For New York real estate operators and their tenants, navigating the exceptions to city and state sales tax provisions for certain services can seem like a waltz through a minefield. While it may seem that reason may not always be at play, there are some consistencies.
For example, sales tax is imposed on services relating to maintaining or repairing real property or tangible personal property, whether inside or outside of a building. Under this guideline, the following types of services are clearly taxable:
However, what starts off well and readily understandable then takes a sharp turn into much murkier waters. Despite the apparent simplicity with which the general rule may apply, there are certain types of services which are not so easily identified as either taxable or exempt for sales tax purposes.
The following will give you a reading on various taxable and exempt items, as well as some quirky exceptions to the rule:
Security and Detective Services. Alarm and protection systems, detective agency services, guard dogs services, security guards, and bonded courier services are taxable. But, there are exceptions. For example, if you are providing personnel, security or otherwise, to operate an elevator on an overtime basis when a tenant moves in or out, there is no sales tax.
Interior Cleaning and Maintenance. Janitorial services such as dusting, vacuuming, disinfecting, deodorizing, stripping, washing, waxing, and other similar activities are taxable. This is not the case when applying cleaning compounds or solvents to carpets or draperies.
Asbestos Removal. This essential service is subject to tax when maintaining, servicing, or repairing real property. However, if the service is part of a capital improvement — such as when asbestos insulation is removed in connection with replacing a boiler— then the service is exempt from sales tax.
Rubbish Removal. Hauling away garbage, including transportation charges, is subject to sales tax, unless this function is part of a capital improvement. Also exempt from sales tax is the removal of hazardous waste and debris if in conjunction with a capital improvement.
Elevator and Escalator Inspection. Typically, it is subject to sales tax. Not so, if the service is performed in connection with a capital improvement or government-mandated inspection for code compliance.
Utilities Provided Under a Lease. Separately metered electricity, steam, and gas are taxable. Overtime Heating, Ventilation and Air Conditioning (HVAC) services are not. New York State attempted to tax HVAC as a utility, but a New York State court struck down the state's position, stating there was no legislative intent to tax overtime HVAC and that it was already included as rent for New York City Commercial Rent Tax.
Water. If water is delivered through mains or pipes it is exempt. Purchases of bottled water and ice cubes are taxable.
Office Supplies. These are subject to tax except when used as promotional materials. This would include envelopes, labels, and paper. Promotional materials are defined as purchases where:
Computer Software. Purchases of “custom” software are exempt from tax while prewritten or “off the shelf” software is subject to sales tax. However, when taxable items and nontaxable items are billed as a lump sum, the entire amount is subject to sales tax.
Capital Improvements. The following canguide you in determining what services are exempt as capital improvements.
A capital improvement is an addition or alteration to real property, which:
The rules governing whether or not an item is a repair or capital improvement for sales tax purposes are different from the principles used for income tax purposes. This discrepancy makes it possible for an item to be a capital expenditure for income tax purposes, but a taxable repair for sales tax purposes.
The above is only a sample of the more commonly occurring situations andis not an all-inclusive list. In an age where governments are constantly looking for new sources of revenue, sales tax laws are, at best, unpredictable. Many of the services you provide must be carefully evaluated to determine whether or not they are taxable or exempt. When in doubt, your financial advisor can delve into the rules which are not always particularly clear.
Lester Rosenbaum is a principal in Berdon LLP’s State & Local Tax Group with more than 35 years of experience. As the firm’s specialist in sales and use tax, he works closely with many real estate organizations and professional service firms. Mr. Rosenbaum continuously monitors and analyzes developments in all state and local jurisdictions and advises clients and firm professionals on the implications.