Magazine article The CPA Journal

Sales Tax on Rent-Inclusion Leases

Magazine article The CPA Journal

Sales Tax on Rent-Inclusion Leases

Article excerpt

New York State Tax Law Sec. 1105(b) imposes a sales tax on the receipt from every sale, other than sales for resale of gas, electricity, refrigeration, and steam and gas, electric, refrigeration and steam service of whatever nature.

The regulations further state that although this tax is generally known as the consumer's utility tax, the intention of the statute is to tax the enumerated sales and services whether or not rendered by a company subject to regulation as a utility company. The words "whatever nature" indicate that a broad construction is to be given the terms describing the items taxed. The inclusion of the word "service" indicates an intent to tax, under this provision, items that are furnished as a continuous supply while the vendor-vendee relationship exists (Reg. 527.2(a)(2)).

Therefore, a sale of electricity or steam by a landlord to tenants for a separately stated fee is taxable. The New York State Department of Taxation and Finance is attempting to take this tax one step further by imposing the sales tax on buildings of which electric charges are included in the base rent or escalation charges paid by tenants. For example, a building leases a floor to Tenant A for $20 per square foot. Included in this rental charge is a charge for electricity of $2 per square foot. The state's position is that the $2 rental charge is a sale of utility services and is thus subject to sales tax. If the building has already paid sales tax to the utility (e.g., Con Edison), the tax would only be on the "profit" made by the building.

Many of New York City's largest buildings have been subject to a sales tax audit on these issues. This type of audit is quite subjective because in many cases, it is difficult to compute whether a building had made a profit on electric charges. For instance, an allocation must be computed between tenant usage, and common area usage which is made up of such items as hallways, bathrooms, elevators, and air conditioning. …

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