We're a nonprofit local development corporation that helps finance small-business construction projects through the SBA 504 loan program, using sale/leaseback, installment sale, or lease/leaseback structures where we briefly hold title or a leasehold interest. Are our purchases (or the contractor's purchases as our agent) exempt from sales tax, and is a mortgage where we're named as mortgagee exempt from mortgage recording tax?

Plain-English summary

Greater Syracuse Business Development Corporation is a Not-For-Profit Local Development Corporation, reincorporated under Not-For-Profit Corporation Law § 1411, that provides financial assistance to businesses in Onondaga and neighboring counties. Its main tool is participating in the U.S. Small Business Administration's 504 Loan Program: a business (the "Company") gets long-term financing for a construction project, split roughly 50% from a private commercial lender, 40% from the Corporation (via the SBA 504 program), and 10% from the Company itself. To make that work, the Corporation briefly takes an interest in the project property through one of three structures: (1) sale/leaseback — the Company deeds the property to the Corporation, which leases it back with a buy-back obligation at lease end; (2) installment sale — the Company deeds the property to the Corporation, which sells it back via an installment agreement; or (3) lease/leaseback — the Company leases the property to the Corporation, which subleases it back. In each structure, the Corporation joins the mortgage (with the bank as mortgagee) and appoints the Company as its purchasing agent for construction materials and equipment.

The Corporation asked two questions: whether its purchases (or the Company's purchases as its agent) for these projects are exempt from sales and use tax, and whether mortgage recording tax applies to the mortgages the Corporation joins.

On sales tax, the Department explained that a nonprofit isn't automatically tax-exempt just by being organized as one (20 NYCRR § 529.7(a)(2)) — the Corporation has to apply for and receive an Exempt Organization Certificate under Tax Law § 1116(a)(4) (organized/operated for charitable purposes). Once certified, materials that become an integral, incorporated part of real property the Corporation actually OWNS are exempt under § 1115(a)(15)/(16) — which covers the sale/leaseback structure, where the Corporation holds fee title during construction. But that exemption does NOT extend to situations where the Corporation holds only a leasehold interest (the installment-sale and lease/leaseback structures), per 20 NYCRR § 528.16 — so those purchases remain taxable regardless of certification. Separately, the Department found the proposed arrangement didn't satisfy the strict agency-purchase rules of 20 NYCRR § 541.3(d)(4) that would let the Company buy materials tax-free "as agent" for the Corporation, because loan payments were going to flow from the commercial bank's Loan funds directly to the lender rather than through a special fund controlled by the Corporation, as the regulation requires.

On mortgage recording tax, the answer was simpler: the Department had already ruled, in a prior opinion about this same Corporation (TSB-A-95(16)R), that a mortgage where the Corporation is mortgagee is exempt from mortgage recording tax under N-PCL § 1411(f) — the statute that exempts § 1411 local development corporations from taxation because they exist to relieve and reduce unemployment, a "charitable or public purpose." The Department confirmed that same exemption applies to any mortgage recorded here where the Corporation participates as mortgagee.

What this means for you

Local development corporations running SBA 504 or similar financing programs

Your § 1411 tax exemption reliably covers mortgage recording tax when you're named mortgagee on financing you help arrange. Sales tax is a separate, harder question: you need your own Exempt Organization Certificate (don't assume nonprofit status alone is enough), and the exemption for construction materials only reaches structures where you actually hold FEE TITLE to the property during construction — a sale/leaseback works, but installment-sale or lease/leaseback structures that leave you with only a leasehold interest do not.

Small businesses using SBA 504 or similar development-corporation financing

If your project's tax savings depend on the development corporation's sales tax exemption, the deal structure matters: ask which of the three ownership arrangements is being used, since only the sale/leaseback (full title transfer) structure gets the real-property-improvement sales tax exemption.

Accountants and nonprofit tax professionals

This is a companion piece to the Department's § 1411 local development corporation mortgage recording tax line (Albany County BDC, Brooklyn Navy Yard Development Corp., and the SBA 504 CDC assignment ruling) — all resting on the same N-PCL § 1411(f) exemption, but this opinion is the origin case showing the underlying SBA 504 sale/leaseback and lease/leaseback mechanics those later rulings build on, plus the separate sales-tax dimension those later rulings don't address.

Common questions

Q: Is a nonprofit local development corporation automatically exempt from sales tax?
A: No. It must file an application and receive an Exempt Organization Certificate under Tax Law § 1116(a)(4); simply being organized and operating as a nonprofit isn't enough.

Q: Does the sales tax exemption cover all three financing structures described here?
A: No. It only reaches the sale/leaseback structure, where the Corporation holds fee title to the real property during construction. The installment-sale and lease/leaseback structures leave the Corporation with only a leasehold interest, which doesn't qualify under 20 NYCRR § 528.16.

Q: Is the mortgage recording tax exemption conditioned on anything?
A: The ruling confirms it applies whenever the Corporation participates as mortgagee, based on its N-PCL § 1411(f) exemption -- no additional certification process like the sales tax exemption requires.

Q: Can another local development corporation rely on this specific ruling?
A: No. It binds the Department only as to this petitioner and these facts, though the § 1411(f) mortgage recording tax exemption and the § 1116(a)(4) sales tax exemption process are both generally available to similarly organized local development corporations that separately establish their own qualification.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law § 1115(a)(15), (16) (exemption for materials incorporated into an exempt organization's real property)
• Tax Law § 1116(a)(4) (exempt organization -- charitable/educational purposes)
• Tax Law § 1116(b)(1) (exemption doesn't cover retail sales through an exempt org's own shop or store)
• 20 NYCRR § 529.7(a)(2) (must file application to establish exempt status)
• 20 NYCRR § 541.3(d)(4) (agency-contract requirements for tax-free purchases on an exempt organization's behalf)
• 20 NYCRR § 528.16 (leasehold interest doesn't qualify for the real-property-improvement exemption)
• Not-For-Profit Corporation Law § 1411(a) (local development corporation purposes -- relieving/reducing unemployment)
• Not-For-Profit Corporation Law § 1411(f) (local development corporation tax exemption)

Prior opinions cited:

• Greater Syracuse Business Development Corporation, TSB-A-95(16)R (Dec. 22, 1995) (prior ruling exempting the Corporation's mortgages from mortgage recording tax under N-PCL § 1411(f))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a97_54s_7r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(54)S
Sales Tax
TSB-A-97(7)R
Mortgage Recording Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.Z950802D

On August 2, 1995, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Greater Syracuse Business Development
Corporation, 572 South Salina Street, Syracuse, New York, 13202-3320. Petitioner
subsequently provided additional information pertaining to the Petition.
The issue raised by Petitioner, Greater Syracuse Business Development
Corporation, is whether the sales and compensating use tax imposed by Article 28
of the Tax Law and the mortgage recording taxes imposed or authorized to be
imposed by Article 11 of the Tax Law are imposed in connection with activities
directly related to projects in which Petitioner participates in furtherance of
its purposes as established by Section 1411(a) of the Not-For-Profit-Corporation
Law (N-PCL).
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a Not-For-Profit Local Development Corporation reincorporated
under Section 1411 of the N-PCL. Petitioner's operations include providing
financial assistance to businesses in Onondaga and contiguous counties.
In furtherance of its corporate purposes and powers, Petitioner provides
assistance to businesses located in its geographic area to finance certain
eligible construction projects by participating in permanent financing of
construction loans pursuant to the United States Small Business Administration's
("SBA") 504 Loan Program.
The 504 Loan program was established by the SBA to make available to local
development companies, like Petitioner, funds to lend to eligible small business
concerns. The 504 Loan Program provides long-term permanent financing to these
businesses in participation with private lenders, and requires an equity
contribution on the part of the borrower. Typically the private lender provides
permanent financing in an amount not to exceed fifty percent of the total project
cost, with forty percent provided by the local development company and ten
percent provided by the borrower.
In the circumstances which are the subject of this Advisory Opinion,
Petitioner would adopt a formal resolution whereby it would commit to undertake
completion of an eligible project which would involve the acquisition of and/or
the construction, renovation and improvement of real property and/or the
acquisition and installation of equipment (the "Project"). At or before the
construction financing closing, Petitioner would obtain an interest in the
Project, from a participating company (the "Company") by way of one of the
following three transactions.

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1. Sale/Leaseback - The Company would transfer the real property and the
   personal property involved in the Project to Petitioner by delivering a deed with
   respect to the real property and, if necessary, a bill of sale with respect to
   any personal property to Petitioner. Petitioner would then lease the real and
   personal property back to the Company. The Company would be required to purchase
   back the real and personal property when the lease expires.
2. Installment Sale - The Company would transfer its interest in the real
   and personal property to Petitioner by delivering a deed and bill of sale for the
   real and personal property, respectively. Petitioner would then enter into an
   installment sale agreement with the Company, transferring the real and personal
   property back to the Company in exchange for the installment sale payments.
3. Lease/Leaseback - The Company would lease its interest in the real and
   personal property to Petitioner. Petitioner would then sublease the real and
   personal property back to the Company.
   In each of the above transactions, the Company would borrow money to
   finance the Project from a commercial bank (including the forty percent to be
   ultimately provided by Petitioner pursuant to the 504 Loan Program after
   completion of the construction phase of the project).
   The repayment of the
   entire amount financed (the "Loan") would be secured by a mortgage on the real
   property or other form of security interest on the personal property. Petitioner
   would join in any mortgage or security agreement and the commercial bank would
   be the mortgagee or secured party. In all likelihood the Company would be asked
   to join in the mortgage or security agreement to undertake the affirmative
   obligations thereunder.
   In the sale/leaseback transaction, payments under the lease from Petitioner
   back to the Company would correspond to the debt service payments due under the
   Loan and the lease would obligate the Company to make such payments directly to
   the involved commercial lender. In the installment sale and lease/leaseback
   transactions, the debt service under the Loan would correspond to the payments
   due under the installment sale agreement or rental payments under the sublease,
   as the case may be, and the involved lender would be receiving its debt service
   payments directly from the Company.
   Petitioner would covenant and agree to arrange for the deed, mortgage,
   memorandum of installment sale agreement, and/or a memorandum of lease or
   sublease, as appropriate, to be recorded immediately following the closing.
   Upon payment in full of the Loan, the Company would reacquire the real and
   personal property from Petitioner.
   Petitioner would appoint the Company as its agent in all of the above
   transactions and the Company would covenant to construct and complete the Project
   on behalf of Petitioner. As agent of Petitioner, the Company's purchases of
   equipment and materials used in the Project would be by the Company on behalf of
   Petitioner. The invoice would refer to the Company as agent for Petitioner, as

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the purchaser. Petitioner will apply for exemption from sales and use taxes
pursuant to Section 1116(a)(4) of the Tax Law and, if exemption is obtained, will
provide the Company with an Exempt Organization Certification for presentation
to vendors for purchases made by the Company in connection with the Projects.
The equipment or materials purchased may act as additional security for the Loan.
Petitioner submitted a copy of a lease agreement and a copy of an
installment sale agreement as part of its Petition for Advisory Opinion.
Petitioner represents that the agreements entered into between Petitioner and the
Company will contain the same terms.
Regarding the imposition of sales tax to the above transactions, Section
1105(a) of the Tax Law imposes a sales tax upon the receipts from every retail
sale of tangible personal property unless otherwise excluded or exempt. Sales
of real property are not subject to sales tax.
Section 1115 of the Tax Law provides, in part:
Sec. 1115. Exemptions from sales and use taxes.--(a) Receipts from
the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the
compensating use tax imposed under section eleven hundred ten:
*

*

*

(15) Tangible personal property sold to a contractor,
subcontractor or repairman for use in erecting a structure or
building of an organization described in subdivision (a) of section
eleven hundred sixteen, or adding to, altering, improving real
property, property or land of such an organization, as the terms
real property, property or land are defined in the real property tax
law; provided, however, no exemption shall exist under this
paragraph unless such tangible personal property is to become an
integral component part of such structure, building or real
property.
(16)
Tangible personal property sold to a contractor,
subcontractor or repairman for use in maintaining, servicing or
repairing real property, property or land of an organization
described in subdivision (a) of section eleven hundred sixteen, as
the terms real property, property or land are defined in the real
property tax law; provided, however, no exemption shall exist under
this paragraph unless such tangible personal property is to become
an integral component part of such structure, building or real
property.
Section 1116 of the Tax Law provides, in part:

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Sec. 1116. Exempt organizations.--(a) Except as otherwise provided
in this section, any sale or amusement charge by or to any of the
following or any use or occupancy by any of the following shall not
be subject to the sales and compensating use taxes imposed under
this article:
*

*

*

(4) Any corporation, association, trust, or community chest,
fund or foundation, organized and operated exclusively for
religious, charitable, scientific, testing for public safety,
literary or educational purposes, or to foster national or
international amateur sports competition (but only if no part of its
activities involve the provision of athletic facilities equipment),
or for the prevention of cruelty to children or animals, no part of
the net earnings of which inures to the benefit of any private
shareholder or individual, no substantial part of the activities of
which is carrying on propaganda, or otherwise attempting to
influence legislation, (except as otherwise provided in subsection
(h) of section five hundred one of the United States internal
revenue code of nineteen hundred fifty-four, as amended), and which
does not participate in, or intervene in (including the publishing
or distribution of statements), any political campaign on behalf of
any candidate for public office;
*

*

*

(b) Nothing in this section shall exempt:
(1) retail sales of tangible personal property by any shop or
store operated by an exempt organization described in paragraph (4),
paragraph (5) or paragraph (6) of subdivision (a) of this section.
Section 529.7(a)(2) of the Sales and Use Tax Regulations provides:
An organization is not exempt from tax because it is organized
and operated as a nonprofit organization or because it appears to
meet the requirements of this section. In order to establish its
exempt status, it is necessary to file a completed application as
set forth in subdivision (f) of this section and prove that the
organization meets the statutory requirements.
Section 541.3(d)(4) of the Sales and Use Tax Regulations provides, in part:
Agency contracts. (i) If an exempt organization described in
section 1116(a)(3), (4), (5) or (6) of the Tax Law enters into an
agency contract with the prime contractor and all subcontractors,
all purchases for such contract are exempt as long as the property

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and services are purchased by the contractor or subcontractor as
agent for the exempt organization. In order to create a
principal/agent relationship all of the following conditions must be
met:
(a) purchases must be billed or invoiced by the vendor to the
exempt organization or to the contractor specifying that the
contractor is acting as agent for the exempt organization (e.g., X
contractor, as agent for Y, name of exempt organization) and
identify the place of delivery;
(b) payment must be made by the exempt organization or by the
contractor, acting as agent, directly to the vendor from a special
fund created by the exempt organization for this specific purpose;
(c) deliveries must be made to the job site; or under certain
circumstances (such as where the materials require additional
fabrication before installation on the job site or for storage to
protect the materials from theft or vandalism prior to installation
at the job site) deliveries may be made to a site, other than the
job site, providing the ultimate delivery of the materials is made
to the job site. Where delivery is made to a site, other than the
job site, the purchases must be billed or invoiced by the vendor to
the exempt organization or to the contractor as agent, identify the
place of delivery, the exempt organization's full name and address
and the job site location where the materials will ultimately be
delivered for installation; and
(d) the contractor must furnish the vendor with the exempt
organization certification when acting as agent for such
organization. A statement signed by a responsible officer of the
exempt organization which identifies the contract and the
contractor, as agent for the exempt organization, must be either
made on the exempt organization certification or appropriately
attached thereto.
If the proposed agency contract differs from the requirements of
this subparagraph, copies of the proposed contract and procedures
may be submitted for an opinion to the Instructions and
Interpretations Unit, Sales Tax Section, Technical Services Bureau,
W.A. Harriman Campus, Albany, N.Y. 12227.
(ii) All purchases or rentals of materials, equipment, tools,
and supplies by an exempt organization or by a contractor or
subcontractor, as agent for an organization which is exempt from
sales taxes under section 1116(a)(3), (4), (5) or (6), are exempt
from sales and use taxes when the contract fully complies with the
requirements set forth in subparagraph (i) of this paragraph.

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(iii) A contractor is liable for the tax due on purchases or
rentals of equipment, tools and supplies made under a purported
exempt organization agency contract if subsequently it is determined
the contract does not qualify as an agency contract.
Example 9: A contractor enters into a purported agency contract with
an exempt organization for the construction of a capital improvement
to real property. The exempt organization or the contractor, acting
as agent for the exempt organization, makes tax free purchases or
rentals of materials, tools and/or equipment and supplies.
Subsequently, it is determined the contract does not qualify as an
agency contract. The contractor is liable for the tax due on the
purchases or rentals of tools and/or equipment and supplies. The
purchase of materials incorporated into the capital improvement to
real property owned by the exempt organization is exempt from the
tax, providing proper exempt documentation is given to the vendor of
the materials.
In this case, Petitioner is reincorporated under Section 1411 of the N-PCL
as a Not-For-Profit Local Development Corporation. Under Section 1411(a) of the
N-PCL, local development corporations are operated for "exclusively charitable
or public purposes" related to relieving and reducing unemployment.
In
accordance with Section 529.7(a)(2) of the Sales and Use Tax Regulations an
organization is not exempt from sales tax simply because it is organized and
operated as a nonprofit organization or because it appears to meet the
requirements of this section. In order to establish its exempt status, it is
necessary to file a completed application with the Department of Taxation and
Finance to certify that it is an organization described under Section 1116(a)(4)
of the Tax Law.
Petitioner states that it will apply for exemption from sales and use taxes
pursuant to Section 1116(a)(4) of the Tax Law. Therefore, provided Petitioner
applies for and receives an Exempt Organization Certificate confirming that it
meets the requirements under Section 1116(a)(4) of the Tax Law, Peititioner's
purchases will be exempt from sales and use taxes. In addition, pursuant to
Section 541.3(d)(4) of the Sales and Use Tax Regulations, if the Company is
appointed as agent for Petitioner, the Company, as agent for Petitioner, may make
purchases on behalf of Petitioner exempt from sales and use taxes, provided the
conditions set forth in Section 541.3(d)(4) of the Sales and Use Tax Regulations
for making exempt purchases in principal/agent relationships are followed. It
does not appear from the facts described above that the requirement for agency
specified in Section 541.3(d)(4)(b) of the Sales and Use Tax Regulations will be
satisfied since the Company will be borrowing money to finance the Projects set
forth in the above transactions from a commercial bank, rather than payment for
the Project being made by Petitioner, as an exempt organization, or by the
Company, acting as agent, directly to the vendor from a special fund created by
Petitioner for this specific purpose.

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It should be noted that, whether or not Petitioner enters into an agency
agreement with the Company, pursuant to Sections 1115(a)(15) and (16) of the Tax
Law, tangible personal property sold to a contractor, subcontractor or repairman
for use in erecting a structure or building, or in maintaining, servicing or
repairing real property, property or land, of an organization described in
subdivision (a) of section eleven hundred sixteen, or in adding to, altering or
improving real property, property or land of such an organization, is not subject
to sales and use tax where such tangible personal property becomes an integral
component part of such structure, building or real property. The contractor
should issue a properly completed contractor exempt purchase certificate (Form
ST-120.1) to its supplier in order to make exempt purchases of building materials
for exempt organization projects.
Therefore, if Petitioner establishes its
exemption under Section 1116(a)(4) of the Tax Law, tangible personal property
sold to a contractor, subcontractor or repairman for incorporation into the
Project would not be subject to sales and use tax under the ownership interest
set forth in transaction 1 above.
However, purchases in connection with
transactions 2 and 3 above would be subject to sales and use tax if Petitioner
did not have an ownership interest in the real property when the Project was
being constructed.
It should be noted that purchases will not qualify for
exemption under Section 1115(a)(15) or 1115(a)(16) if an exempt organization has
only a leasehold interest in real property. See Section 528.16 of the Sales and
Use Tax Regulations.
In addition, while purchases by an organization described in Section
1116(a)(4) of the Tax Law are exempt from tax, sales of tangible personal
property by such an organization through a shop or store are subject to sales
tax. Thus, Petitioner's sales or leases of tangible personal property to the
Company in the transactions described above will be taxable if made from a shop
or store, unless the tangible personal property is otherwise exempt under Article
28 of the Tax Law (e.g., machinery or equipment used directly and predominantly
in production for sale which is exempt under Section 1115(a)(12) of the Tax Law).
See Section 529.7(i)(2) of the Sales and Use Tax Regulations for definition of
"shop or store."
Regarding the mortgage recording taxes, Petitioner was issued an Advisory
Opinion related to a proposed transaction in which it was participating, in
furtherance of its corporate purpose. See Greater Syracuse Business Development
Corporation, Adv Op Comm T&F, December 22, 1995, TSB-A-95(16)R. In that opinion,
Petitioner was a mortgagee and the recording of the mortgage was deemed exempt
from the mortgage recording taxes based on exemption from taxation provided at

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Section 1411(f) of the Not-For-Profit Corporation Law. Accordingly, with respect
to this Advisory Opinion, any mortgage recorded in which Petitioner participates
as mortgagor would be similarly exempt from the mortgage recording taxes.

DATED: August 25, 1997

NOTE:

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

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