The Appellate Division, Third Department has affirmed the decision of the State Tax Appeals Tribunal, holding that certain pre- and post-remediation environmental testing and monitoring services related to petroleum spills are subject to New York State and local sales tax. Matter of Exxon Mobil Corp., 2015 N.Y. Slip Op. 01840 (App. Div. 3d Dep’t, Mar. 5, 2015). At issue was whether the services related to “maintaining, servicing and repairing” real property or land.

Exxon Mobil owned and operated retail gas stations in New York. Under New York law and regulations, if a petroleum discharge was discovered at one of the properties, Exxon Mobil was required to comply with New York State Department of Environmental Conservation (“DEC”) rules for the investigation, cleanup, and removal of the petroleum discharge at the site in question. The required process consisted of three general steps: (1) the performance of an environmental investigation to determine the adverse effects on adjacent properties and whether remediation of the site was required; (2) remediation of the property, if required; and (3) post-remediation sampling, testing, and monitoring of the site for a period of time. In most cases, Exxon Mobil hired the same consultant to investigate, remediate, and monitor the site post-remediation.

Exxon Mobil did not pay sales tax on charges for testing and monitoring services that were either (i) performed as part of the investigation to determine whether any remediation was necessary (whether or not remediation was ultimately deemed to be necessary); or (ii) performed after remediation was completed. It did pay sales tax on the payments for the remediation of the property itself. Exxon Mobil disputed the imposition of sales tax on the monitoring and testing services, arguing that those services did not alter the condition of the property, and that the testing and monitoring were separate and distinct from the actual remediation services.

Tax Law § 1105(c)(5) imposes sales tax on “[m]aintaining, servicing or repairing real property.” The sales tax regulations define “[m]aintaining, servicing or repairing” as covering “all activities that relate to keeping real property in a condition of fitness, efficiency, readiness or safety or restoring it to such condition.” 20 NYCRR 527.7(a)(1).

The Tribunal held that monitoring and testing services, whether performed before or after remediation work, if any, would be taxable as standalone services because they were necessary for the properties to be in compliance with DEC clean up procedures, and therefore fell under the regulatory definition of keeping property “in a condition of fitness, efficiency, readiness or safety.” The Third Department upheld the Tribunal decision, finding that there was “nothing irrational” in the Tribunal’s determination that “the monitoring and testing services at issue constituted an ‘integral part of the’ taxable remediation efforts, even if they were billed separately.” As a result, the Third Department concluded, as did the Tribunal, that the monitoring and testing services were taxable services under Tax Law § 1105(c)(5) because they were “activities that relate to keep real property in a condition of fitness, efficiency, readiness or safety.”

Additional Insights

Under the Tribunal’s holding, which has now been affirmed by the Appellate Division, environmental monitoring and testing services in connection with the actual or potential hazardous contamination of real property are subject to sales tax, regardless of whether they are performed pursuant to a separate contract and separately billed, and regardless of whether any remediation work is ultimately performed. It remains to be seen whether Exxon Mobil will seek leave to appeal to the Court of Appeals.