A New York State Administrative Law Judge held that the sale of security services by a vendor to a property manager that managed various apartment buildings for the New York City Housing Authority ("NYCHA") was exempt from sales tax both because the property manager was acting as an agent for NYCHA and because such purchases were sales for resale. Matter of Garrison Protective Services, Inc., DTA No. 826738 (N.Y.S. Div. of Tax App., July 6, 2017).

Facts. Garrison Protective Services ("Garrison") provided security guard services to Grenadier Realty Corporation ("Manager"), as well as to several other entities. Manager contracted with NYCHA to manage various apartment buildings located in New York City. The contract described Manager as an "independent contractor." Pursuant to the terms of the contract, Manager agreed to provide management services that included, among other things, rent collection, inspection and maintenance, and security services. Manager was expressly authorized by the contract to hire a private security firm to provide the security services. In addition, the contract between Manager and NYCHA required Manager to perform its duties under the contract in accordance with the directions of appropriate NYCHA personnel, and to use a request for proposals ("RFP") "to ensure the best possible price for the [NYCHA]" before procuring third-party services.

Garrison did not collect sales tax on its sale of security services to Manager because it understood that Manager was acting as an agent for NYCHA. Subsequently, the Department audited Garrison and assessed sales tax on its sale of security services to Manager, as well as its sales to certain other entities.

Law. Under New York law, the provision of security services is subject to sales and use tax. Tax Law 1105(c)(8). However, purchases made by New York State government agencies are exempt from tax. Tax Law 1116(a)(1). In addition, purchases made by any person for resale are also exempt from tax. Pursuant to New York State Department of Taxation and Finance Publication 765 (May 2005), a vendor may establish that a sale to a private entity is not taxable because that entity is acting as an agent for a New York State agency by procuring both an Exempt Purchase Certificate for an Agent of a New York Governmental Agency (Form ST-122) and a Certification of Agency Appointment by a New York Governmental Agency (Form DTF-122).

Decision. In this case, Garrison only obtained Form ST-122, but not Form DTF-122. Nevertheless, the ALJ held that the lack of both prescribed forms did not end the inquiry as to whether the sale was taxable, as nontaxability may be established through other evidence. As there was no dispute that direct purchases by NYCHA were not subject to sales tax, the ALJ focused his inquiry on whether Manager was acting as an "agent" for NYCHA.

Applying a commonly accepted definition of "agency" as a relationship whereby "one retains a degree of direction and control over another" (Garcia v. Herald Tribune Fresh Air Fund, Inc., 51 A.D.2d 897 (1st Dep't, 1976)), the ALJ found that an agency relationship existed because the record clearly established that NYCHA had a fiduciary relationship with Manager, and exercised a high degree of direction and control over Manager's actions. The ALJ rejected the Department's argument that because the contract stated that Manager was an "independent contractor," it could not also be an "agent," holding that under established case law a finding that a person is an independent contractor does not preclude a finding of an agency relationship.

The ALJ also rejected the Department's argument that even if Manager was acting as an agent for NYCHA in general, Manager's purchase of security services was still subject to tax because it was ancillary to the main purpose of the contract, and therefore outside the scope of the agency relationship. The ALJ held that as the contract expressly provided that Manager would provide security services, those services were integral to the contract and not ancillary to its performance.

Although the issue does not appear to have been raised by the parties, in addition to finding that the sale of security services was exempt because Manager was acting as an agent of NYCHA, the ALJ also held that the sale was not taxable as a sale for resale. The ALJ found that the security services were resold as such, and that it was NYCHA, an exempt government agency, and not Manager that was the ultimate consumer of the security services.

Additional Insights

Although the agency issue seems straightforward, the ALJ's additional holding that the sale was also nontaxable as a sale for resale -- an issue not raised by the parties -- serves as a reminder that an ALJ has the ability to rule on legal issues that were not raised by either party. This rule also applies to the Tax Appeals Tribunal, which may rule on legal issues that were not raised by the parties or even raised in the proceeding before the ALJ, as discussed immediately below.