Are a contractor's purchases of construction materials for a town-owned recreation facility exempt from New York sales tax, even though the contractor pays for construction and later gets a license fee to operate the facility?

Plain-English summary

The Town of Tonawanda, a New York municipality, wanted a roughly $1.5 million recreational facility built in one of its parks -- housing a driving range, other recreational activities, and concessions. Under the arrangement, a contractor would pay for and build the facility, but the Town would own and hold title to it during construction and afterward. Once built, the contractor would pay the Town an annual license fee to operate the facility for an agreed number of years; the Town could evict the contractor or end the license for cause, and ownership would never revert to the contractor when the license ended. The Town asked whether the contractor's purchases of construction materials for the project were subject to New York state and local sales and use tax.

The Department said no, they're exempt. Tax Law § 1115(a)(15) exempts tangible personal property sold to a contractor for use erecting a structure for an organization described in § 1116(a) -- which includes New York municipalities -- as long as the property becomes an integral component part of the structure. Because the Town would own and hold title to the facility throughout construction and afterward (with the contractor merely licensed to operate it, not owning it), the Town qualified as the exempt owner of the project. So the contractor's purchases of materials that become a permanent part of the building are exempt from state and local sales and use tax. The Department did note one limit: the contractor's purchases of tools, equipment, and supplies that do NOT become an integral, permanent part of the building remain fully taxable.

What this means for you

Municipalities structuring public facilities built and operated by private contractors

The exemption tracks legal ownership of the finished structure, not who pays for construction or who ultimately operates it. As long as your municipality holds title throughout construction and afterward -- even if a private contractor pays for the build and later operates the facility under a license or lease-back arrangement -- your contractor's construction materials can qualify for the governmental exemption.

Contractors building municipal facilities under license/operating arrangements

Keep your purchases split cleanly between materials that become part of the building (exempt) and tools, equipment, or supplies that stay yours and don't become part of the structure (taxable). Only the former category benefits from the exemption tied to your municipal client's ownership.

Accountants and tax professionals

This ruling is a clean illustration that § 1115(a)(15)'s exemption turns on the exempt organization's ownership of the completed structure (§ 1116(a) status plus title), not on the financial structure of who funds the build or who later profits from operating it. Watch for the same distinction (materials that become part of the structure vs. tools/equipment that don't) that recurs throughout this corpus's contractor-exemption rulings.

Common questions

Q: Are a contractor's construction materials exempt just because a municipality will eventually own the building?
A: The key fact here is that the Town held title throughout construction and afterward -- not merely at the end. As long as the exempt organization is the actual owner during the build, materials that become part of the structure are exempt.

Q: Does it matter that the contractor pays for construction and gets a license fee?
A: No. The exemption follows ownership of the structure, not who funds the project or who profits from operating it afterward.

Q: Are all of the contractor's purchases exempt?
A: No. Only materials that become an integral, permanent part of the structure are exempt. Tools, equipment, and supplies that remain the contractor's own property are still taxable.

Q: Can another municipality rely on this ruling for a similar contractor-built facility?
A: Not automatically. This advisory opinion binds the Department only as to the petitioner and the specific ownership and licensing structure described.

Citations and references

Statutes and rules:

• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1115(a)(15) (exemption for construction materials sold to a contractor for an exempt organization's structure)
• Tax Law § 1116(a) (exemption for governmental entities, including municipalities)
• 20 NYCRR § 528.16(a) (exemption for contractor purchases for exempt organizations; integral component part requirement)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_67s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(67)S
Sales Tax
September 9, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980603A

On June 3, 1998, the Department of Taxation and Finance received a Petition
for Advisory Opinion from Town of Tonawanda, New York, 2919 Delaware Avenue,
Kenmore, New York 14217-2308.
The issue raised by Petitioner, Town of Tonawanda, New York, is whether
purchases of construction materials by a contractor for the construction of a
facility which is to be owned by Petitioner are subject to State and local sales
and use taxes.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a municipality and owns a recreation area.
Petitioner
desires to have a facility built in the recreation area which will house a
driving range, other recreational activities and concessions.
The cost of the
facility will be approximately $1.5 million.
The facility will be constructed by a contractor at cost. The contractor
will pay for the construction of the facility. Petitioner will own and have
title to the facility during all phases of the construction and post
construction.
Upon completion of the facility, the contractor will pay to
Petitioner an annual license fee for the operation of the facility for an agreed
upon number of years. Petitioner will maintain the right to evict or terminate
the license upon just cause. In addition, ownership of the property will not
revert to the contractor upon the expiration of the license agreement.
Applicable Laws and Regulations
Section 1105(a) of the Tax Law imposes tax on “[t]he receipts from
every retail sale of tangible personal property, except as otherwise provided in
this article.”
Section 1115 of the Tax Law provides, in part:
Exemption 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 or improving real
property, property or land of such an organization, as the terms

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TSB-A-98(67)S
Sales Tax
September 9, 1998

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:
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:
(1) 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 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 528.16(a) of the Sales and Use Tax Regulation provides, in part:
Exemption. (1) Tangible personal property sold to a
contractor, subcontractor or repairman for use in erecting a
structure or building of an organization described in Part 529 of
this Title, is exempt when it is to become an integral component
part of such structure or building.
Example 1: An exempt organization contracts to have a
building erected on its land. Purchases by its
contractor of tangible personal property, such as nails,
sheet rock and plywood that become part of the
structure, are exempt.
Opinion
Petitioner is a municipality and owns a recreation area which it desires
to have a facility built which will house a driving range, other recreational
activities and concessions. The cost of the facility will be approximately $1.5
million.
The facility will be constructed by a contractor at cost.
The
contractor will pay for the construction of the facility. Petitioner will own
and have title to the facility during all phases of the construction and post
construction.
Upon completion of the facility, the contractor will pay to
Petitioner an annual license fee for the operation of the facility for an agreed
upon number of years. Petitioner will maintain the right to evict or terminate
the license upon just cause. In addition, ownership of the property will not
revert to the contractor upon the expiration of the license agreement.
Pursuant to Section 1115(a)(15) of the Tax Law, tangible personal property
sold to a contractor for use in erecting a structure or building for an
organization described in Section 1116(a) of the Tax Law is not subject to sales

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TSB-A-98(67)S
Sales Tax
September 9, 1998

and use tax, if the tangible personal property becomes an integral component part
of the structure or building. Petitioner, as a municipality of the State of New
York, is an organization described in Section 1116(a) of the Tax Law.
Accordingly, since the contractor will be erecting a structure or building owned
by an organization exempt under Section 1116(a) of the Tax Law, the contractor’s
purchases of construction materials which will become a permanent part of such
structure or building for the exempt organization are not subject to State and
local sales and use taxes under Section 1115(a)(15) of the Tax Law.
The
contractor’s purchases of tools, equipment, and supplies which do not become an
integral component part of the structure or building will be subject to sales and
use tax.

DATED:

September 9, 1998

NOTE:

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

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