Does a private railroad acting as an independent contractor for the state owe sales tax on materials it buys to improve property that the MTA leases?

Plain-English summary

Consolidated Rail Corporation ("Conrail"), under a July 15, 1980 agreement with New York State, performs improvement and maintenance work on Owasco River Railroad properties (between Croton and Poughkeepsie) that are leased to the Metropolitan Transportation Authority (MTA). The State reimburses Conrail monthly; title to the materials vests in Owasco; and the agreement designates Conrail an independent contractor. Conrail claimed it was exempt from sales, use and other excise taxes under Tax Law § 1116(a)(1) and Public Authorities Law § 1275.

The Department rejected both exemptions — Conrail must pay the tax.

• Conrail isn't itself an exempt government entity. Section 1116(a)(1) exempts the State and its agencies, instrumentalities, public corporations and political subdivisions. Conrail is a private, for-profit corporation, so it doesn't qualify.
• Conrail isn't the State's purchasing agent. The agreement makes it an independent contractor (§ 3.5); the State doesn't control the manner of the work (agency needs such control — Matter of Morton; a general right of inspection isn't control — Wawrzonek); Conrail indemnifies the State (Uppington); title to materials vests in Owasco, not the State or MTA; and Conrail buys with its own funds and is only reimbursed. So it isn't "clothed with" the State's exemption.
• The § 1115(a)(15)/(16) exemptions don't apply. Those (not cited by Conrail) exempt property that becomes an integral component of an exempt organization's real property. Here the property is leased, not owned, by the State, making the State's interest personal property (Matter of Earl Hamilton Manor v. Boyland) — so the improvement isn't to an exempt organization's real property.
• Public Authorities Law § 1275 exempts only the MTA. Its first sentence exempts MTA property from real-property "taxation and special ad valorem levies" — not Tax Law taxes. Its second sentence exempts the MTA (and, under § 1266.5, its subsidiaries) from sales and other excise taxes. Conrail is neither the MTA's agent nor its subsidiary, so § 1275 doesn't help it.
• Result: Conrail must pay sales and use taxes (and applicable excise taxes) on the tangible personal property it buys for the contract work.

What this means for you

Doing work for the government doesn't borrow the government's exemption. A private contractor is a taxable purchaser of its own materials unless it truly buys as the government's agent. Independent-contractor status, self-funding-then-reimbursement, indemnifying the government, and title vesting elsewhere all point away from agency — and toward tax.

The exemption for improving exempt-entity property requires ownership, not a lease. Section 1115(a)(15)/(16) turns on improving the real property of an exempt organization. When the public entity only leases the property, its interest is treated as personal property, and the exemption fails — the same lease-versus-ownership line the Department drew in the companion Conrail opinion, TSB-H-81(98)S.

A public authority's own tax exemption usually stops at the authority (and its subsidiaries). The MTA's § 1275 exemption runs to the MTA and its subsidiaries, not to its independent contractors. Read the authority's enabling statute carefully before assuming its exemption flows down to you.

Common questions

Q: We're doing contract work for New York State — aren't our material purchases exempt?
A: No. A private contractor isn't an exempt government entity under § 1116(a)(1), and it only inherits the State's exemption if it buys as the State's agent. Independent-contractor status, buying with your own funds, indemnifying the State, and title vesting elsewhere all defeat agency, so the purchases are taxable.

Q: The property belongs to a public authority (the MTA) — doesn't that exempt the materials?
A: Not here. The § 1115(a)(15)/(16) exemptions require improving the exempt entity's real property, but the MTA only leases the property, so its interest is personal property (Earl Hamilton Manor) and the exemption doesn't apply.

Q: Doesn't the MTA's Public Authorities Law § 1275 exemption cover its contractors?
A: No. Section 1275 exempts the MTA (and its subsidiaries under § 1266.5) from sales and excise taxes; its real-property "taxation" language doesn't reach Tax Law taxes, and Conrail is neither the MTA's agent nor its subsidiary.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1116(a)(1) — exempts the State, its agencies, instrumentalities, public corporations and political subdivisions (a private contractor is not among them)
• Tax Law § 1115(a)(15) and (16) — exempt property that becomes an integral component of an exempt organization's real property (inapplicable where the property is leased, not owned)
• Public Authorities Law § 1275 — exempts the MTA from real-property taxation and from sales/excise taxes on its property and activities
• Public Authorities Law § 1266.5 — may extend the MTA's exemption to its subsidiary corporations
• Matter of Morton, 284 N.Y. 167 — control over the manner of work as a test of agency
• Wawrzonek v. Central Hudson Gas & Electric Corp., 276 N.Y. 412 — a right of inspection is not sufficient control to create agency
• Uppington v. City of New York, 165 N.Y. 222 — assuming indemnity liability indicates independent-contractor status
• Matter of Earl Hamilton Manor v. Boyland, 4 N.Y.2d 192 — a lessee's interest in leased property is personal property

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_74s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(74)S
Sales Tax
April 13, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S801112E

On November 12, 1980 a Petition for Advisory Opinion was received from
Consolidated Rail Corporation, Six Penn Center Plaza, Philadelphia, Pennsylvania
19104.
The issue raised is whether Petitioner is required to pay sales, use or
other excise taxes on the purchase of materials used in the performance of
certain improvement and maintenance work on properties leased by Owasco River
Railroad Company, Inc. to the Metropolitan Transportation Authority.
The Consolidated Rail Corporation (hereinafter "Conrail"), pursuant to an
agreement with the State of New York, dated July 15, 1980 (hereinafter "the
Agreement"), is required to perform improvement and maintenance work on certain
properties of the Owasco River Railroad Company, Inc. (hereinafter "Owasco"), a
successor to the interests of the Penn Central Transportation Company. These
properties, located between Croton and Poughkeepsie, New York, are leased to the
Metropolitan Transportation Authority (hereinafter "MTA").
MTA is a public benefit corporation created under Title 11 of Article 5 of
the Public Authorities Law for the purpose, among other things, of continuing and
furthering the development and improvement of commuter transportation and other
related services within the Metropolitan Commuter Transportation District.
Conrail is a private, for-profit corporation created under the Regional Rail
Reorganization Act of 1973 (P.L. 93-236), as successor to the Penn Central
Transportation Company.
Section 2.3 of the Agreement provides for monthly reimbursement to Conrail,
by the State, in the amount of "the cost of the work performed and of facilities
and equipment provided" by Conrail. Section 2.4 provides that title to the
materials purchased and used by Conrail for the agreed upon work is to vest in
the owner, Owasco. Section 3.5 provides as follows: "The relationship of the
Railroad "viz., Conrail1 to the State is that of an independent contractor, and
said Railroad, in accordance with its status as such contractor, covenants and
agrees that it will conduct itself consistent with such status, that it will
neither hold itself out as nor claim to be an officer or employee of the State
by reason hereof, and that it will not, by reason hereof, make any claim, demand
or application to or for any right or privilege applicable to an officer or
employee of the State, including but not limited to workmen's compensation
coverage, unemployment insurance benefits, social security coverage, or
retirement membership or credit."
Petitioner asserts that it is exempt from sales and use taxes, as well as
other excise taxes, pursuant to section 1116(a)(1) of the Tax Law and section
1275 of the Public Authorities Law, with respect to purchases made in connection
with the work done pursuant to the Agreement.
Section 1116(a)(1) of the Tax Law exempts from subjection to the sales and
use taxes imposed under Article 28 of the Tax Law "The state of New York, or any
of its agencies, instrumentalities, public corporations...or political
subdivisions where it is the purchaser, user or consumer...." As indicated above,
Conrail is a private, for-profit corporation and has been neither asserted nor
demonstrated to be an agency, instrumentality, public corporation or political
subdivision of the State of New York.

TP-8 (4/80)

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-H-81(74)S
Sales Tax
April 13, 1981

Not only is Petitioner not itself an exempt govermental entity. it can not
be said to make the purchases in question as an agent of the State. This view is
supported by Section 3.5 of the Agreement, wherein it is stated that Conrail's
relationship to the State is that of an independent contractor. Even apart from
such contractual designation, the facts of the present matter compel the same
conclusion. One important factor in determining whether an agency relationship
exists is the degree of control that can be exercised over the performing party
by the other party. If not only the result of the contract performance but the
way in which the work is to be performed is subject to such control an agency
relationship may be found to exist. Matter of Morton, 284 N.Y. 167. Such control
is absent under the Agreement. Section 2.5 of the Agreement, entitled "Manner of
Performing Work", provides that Conrail can either use its own labor and
equipment in performing contract obligations or it can contract out the work.
This section specifies the parties who may do the work, but not how it is to be
done. Nowhere in the Agreement are there specific instructions given as to the
manner in which the work is to be performed. It should be noted that the general
right of inspection given the State by Section 2.6 of the Agreement does not
constitute sufficient control over Conrail's activities to warrant a finding of
an agency relationship. Wawrzonek v. Central Hudson Gas & Electric Corp., 276
N.Y. 412.
Section 3.8 of the Agreement obligates Conrail to indemnify and save the
State harmless from any liability for injury or death to third parties and from
damage or loss of equipment arising in connection with Conrail's performance
under the contract. Conrail's assumption of this responsibility further indicates
that it is an independent contractor and not an agent of the State. Uppington v.
City of New York, 165 N.Y. 222.
Most significantly, section 2.4 of the Agreement provides that title to the
property purchased by Conrail is acquired not by the State, nor even MTA, but by
Owasco. Conrail, thus, cannot be said to purchase property as an agent of the
State or one of its agencies or instrumentalities. Further, the Agreement
provides that Conrail is to make purchases with its own funds and only
subsequently to be reimbursed therefor by the State. This procedure is consistent
with a finding that Conrail does not make its purchases as an agent of the State,
and therefore is not clothed with the latter's exemption under the Tax Law.
Section 1115(a) (15) and (16) of the Tax Law, not cited by Petitioner,
provide that purchases of personal property for use in improving or maintaining
the real property of an exempt organization wlll be exempt from the sales and use
taxes if the personal property is to become "an integral component part" of the
real property of the exempt organization. These provisions are not applicable in
the present case because the property to be improved and maintained by Conrail
under the Agreement is leased, not owned, by the State. This property, thus,
constitutes personal property of the State. Matter of Earl Hamilton Manor v.
Boyland, 4 N.Y. 2d 192. Conrail therefore cannot be held to be using personal
property to improve or maintain real property of an exempt organization, within
the meaning and intent of section 1115(a)(15) and (16) of the Tax Law.
Finally, Petitioner asserts that it derives its exempt status with respect
to sales and use taxes pursuant to section 1275 of the Public Authorities Law.
It is there provided, with respect to MTA (referred to as "the authority" in the
statutory provision), in relevant part, that "Without limiting the generality of
the following provisions of this section, property owned by the authority,
property leased by the authority and used for transportation purposes, and
property used for transportation purposes by or for the benefit of the authority
exclusively pursuant to the provisions of a joint service arrangement or of a
joint facilities agreement or trackage rights agreement shall all be exempt from
taxation and special ad valorem levies. The authority shall be required to pay
no fees, taxes or assessments, whether state or local, including but not limited

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TSB-H-81(74)S
Sales Tax
April 13, 1981

to fees, taxes or assessments on real estate, franchise taxes, sales taxes or
other excise taxes, upon any of its property, or upon the use thereof, or upon
its activities in the operation and maintenance of its facilities or any fares,
tolls, rentals, rates, charges or other fees, revenues or other income received
by the authority and the bonds of the authority and the income therefrom shall
at all times be exempt from taxation, except for gift and estate taxes and taxes
on transfers. This section shall constitute a covenant and agreement with the
holders of all bonds issued by the authority. The terms 'taxation' and 'special
ad valorem levies' shall have the same meanings as defined in section one hundred
two of the real property tax law and the term 'transportation purposes' shall
have the same meaning as used in titles two-a and two-b of article four of such
law."
The first sentence of the quoted material exempts from "taxation and
special ad valorem levies" property which is owned by or leased by MTA, and
property used for specified purposes. The terms "taxation" and "special ad
valorem levies" are explicitly stated to refer to real property taxation and not
to any tax imposed under the Tax Law. The second sentence of the quoted material
provides for an exemption from the payment of "sales taxes or other excise
taxes", but this exemption is made applicable to MTA and to no other entity.
Under section 1266.5 of the Public Authorities Law such exemption may also be
made applicable to subsidiary corporations of MTA. Inasmuch as Conrail is neither
agent nor subsidiary of MTA the exemption language of section 1275 of the Public
Authorities Law is not applicable thereto,
Accordingly, Petitioner is required to pay sales and use taxes on tangible
personal property purchased in connection with its operations performed pursuant
to the Agreement described above. It is also similarly subject to all applicable
excise taxes imposed under the Tax Law, based on the considerations set forth
above.

DATED: March 20,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau