In a recent New York sales and use tax advisory opinion, TSB-A-24(3)S, the New York Department of Taxation and Finance (DTF) addressed whether certain waste removal services are subject to sales tax. The Petitioner sought clarification on two key issues: whether its food waste removal services are taxable and whether its purchase of roll-off dumpster services is subject to tax. The DTF concluded that the food waste removal services provided by the Petitioner and the dumpster services it purchases are subject to sales tax.
This determination has important implications for businesses involved in waste management and those utilizing such services in New York State. In this blog post, we will delve into the details of the DTF's advisory opinion and discuss what this means for businesses operating in this sector.
New York Waste Removal Services – What Happened?
The Petitioner, a waste removal company, primarily assists grocery stores, schools, manufacturers, restaurants, and third-party contractors in managing their organic waste. The company uses specialized trucks to collect its clients' Source-Separated Organics—food scraps. Customers are provided with totes that are regularly emptied into the dump bodies of the Petitioner’s trucks.
The collected organic material is then transported to permitted composting or anaerobic digestion facilities, which the Petitioner does not own or operate. The food waste is converted into high-quality soil amendments through composting or transformed into fertilizer via anaerobic digestion. Clients are charged a rate per tote or a flat monthly fee for this environmentally friendly service. The Petitioner offers this service directly to consumers or as a subcontractor for other companies.
In addition to regular food waste collection, the Petitioner also handles transporting and disposing of packaged organics from customers' distribution warehouses. For this service, the company typically hires a third-party transport service to pick up the materials and deliver them to a digester or compost facility. Once there, the organics are de-packaged and disposed of similarly to other food scraps.
Recyclable materials such as pallets, cardboard, and plastics are recovered and either recycled or upcycled. The Petitioner charges a freight rate and a per-ton disposal rate for this service, with costs varying based on the complexity of the de-packaging process. This service is also provided either directly to customers or as a subcontractor.
The company occasionally undertakes special projects to collect materials that cannot be processed at compost or anaerobic digestion facilities, like organics unsuitable for de-packaging machines. While the Petitioner may de-package smaller quantities, this waste is usually delivered to a landfill for solidification. Clients are billed based on a freight rate and disposal cost for this specialized service.
In most scenarios, the Petitioner provides services directly and invoices the customer accordingly. However, there are instances where the company acts as a subcontractor for a third party that arranges the removal on behalf of the customer. In such cases, the Petitioner invoices the third party for the services.
The Petitioner inquired about its tax obligations concerning purchasing a roll-off dumpster service. The company hires this service to collect recyclables or trash from food waste delivered to the anaerobic digester and de-packaging facilities. The dumpster service delivers a dumpster to the facility, where its employees load it with recyclables or trash.
Once filled, the dumpster service hauls the materials to a landfill or recycling facility. The fees for this service are either absorbed into the Petitioner’s operational costs or sent to the customer for reimbursement. Notably, the customer never pays for the dumpster service directly.
The DTF’s Analysis
The DTF examined whether the Petitioner's food waste removal services and its purchase of roll-off dumpster services are subject to sales tax under New York Tax Law.
Under Tax Law § 1105(c)(5), sales tax is imposed on receipts from services related to "maintaining, servicing or repairing real property," which includes trash and garbage removal services as specified in 20 NYCRR § 527.7(a)(1). The primary consideration is whether the Petitioner's activities constitute taxable trash removal or non-taxable transportation services.
The DTF first assessed whether the food waste handled by the Petitioner is considered "trash" or if it holds any value to either the Petitioner or its customers. Citing cases like Matter of Marisol, Inc. and Matter of Seneca Foods Corp., the DTF noted that the service might be classified as non-taxable transportation if the waste has value to the parties involved.
However, in this situation, the customers pay the Petitioner to remove the food waste, which the DTF likened to traditional trash disposal services. They determined that the Petitioner also does not gain value from the waste, as the costs for processing and disposal often match or exceed standard landfill rates.
Since neither the Petitioner nor the customers derive a financial benefit from the food waste, the DTF concluded that the waste is indeed "trash" for tax purposes. Third parties' eventual conversion of the food scraps into valuable products like fertilizer or compost does not influence this classification. Therefore, the DTF determined the Petitioner's food waste removal services are subject to sales tax.
The DTF further clarified that the Petitioner's services are integrated trash removal operations where transportation and processing are integral components. All charges associated with these services are subject to sales tax regardless of whether they are itemized separately on invoices. This stance is supported by the Matter of Penfold v. State Tax Commission decision, which emphasizes that separating charges does not separate taxable services from taxation.
The DTF determined that the roll-off dumpster services purchased by the Petitioner are also subject to sales tax. The Petitioner uses these dumpster services to collect recyclables and trash from its processing facility operations. Since the Petitioner is the end consumer of the dumpster services and utilizes them to provide taxable trash removal services, it cannot claim a resale exemption. The precedent set in the Matter of XO Communications v. Tax Appeals Tribunal supports this view, highlighting that services consumed in the provision of taxable services are taxable.
Finally, when the Petitioner acts as a subcontractor for a third party arranging waste removal on behalf of a customer, it is still obligated to collect and remit sales tax unless it receives a properly completed exemption certificate from the third-party contractor. According to 20 NYCRR 532.4(b)(2), the Petitioner must obtain this certificate within 90 days after rendering the service to be relieved from the responsibility of collecting sales tax.
Potential New York Sales and Use Tax Challenges
This advisory option is questionable on several grounds. The DTF’s determination rests on classifying the food waste as "trash" and the assertion that the services provided are integrated, taxable trash removal services.
The DTF concluded that because neither the Petitioner nor its customers receive compensation or any direct pecuniary benefit from the waste, it constitutes trash. However, the broader context tells a different story. The organic material collected by the Petitioner is eventually converted into high-value products like fertilizer and compost. While the customers may pay for its removal, the fact remains that this waste contributes to the creation of valuable resources. This could be seen as an indirect benefit to both the customer, who avoids landfill use, and the Petitioner, who facilitates a sustainable and environmentally friendly process.
Additionally, the Petitioner’s services go beyond simple trash removal. The transportation of organic material to specialized facilities, where it is transformed into useful products, resembles resource recovery or recycling services more closely than traditional garbage disposal. This distinction is critical, as certain recycling and transportation services are exempt from sales tax.
The DTF’s decision also imposes sales tax on the roll-off dumpster services that the Petitioner purchases for its use. While the DTF concluded that the Petitioner cannot claim a resale exemption on these services, the dumpster services are an essential component of the broader service package. If the Petitioner relies on the dumpster services to fulfill its contractual obligations, an argument could be made that these services should qualify for a resale exemption.
Conclusion
The complex web of sales tax regulations for New York business can be challenging. With constantly evolving rules and numerous exceptions, even the most diligent professionals may need to be more compliant. This complexity significantly increases the likelihood of a New York sales and use tax audit.
Contact Sales Tax Helper LLC and speak with one of our New York attorneys today. We will learn how we can support your business's sales and use tax needs. With our professional guidance, you can focus on growing your business with confidence, knowing that your New York sales and use tax obligations are in expert hands. Reach out to us at our New York office and take the first step towards a stress-free tax experience.