, "premises III"; Premises I, II, and III, collectively,
the "Improvement Premises"). Because the IDA will not take title to any portion of the Building that
the Viacom Group does not occupy, the Building will be converted to a condominium form of
ownership, with Premises III comprising separate condominium units, title to which can be
separately conveyed to the IDA. That portion of Premises III to be leased by the Viacom Group and
for which Petitioner will seek real estate tax benefits will consist of the condominium units initially
conveyed by the owner to the IDA and, upon Petitioner's exercise of its expansion options or
otherwise, so conveyed from time to time thereafter (these initial units together with any additional
units, the ("IDA Units").
In order for sales and use tax exemptions to be available to Petitioner, all purchases of
tangible personal property and services which the IDA intends to be eligible for exemption in
connection with the Project ("Acquisitions") must be made by the IDA through one of its designated
agents within the Viacom Group (the "Agent"). From time to time, any such Agent may designate
another Agent (the "Group Agent") to act on its behalf as its agent, and in each such Agent's capacity
as the IDA's agent, for the purpose of making Acquisitions. In addition to Petitioner, the following
members of the Viacom Group have been designated agents of the IDA under the Exemption Letter

-3­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
and Project Agreement for purposes of the sales and use tax exemption: Viacom International Inc.;
Riverside Broadcasting Co., Inc.; Antics Inc.; Viacom MGS Services Inc.; Showtime Networks Inc.;
Prentice-Hall, Inc.; Prentice Hall International, Inc.; Simon & Schuster, Inc.; Paramount Pictures
Corporation; Comedy Partners; USA Networks; Hamilton Projects, Inc.; Worldvision Enterprises,
Inc.; Laurel Entertainment, Inc.; Blockbuster Videos, Inc.; and Premier Advertiser Sales Inc. It is
anticipated that from time to time certain additional members of the Viacom Group may be
designated by Petitioner as agents of the IDA for the purpose of making Acquisitions. Any such
Acquisitions will be made in all respects in accordance with (i) the Exemption Letter and, as and
when applicable, (ii) the Project Agreement. In addition, the IDA will authorize, by specific
resolution, each site in the City where property acquired in Acquisitions may be situated and where
services acquired in Acquisitions may be rendered, for use by the Viacom Group in connection with
the Project (together, all such sites authorized by IDA resolution, the "Approved Premises").
Currently, the Approved Premises consist of all of the following locations in Manhattan; 1515
Broadway; 1633 Broadway; 1230 Avenue of the Americas; 1619 Broadway; 423 West 55th Street;
1775 Broadway; 825 Eighth Avenue (a/k/a 309 West 49th Street); 138-142 West 43rd Street; 2
Broadway; 619 West 54th Street; 866 Third Avenue; 6 West 48th Street; 1700 Broadway; 727
Eleventh Avenue; 350 Fifth Avenue; and 7 Penn Plaza.
To finance the Acquisitions, the IDA will from time to time issue special obligation revenue
bonds (the "Bonds"). The Bonds may be sold to a member of the Viacom Group (other than an Agent
or Group Agent). Proceeds raised through the sale of such Bonds will be available: (i) to purchase
the Acquisitions directly; or (ii) to reimburse the Agents or Group Agents (or other members of the
Viacom Group which have been designated agents of the IDA) that may have advanced funds to
purchase the Acquisitions. Such reimbursements shall be made only for purchases made after the
purchaser has been appointed an Agent of the IDA. For income tax and financial reporting purposes,
the Viacom Group will report the Acquisitions in the same manner that similar acquisitions were
reported prior to the Project.
Pursuant to Petitioner's internal corporate policies, generally each member of the Viacom
Group is responsible for its own costs. Each such member of the Viacom Group which will use
Equipment (each, a "User") will be appointed as an agent of the IDA for the purpose of making
Acquisitions, either directly or through a Group Agent acting in its capacity as agent of the User and
in its capacity as agent of the IDA. Users will incur costs for Equipment Acquisitions in the
following manner: (a) any Agent that is itself a User may purchase Equipment, on behalf of and as
agent of the IDA, for its own use, (b) a Group Agent may also purchase Equipment, on behalf of and
as agent of one or more Users, and also on behalf of and as agent of the IDA, for the use of such
User(s) in which event (i) such User(s) will make a payment to, or be assessed a charge (e.g., an
intercompany charge) by, the appropriate Group Agent to reimburse such Group Agent for the cost
of such Equipment, and (ii) the Equipment shall be deemed to have been purchased by such User

-4­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
(or jointly by such Users, if there is more than one User of such Equipment) on behalf of and as
agent of the IDA through such Group Agent as its agent and as agent of the IDA, or (c) a Group
Agent may purchase Equipment, on behalf of and as agent of the IDA, for its own use and also for
the use of one or more other Users, in which event the other User(s) of such Equipment may be
assessed a charge (e.g., an intercompany charge) for their use.
The Agent or Group Agent will be authorized to act as the IDA's agent in (i) purchasing
materials to be incorporated as permanent improvements, additions and installations to the
Improvement Premises and purchasing the services of installing such materials (such materials as
so incorporated, including any replacements, enhancements and additions thereto, collectively, the
"Improvements"); (ii) making purchases of, or entering into leases and contracts for, as the case may
be furniture, furnishings, machinery, equipment, or other personalty for use at the Approved
Premises (such personalty, including any replacements, enhancements and additions thereto,
collectively, the "Equipment"); and (iii) making purchases of the services of maintaining, servicing
and repairing real and personal property consisting of Improvements and Equipment with a useful
life of one year or more, comprising part of or in use at the Approved Premises, including
replacement parts but not including parts (e.g., a toner cartridge) that contain materials consumed
in operating the property and that are replaced when the part is consumed, and also not including
contracts for general services (e.g., janitorial services) (the "Exempt Service Contracts").
As used herein, the term Equipment shall specifically include equipment in the form of
prewritten computer software, not limited as to any of the following: (i) the medium by means of
which conveyed (including tangible media, e.g., computer disk, compact disc or magnetic tape, as
well as intangible media, e.g., electronic transmission); (ii) the kind of equipment for which acquired
(including computers, e.g., mainframe computers and peripherals, work stations, personal computers
or networks, as well as related equipment, e.g., modems, printers, copiers, scanners, facsimile
machines, equipment for video/multimedia teleconferencing or other telecommunications
equipment); and (iii) whether or not such software is used on equipment in which the IDA has an
interest (such computer software, as not so limited, including any replacements, enhancements and
upgrades pursuant to maintenance contracts and additions thereto, collectively, "Computer
Software").
a. Improvements at Premises III. The following structure is proposed to secure the tax
benefits offered by the IDA to Petitioner with respect to Improvements at Premises III.
(i) An Agent or Group Agent, acting on behalf of and as agent of the IDA (through
contractors acting on behalf of and as agent of such Agent or Group Agent, in their capacity as agent
of the IDA), will purchase and install the materials to be incorporated into Improvements to Premises
III.
(ii) The Agent or Group Agent will have purchased all materials to be incorporated as
Improvements to Premises III, on behalf of and as agent of IDA, but there will be no installation of

-5­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
any such materials until the IDA acquires a leasehold interest in Premises III. (In the period prior to
when Bonds are first issued, the IDA will acquire a leasehold interest in Premises III by an interim
arrangement in which Petitioner will lease Premises III to the IDA pursuant to an interim lease
agreement (the "Interim Lease") for nominal rent and the IDA will lease Premises III back to
Petitioner pursuant to an interim sublease agreement (the "Interim Sublease") for nominal rent. The
terms of the Interim Lease and of the Interim Sublease shall each end on the date when Bonds are
first issued or earlier upon certain other events.) In the period after the Bonds are first issued, the
IDA will obtain both title to the IDA Units and a leasehold interest in Premises III. The IDA will
acquire a leasehold interest pursuant to the Premises III Facility Lease defined below. In addition,
the IDA will have acquired title to the IDA Units from the Owner. The Owner will condominiumize
the Building and convey title to the IDA Units for a nominal amount to the IDA, subject to an
existing mortgage on the Building. The IDA will then lease the IDA Units back to the Owner
pursuant to a lease agreement (the "Overlease") for nominal rent. The deed conveying the initial IDA
Units to the IDA (the "Initial Deed") will contain reverters to the owner upon the expiration of, or
earlier termination of, the Premises III Financing Lease defined below, or upon certain other events.
(iii) The Owner will have already leased Premises III, including the IDA Units, to Petitioner
pursuant to a lease agreement (the "premises III Prime Lease") for fair market value rent.
(iv) Petitioner will then lease Premises III, including the IDA Units, to the IDA pursuant to
a lease agreement (the "Premises III Facility Lease") for nominal rent. The IDA, which will by then
also hold title to the Improvements, will lease Premises III (including the IDA Units and the
Improvements) back to one or more Agents and/or Group Agents pursuant to a lease agreement (the
"Premises III Financing Lease") for an amount sufficient to repay the Bonds (the "Debt Service
Payments").
b. Improvements at Premises I and II. The following structure is proposed to secure the tax
benefits offered by the IDA to Petitioner with respect to Improvements at Premises I and II.
(i) An Agent or Group Agent, acting on behalf of and as agent of the IDA (through
contractors acting on behalf of and as agent of such Agent or Group Agent, in their capacity as agent
of the IDA), will purchase and install materials to be incorporated into Improvements located on
Premises I and II.
(ii) MRI Broadway Rental Inc. leased Premises I, and Rockefeller Center Properties leased
Premises II, to Petitioner or another member of the Viacom Group which is an agent or Group Agent
(in each case, the "Tenant") pursuant to separate lease agreements (the "Premises I Prime Lease" and
"Premises II Prime Lease" respectively) for fair market value rent.
(iii) The Agent or Group Agent will purchase all materials to be incorporated as
Improvements to Premises I and II, on behalf of and as agent of the IDA, but there will be no

-6­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
installation of any such materials until the IDA acquires leasehold interests in Premises I and II. (In
the period prior to when Bonds are first issued, the IDA will acquire leasehold interests in Premises
I and II by an interim arrangement in which the Tenant will lease Premises I and II to the IDA
pursuant to the Interim Lease for nominal rent and the IDA will lease Premises I and II back to the
Viacom Group pursuant to the Interim Sublease for nominal rent. The terms of the Interim Lease and
of the Interim Sublease shall each end on the date when Bonds are first issued or earlier upon certain
other events.) In the period after the Bonds are first issued, the Tenant(s) will then lease Premises
I and II to the IDA pursuant to separate lease agreements (the "Premises I Facility Lease" and
"Premises II Facility Lease" respectively) for nominal rent and the IDA, also holding title to the
Improvements, will lease back Premises I and II and the Improvements made at Premises I and II,
to one or more Agents and/or Group Agents pursuant to separate lease agreements (the "Premises
I Financing Lease" and "Premises II Financing Lease" respectively), each for the respective Debt
Service Payments.
c. Equipment. The following structure is proposed to secure the tax benefits offered by the
IDA to Petitioner with respect to Equipment.
(i) An Agent or Group Agent, acting on behalf of and as agent of the IDA (or through
contractors acting on behalf of and as agent of such Agent or Group Agent, in their capacity as agent
of the IDA), will purchase or lease Equipment for use at the Approved Premises.
(ii) The IDA will lease such Equipment to the Agent or Group Agent pursuant to a separate
lease agreement (the "Equipment Financing Lease"; collectively, the Premises I, II, III, and
Equipment Financing Leases, the "Financina Leases") for the Debt Service Payments.
d. Other Facts. The Overlease will require the Owner to pay the PILOT due from Petitioner
in the event Petitioner should fail to make such payments under the PILOT Agreement. In addition,
the Overlease will contemplate the potential for additional units to be conveyed to the IDA in
connection with Petitioner's expansion options, and will become applicable to such additional units
upon the conveyance thereof to the IDA.
The Premises III Prime Lease will, among other things, require Petitioner to: (i) pay fair
market value rent with respect to Premises III; (ii) pay real property taxes imposed against Premises
III, if any; and (iii) reimburse the Owner for any PILOT paid by the Owner under the Overlease as
a result of Petitioner's default under the PILOT Agreement. The Prime Lease may also contain
various expansion options which, if exercised, could result in the conveyance of additional unit(s)
to the IDA. In the event such additional conveyances are consummated, the deeds executed in
connection therewith will grant the same type of interest to the IDA and contain the same reverters
as the Initial Deed.
The PILOT Agreement will require that Petitioner pay PILOT to a PILOT Trustee. The
Owner's obligation to pay PILOT under the Overlease will be secured by a form of security

-7­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
acceptable to the IDA. The existing mortgage on the Building may be subordinated to the PILOT
Mortgage.
Under the Project Agreement (but only for the purpose of the Project Agreement as Petitioner
has no intention to remove the Improvements), among other things and with certain limited
exceptions, (i) none of the Improvements may be removed from the Improvement Premises prior to
the expiration of three years after the installation or location of such Improvements at the
Improvement Premises and (ii) none of the purchased Equipment may be removed from the
Approved Premises (except for removals from one Approved Premises to another Approved
Premises) prior to the expiration of the period provided for in the Project Agreement following the
location of such Equipment at the Approved Premises (the periods referred to in clauses (i) and (ii)
above, the "Retention Period").
At the end of the Project term (or earlier if the Bonds have been redeemed in full), the
Improvements, the Leasehold interests in the Equipment and all rights under the Exempt Service
Contracts may be purchased from the IDA by the Agent and/or Group Agent pursuant to a purchase
option (the "Option") contained in the Financing Leases for the option price of $1.00 (the "Option
Price").
If any of the Improvements is removed from the Improvement Premises or any of the
Equipment is removed from the Approved Premises prior to the expiration of the Retention Period
for reasons other than upon the occurrence of certain specified grounds for such removal (i.e.,
obsolescence, uselessness, or another good faith reason), the Agent or the Group Agent who removes
the Improvements or the Equipment must pay the IDA an amount equal to the net present value, at
the time of removal, of the sales tax or compensating use tax which would have been required to be
paid at the time of original purchase if such item removed had been purchased or leased by an Agent
or a Group Agent in its own name on the date of its original purchase, based upon a purchase price
equal to its fair market value as of the date of such removal (the "Premature Removal Penalty").
The Project Agreement will provide that all amounts paid to make Acquisitions (including,
without limitation, Exempt Service Contracts) will be exempt from state and local sales and use tax.
The Project Agreement contemplates that benefits will be received by the Viacom Group over a
period of approximately fifteen (15) years (beginning November 17, 1994 and ending December 31,
2009). All benefits must be used during that period or forfeited.
The IDA and a banking institution designated by the IDA (the "Bond Trustee") will enter into
a trust indenture (the "Trust Indenture") to provide for the issuance from time to time by the IDA of
the Bonds. The term of the Bonds will end upon the earlier to occur of the maturity date (December
31, 2009) or the redemption of all of the Bonds prior to maturity. However, Petitioner is entitled to
redeem less than all of the Bonds from time to time, subject to certain requirements of the IDA. Bond
proceeds may not be used to finance: (i) payments under maintenance contracts (including Exempt
Service Contracts) or (ii) that portion of any lease payment for Equipment not otherwise attributable
to the deemed "principal portion" of the payments due for such Equipment.

-8­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
The Project will not exceed the allowable one-third retail facilities restriction of Section 862
of the General Municipal Law.
Applicable Law and Regulations
Section l101(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 (including, with respect to computer software, merely the right to
reproduce), 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 l101(b)(6) of the Tax Law defines "tangible personal property" as:
Corporeal personal property of any nature .... Such term shall also include pre-written
computer software, whether sold as part of a package, as a separate component, or
otherwise, and regardless of the medium by means of which such software is
conveyed to a purchaser ....
Section l101(b)(14) of the Tax Law defines "pre-written computer software" as:
Computer software (including pre-written upgrades thereof) which is not software
designed and developed by the author or other creator to the specifications of a
specific purchaser. The combining of two or more pre-written computer software
programs or pre-written portions thereof does not cause the combination to be other
than pre-written computer software. Pre-written software also includes software
designed and developed by the author or other creator to the specifications of a
specific purchaser when it is sold to a person other than such purchaser. Where a
person modifies or enhances computer software of which such person is not the
author or creator, such person shall be deemed to be the author or creator only of
such person's modifications or enhancements. Pre-written software or a pre-written
portion thereof that is modified or enhanced to any degree, where such modification
or enhancement is designed and developed to the specifications of a specific
purchaser, remains pre-written software; provided, however, that where there is a
reasonable, separately stated charge or an invoice or other statement of the price
given to the purchaser for such modification or enhancement, such modification or
enhancement shall not constitute pre-written computer software.

-9­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
Section 1105 of the Tax Law provides, in relevant part:
... 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 nine of subdivision (b) of section eleven hundred one of this chapter ...
Section l107(a) of the Tax Law provides, in relevant part:
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.

-10­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
Section l109(a) of the Tax Law provides, in relevant part:
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:
(a) 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 (other than computer software used by
the author or other creator) 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 paragraphs (1), (7) and (8) of subdivision (c) of section eleven hundred
five, (D) of any tangible personal property ... not acquired for purposes of resale,
upon which any of the services described in paragraphs (2), (3) and (7) of subdivision
(c) of section eleven hundred five have been performed ....
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven hundred five or
under section eleven hundred ten shall be exempt from tax under this article where
performed on computer software of any nature; provided, however, that where such
services are provided to a customer in conjunction with the sale of tangible personal
property any charge for such services shall be exempt only when such charge is
reasonable and separately stated on an invoice or other statement of the price given
to the purchaser.
Section ll16(a) of the Tax Law provides, in relevant part:
... 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:

-11­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
(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 526.6(c) of the New York State Sales and Use Tax Regulations provides, in relevant
part:
(1) Where a person, in the course of his business operations, purchases tangible
personal property or services which he intends to sell ... the property or services
which he has purchased will be considered as purchased for resale, and therefore not
subject to tax until he has transferred the property to his customer.
(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate ....
(3) Receipts from the sale of property purchased under a resale certificate are not
subject to tax at the time of purchase by the person who will resell the property. The
receipts are subject to tax at the time of the retail sale.
*
*
(8) The resale exclusion also applies to a sale of service.

*

Example 12: A jeweler sends a customer's watch to a repairman for servicing. The
charge by the jeweler to the customer is taxable. The charge to the jeweler by the
repairman is not taxable because the service was purchased for resale by the jeweler.
Section 526.7(a) of the New York State Sales and Use Tax Regulations provides, in relevant
part:
(1) The words sale, selling or purchase mean any transaction in which there is a
transfer of title or possession, or both, of tangible personal property for a
consideration.
(2) Among the transactions included in the words sale, selling, or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
Section 526.7(c)(2) of the New York State Sales and Use Tax Regulations provides, in
relevant part:
Where a lease ... with an option to purchase has been entered into, and the option is
exercised, the tax will be payable on the consideration given when the option is
exercised, in addition to the taxes paid or payable on each lease payment.

-12­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
Section 526.8(c) of the New York State Sales and Use Tax Regulations provides, in relevant
part:
Tangible personal property does not include:
(1) real property; ....
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 ...
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 New York State Sales and Use Tax Regulations provides, in relevant
part:
When a contractor's customer is a governmental entity described in section ll16(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) Pursuant to section ll16(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:
*

*

*

(c) industrial development authorities.
Section 858 of the General Municipal Law provides, in relevant part:
... [E]ach agency shall have the following powers:
*

*

*

(3) To acquire, hold and dispose of personal property for its corporate purposes;
*

*

*

-13­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
(10) To acquire, construct, reconstruct, lease, improve, maintain, equip or furnish
one or more projects; ...
Section 862(2) of the General Municipal Law provides as follows:
(2)(a) Except as provided in paragraph (b) of this subdivision, no financial assistance
of the agency shall be provided in respect of any project where facilities or property
that are primarily used in making retail sales to customers who personally visit such
facilities constitute more than one-third of the total project cost. For the purposes of
this article, retail sales shall mean: (i) sales by a registered vendor under article
twenty-eight of the tax law primarily engaged in the retail sale of tangible personal
property, as defined in subparagraph (i) of paragraph four of subdivision (b) of
section eleven hundred one of the tax law; or (ii) sales of a service to such customers.
Except, however, that tourism destination projects and projects operated by not-for­
profit corporations shall not be prohibited by this subdivision. For the purpose of this
paragraph, "tourism destination" shall mean a location or facility which is likely to
attract a significant number of visitors from outside the economic development
region as established by section two hundred thirty of the economic development
law, in which the project is located.
(b) Notwithstanding the provisions of paragraph (a) of this subdivision, financial
assistance may, however, be provided to a project where facilities or property that are
primarily used in making retail sales of goods or services to customers who
personally visit such facilities to obtain such goods or services constitute more than
one-third of the total project cost, where (i) the project occupant would, but for the
assistance provided by the agency, locate the related jobs outside the state, or (ii) the
predominant purpose of the project would be to make available goods or services
which would not, but for the project, be reasonably accessible to the residents of the
city, town, or village within which the proposed project would be located because of
a lack of reasonably accessible retail trade facilities offering such goods or services,
or (iii) the project is located in a highly distressed area.
(c) With respect to projects authorized pursuant to paragraph (b) of this subdivision,
no project shall be approved unless the agency shall find after the public hearing
required by section eight hundred fifty-nine of this chapter that undertaking the
project will serve the public purposes of this article by preserving permanent, private
sector jobs or increasing the overall number of permanent, private sector jobs in the
state. Where the agency makes such a finding, prior to providing financial assistance
to the project by the agency, the chief executive officer of the municipality for whose
benefit the agency was created shall confirm the proposed action of the agency.

-14­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
Section 874(1) and (2) of the General Municipal Law provides as follows:
(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 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 Markets v. The Department of Taxation and Finance of the State of N.Y.,
(Sup. Ct., Monroe County, Jan. 10, 1992, Galloway, J.) ("Wegmans II"), 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 industrial development agencies ("IDAs") 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 IDAs. The projects were technically owned by the respective IDAs
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 & Finance of the State of N.Y., 126 Misc. 2d
144, affd 115 AD2d 962, lv to app den 67 NY2d 606, ("Wegmans I") the section 874 tax exemption
was held to be broader than the exemption provided by section 1116 of the Tax Law. The court in
Wegmans II 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

-15­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
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 [sic] 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 [sic] 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 financial 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.
This decision is not inconsistent with ("Wegmans I") (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 ("Wegmans I"), the Court stated:
The Legislature very carefully included all revenues received by an IDA within the
purposes of article 18-A. The definition of "revenues" in subdivision (7) of section
854 of the General Municipal Law is all inclusive: "All rents, revenues, fees, charges
and other sources of income derived by the agency from the leasing, sale or other
disposition of a project or projects."
The term "projects" was also made all-embracing. Subdivision (4) of section 854 of
the General Municipal Law defines "Project[s]" as "any land, and building[s] or other

-16­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
improvement, and all real and personal properties located within the state of New
York ....
In Smith Barney Inc., Adv. Op. Comm. Of Taxation and Finance, August 18, 1995,
TSB-A-95(35)S, the Commissioner advised that certain payments made to an Agent
or to a Group Agent by another Agent or Group Agent, constituting an allocation of
costs for Exempt Maintenance Contracts and for the purchase of Acquisitions, would
not be subject to sales and use taxes imposed under Sections 1105, 1107, 1109 and
1110 of the Tax Law.
Opinion
Based on the structures under which the IDA proposes to make sales and compensating use
tax benefits available to Petitioner with respect to Improvements, Equipment and Exempt Service
Contracts, and based on the other facts, as described by Petitioner in its petition, and in accordance
with the sections of law and regulations cited above and the decisions in Markets v. Department of
Taxation and Finance (126 Misc. 2d 144, affd 115 AD2d 962, lv to app den 67 NY2d 606) and
Wegmans Food Markets 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, and that these terms and conditions are consistent with
Petitioner's description of them as set forth above, in the instant matter:
(a) An advisory opinion does not determine factual issues. Petitioner's petition does not indicate
whether Petitioner's Improvements constitute capital improvements as defined in section l101(b)(9)
of the Tax Law. Therefore, this opinion cannot conclude whether such Improvements are capital
improvements. If the Improvements do constitute capital improvements, then payments for these
capital improvements will not be subject to sales and use tax imposed under sections 1105, 1107,
1109 and 1110 of the Tax Law. But a purchaser's payment of the purchase price of materials used
to construct capital improvements would be subject to tax (see section 1101(b)(4) of the Tax Law),
unless otherwise exempt. In this case, purchases of materials to be incorporated into Improvements
at any of Premises I, II, and III by an Agent or Group Agent, acting on behalf of and as agent of the
IDA (including those made through contractors acting on behalf of and as agent of such Agent or
Group Agent, in such Agent's or Group Agent's capacity as agent of the IDA), pursuant to the
Exemption Letter and the Project Agreement will be exempt from the taxes imposed under sections
1105, 1107, 1109 and 1110 of the Tax Law, provided that (i) the IDA is the owner, lessor or lessee
of the property, (ii) any purchase invoices, statements and contracts with vendors and suppliers
provide that the IDA is the purchaser, lessor or lessee and (iii) such purchaser is the disclosed agent
of the IDA.
If the Improvements do not constitute a capital improvement under section 1101(b)(9) of the
Tax Law, then the charges for such Improvements which do not constitute capital improvements will
be exempt from such taxes only if the purchaser is an agent of the IDA, as provided above. Thus, the

-17­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
payments to purchase Improvements which do not constitute capital improvements will be exempt
from such taxes only where an Agent or Group Agent, or a contractor acting on behalf of and as
agent of such Agent or Group Agent, makes purchases as agent of and on behalf of the IDA.
(b) Purchases (including leases) of Equipment (including Computer Software) by an Agent or Group
Agent, acting on behalf of and as agent of the IDA (including those made through contractors acting
on behalf of and as agent of such Agent or Group Agent, in such Agent's or Group Agent's capacity
as agent of the IDA), and purchases by Users, acting on behalf of and as agent of the IDA, through
a Group Agent acting on behalf of and as agent of the User, each acting on behalf of and as agent
of the IDA, pursuant to the Exemption Letter and the Project Agreement, will be exempt from the
taxes imposed under sections 1105, 1107, 1109 and 1110 of the Tax Law provided that (i) the IDA
is the owner or lessee of the equipment, (ii) any purchase invoices, statements and contracts with
vendors and suppliers provide that the IDA is the purchaser or lessee and (iii) the Agent or Group
Agent is the disclosed agent of the IDA.
(c) Payments made under Exempt Service Contracts by the Agent or Group Agent for and on behalf
of the IDA, (1) for the maintenance, service and repair of tangible personal property, consisting of
Equipment, with a useful life of one year or more, and which comprises part of or is in use at the
Approved Premises, including replacement of parts, but not including parts (e.g., a toner cartridge)
that contain materials or substances consumed in operating the property and that are replaced when
the part, material or substance is consumed, but not including contracts for general services (e.g.,
janitorial services), or (2) for purchases of the services of maintaining, servicing and repairing the
Improvements which constitute real property, property or land, will be exempt from sales and use
taxes, to the extent that (1) the Exempt Service Contracts, services and parts, with respect to
Equipment, are necessary to maintain, repair or service such Equipment used as part of the Project,
and provided that the IDA is the owner, lessor or lessee of such Equipment, or (2) the Exempt
Service Contracts, services and tangible personal property, with respect to Improvements, are
necessary to maintain the structural integrity of the Improvements, and provided that the IDA is the
owner of such Improvements, and also provided that the purchase invoices, statements and contracts
with vendors and suppliers for services described in preceding clauses (1) and (2) provide that the
IDA is the purchaser, lessor or lessee with respect to Equipment and that the IDA is the purchaser
with respect to Improvements, and that the Agent or Group Agent is the disclosed agent of the IDA.
In any instance where the maintenance, servicing or repair service results in the replacement of parts,
materials or supplies that are consumed in the ongoing operation of the Equipment, where such parts,
materials or supplies must be replaced when consumed, the portion of the charges applicable to such
parts, materials or supplies will be subject to sales and use taxes, as indicated in Wegmans Food
Markets v. The Department of Taxation and Finance of the State of N.Y. (Sup. Ct., Monroe County,
Jan.lO, 1992, Galloway, J.) supra. The purchase and use of fuels and energy and utility services are
not tax-exempt. Id. Enhancements, modifications and upgrades to computer software which
constitute services described in section 1105(c) of the Tax Law are exempt from the taxes imposed
by sections 1105, 1107, 1109 and 1110 of the Tax Law pursuant to section 1115(o) of the Tax Law,

-18­
TSB-A-96 (36)S
Sales Tax
June 28, 1996
provided that, however, where such services are provided to a customer in conjunction with the sale
of tangible personal property any charge for such services shall be exempt only when such charge
is reasonable and separately stated on an invoice or other statement of the price given to the
purchaser.
However, it is noted that in a transaction where the charge is for both taxable maintenance
and repair services and qualifying exempt services under an Exempt Services Contract, the total
charge will be subject to sales and use taxes, unless the portion of the charge applicable to the
qualifying exempt services under the Exempt Service Contract is separately stated from the other
charges or otherwise reasonably allocated.
(d) Debt Service Payments made to the IDA under the Financing Leases with respect to
Improvements and Equipment will not be subject to sales and use taxes.
(e) Payments made by a User to a Group Agent to reimburse the Group Agent for the cost of
applicable Equipment, or for the User's share in the cost of such Equipment, or to settle
intercompany charges for the use of Equipment, will not be subject to sales and use taxes provided
that the IDA is the owner, lessor or lessee of such Equipment and the Users making such payments
are agents of and acting on behalf of the IDA under the Project at the time that the Users purchase
or lease such Equipment.
(f) The Option Price paid by an Agent or Group Agent to the IDA at the time the Option under the
Financing Leases is exercised will not be subject to sales and use taxes.
(g) The amount paid to the IDA as a Premature Removal Penalty by an Agent or Group Agent will
not be subject to sales and use taxes.
All of the foregoing conclusions depend on compliance with the terms and conditions of all
of the relevant Project documents, subject to any limitations set forth in such documents.

DATED: June 28, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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