New York Advisory Opinion TSB-A-96(7)S: Does a computer-services tenant in an Economic Development Zone building qualify for the sales tax refund/credit on construction materials used to build or rehabilitate the building, even though it isn't the one buying the materials?

Plain-English summary

Gloria S. Friedman, doing business as Damomics, operates a certified business in the Elmira, New York Economic Development Zone (EDZ) and has held that certified status for many years. Based on Publication 750's Business Description Codes, Petitioner's revenue breaks down across several activities: computer maintenance and repair (31%), computer & software sales (25%), industrial/commercial machinery and computer equipment (19%), computer-integrated systems design (9%), computer consulting (7%), computer programming services (4%), electrical work (3%), accounting services (1%), and business consulting services (1%). By Petitioner's own accounting, only about 25% of business receipts come from selling tangible personal property, with the rest from various services. The building Petitioner will occupy will also house a second, unrelated tenant -- a beauty shop -- and won't be used exclusively for retail sales of goods.

Tax Law § 1119(a)(6) allows a refund or credit for sales tax paid on tangible personal property purchased to construct, expand, or rehabilitate industrial or commercial real property in a designated EDZ -- but excludes property used EXCLUSIVELY by one or more registered vendors PRIMARILY engaged in retail sales of tangible personal property (defined by regulation as 50% or more of receipts, per 20 NYCRR §§ 528.9(a)(4) and 528.14(c)). Since neither Petitioner (only 25% of revenue from goods sales) nor the other tenant (a beauty shop, a services business) is primarily engaged in retail sales, the Department ruled the building itself qualifies for the § 1119(a)(6) refund or credit on construction materials that become an integral part of the real property being built, expanded, or rehabilitated. But the Department drew a critical distinction: the refund or credit is available only to the person who ACTUALLY PURCHASES the tangible personal property and pays the sales tax on it -- typically the contractor doing the construction work, not the tenant who will occupy the finished space. So unless Petitioner personally buys the building materials and pays sales tax on those purchases, Petitioner herself isn't entitled to claim the refund or credit, even though the building qualifies.

What this means for you

Tenants in Economic Development Zones

Your business's own retail-versus-service revenue mix (and that of any co-tenants) determines whether the BUILDING you occupy is eligible for the § 1119(a)(6) construction-materials refund -- but eligibility of the building doesn't automatically mean YOU get the refund. Only whoever actually buys the materials and pays the tax (usually your contractor) can claim it.

Property owners and developers building in an EDZ

If you want to personally capture the § 1119(a)(6) refund or credit, make sure you (not just your contractor) are the one purchasing taxable construction materials and paying the sales tax directly, or coordinate with your contractor about how the refund/credit will be claimed and potentially passed through.

Businesses with mixed retail and service revenue

Track your percentage of revenue from tangible-property sales versus services carefully -- crossing the 50% "primarily" threshold into retail sales could disqualify your building space from EDZ construction-material refund eligibility if you or a co-tenant occupy it exclusively.

Common questions

Q: If Petitioner hires a contractor who buys and pays tax on the materials, can Petitioner still get reimbursed some other way?
A: The ruling doesn't address a pass-through or reimbursement arrangement between contractor and tenant -- it simply holds that the STATUTORY refund/credit itself belongs to whoever purchased the materials and paid the tax, which any private cost-sharing arrangement wouldn't change for purposes of who's entitled to file the Section 1119(a)(6) claim with the Department.

Q: Why does the beauty shop co-tenant matter to the analysis?
A: Because the exclusion in Section 1119(a)(6) applies only if the building is used EXCLUSIVELY by retail-primarily vendors -- since the beauty shop (a service business) shares the building, and neither tenant is primarily a retail-goods seller, the building doesn't trip that exclusion regardless of Petitioner's own business mix.

Q: Does the 50% "primarily" threshold apply to each individual tenant or the building as a whole?
A: Based on the ruling's analysis, it's applied tenant-by-tenant -- the Department checked whether EITHER Petitioner OR the other tenant was "primarily" engaged in retail sales, and since neither was, the building as a whole avoided the exclusive-retail-use exclusion.

Citations and references

Statutes and regulations:

• Tax Law § 1119(a)(6) (EDZ construction materials refund/credit)
• 20 NYCRR 528.9(a)(4) (definition of primarily)
• 20 NYCRR 528.14(c) (definition of primarily)

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_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (7)S
Sales Tax
February 13, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950705A

On July 5, 1995, a Petition for Advisory Opinion was received from Gloria S. Friedman
/DBA Damomics, 111 N. Main St., Elmira, New York 14901-2921.
The issue raised by Petitioner, Gloria Friedman /DBA Damomics, is whether Petitioner
qualifies for the sales tax refund or credit for tax paid on the sale of tangible personal property
purchased for use in constructing, expanding, or rehabilitating industrial or commercial real property
located in an area designated as an economic development zone (an "EDZ").
Petitioner operates a business in the Elmira, New York EDZ and has been a certified zone
business for many years. In accordance with the Business Description Codes set forth in Publication
750, A Guide to Sales Tax in New York State (formerly published in DTF-144), Petitioner states that
it is currently involved in the following services:
Code
7378
5734
3500
7373
7379
7371
1731
8721
8748

Description
Computer maintenance and repair
Computer & computer software stores
Industrial & commercial machinery &
computer equipment
Computer integrated systems design
Computer consultants
Computer programing services
Electrical work
Accounting services
Business consulting services

Pct. of Business
31%
25%
19%
9%
7%
4%
3%
1%
1%

Based on the above business codes and services, Petitioner contends that only 25% of the
receipts from its business comes from the sale of tangible personal property. According to
Petitioner, the remainder of its business receipts comes from the sale of computer maintenance
services and consulting and programming services. Moreover, the building that Petitioner will
occupy will not be used exclusively for the sale of tangible personal property. While Petitioner is
only 25% involved in the sale of tangible personal property, the other expected tenant of the building
is a beauty shop.
Section 1119 of the Tax Law provides, in pertinent part, as follows:
Section 1119. Refunds or credits based on proof of certain uses.--(a) Subject
to the conditions and limitations provided for herein, a refund or credit shall be
allowed for a tax paid pursuant to subdivision (a) of section eleven hundred five or
section eleven hundred ten . . .

-2­
TSB-A-96 (7)S
Sales Tax
February 13, 1996
(6) on the sale of tangible personal property purchased for use in constructing,
expanding or rehabilitating industrial or commercial real property (other than
property used or to be used exclusively by one or more registered vendors primarily
engaged in the retail sale of tangible personal property) located in an area designated
as an economic development zone pursuant to article eighteen-B of the general
municipal law, but only to the extent that such property becomes an integral
component part of the real property. . . .(emphasis added)
There are no Sales and Use Tax Regulations that specifically address the refund or credit
provided for in Section 1119(a)(6) of the Tax Law. However, the term "primarily" is defined by
Sales and Use Tax Regulations to mean 50 percent or more of receipts. (See 20 NYCRR 528.9(a)(4),
528.14(c))
To qualify for the refund or credit for sales tax paid on the purchase of tangible personal
property to be used in constructing, expanding or rehabilitating industrial or commercial real
property located in a designated EDZ, the purchase cannot be for use in real property used
exclusively by one or more registered vendors primarily engaged in the retail sale of tangible
personal property. Neither Petitioner nor the other expected tenant is primarily engaged in retail
sales of tangible personal property. Accordingly, the purchase of tangible personal property to be
used in constructing, expanding or rehabilitating the building that Petitioner and the other tenant will
occupy qualifies for the refund or credit provided in Section 1119(a)(6) of the Tax Law, provided
the tangible personal property to be purchased is to become an integral part of the real property to
be constructed, expanded or rehabilitated in an EDZ.
However, the credit or refund of sales tax paid on eligible purchases of tangible personal
property to be used in constructing, expanding or rehabilitating industrial or commercial real
property is available to the person who actually purchases the tangible personal property and pays
the taxes (generally, the contractor). Therefore, unless Petitioner purchases the building materials
and pays the applicable sales tax on those purchases, Petitioner will not be entitled to the credit or
refund allowed under Section 1119(a)(6) of the Tax Law.

DATED: February 13, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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