Which water-damage restoration charges are taxable in New Jersey, and when can rebuilding qualify as an exempt capital improvement?

Plain-English summary

New Jersey generally taxed water-damage drying, extraction, repair, mold removal, and household-item restoration, while qualifying new construction could be an exempt capital improvement.

Work on buildings and other real property

Drying and extracting water from an existing building restored it to working condition, so the Division treated those charges as taxable real-property maintenance or repair services.

The result could differ when the work created new construction rather than merely repairing damage. The TAM gave these contrasts:

• installing new walls, siding, and a garage door while rebuilding a destroyed garage could be an exempt capital improvement;
• simply replacing shattered glass or fixing the existing garage door was a taxable repair;
• rebuilding a water- or sand-damaged deck was new construction and an exempt capital improvement; and
• repairing the existing deck produced taxable labor charges.

For exempt capital-improvement labor, the customer had to give the installer a properly completed Form ST-8.

The TAM warned that floor-covering installation, alarm or security-system installation, and certain landscaping services remained taxable even if they might otherwise look like capital improvements.

Mold work

Mold detection or inspection was not taxable because it was a non-enumerated service. Mold removal was taxable because it maintained or repaired real property.

Household goods

Restoration of furniture, decorative items, personal items, and other household goods was taxable as servicing tangible personal property. Bleaching, deodorizing, carpet cleaning, and sand removal were also taxable maintenance services.

What this means for you

Restoration contractors

Separate taxable drying, cleaning, repair, and personal-property work from qualifying new construction. Retain Form ST-8 when claiming the capital-improvement labor exemption.

Property owners and insurers

The tax result depends on the work actually performed, not simply on labeling the entire project “restoration.” Detailed scopes and invoices matter.

Mold-service providers

Inspection and removal had different outcomes in this TAM: inspection was non-taxable, while removal was taxable.

Common questions

Q: Was emergency water extraction from a building taxable?
A: Yes. The TAM treated drying and extraction as restoring the building to working condition.

Q: Was all post-damage rebuilding taxable?
A: No. Genuine new construction could be an exempt capital improvement, while repairs to existing property were taxable.

Q: What document supported exempt capital-improvement labor?
A: A properly completed Certificate of Exemption Capital Improvement, Form ST-8.

Q: Was mold inspection taxable?
A: No, but mold removal was taxable.

Q: Were damaged furniture and carpet-cleaning services taxable?
A: Yes. The TAM treated household-item restoration and the listed cleaning services as taxable.

Citations and references

• N.J.S.A. 54:32B-3(b)(4) — real-property maintenance, servicing, and repair
• N.J.S.A. 54:32B-3(b)(2) — services to tangible personal property and specified installations
• N.J.S.A. 54:32B-3(b)(11) — specified taxable services
• N.J.A.C. 18:24-5.16 — repair and maintenance services

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam2012-3.pdf

Original ruling text

Charges for Water Damage Restorative Services
TAM 2012-3 – Issued December 11, 2012
Tax: Sales and Use Tax
The Division has received several inquiries regarding the application of the New Jersey Sales and
Use Tax Act to charges for water restoration services.
REAL PROPERTY: STRUCTURES AND BUILDINGS
Charges for maintaining, servicing, and repairing real property are subject to tax. N.J.S.A. 54:32B3(b)(4). A repair service means a service that fixes problems with property to maintain the
property’s existing value and keep it in working condition. N.J.A.C. 18:24-5.16. A maintenance
service preserves the existing condition of property. N.J.A.C. 18:24-5.16.
Restoration work often includes the installation of tangible personal property to replace or
repair existing structures. Unless the installation of tangible personal property results in an
exempt capital improvement to real property, the installation of tangible personal property to
real property is also subject to tax. N.J.S.A. 54:32B-3(b)(4). A “capital improvement” occurs when
tangible personal property is permanently affixed to real property (land or buildings) and
becomes a permanent part of such property. To qualify as a capital improvement, the
installation must increase the capital value of the real property or significantly increase the
useful life of such property. If the work performed on the real property results in an exempt
capital improvement, the installer does not collect Sales Tax on the labor portion of the bill,
provided the customer issues the installer a properly completed Certificate of Exemption Capital
Improvement (Form ST-8).
In general, water damage restoration services (drying and extracting water) performed on
buildings are subject to tax pursuant to N.J.S.A. 54:32B-3(b)(4) since the building is being
restored to working condition. However, if the work consists of new construction, it is a capital
improvement. For example, charges for the installation of new walls, siding, and a garage door
are exempt capital improvements when rebuilding a garage destroyed by water damage.
However, if the garage is simply being repaired from the damage inflicted (i.e., replacing
shattered glass or fixing the garage door but not replacing it), the charges are taxable as a
repair. Rebuilding a deck that was damaged from the water and/or sand constitutes new
construction, thus this work is considered an exempt capital improvement to real property.
However, if the existing deck is simply repaired, the labor charges are subject to tax.
Note that the installations of floor covering and alarm/security systems, and certain landscaping
services are subject to tax. N.J.S.A. 54:32B-3(b)(2). Although these services may result in a capital
improvement to real property, they are subject to tax. N.J.S.A. 54:32B-3(b)(2); N.J.S.A. 54:32B3(b)(11).
Charges for mold detection or inspection are not subject to Sales Tax as they are nonenumerated services. However, mold removal services involve the maintenance or repair of real
property, which is subject to Sales Tax. N.J.S.A. 54:32B-3(b)(4).

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TANGIBLE PERSONAL PROPERTY: HOUSEHOLD ITEMS
Charges for installing, maintaining, servicing, and repairing tangible personal property are
subject to tax. N.J.S.A. 54:32B-3(b)(2).
Charges for water damage restoration services performed on household goods such as
furniture, decorative items, personal items, bric-a-brac, etc., are subject to Sales Tax as charges
for maintaining or servicing tangible personal property under N.J.S.A. 54:32B-3(b)(2). Charges for
bleaching, deodorizing and other cleaning services, including charges for carpet cleaning and
sand removal services, are taxable maintenance services. N.J.S.A. 54:32B-3(b)(4).
If you have any doubt whether the work to be performed constitutes a repair or an exempt
capital improvement, you should communicate with the Division of Taxation and describe in
detail such work. You may contact the Division’s Customer Service Center at (609) 292-6400 or
send an email to the Division at: [email protected].

Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law,
regulations, or Division policies. It is accurate on the date issued. Subsequent changes in the law
or regulations, judicial decisions or changes in Division policies could affect the validity of the
information presented in a TAM.

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