A recent Advisory Opinion holds that compensation paid by an employer to an employee for otherwise taxable building cleaning and maintenance services is not subject to New York State and local sales tax. Advisory Opinion, TSB-A-13(2) S (N.Y.S. Dep’t of Taxation & Fin., Jan. 8, 2013). The ruling reaffirms the Department’s policy of not imposing sales tax when building owners properly structure agency relationships with managing agents.
New York State and local sales tax is imposed on receipts from the sale of building cleaning and maintenance services. Tax Law § 1105(c)(5). However, wages, salaries, and other compensation paid by an employer to an employee for performing those services are excluded from sales tax. 20 NYCRR 527.7(c)(2) (“employee compensation exclusion”). Owners of office buildings in New York typically hire independent managing agents to perform building and maintenance services. The managing agents receive management fees, which in part cover the salaries of the maintenance workers hired by the managing agent.
For sales tax purposes, the critical issue for determining whether the employee compensation exclusion applies is whether the maintenance workers are employees of the building owner (in which case their compensation is not subject to tax) or employees of the managing agent (in which case the exclusion does not apply). The distinction between the provision of cleaning and maintenance services rendered by employees for their employers, and those same services rendered by third parties to their customers, is not always clear.
In light of this uncertainty, the Department previously ruled that the employee compensation exclusion applied when the building owner retains a managing agent to hire the employees, who work under the direction, supervision, and control of the property owner, even though they are nominally paid by the agent. In such cases, the employees are considered the employees of the building owner and no sales tax is due on the payments made to the managing agent for providing what is, in effect, a payrolltype service. See Building Owners and Managers Association of Greater New York, Advisory Opinion, TSB-A-93(52)S (N.Y.S. Dep’t of Taxation & Fin., Oct. 4, 1993).
The recent Advisory Opinion involves managing agents that manage the performance of interior cleaning and janitorial services for owners of office buildings and, through a separate entity, also manage the performance of maintenance and engineering services for the owners. The managing agents and building owners enter into management agreements pursuant to which the managing agents hire and supervise workers on behalf of the owners. Workers are subject to the building owner’s “ultimate direction and control” and must perform the services under work rules and practices prescribed by the owners.
Separate control agreements and payroll services agreements provide that the managing agent “shall act for and in the name of the owner, as owner’s Agent” and that “[a]ll persons providing the [cleaning and maintenance] services shall perform such services on behalf of owner and under owner’s ultimate direction and control, subject to the supervision of [the managing agent] as the representative of the owner.” Also under these agreements, the building owner indemnifies the managing agent for claims related to the workers and must carry adequate liability insurance and workers’ compensation coverage. However, the managing agent is permitted to obtain insurance policies in its own name as agent and for the benefit of the building owner, can issue W-2s to the workers, and can establish a bank account in the building owner’s name with the agent as signatory solely for payroll processing purposes.
The Department reviewed the agreements and concluded they are consistent with the existence of an agency relationship between the managing agent and the building owner, and do not make the managing agents independent contractors for this purpose. Thus, the maintenance workers are considered the employees of the building owners, and the owners’ payments to the managing agents for the wages and salaries paid to those maintenance employees to perform cleaning and maintenance services are not subject to sales tax.
The Advisory Opinion reaffirms the Department’s long-standing (and prudent) policy in this area of disregarding formal labels and considering the substance of the employer-employee relationship. This is particularly welcome news with respect to the sales tax, where the taxability of a transaction is often driven by its form rather than its substance. If management agreements between building owners and agents adhere to the guidelines set out in TSB-A-93(52)S —as they did here — the Department will treat the managing agent as the building owner’s agent, and the maintenance workers will be considered employees of the owner for purposes of the employee compensation exclusion. It is noteworthy that the Department looks to the “ultimate” direction and control exercised by the building owner, and not to the day-to-day supervision carried out by the managing agent, in reaching its conclusion.