New York State Department of Taxation and Finance
                                                                                TSB-M-99(2)S
Taxpayer Services Division
                                                                                Sales Tax
Technical Services Bureau                                                       March 29, 1999

                          Materialmen - Pay When Paid          

     Governor George E. Pataki has signed into law a provision allowing certain materialmen (defined
below) to elect to remit sales tax when they actually receive payment on sales of qualifying building materials
and certain services performed on such materials from contractors. However, in all cases, the tax must be
remitted within one year of the date of sale. (See Tax Law, section 1132(a)(2)).

     Generally, sales tax is required to be remitted to the Tax Department  with the sales tax return filed for
the period in which the sale occurs, without regard to when the vendor actually receives payment from the
customer.  A sale occurs when property is delivered or a service is performed. Subject to the conditions noted
below, qualifying materialmen  may elect to postpone remitting the sales tax until they receive payment (pay-
when-paid) on qualifying sales to contractors.  A qualifying sale is a sale of  building materials (defined
below), or  services to such building materials, for use in improving real property, provided the sale is made
to a contractor on credit granted by the materialmen.

     When a materialman who has made the election receives payment of the purchase price or any portion
of the purchase price on a qualifying sale from the contractor, the materialman must collect the sales tax due
on the amount of the payment and remit it with the report for that period. 

     One year from the date of sale, the materialman must remit any remaining balance of  sales tax due on
the full purchase price even if the materialman has not been paid for the materials or services by the contractor
or collected sales tax  from the contractor.  The sales tax  must be remitted with the sales and use tax return
for the period that includes the date which is one year after the date of sale.

Definitions for Pay-When-Paid Option

     For purposes of this provision, the term contractor includes a contractor, a subcontractor, a repairman,
and a property owner acting as his or her own contractor.

     The term materialman is limited to any seller of building materials and related services who, by June
first of any year:

                                                                                1
     •    was a materialman within the meaning of section 2 of the Lien Law during any two
          sales tax quarters within the most recent four consecutive sales tax quarters; 
     •    was primarily engaged (more than 50% of sales) in selling building materials to
          contractors for the improvement of real property;
     •    was authorized by  the Lien Law to file a mechanics lien upon such real property and
          improvement; and
     •    files an application by June 1 of any year electing to remit sales and use tax under the
          pay-when-paid rules for the twelve month period beginning June 1 and ending the
          following May 31.  The application must be filed annually.
           
     The term building materials is limited to building materials which are  incorporated  into real property
as a capital improvement or repair, and to tools and other items that are used to improve real property.

         1
          In general, the Lien Law defines a “materialman” as any person who furnishes material or the use of
machinery, tools, or equipment, or compressed gases for welding or cutting, or fuel or lubricants for the operation of
machinery or motor vehicles,  to an owner, contractor or subcontractor, for the improvement of real property.

                                                                      TSB-M-99(2)S
                                                                      Sales Tax
                                                                      March 29, 1999

Annual Application for Materialman Pay-When-Paid Option

      Vendors electing to use the  pay-when-paid option should file a Pay-When-Paid   application by  June
1 of each  year.  

Application of Payments Received on Account

      Payments received on account from a contractor should be applied in accordance with the accounting
method regularly used by the materialman.

Selling or Pledging Accounts Receivable

      If a materialman sells, assigns or pledges as collateral only accounts receivable from qualifying sales,
sales tax will be due on the amount of the qualifying sales and must be reported on and remitted with the sales
tax return filed for the period in which the sale, assignment or pledge of the receivable occurs.

      However, if a  materialman  pledges as collateral a combination of accounts receivable from qualifying
sales and any other assets such as accounts receivable from non-qualifying sales, inventory, equipment or
securities, sales tax will not be due until the materialman actually  receives payment from the contractor or
one year after the date of sale, whichever is earlier.
 
Uncollectible Accounts

      If a receivable from a qualifying sale is ascertained to be uncollectible (worthless, as determined for
federal income tax purposes), either in whole or in part, the materialman may apply for a refund or credit of
the tax paid on the portion of the receivable ascertained to be uncollectible.  The materialman must apply for
the credit or refund within three years from the date the tax was payable by the materialman to the New York
State Department of Taxation and Finance, applying the pay-when-paid rules described herein.  A credit is
claimed on a quarterly sales tax return and a refund is claimed by filing form AU-11.  

Recordkeeping

      In addition to the general record keeping requirements for all sales tax vendors, a materialman using
the pay-when-paid option is required to keep the following records with respect to each sale of building
materials or services to a contractor:

      (1) the date of the sale;
      (2) proof (such as an invoice) that the sale is a sale of building materials or related services as
           described herein;
      (3) the amount of credit, if any, extended by the materialman to the contractor for the sale;
      (4) the payment terms; and
      (5) the date or dates on which the purchase price is paid, in part or whole, and the amount of each
           payment or repayment. 

                                                      -2-

                                          TSB-M-99(2)S
                                          Sales Tax
                                          March 29, 1999

Filing of Returns and Payment of Taxes

Qualifying sales are to be reported as gross sales on the return covering the period in which the sale
is made.  Sales which will be reported by a materialman using the pay-when-paid option, must not be shown
as taxable sales on the sales and use tax return for the period in which the sale is made (except when a part
payment is received during that period).  Instead, the receipts from each payment are to be reported as taxable
sales on the sales and use tax return submitted for the period in which the payment is received. However, the
sales tax must be computed using the combined state and local sales tax rate in effect for the applicable locality
at the time the sale occurs and not when payment is received. In the case of a sales tax rate change in the
applicable locality since the time of the sale, the materialman will have to manually enter the correct name of
the taxing jurisdiction, the jurisdiction code that was in effect when the sale was made, the amount received
for the taxable sale, the tax rate and the sales tax due on one of the blank lines, beneath the taxing jurisdiction
listings, provided on page 3 of the sales tax return being filed.  This method must be employed to report  any
payments on account received from a contractor when the pay-when-paid option is being utilized by the
materialman. If the correct jurisdiction code is not known, the materialman should call the Business Tax
Information Center at 1 800 972-1233. 

Example 1:

A building materials supplier qualifies as a materialman as of June 1 and chooses the pay-
when-paid option.

In July of the same year, the supplier sells $30,000 of building materials to a contractor who
is building a house.  The supplier delivers the material to the job site in XYZ County.  The
supplier  bills the contractor $32,400 ($30,000 for materials plus $2,400 for 8% (4% state and
4% local (XYZ County) sales tax).   The agreement between the contractor and the supplier
is that the contractor will pay the bill when the house is sold.  The house is sold in November
of the same year and the contractor pays the supplier the total amount owed of $32,400. 

The supplier files sales and use tax returns quarterly. The supplier reflects the $30,000 sale of
building materials as a gross sale, but not as a taxable sale, on its return for the quarter ended
August 31. Because payment is received in November,  the sale will be reported as a taxable
sale by using the appropriate line for XYZ County on the sales and use tax return filed for the
period September 1 through November 30.

Example 2:

Assume the same facts as stated in Example 1, except that the XYZ local sales tax rate was
reduced to 3 ½% effective September 1.

As in Example 1, the supplier reflects the $30,000 sale of building materials as a gross sale,
but not as a taxable sale, on its return for the quarter ended August 31.  Because payment is
received in November, the supplier will report the sale as a taxable sale on the sales and use
tax return filed for the period September 1 through November 30.  However, since the sale was
made when the sales tax rate in XYZ County was at 8%, the supplier will not report the sale

                                       -3-

                                                                         TSB-M-99(2)S
                                                                         Sales Tax
                                                                         March 29, 1999

 on  the 7 ½% line provided for XYZ County.  Instead, on one of the blank lines provided on
 page 3, beneath the last listing of taxing jurisdictions, the supplier will manually enter XYZ
 County, the jurisdiction code for XYZ County in effect at the time of the sale,  the taxable sale
 of $30,000, the tax rate at the time of the sale of 8%,  and the sales  tax of $2,400.

 Example 3:

 In February, a building materials supplier located in Schenectady County sells $10,000 of
 materials to a contractor.  The contractor requests delivery of the materials to a job site in
 Albany County.  The building materials supplier bills the contractor $10,800 ($10,000 for
 materials plus $800 for 4% state and 4%local (Albany County) sales tax).   The contractor
 makes a payment of $2,700 each  month during March, April, May, and June.

 The building materials supplier files sales and use tax turns quarterly.

 As of June 1 of the previous year, the building materials supplier qualified as a materialman
 and for sales tax reporting purposes chose the pay-when-paid option.  Accordingly, the total
 sale of $10,000 is reported as a gross sale, but not as a taxable sale, on the supplier’s return for
 the period December - February.  The supplier will report $7,500.00 as a taxable sale and
 $600.00 as sales tax on the Albany County line of the supplier’s quarterly sales and use tax
 return for the period March - May.

 The final payment of $2,700.00 is to be reported as a taxable sale of $2,500.00 and sales tax
 of $200.00 on the Albany County line of the quarterly sales and use tax return for the period
 June - August. 

 Example 4:

 Assume the same facts as in Example 3 with the exception that the building materials supplier
 files sales and use tax returns part-quarterly (monthly).

 A taxable sale of $2,500.00 and sales tax of $200.00 is required to be reported on each  part-
 quarterly (monthly) return filed for the months of March, April, May and June.
 
Cash Sales and Sales to Other Than Contractors

 Receipts from cash sales, third party credit cards, and so forth, do not qualify for the pay-when-paid
option.  Sales tax must be collected on these receipts at the time of the sale,  and remitted with the sales and
use tax return filed for the period in which the sale occurs.

Effective Date

 The pay-when-paid amendment to the Tax Law applies to qualifying sales made and uses occurring
on or after June 1, 1999, including those made or occurring under a contract entered into prior to June 1, 1999.

 (See Tax Law, section 1132(a)(2)).

                                              -4-