If only the act of building a development—and doling out for the attendant fees and taxes—was as easy as pairing brick with mortar. Indeed, for real estate developers in New York, materials purchased, not to mention the land on which they build, is subject to a variety of tariffs, not least of all sales tax, which are increasingly becoming a costly irritant for owners. Sean Kanousis, a principal at Berdon LLP’s State and Local Tax Group, spoke to The Commercial Observer about how state officials are increasingly targeting real estate developers for sales tax collections and what those industry leaders can do to avoid those pricey measures as the laws continue to change.
The Commercial Observer: Would you say New York has been more aggressively targeting real estate developers and owners with regard to collecting sales tax?
Mr. Kanousis: Yes, I would say increasingly aggressive—I think because the psychology now is that the state needs a lot more money, and sales taxes are a huge benefactor for the state. With regard to developers, it largely depends, of course, on exactly how the transaction is structured.
How are transactions like these usually structured?
In sales tax, every piece of tangible personal property is subject to sales tax unless there is an applicable exemption. But only certain enumerated services are subject to tax. So [with] a service being performed, the presumption would be that it’s not subject to tax unless it is specifically enumerated. With regard to construction, as long as something is considered a capital improvement—which is a term that is generally considered permanent to real property—then that labor piece will not be subject to tax. The only thing that could be subject to tax would be the tangible personal property.
What pitfalls typically ensnare most developers?
What happens a lot of the time is developers want certain specific materials, or they like dealing with certain specific vendors, and/or the vendors they want to purchase from often are overseas. And that’s where developers really get in trouble, because they make the purchase of the materials themselves. Now, even though the contractor is doing a build-out of a condo project or even a hotel—this most recently happened for me when a hotel was built in ground-up construction. If people know anything at all, they think, “Well, this is ground-up construction. It’s all a capital improvement, there’s no sales tax.”
But what they forget and leave out as developers is that they are the purchaser of tangible personal property in that instance. Even if the ultimate project is going to be considered a capital improvement, because they then purchase the materials, they are on the hook for all of that tax. And since they purchased from either out-of-state or overseas [vendors], clearly no sales tax was charged. If they don’t add that into their potential purchase price, which a lot of people don’t, then they find themselves very, very exposed, and it gets very expensive very quickly.
How can developers take advantage of sales tax laws?
As a general rule, if you build something on real property that’s owned by New York State or an agency thereof, there are some sales tax exemptions that will apply as long as it’s materials that are sold directly to a contractor and become an integral component part of the building. A lot of people just understand that they’re building something on a [governmental] organization’s land, and they don’t realize that in order for that exemption to work, the materials—tangible personal property— have to be sold to the contractor, and then have to be an integral part of the real property. So people miss those last two parts.