Can an asbestos-removal contractor get a refund of the sales tax it paid on disposable supplies (bags, suits, filters, encapsulant) that get contaminated and are transferred to its clients as part of the job?

Plain-English summary

Modern Management Group, doing business as Modern Environmental Service, is an asbestos-abatement contractor that isolates work areas, removes asbestos-contaminated material, and disposes of it under strict federal and state regulations. In the process, it consumes a long list of disposable supplies: air filters, HEPA filters, asbestos disposal bags, glove bags, disposable suits and gloves, respirator cartridges, duct tape, foam sealant, polyethylene sheeting, and an asbestos encapsulant sprayed on surfaces to "lock down" residual fibers. Because federal and state law require that the generator of asbestos waste -- the client, not the contractor -- always owns that waste, Modern Management asked whether it could get a refund or credit for the sales tax it had already paid when it originally bought these supplies.

The Department said yes, generally. Asbestos removal is itself a taxable real-property service under Tax Law § 1105(c)(5) (unless it's done as part of a capital improvement, or for a client exempt under § 1116(a)). Ordinarily, a contractor's own purchases of supplies used to perform a taxable service are themselves taxable retail purchases. But Tax Law § 1119(c) allows a refund or credit if the contractor's purchased property is later "actually transferred" to the client as part of performing the taxable service -- effectively, the contractor is treated as reselling that property to the client. Relying on two earlier Tax Appeals Tribunal decisions involving similarly contaminated, single-use liners (Chem-Nuclear Systems and Waste Management of New York), the Department found that almost every item on Modern Management's list -- once exposed to asbestos and no longer usable by the contractor, and legally the client's waste -- counts as "actually transferred" to the client. That makes these purchases eligible for the § 1119(c) refund or credit. The asbestos encapsulant is treated the same way (transferred to the client as part of its property) even though it isn't disposed of as waste.

The refund/credit is not automatic, though: it only applies where the underlying removal service is actually subject to tax. If a particular job was performed as part of a capital improvement to real property (not taxable) or for a governmental/exempt client where the service itself is exempt, the refund and credit rules explain that the exempt-client case still lets the contractor claim the refund, but the capital-improvement case does not.

What this means for you

Asbestos abatement and environmental remediation contractors

If your removal work is subject to New York sales tax, and you're required by law to leave contaminated disposable supplies with the client as its waste, you may be entitled to a refund or credit under § 1119(c) for the sales tax you originally paid on those supplies -- essentially recovering the double taxation of buying the item and then providing a taxable service with it. Track which projects are taxable service jobs (not capital improvements) so you can identify which purchases qualify.

Contractors performing similar hazardous-material or contaminated-waste services

The reasoning here (property that becomes unusable to the contractor and is legally transferred to the client as part of a taxable service is treated as "actually transferred," triggering a resale-style refund) traces back to the Chem-Nuclear Systems and Waste Management of New York Tax Appeals Tribunal decisions on contaminated liners. Any contractor whose regulatory scheme requires handing off consumed materials as the client's own waste should look at whether the same refund/credit logic applies to its supplies.

Accountants and tax professionals

The two-step structure matters: (1) confirm the underlying service is taxable under § 1105(c)(5) (not a capital improvement, not for an exempt organization performing an exempt project); then (2) apply § 1119(c) to any purchased tangible personal property that is later "actually transferred" to the client in conjunction with that taxable service. A Direct Payment Permit from the client can also be relevant to establishing the service was taxable.

Common questions

Q: Can an asbestos-removal contractor recover sales tax paid on disposable supplies used on the job?
A: Yes, for supplies that become contaminated and are legally transferred to the client as asbestos waste (or, for the encapsulant, remain on the client's property), as long as the underlying removal service is itself subject to sales tax.

Q: Does the refund apply if the removal is part of a capital improvement?
A: No. If the asbestos removal is performed as part of a capital improvement to real property, the service itself isn't taxable, so there's no tax paid on the service to offset, and the contractor is not entitled to this particular refund/credit on that job.

Q: What if the client is a tax-exempt organization?
A: The contractor is still eligible for the refund/credit even though the client doesn't pay tax on the service, as long as the service isn't part of a capital improvement.

Q: Can another asbestos contractor rely on this ruling directly?
A: Not automatically. This advisory opinion binds the Department only as to the petitioner and the specific supply list and facts described. A contractor with different supplies or a different regulatory posture should confirm its own facts.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(4)(i) (definition of retail sale)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(5) (tax on maintaining, servicing, or repairing real property)
• Tax Law § 1116(a) (exemption for governmental entities and certain exempt organizations)
• Tax Law § 1119(c) (refund or credit for property later transferred in performing a taxable service)
• Chem-Nuclear Systems, Inc., Tax App Trib, Jan. 12, 1989, TSB-D-89(2)S
• Waste Management of New York, Inc., Tax App Trib, Mar. 21, 1991, TSB-D-91(19)S

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_78s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(78)S
Sales Tax
November 13, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S971027A

On October 27, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Modern Management Group, Inc., d/b/a Modern
Environmental Service, 747 Erie Avenue, North Tonawanda, New York 14120.
The issue raised by Petitioner is whether it is entitled to a refund or
credit of sales taxes paid on purchases of the following items of tangible
personal property that are typically used by Petitioner in performing its
asbestos removal service.

1. Air filters for negative air machines
2. Asbestos bags
3. Asbestos encapsulant
4. Disposable towels
5. Disposable gloves
6. Disposable suits
7. Duct tape
8. Foam sealant
9. Glove bags
10. HEPA filters for negative air machines
11. HEPA vacuum dust bags
12. Polyethylene
13. Reinforced feed bags
14. Respirator cartridges
15. Respirator cleaning wipes
16. Smoke tubes
17. Spray adhesive
    Petitioner submitted the following facts as the basis for this Advisory
    Opinion.
    Petitioner, a New York State corporation, is a contractor that provides
    the service of asbestos removal.
    Petitioner removes asbestos contaminated
    materials from boilers, piping, roofs, floors, walls, ceilings and anywhere else
    asbestos materials are encountered. Clients of Petitioner include industrial
    and manufacturing facilities, hospitals, schools, the State University
    Construction Fund, the New York State Department of Transportation, the Erie
    County Department of Public Works and various municipalities. Petitioner does
    not provide asbestos removal for residential customers.
    During the course of removing asbestos materials, Petitioner must comply
    with regulations of the New York State Department of Labor (Asbestos, 12 NYCRR
    Part 56), the United States Environmental Protection Agency (National Emissions
    Standards for Hazardous Air Pollutants, 40 CFR Part 61), the New York State
    Department of Environmental Conservation (Transportation and Disposal of
    Asbestos), the United States Department of Transportation (Transportation of

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Asbestos) and
Protection).

the

Occupational

Safety

and

Health

Administration

(Worker

The sequence of removing asbestos begins with the work area isolation.
Petitioner is required to erect an enclosure isolating the asbestos from
surrounding areas. Such an enclosure or barrier is constructed of either metal
or wood studs (16 inches on-center) with plywood or aspinite sheathing (minimum
thickness of 5/8 of an inch) applied to the work side of the studs. On the work
side of the sheathing, Petitioner is required to install at least two layers of
fire retardant polyethylene (minimum thickness of 6 mils). These layers are
installed one at a time and must overlap at the seams by 6 feet. The floors and
ceiling areas inside the barrier are covered with polyethylene in the same
manner as are the walls.
There are two additional layers of polyethylene
required to cover windows, electrical outlets, HVAC diffusers, grills and any
other protrusions to the work area.
Foam sealant is also used to seal
protrusions. The polyethylene sheeting is generally held in place with spray
adhesive, duct tape and staples.
A decontamination system is erected at the entrance to the work area where
all persons entering or exiting the work area must pass through.
This
decontamination system is erected and enclosed in the same manner as the work
area described above.
The work area must remain under constant negative air pressure. This is
accomplished by installing portable negative air machines that are equipped with
three stage filtration systems. A prefilter, secondary filter and a HEPA (High
Efficient Particulate Air) filter must be used.
Special vacuum cleaners
equipped with disposable dust bags and HEPA filters must also be utilized. In
addition, disposable rags, towels and sponges are used to wipe down the work
area.
Once the decontamination system and barrier are completed and tested using
smoke delivered through smoke tubes, workers begin the actual asbestos removal
process. The asbestos materials are removed from where they are located and
placed into asbestos burial bags. These bags must also be 6 mils thick and
preprinted with "Asbestos Danger" verbiage that is required by regulation.
Nonpermeable drums may be used in lieu of these bags. Glove bags (i.e., bags
with gloves incorporated in them) are also used to seal objects, such as pipes,
and allow workers to use the gloves to remove asbestos. Heavy or sharp debris,
such as floor tiles, may be placed in reinforced feed bags before being placed
in the asbestos disposal bags. After the asbestos is removed and the work area
is wiped and vacuumed clean, an asbestos encapsulant is sprayed on the work area
surface to "lock down" any residual fibers that may be present.
Workers performing the removal process must wear personal protective
equipment that is also required by regulation. These items include disposable
suits, respirators (complete with disposable HEPA filter cartridges) and
disposable rubber gloves. Upon exiting the barrier each time, the workers are
required to remove the personal protective items in the decontamination system
prior to taking showers. These items are removed in the "dirty" chamber of the
decontamination system and placed in asbestos disposal bags. The items are

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required to be disposed of as asbestos waste, together with the towels used
after the workers take their showers. This process continues until the asbestos
has been removed, bagged and air samples confirm that there is no asbestos
present in the air.
At the end of the project, the polyethylene sheeting located on the walls,
floors and ceilings must be removed and placed into asbestos disposal bags and
disposed of as asbestos waste. At this time the studs and sheathing are removed
and the project is complete.
Petitioner collects and remits sales tax on the asbestos removal service
it provides to its clients.
On certain projects, Petitioner also receives
Certificates of Capital Improvement or copies of Direct Payment Permits from its
clients.
Petitioner states that federal and state regulations dictate that the
generators of asbestos waste (i.e., Petitioner’s clients) will always own the
waste regardless of where it is buried or who removes or transports this waste.
This includes all materials required to be disposed of with the asbestos, such
as the polyethylene sheeting, personal protective equipment, bags or drums used
for disposal and all filtering devices for water and air that are used to
complete the project.
During each project ownership of these consumable,
contaminated materials is transferred from Petitioner to the generators of the
asbestos waste.
Applicable Law
Section 1101(b)(4)(i) of the Tax Law defines a "retail sale," in part, as
follows:
A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical
component part of tangible personal property, or (B) for use by
that person in performing the services subject to tax under
paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of
section eleven hundred five where the property so sold becomes a
physical component part of the property upon which the services are
performed or where the property so sold is later actually
transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax. Notwithstanding the
preceding provisions of this subparagraph, a sale of any tangible
personal property to a contractor, subcontractor or repairman for
use or consumption in erecting structures or buildings, or building
on, or otherwise adding to, altering, improving, maintaining,
servicing or repairing real property, property or land, as the
terms real property, property or land are defined in the real
property tax law, is deemed to be a retail sale regardless of
whether the tangible personal property is to be resold as such
before it is so used or consumed....

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Sales Tax
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Section 1105(a) of the Tax Law imposes sales tax upon receipts from every
retail sale of tangible personal property, except as otherwise provided.
Section 1105(c)(5) of the Tax Law imposes sales tax upon receipts from
every sale, except for resale, of the following services:
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, as
distinguished from adding to or improving such real property,
property or land, by a capital improvement as such term capital
improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this chapter, but excluding services
rendered by an individual who is not in a regular trade or business
offering his services to the public.
Section 1116(a) of the Tax Law provides for exemption from the sales and
compensating use taxes with respect to New York State governmental entities,
United States governmental entities, certain nonprofit organizations and other
entities who have received New York State exempt organization status.
Section 1119(c) of the Tax Law provides:
A refund or credit equal to the amount of sales or
compensating use tax imposed by this article and pursuant to the
authority of article twenty-nine, and paid on the sale or use of
tangible personal property, shall be allowed the purchaser where
such property is later used by the purchaser in performing a
service subject to tax under paragraph (1), (2), (3), (5), (7) or
(8) of subdivision (c) of section eleven hundred five or under
section eleven hundred ten and such property has become a physical
component part of the property upon which the service is performed
or has been transferred to the purchaser of the service in
conjunction with the performance of the service subject to tax or
if a contractor, subcontractor or repairman purchases tangible
personal property and later makes a retail sale of such tangible
personal property, the acquisition of which would not have been a
sale at retail to him but for the second to last sentence of
subparagraph (i) of paragraph (4) of subdivision (b) of section
eleven hundred one.
An application for the refund or credit
provided for herein must be filed with the commissioner of taxation
and finance within the time provided by subdivision (a) of section
eleven hundred thirty-nine. Such application shall be in such form
as the commissioner may prescribe. Where an application for credit
has been filed, the applicant may immediately take such credit on
the return which is due coincident with or immediately subsequent
to the time that he files his application for credit. However, the
taking of the credit on the return shall be deemed to be part of
the application for credit. The procedure for granting or denying
such applications for refund or credit and review of such

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determinations shall be as provided in subdivision (e) of section
eleven hundred thirty-nine.
Opinion
The service of asbestos removal is subject to tax under Section 1105(c)(5)
of the Tax Law, unless the service is performed as a constituent part of a
capital improvement to real property, property or land.
Where an asbestos
removal service is performed for an organization that is exempt from tax under
Section 1116(a) of the Tax Law, receipts from the sale of such service to the
exempt organization are not taxable. Whether Petitioner performs its service
in conjunction with a capital improvement or for a client that qualifies as an
exempt organization, although relevant, is not directly at issue in this
Advisory Opinion.
Sales of tangible personal property to Petitioner, as a contractor, for
use in performing its asbestos removal service are retail sales subject to tax
under Section 1105(a) of the Tax Law. However, Petitioner may be entitled to
a refund or credit equal to the amount of tax paid on these sales where
Petitioner purchases the tangible personal property and later makes a retail
sale of the property to a client (Tax Law, §1119(c)).
In Chem-Nuclear Systems, Inc. (Tax App Trib, January 12, 1989,
TSB-D-89(2)S), the Tax Appeals Tribunal determined that liners used in the
processing of radioactive waste were "actually transferred" to customers in
conjunction with the performance of a taxable service. In essence, the liners
were considered sold at retail to these customers.
Once exposed to the
radioactive waste and contaminated, the liners were no longer usable by
Chem-Nuclear, but were effectively consumed in the processing of the waste. In
addition, under state and federal law, the customers had a continued legal
responsibility for the liners as well as the radioactive waste. (See, also,
Waste Management of New York, Inc., Tax App Trib, March 21, 1991,
TSB-D-91(19)S.)
With the exception of the asbestos encapsulant, the items of tangible
personal property typically used by Petitioner in performing its asbestos
removal service, and listed in this Opinion, when exposed to asbestos become
contaminated and therefore part of the asbestos waste.
These items are no
longer usable by Petitioner, but are transferred from Petitioner to its clients
in the same manner as were the liners in Chem-Nuclear. Petitioner and its
clients are responsible for the proper disposal of the waste, including the
items in question, pursuant to applicable federal and state laws and
regulations.
Accordingly, all of these items are considered actually
transferred or sold at retail by Petitioner to its clients.
The asbestos
encapsulant that is sprayed on the clients’ properties to "lock down" residual
asbestos fibers does not necessarily become part of the disposable asbestos
waste. However, the encapsulant remains part of the clients’ properties, and
is also actually transferred to the clients.
Consequently, Petitioner is
eligible for a refund or credit under Section 1119(c) of the Tax Law equal to
the amount of sales tax paid on these items, provided such items are transferred
by Petitioner in connection with the performance of a service that is subject

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to sales tax.
If, however, the asbestos removal service is performed in
conjunction with a capital improvement to real property, property or land, and
thus is not subject to tax, Petitioner would not be entitled to this refund or
credit.
It is noted that if Petitioner performs its asbestos removal service
(other than as part of a capital improvement) for an exempt organization under
Section 1116(a) of the Tax Law, although the purchaser of the service is exempt
from tax, Petitioner would still be eligible for the refund or credit. It is
further noted, in a case where a copy of a Direct Payment Permit is properly
issued to Petitioner by a client (see 20 NYCRR 532.5 and Part 541), in order to
claim the subject refund or credit Petitioner must be able to establish that the
service was ultimately subject to tax and was not part of a capital improvement.

DATED:

November 13, 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.