Is a commercial tenant's 'additional rent' charge for lawn, common-area, and complex maintenance subject to New York sales tax, and can the landlord charge tax only on its mark-up?

Plain-English summary

Leica Inc., a manufacturer, leases a building inside a commercial complex that also has shared common areas -- the main access road, and lawns and shrubbery either adjacent to specific buildings or unrelated to any particular building. Under the lease, the landlord bills Leica "additional rent" for a combined maintenance charge covering repairs, lawn care, waste removal, and snow plowing -- lumping together maintenance of the common complex-wide areas with maintenance of the areas directly tied to Leica's own leased premises (the lawn/shrubbery next to its building and the surrounding driveways/parking). The landlord charges Leica its own cost plus a markup, but only charges sales tax on the markup portion, telling Leica that's all the tax the arrangement requires. The lease itself splits maintenance duties: the landlord handles the building's structural elements, the exterior of the leased premises (parking curbs, sidewalks, grass, shrubbery, lighting), and the complex's shared roadways, lawns, and utilities. Leica asked whether these additional-rent maintenance charges are taxable, and whether taxing only the markup is correct.

The Department explained that while rent for real property itself is never taxed, maintenance services billed as "additional rent" can still be taxable if the maintenance is something the tenant would otherwise be responsible for performing itself. But maintenance genuinely incidental to the landlord's rental of the premises -- upkeep the landlord would naturally handle as part of being a landlord, like the lawn/shrubbery and parking areas immediately around Leica's own building -- isn't taxable, regardless of how it's billed. Based on Leica's own lease terms (which explicitly make the landlord responsible for exterior maintenance of the leased premises), the Department found this maintenance was incidental to the rent and not taxable.

On the billing-mechanics question, though, the Department flatly rejected the "tax only the markup" approach. If any part of a charge represents a genuinely taxable maintenance service, the landlord must collect tax on the ENTIRE amount billed for that service -- the tenant's proportionate share of the underlying cost plus the landlord's markup and administrative overhead -- not just on the markup alone. Only when nontaxable and taxable items are broken out as genuinely separate, individually purchasable line items can a landlord properly tax just the taxable piece.

What this means for you

Commercial tenants paying "additional rent" for landlord-provided maintenance

Maintenance that's genuinely incidental to your own leased premises (your building's exterior, adjacent lawn/shrubbery, and surrounding parking, if your lease makes the landlord responsible for it) generally isn't taxable, even when billed as additional rent. Check what your own lease actually assigns to the landlord as an included exterior-maintenance responsibility.

Commercial landlords billing tenants for common-area or complex-wide maintenance

If a maintenance charge to a tenant is genuinely taxable (because it's work the tenant would otherwise have to arrange itself), you must charge sales tax on the tenant's full share of that cost, including your markup and any administrative/overhead percentage -- charging tax on only the markup understates the tax due and exposes you to liability.

Accountants and tax professionals

This ruling (following Newsweek Inc., TSB-A-96(69)S, and TSB-M-84(9)S on shopping mall operator charges) distinguishes maintenance incidental to the rent of the specific leased premises (nontaxable) from maintenance the tenant would otherwise be independently responsible for (taxable in full, including markup and pro rata overhead) -- a mark-up-only tax collection approach is never correct for a genuinely taxable service.

Common questions

Q: Is "additional rent" for maintenance ever exempt from sales tax?
A: Yes, when the maintenance is incidental to the tenant's own leased premises -- work the landlord is contractually responsible for as part of the rental, like the exterior areas immediately around the tenant's building.

Q: Can a landlord charge sales tax on only its markup for a taxable maintenance service?
A: No. If any part of a maintenance charge is genuinely taxable, tax is due on the entire amount billed for that service, including the tenant's share of the underlying cost, the markup, and any administrative/overhead charge.

Q: Does labeling a charge "additional rent" automatically make it nontaxable?
A: No -- the label doesn't control. What matters is whether the underlying service is incidental to the rent of the premises, or is a maintenance service the tenant would otherwise be responsible for.

Q: Does this ruling apply to my commercial lease's maintenance charges?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. The right answer depends on your own lease's specific maintenance-responsibility provisions.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_83s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(83)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S970528B

On May 28, 1997, the Department of Taxation and Finance received a Petition
for Advisory Opinion from Leica Inc., 3362 Walden Avenue, Depew, New York 14043­
2437.
The issue raised by Petitioner, Leica Inc., is whether certain maintenance
charges made to Petitioner are subject to sales and use tax.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a manufacturer that leases a building in a commercial
complex. There are common areas in the complex such as the main through road,
and lawn and shrubbery adjacent to either the main road or having no relationship
to specific buildings. The lessor charges Petitioner for maintenance as
additional rent. Petitioner receives a billing for repairs and maintenance to
the premises and lawn, waste removal, snow plowing, etc. The bill contains a
dollar amount which includes both the common area maintenance and the maintenance
of those areas directly related to the leased premises such as the lawn and
shrubbery adjacent to the leased building and drive-ways and parking areas
surrounding the buildings.
Petitioner is charged an amount that reflects the cost of the repair to the
lessor plus a mark-up. On Petitioner’s bills the lessor separately states sales
tax only on the mark-up. Petitioner has been told by the lessor that the added
tax represents only the tax on the mark-up.
The following paragraphs in the lease agreement are relevant to the issue
presented in this Advisory Opinion:
ELEVENTH:
MAINTENANCE.
Subject
to
Paragraph
"THIRTEENTH"
responsibility of the respective parties for maintenance and repairs
to the Leased Premises shall be determined as follows:
A) Landlord shall, repair and maintain the structural portion
of the Leased Premises including: roof, exterior walls (excluding
window glass), foundation, floor slab (excluding floor finishing
such as tile, carpeting and the like).
B) Landlord shall maintain and repair the exterior portions of
the Leased Premises and the Building, including but not limited to,
parking area curbs, sidewalks, grass and shrubbery, and external
lighting.

-2­
TSB-A-97(83)S
Sales Tax

C) Landlord shall maintain the complex access roadways, lawns
and green areas and all utilities and related infrastructure
improvements serving the Walden Business Center. Such maintenance
shall include upkeep, repair and replacement of such complex
roadways, lawns and green areas, utilities and related services in
order that Tenant shall have use and enjoyment and access to its
Leased Premises.
Applicable Law and Regulations
Section 1105(c) of the Tax Law imposes sales tax upon:
The receipts from every sale, except for resale, of the following
services:
*

*

*

(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...."
Opinion
While the sales tax is imposed upon the receipts from the sale of tangible
personal property and certain services, it is not imposed on receipts from either
the sale or rental of real property.
Certain services even though characterized as additional rent may be
subject to sales tax. These services may include maintenance of the premises
which is required to be performed by the lessee but for whatever reason is
performed by the lessor and charged to its tenant as additional rent. These
maintenance services are taxable under Section 1105(c)(5) of the Tax Law. Other
services, however, may be considered incidental to the rent. Additional rent
charges for these services are not subject to tax. (See Newsweek Inc., Adv Op
Comm T&F, November 1, 1996, TSB-A-96(69)S.)
Services considered incidental to the rent may include services related to
the leased premises of a tenant. The maintenance by Petitioner's lessor of areas
related to the leased premises such as the lawn and shrubbery adjacent to the
leased building, and drive-ways and parking areas surrounding the leased
building, is incidental to Petitioner's rental of the premises. Petitioner's
lease agreement supports this conclusion.
Paragraph 11(B) of the agreement
provides that the "[l]andlord shall maintain and repair the exterior portions of
the Leased Premises and the building, including but not limited to, parking area
curbs, sidewalks, grass and shrubbery, and external lighting." Accordingly, the
lessor's "additional rent" charges to Petitioner for these services are not
subject to tax.

-3­
TSB-A-97(83)S
Sales Tax

Administrative and overhead charges made by a lessor to its tenants, where
such charges are a percentage of the actual operating costs of the "common area"
and are either designated as additional rent or similarly provided for by
specific provisions in the lease agreement, are considered to be "additional
rent" and as such are not subject to sales tax.
Administrative and overhead charges billed as a separate item on the
monthly rental invoice by a lessor to its tenants, and representing a percentage
of actual expenses relating to the tenants’ premises are considered to be a pro
rata part of the various charges included in the billing and taxed accordingly.
If the billing reflects a charge for any taxable sale of tangible personal
property or services, tax would be due on both such charge and a pro rata portion
of the charge for administration and overhead (See TSB-M-84(9)S Charges by
Shopping Mall Operators). Petitioner's lessor may not charge and collect sales
tax only on the amount of the mark-up billed to Petitioner for a taxable sale of
property or services. The lessor must charge and collect tax on the total amount
billed to Petitioner for a taxable sale, including expenses attributable to the
sale.

DATED: December 29, 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.