Are a licensed engineering firm's design services, the drilling/testing/lab work it subcontracts, and its construction-management and post-construction-monitoring work subject to New York sales tax?

Plain-English summary

An accounting firm, Hall & Dettor, asked on behalf of "XYZ," a New York-licensed engineering firm doing underground and environmental-consulting work -- designing infrastructure and soil/groundwater remediation systems, monitoring construction to make sure it matches the design, and later monitoring how the finished system performs. XYZ also sometimes takes on a construction-management role, contracting and managing the actual construction work directly, under a separate agreement from its engineering contract.

The Department worked through each piece separately. Genuine professional engineering services -- the kind that by law (Education Law § 7201) only a licensed engineer may perform, including the written reports, plans, and specifications delivered alongside them -- are not an enumerated taxable service, so no sales tax applies, even when a document changes hands as part of the engagement. The same goes for analytical and geotechnical laboratory reports, which the Department has already ruled non-taxable in an earlier opinion and a technical memorandum.

Subcontracted drilling and testing (test borings, monitoring wells, piezometers) don't get that same protection just because they support the engineering work -- they're taxable installation services under § 1105(c)(5), unless they're part of building an actual capital improvement, in which case the capital-improvement exception applies (with a Certificate of Capital Improvement covering the job). Construction-management/general-contractor work is judged the same way real-property services always are: it depends entirely on the end result. Building a capital improvement is exempt; repairing or maintaining existing property or personal property is taxable. Post-construction performance monitoring is taxable under the same repair/maintenance provisions unless it either qualifies as protected engineering work or is purely a mandatory government-code-compliance inspection unconnected to any repair or service work, in which case it too is untaxed.

What this means for you

Licensed engineering and environmental-consulting firms

Your core design, evaluation, and reporting work is not taxable -- that protection follows the professional license, not just the paperwork. But anything you subcontract (drilling, testing, lab work) or perform yourself outside the strict scope of licensed engineering needs its own separate taxability analysis; don't assume the whole project is shielded just because engineers are involved.

Firms that also act as construction manager or general contractor

When you take on construction-management or general-contracting work under a separate contract, the tax answer turns entirely on whether the finished project is a capital improvement (exempt) or a repair/maintenance job (taxable) -- get a Certificate of Capital Improvement or Direct Payment Permit from the client to shift the tax-collection burden off you.

Accountants and tax professionals

This ruling is a useful multi-part template: it separately resolves (1) core professional-license services, (2) subcontracted testing/drilling, (3) lab reports, (4) construction management, and (5) post-construction monitoring -- each governed by a different rule, even within one client engagement.

Common questions

Q: Are all services performed by a licensed engineer automatically exempt?
A: Only the services that, by law, must be performed by a licensed engineer (design, evaluation, planning based on engineering/physical-science principles) -- not every task the firm happens to perform.

Q: Is drilling and testing exempt just because it supports an engineering project?
A: No -- it's taxable on its own unless it's actually part of constructing a capital improvement, regardless of why it was ordered.

Q: What about monitoring a system after construction is finished?
A: That's taxable as a repair/maintenance-type service unless it either qualifies as licensed engineering work or is a pure regulatory-compliance inspection unconnected to repair or servicing.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) (definition of capital improvement)
• Tax Law § 1105(c)(3) (installation services, capital-improvement exception)
• Tax Law § 1105(c)(5) (maintaining, servicing, or repairing real property)
• 20 NYCRR § 527.7(b)(4) (taxability of real-property services turns on end result)
• 20 NYCRR § 532.4(c) (exemption certificates, capital improvements)
• 20 NYCRR § 532.5 (direct payment permits)
• Education Law § 7201 (definition of professional engineering practice)

Prior rulings referenced:

• R.H. McDermott Corp., TSB-A-88(22)S (March 2, 1988)
• PCA Engineering, Inc., TSB-A-90(4)S (February 15, 1990)
• Architectural Engineering Investigations, TSB-A-98(48)S (July 31, 1998)
• KPMG Peat Marwick, LLP, TSB-A-96(54)S (September 12, 1996)
• Technical Services Bureau Memorandum TSB-M-95(8)S (July 31, 1995), "Taxability of Certain Laboratory Reports"
• Elevator Services Companies, TSB-A-96(67)S (October 7, 1996)
• Richard T. Smokowski, TSB-A-97(18)S (March 27, 1997)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_53s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(53)S
Sales Tax
November 30, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981113A

On November 13, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Hall & Dettor, LLP, Certified Public Accountants, P.O. Box 423, 551 E.
Genesee Street, Fayetteville, New York, 13066.
The issues raised by Petitioner, Hall & Dettor, LLP, Certified Public Accountants, are
whether the following services provided by licensed engineers, and the following purchases by such
engineers, are subject to the sales tax:
1) Professional engineering services;
2) Purchases of supporting information and testing services used in providing engineering
services;
3) Post-construction performance monitoring services for systems designed under a
professional engineering services contract, when:
a) no construction management services are performed by the engineers;
b) engineering oversight services of construction management performed by a third
party are performed; and
c) construction management services are performed by the engineers.
4) Engineering oversight services of construction management performed by a third party;
and
5) Construction management services in acting as general contractor for the construction of
systems designed for the same client under a separate contract for engineering services.
Petitioner submits the following facts as the basis for this Advisory Opinion.
XYZ, a New York State limited liability partnership, is registered and licensed to perform
professional engineering services in the State of New York. XYZ's practice includes underground
engineering and environmental consulting services performed largely for private industry. These
engineering and consulting services include design engineering associated with various infrastructure
projects and the design of remedial activities and systems to mitigate the presence of soil and/or

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groundwater contamination. Subcontractor support for design engineering activities typically
includes the procurement of specialty engineering services from other licensed professionals in
addition to the following routine informational subcontractor services:
a) drilling and testing services including test borings and the installation of test pits,
groundwater monitoring wells and/or piezometers;
b) analytical laboratory services; and
c) geotechnical laboratory services.
The testing services are performed and used as a source of information for engineering
purposes. Occasionally, the pits, wells and/or piezometers installed for the collection of information
for the engineering services are used later by the client.
The above service activities result in a work product typically consisting of a written report,
including supporting figures, plans, specifications and tables that present and discuss information
that is unique and personal in nature to a specific client.
Other services performed by XYZ include construction monitoring activities (oversight) to
document that third party construction managers hired by XYZ's client build infrastructure and
remediation systems according to the plans and specifications reflected in the above written report.
Also, XYZ monitors the post-construction performance of the infrastructure and/or environmental
remediation projects.
Construction activities related to the services provided by XYZ are typically contracted
directly by XYZ's client with a third party. Occasionally, project and/or client requirements dictate
that XYZ become engaged in a construction management role, whereby XYZ will directly
subcontract and manage construction services on a turnkey basis for the client. This situation may
occur on both infrastructure and environmental remediation projects. This work is often performed
for entities with Direct Payment Permits (Form AU 297). Occasionally, this work is performed for
smaller industrial or commercial accounts who do not possess Direct Payment Permits. Typical
subcontractor support includes various equipment and material suppliers, licensed and non-licensed
tradesmen, equipment operators, and providers of specialty drilling and technical services necessary
to support the construction related activities. XYZ's construction management activities typically
include construction of all or part of an engineered-structure(s), and/or the construction and
subsequent operation, maintenance and performance monitoring of remedial measures. The
construction management services, including subcontracted support services, are typically
contractually separated from any project-related engineering service activities.

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Applicable Law and Regulations
Section 1101(b)(9)(i) of the Tax Law defines the term capital improvement in part as:
An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article itself;
and
(C) Is intended to become a permanent installation.
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby
imposed and there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property ... or maintaining, servicing or
repairing tangible personal property ... not held for sale in the regular course of
business, whether or not the services are performed directly or by means of coin­
operated equipment or by any other means, and whether or not any tangible personal
property is transferred in conjunction therewith, except:
*

*

*

(iii) for installing property which, when installed, will constitute an addition
or capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital

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improvement is defined in paragraph nine of subdivision (b) of section eleven
hundred one of this chapter....
*

*

*

(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, 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 527.7(b)(4) of the Sales and Use Tax Regulations states:
(4) The imposition of tax on services performed on real property depends on
the end result of such service. If the end result of the services is the repair or
maintenance of real property, such services are taxable. If the end result of the same
service is a capital improvement to the real property, such services are not taxable.
Section 532.4(c) of the Sales and Use Tax Regulations states in part:
Use of exemption certificates. (1) To enable purchasers entitled to an
exemption from the sales and compensating use tax to avail themselves of the
exemption and for administrative purposes, the Department of Taxation and Finance
provides various exemption certificates. Examples of exemption certificates are
forms for:
*

*

*

(ii) capital improvements....
Section 532.5 of the Sales and Use Tax Regulations states in part:
(a) General. A direct payment permit is a notice to a vendor that the holder
thereof is authorized to pay directly to the Department of Taxation and Finance any
tax due on purchases made. The vendor's responsibility for the collection of tax from
the permit holder is waived upon receipt of such permit.
*

*

*

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(e) Use of direct payment permits. (1) A direct payment permit may only be
used by the holder who makes purchases of tangible personal property or services,
the use of which is unknown to him at the time of purchase.
Example 1: A manufacturer-contractor purchases ingredients for use in the
production of concrete septic tanks. Some of the septic tanks will be sold without
installation, while others are to be sold installed. Since the manufacturer-contractor
does not know the number of tanks that will be sold installed, he may use a direct
payment permit when purchasing the ingredients.
(2) A direct payment permit may not be used:
(i) as a device to defer payment of the sales tax on purchases;
(ii) as a substitute for a resale certificate or other exemption certificates;
or
(iii) as a device to transfer the permit holder's privileges to another person.
Example 2: The holder of a direct payment permit purchasing display cases
for use in his showroom gives his supplier a copy of his direct payment permit to
defer the payment of tax on his purchase which is taxable. This is a use of the permit
which is prohibited.
Example 3: A holder of a direct payment permit engages a contractor to
erect a warehouse and gives the contractor a copy of his direct payment permit.
The contractor may not use the direct payment permit to defer his payment of tax on
purchases which are for use by him in the erection of the warehouse. The
contractor's liability for the tax on his purchase is not relieved by his customer's
direct payment permit. This is a use of the permit which is prohibited.
(3) Direct payment permit holders are required to notify vendors, from
whom they make purchases, of their status by submitting a copy of the direct
payment permit with the first purchase order. Each vendor accepting a direct payment
permit must, for verification purposes, maintain a method of associating a sale for
which the permit was used, with the permit on file.
(4) A direct payment permit holder, who by reason of misusing such
permit, fails to pay any tax due when required, shall be liable for penalty and interest
in addition to the tax due and revocation of his permit. See Part 536 of this Title for
penalties and interest.

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Section 7201 of the Education Law provides:
The practice of professional engineering is defined as performing professional
service such as consultation, investigation, evaluation, planning, design or
supervision of construction or operation in connection with any utilities, structures,
buildings, machines, equipment, processes, works, or projects wherein the
safeguarding of life, health and property is concerned, when such service or work
requires the application of engineering principles and data.
Opinion
Professional engineering services are not considered services subject to sales tax enumerated
in Section 1105 of the Tax Law. The furnishing of technical advice by a licensed professional
engineer is not deemed to be the sale of tangible personal property or the sale of an enumerated
service even if a written report is furnished as an incident to the engineering service being performed.
Such a professional service is outside the scope of Sections 1105 and 1110 of the Tax Law and is
not subject to sales or use tax. It is noted that this conclusion concerning the taxability of
engineering services is limited to engineering services and related reports and documents (e.g.,
evaluations, specifications, plans and designs) which, being based upon the principles of
mathematics and the physical sciences, may legally be rendered only by licensed professional
engineers. See 1966 New York Tax Bulletin - Vol. 2, Page 58; R.H McDermott Corp., Adv Op
Comm T&F, March 2, 1988, TSB-A-88(22)S, and PCA Engineering, Inc., Adv Op Comm T&F,
February 15, 1990, TSB-A-90(4)S. It is also noted that charges for copies of plans, drawings,
specifications, etc., pursuant to a separate contract or agreement apart from the contract or agreement
for engineering services would be subject to sales or use tax. See Architectural Engineering
Investigations, Adv Op Comm T&F, July 31, 1998, TSB-A-98(48)S. Consulting services are not,
per se, enumerated services.
XYZ performs design engineering and consulting in conjunction with various infrastructure
projects and activities related to implementing remediation systems with respect to soil and/or
groundwater contamination. Also, XYZ monitors the construction or implementation of
infrastructure and remediation systems in order to ascertain that they are constructed in accordance
with the appropriate plans and specifications. XYZ also performs post-construction monitoring and
reports on the performance of the newly constructed infrastructure or remediation system. In
connection with these services, XYZ provides its customer with a written report, including
supporting figures, and, with respect to the design engineering activities, XYZ may also furnish
plans, specifications and tables.
To the extent that these design and monitoring services constitute the practice of engineering
which are based on principles of mathematical and physical sciences and may legally be rendered

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only by a licensed professional engineer, as provided in Section 7201 of the Education Law, they are
not subject to sales or use tax.
In the course of providing its engineering services, XYZ procures drilling and testing
services, including test borings and installation of test pits, groundwater monitoring wells and/or
piezometers. Analytical and geotechnical laboratory services are also procured. The charges to XYZ
for the procurement of drilling services, including the test borings and installation of test pits,
groundwater monitoring wells and piezometers are subject to sales tax under Section 1105(c)(5) of
the Tax Law. However, if such services are performed in connection with the construction of a
capital improvement as defined in Section 1101(b)(9)(i) of the Tax Law, they are not subject to tax
in accordance with Section 527.7(b)(4) of the Sales and Use Tax Regulations. In such case a
properly completed Capital Improvement Certificate (Form ST-124) should be furnished to the
person performing the service. Also, the charges to XYZ for analytical and geotechnical laboratory
services are not subject to sales tax. See KPMG Peat Marwick, LLP, Adv Op Comm T&F,
September 12, 1996, TSB-A-96(54)S and Technical Services Bureau Memorandum TSB-M-95(8)S
dated July 31, 1995, entitled Taxability of Certain Laboratory Reports.
XYZ may also act as the general contractor on its clients’ projects, under a separate contract
from its contract for engineering services. Under Section 527.7(b)(4) of the Sales and Use Tax
Regulations, the taxability of XYZ's receipts from the sale of services as a general contractor
depends on the end result of the service. If the end result of a client project constitutes a repair or
maintenance to real or tangible personal property, then the receipts from the service are subject to
sales tax under Section 1105(c)(3) or 1105(c)(5) of the Tax Law. If the end result is a capital
improvement as defined in Section 1101(b)(9) of the Tax Law, then the receipts from the sale of the
service are not subject to sales tax. Whether the construction or installation of a client's project
constitutes a capital improvement is a question of fact based on the circumstances in each instance.
In any case where a client of XYZ timely furnishes a properly completed Certificate of Capital
Improvement or Direct Payment Permit, XYZ is relieved of the responsibility for the collection of
tax from such client.
The receipts from the charges for the subsequent operation, maintenance and performance
monitoring of remedial measures may be subject to sales tax under either Section 1105(c)(3) or
Section 1105(c)(5) of the Tax Law, assuming these services are not engineering services that are
legally required to be performed by a licensed engineer and depending on the nature of the services
performed. However, if services performed with respect to such remedial measures are in the nature
of inspection services performed solely for purposes of mandatory governmental code compliance,
and are not related to or performed in conjunction with repairing, maintaining or servicing tangible
personal property, the charges for such services are not subject to sales tax. (See Elevator Services
Companies, Adv Op Comm T&F, October 7, 1996, TSB-A-96(67)S and Richard T. Smokowski,

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Adv Op Comm T&F, March 27, 1997, TSB-A-97(18)S.) Services performed by XYZ consisting
solely of the provision of reports containing results of the scientific laboratory analysis of
environmental samples are not subject to sales tax. See TSB-M-95(8)S.

DATED: November 30, 1999

NOTE:

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

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