When a commercial landlord charges tenants for 'condenser water' used to run their air conditioning, is that a taxable utility sale or an untaxed part of the rental?

Plain-English summary

Cushman & Wakefield asked whether commercial building owners' charges to tenants for "condenser water" are subject to New York sales tax. Condenser water is part of a building's central air conditioning system: it circulates through pipes, absorbs heat given up by the chiller's refrigerant, and carries that heat up to a rooftop cooling tower, where it evaporates and releases the heat to the outside air. Building owners own the base building air conditioning systems that use this water; some tenants also install their own supplemental air conditioning units that tap into the same condenser water piping. Leases typically address this with clauses charging tenants for condenser water used outside normal building hours -- sometimes labeled "additional rent," sometimes labeled simply as a "charge" (particularly for tenants with their own supplemental units).

Tax Law § 1105(b) taxes sales of gas, electricity, refrigeration, and steam service, while § 1115(a)(2) separately exempts plain water delivered to a consumer through mains or pipes. The Department didn't need to resolve which of those categories condenser water itself might fall into, because it relied on two New York Court of Appeals decisions holding that similar building-utility charges are incidental to the rental of commercial real property, not separate sales of a utility service: Debevoise & Plimpton (overtime heat/ventilation/air conditioning charges) and Empire State Building Co. (an Electricity Rent Inclusion Factor). Following that reasoning, the Department concluded that a landlord providing condenser water isn't really selling water or a refrigeration service at all -- it's providing an air conditioning service as an incident of the real property lease. That conclusion holds whether the charge is labeled additional rent or a separate line-item charge, and even when the water feeds a tenant's own supplemental unit rather than only the building's base system.

What this means for you

Commercial landlords

Condenser water charges to tenants -- whatever you call them in the lease (additional rent vs. a separate charge) -- are treated as part of the untaxed real property rental under this opinion, not a taxable utility sale, as long as the charge really reflects an air conditioning service tied to the leased premises rather than a free-standing utility sale.

Commercial tenants, including those with supplemental AC units

Even if you've installed your own supplemental air conditioning unit and tap into the building's condenser water supply, the resulting charge is still treated as part of the building's air conditioning service under this opinion -- not a separately taxable water or refrigeration sale.

Accountants and tax professionals

This opinion extends the Debevoise & Plimpton/Empire State Building Co. "incidental to the rental" line of Court of Appeals authority from overtime HVAC and electricity rent-inclusion charges to condenser water specifically -- useful precedent whenever a commercial lease bundles a building-system utility charge into rent or bills it as a nominally separate line item.

Common questions

Q: Does it matter whether the charge is called "additional rent" or a separate "charge" in the lease?
A: No -- the opinion reaches the same untaxed result under either label, since what matters is that the charge reflects an air conditioning service tied to the real property rental.

Q: Does a tenant's own supplemental air conditioning unit change the analysis?
A: No -- the opinion states that a tenant using a supplemental unit connected to the landlord's system doesn't change the transaction from a service into a taxable sale of water.

Q: Can another building owner rely on this ruling?
A: No. This advisory opinion binds the Department only with respect to Cushman & Wakefield and the specific lease clauses and facts it described.

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) (tax on gas, electricity, refrigeration, steam, and related services)
• Tax Law § 1115(a)(2) (exemption for water delivered through mains or pipes)

Prior rulings and cases referenced:

• Debevoise & Plimpton v. New York State Dept. of Taxation and Finance, 80 NY2d 657
• Empire State Building Company v. New York State Dept. of Taxation and Finance, 81 NY2d 1002

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_87s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (87) S
Sales Tax
December 27, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S960718A

On July 18, 1996, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Cushman & Wakefield, Inc., 51 West 52nd Street, New York, New York 10019.
Petitioner, Cushman & Wakefield, Inc., provided additional information pertaining to the Petition
on October 23, 1996.
The issue raised by Petitioner is whether the sale of condenser water by commercial building
owners to tenants is subject to New York State sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Condenser water is water which is circulated through pipes and is part of a condenser water
system. This system works in conjunction with other air conditioning units in a building to transfer
heat from inside the building to the outside. The heat within a building is absorbed by the chilled
water system that is distributed by pipes through the various building systems (fans, induction units,
etc.). The chilled water gives up this heat to the refrigerant in the chiller. The refrigerant is then
compressed and passed into the condenser, where it gives up the heat to the condenser water system.
The condenser water is circulated by pipes through the cooling tower on the roof, where the
condenser water gives up the heat to the atmosphere as it evaporates while passing through the
cooling tower.
The building owners own the base building air conditioning systems to which the condenser
water is provided. However, some tenants have their own supplemental systems, to which condenser
water is also distributed. Whether the building owners are providing condenser water to their own
base building air conditioning systems or to the tenants' supplemental systems, the water is always
distributed through a piping/valving system.
Condenser water requirements are written into the lease agreements as separate clauses.
Petitioner submitted four typical clauses covering condenser water. Three characterized overtime
charges for the water as additional rent, while the fourth, involving a tenant owned supplemental
unit, characterized the additional amount as a charge.
A typical clause covering condenser water reads as follows:
Section 31.04. If Tenant utilizes condenser water during hours other than the
Building's regular hours or on days other than Business Days, Tenant shall pay on
demand, as additional rent, $476 per connected ton per year (the "Charge"), subject
to increase (but not decrease) as hereinafter provided.

-2­
TSB-A-96 (87) S
Sales Tax
December 27, 1996

Where the tenant provided a supplementary air conditioning unit, the following clause was
used:
As part of the Initial Alterations, Tenant may install a water cooled supplementary
DX air conditioning system reasonable [sic] approved by Landlord of up to eighty­
five (85) tons capacity per floor of the Premises to service the Premises. In
connection therewith, Tenant, at Tenant's sole cost and expense, may tap into the
existing condenser water pipes of the Building to obtain condenser water for the
system. Landlord shall furnish to the floor of the Premises serviced by such system
condenser water to service such system at such times as Tenant shall request. Any
installations required to connect Tenant's supplementary air conditioning system to
the condenser pipe shall be made by Landlord. Tenant shall also pay Landlord for the
supply of condenser water, within ten (10) days after rendition of a bill therefor, an
annual charge per ton of cooling capacity of the system so connected equal to the
then Building standard charge per ton (which amount was $841.75 as of December
31, 1995). Landlord shall not be liable to Tenant for any failure or defect in the
supply or character of condenser water supplied to Tenant by reason of any
Requirement, act or omission of the public service company serving the Building or
for any other reason not attributable to the gross negligence or willful misconduct of
Landlord, its agents, contractors and employees.
APPLICABLE LAW
Section l105(b) of the Tax Law imposes a tax upon:
[T]he receipts from every sale, other than for resale, of gas, electricity, refrigeration
and steam, and gas, electric, refrigeration and steam service of whatever nature, and
from every sale, other than sales for resale, of telephony and telegraphy and telephone
and telegraph service of whatever nature except interstate and international telephony
and telegraphy and telephone and telegraph service and from every sale, other than
sales for resale, of a telephone answering service.
Section 1115(a)(2) of the Tax Law exempts "[w]ater, when delivered to the consumer
through mains or pipes."
In Debevoise & Plimpton v New York State Dept. of Taxation and Finance, 80 NY2d 657,
661, the Court of Appeals held that the tenant's payments for overtime heat, ventilation and air
conditioning services were incidental to the rental of the commercial premises and not the sale of
a refrigeration and steam service and, therefore, not subject to the sales tax pursuant to Section
l105(b) of the Tax Law.

-3­
TSB-A-96 (87) S
Sales Tax
December 27, 1996

In Empire State Building Company v New York State Dept. of Taxation and Finance, 81
NY2d 1002, the Court of Appeals held that the tenant's payments of an Electricity Rent Inclusion
Factor were for an electric service provided only as an incident to the rental of the commercial
premises and not as part of "separate transactions which have as their primary purpose the furnishing
of utilities or utility services," and therefore, not subject to tax as a sale of utility services under
Section l105(b) of the Tax Law.
As described by Petitioner, the landlord is not actually selling condenser water or water
through mains or pipes, but is providing an air conditioning service. The fact that a tenant may use
a supplemental air conditioning unit connected to a landlord's unit does not change the nature of the
transaction from the provision of a service to the sale of water. The courts have held that an air
conditioning service that is provided as part of the rental of real property is not subject to New York
State sales tax. Therefore, the provision in this case of a portion of that same service is likewise not
subject to sales tax.

DATED: December 27, 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.