The New York City Department of Finance has released a previously unpublished letter ruling in which it determined that a company that furnished office space to third parties, as well as office services for that space, was subject to the New York City unincorporated business tax (“UBT”). Finance Letter Ruling, FLR 13-4937/UBT (N.Y.C. Dep’t of Fin., Aug. 19, 2013).

Facts.  The ruling involves a limited liability company (“Company”) in the business of offering furnished office space for rent in New York City.  The Company rented space from various building owners, developed that space into office suites, and then rented out those office suites.  Each office suite shared a common reception area and had access to lounge and kitchen areas.  The rent paid by each office suite occupant included basic reception services and IT assistance, concierge services, cleaning and maintenance services, 24-hour lobby security services, and mail and package delivery.  The Company also offered other services to office suite occupants for an additional charge, including conference room usage, unlimited coffee, telephone service, wireless internet service, cable television, and use of the copying machines located in the common areas.

The Company entered into license agreements, rather than traditional leases, with the office suite occupants.  The agreements forbade occupants from installing any office equipment, telecommunications lines or connections, computer networking equipment, coffee machines, or other items of their own without the Company’s written consent.

The issue presented was whether the Company qualified for the exclusion from the UBT for holding, leasing, or managing real property.

Law.  The UBT is imposed “on the unincorporated business taxable income of every unincorporated business wholly or partly carried on within the city.”  Admin. Code § 11-503(a). An owner or lessee of real property, other than a dealer, “shall not be deemed engaged in an unincorporated business solely by reason of holding, leasing, or managing real property.” Admin. Code § 11-502(d).  The UBT law contains an important protection for owners of real property that allows them to provide certain incidental services at the premises without becoming subject to UBT.  Specifically, the conduct by the owner at the premises “of a trade, business, profession or occupation, including, but not limited to, a garage, restaurant, laundry or health club, shall be deemed to be an incident to the holding, leasing or managing of such real property, and shall not be deemed the conduct of an unincorporated business, if such trade, business, profession or occupation is conducted solely for the benefit of tenants at such real property, as an incidental service to such tenants.” Id.

Ruling.  The Department ruled that the Company was subject to the UBT, notwithstanding the incidental-services provision in the law, because many of the services being provided by the Company “go far beyond the incidental services contemplated by the statute.”  The Department found that the focus of the agreements was on the provision of office services by the Company, and noted that the Company identified itself as being in the business of providing “serviced accommodations” in the agreements themselves.  It noted that the Company marketed, in addition to the office space, a bundle of office services not generally incidental to the leasing or managing of real property, but necessary to the functioning of an office. Finally, the Company reserved the exclusive right to provide office services by prohibiting the occupant from installing any office, telecommunications, or computer equipment of its own without the Company’s consent, and by including a non-compete clause in the agreement prohibiting the occupants from competing with the Company’s business  of providing “serviced accommodations.”  Accordingly, the Department concluded that the Company was not leasing real property within the meaning of the exclusion from the UBT under Admin Code §11-502(d), but was providing an office service, which subjected the Company to the UBT.

Additional Insights

This ruling demonstrates that the protection afforded under the UBT law for certain incidental services provided by a landlord may be limited even where, as here, the incidental services provided are only made available to occupants of the real property.  The ruling does not address whether the office suite occupants are therefore not subject to the commercial rent tax because they are paying for an office service, not for the use and occupancy of premises.

We note that the letter ruling was one of four UBT letter rulings issued by the Department of Finance in 2013 and 2014 that were published on its website on June 12, 2014.  Six previously unpublished rulings involving the real property transfer tax, and two previously unpublished rulings involving the hotel room occupancy tax, were also recently published there.