Is the first-time sealcoating of newly installed asphalt pavement, applied months after the paving job, part of the original capital improvement (and therefore exempt from sales tax) or a separate taxable repair/maintenance service?

Plain-English summary

Cardwell Construction Co., a general contractor specializing in residential and commercial asphalt paving of driveways and parking lots, finishes its paving jobs by "sealcoating" the fresh asphalt with an industrial-grade sealer. New asphalt has to cure for a minimum of six months before it can be sealed, and because sealcoating needs relatively warm weather, Cardwell typically performs it six to ten months after the original paving — as a separate follow-up visit, billed separately, not at the same time as the paving itself. Cardwell's paving warranty is extended an extra year if Cardwell (or the property owner) applies the recommended sealer, but is voided immediately if another contractor does the sealing. Cardwell argued the paving job isn't truly "complete" until this initial sealcoating happens, and asked whether the sealcoating itself counts as part of the original capital improvement (and so escapes sales tax) or is a separate taxable service.

New York taxes services like installing, maintaining, or repairing tangible personal property or real property — but carves out an exception for work that results in a "capital improvement": an addition/alteration that substantially adds value or prolongs useful life, becomes permanently part of the real property (removal would cause material damage), and is intended as permanent. The tax treatment of a service turns on its end result: if the end result is a capital improvement, the labor charge isn't taxed (though the contractor still pays tax on its own materials as the ultimate consumer); if the end result is just repair or maintenance, the labor charge is taxable.

Drawing an analogy to an earlier ruling on painting (painting new construction is a capital improvement; painting existing structures is taxable maintenance), the Department treated properly-timed sealcoating the same way: where a contractor can document that its sealcoating directly follows its own installation of asphalt that was itself a genuine capital improvement, and the sealcoating happens within twelve months of that installation, the sealcoating is treated as part of the same capital-improvement project and isn't taxed — but the contractor needs a completed Certificate of Capital Improvement (Form ST-124) and recordkeeping tying the sealcoating invoice back to the original paving invoice and certificate. Sealcoating that doesn't meet these conditions — because the underlying asphalt job was only a partial-resurfacing repair (not a capital improvement to begin with), or the sealcoating comes from a different contractor, or falls outside the twelve-month window — is a separately taxable repair/maintenance service.

What this means for you

Paving contractors offering delayed sealcoating

Bill and document your delayed sealcoating so it's traceable to the original capital-improvement paving job — keep the Certificate of Capital Improvement and cross-reference invoices, and complete the sealcoating within twelve months of installation to preserve the exemption.

Contractors performing partial repairs or resurfacing

Not all asphalt work is a capital improvement — patching or partially resurfacing an existing lot is ordinary taxable repair/maintenance, and any sealcoating applied to that kind of work is taxable too, regardless of timing.

Accountants and tax professionals

This opinion extends the painting-analogy framework (new construction = capital improvement; existing structure = taxable maintenance) to sealcoating, and adds a concrete twelve-month window as the evidentiary anchor for tying a follow-up service back to an original capital-improvement job.

Common questions

Q: Does sealcoating automatically qualify for the same tax treatment as the paving job it follows?
A: Only if it's the contractor's own initial sealcoating of asphalt that was genuinely a capital improvement, performed within twelve months of the paving, and properly documented with a Certificate of Capital Improvement.

Q: What if a different contractor does the sealcoating later?
A: The opinion doesn't extend the exemption to sealcoating performed by someone other than the original paving contractor under these facts — it ties the exemption to the same contractor completing a continuous capital-improvement project.

Q: Does the contractor ever pay tax even on an exempt capital-improvement job?
A: Yes — a contractor performing a capital improvement still pays sales or use tax on its own purchases of materials (like the sealer itself), since it's the final consumer of those materials; only the labor charge to the customer is exempt.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) (capital improvement definition)
• Tax Law § 1105(c)(3)(iii) (capital-improvement installation exception); § 1105(c)(5) (maintenance vs. capital improvement)
• Tax Law § 1115(a)(15), (16) (contractor purchases for exempt organizations/farm real property)
• 20 NYCRR § 527.7(a), (b) (capital improvement; end-result test)
• 20 NYCRR § 541.3(d) (contracts with exempt organizations); § 541.5(b) (capital improvement contracts; certificates)
• TSB-M-81(9)S (Records Required to Be Kept by Sales Tax Vendors, July 15, 1981)

Prior rulings referenced:

• Sullivan Humes Painting, TSB-A-87(31)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(10)S
Sales Tax
March 5, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020104B

On January 4, 2002, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Cardwell Construction Co., Inc., 955 Buffalo Road, Rochester, New York, 14624. Petitioner,
Cardwell Construction Co., Inc., provided additional information pertaining to the petition on January 23,
2002.
The issue raised by Petitioner is whether the first-time sealcoating of new pavement qualifies as a
capital improvement to real property for sales tax purposes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a general contractor specializing in residential and commercial asphalt paving of
driveways and parking lots. Petitioner finishes its asphalt paving projects by “sealcoating” the asphalt
pavement with an industrial grade of sealer which differs from products purchased at retail outlets such as
hardware stores.
Prior to the initial sealcoating process, the asphalt must be allowed to cure for a minimum period
of six months. Since the sealcoating must be done in relatively warm weather, it is performed on a seasonal
basis, generally from six to ten months after the asphalt is applied. Petitioner does not bill the customer for
the sealcoating at the time the customer is billed for the paving but contacts each of its customers after an
appropriate amount of time has elapsed to have the sealcoating done. Petitioner maintains that the paving
is not complete until such time that the asphalt has cured for the minimum period (six months) and has
received an initial coating of sealer. Petitioner’s one year warranty on the paving job is extended by an
additional year where Petitioner or the property owner applies the type of sealer recommended by Petitioner.
Where another contractor applies sealer, the warranty is immediately voided.
Applicable Law and Regulations
Section 1101(b)(9)(i) of the Tax Law defines the term capital improvement as:
An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably prolongs the
useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real property
so that removal would cause material damage to the property or article itself; and

-2­
TSB-A-03(10)S
Sales Tax
March 5, 2003
(C) Is intended to become a permanent installation.

Section 1105 of the Tax Law provides, in part:
Imposition of sales tax - - . . . there is hereby imposed and there shall be paid a tax
. . . upon:
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property . . . or maintaining, servicing or repairing
tangible personal property . . . except:
*

*

*

(iii) for installing property which, when installed, will constitute an addition or
capital improvement to real property, property or land, as the terms real property, property
or land are defined in the real property tax law as such term capital improvement is defined
in paragraph nine of subdivision (b) of section eleven hundred one of this chapter. . .
*

*

*

(5) Maintaining, servicing or repairing real property, property or land, as such terms
are defined in the real property tax law, whether the services are performed in or outside of
a building, as distinguished from adding to or improving such real property, property or land,
by a capital improvement as such term capital improvement is defined in paragraph nine of
subdivision (b) of section eleven hundred one of this article . . . .
Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the compensating use tax imposed
under section eleven hundred ten:
*

*

*

(15) Tangible personal property sold to a contractor, subcontractor or repairman for
use in (i) erecting a structure or building (A) of an organization described in subdivision (a)

-3­
TSB-A-03(10)S
Sales Tax
March 5, 2003
of section eleven hundred sixteen or (B) used predominantly either in the production phase
of farming or in a commercial horse boarding operation, or in both, or (ii) adding to, altering
or improving real property, property or land (A) of such an organization or (B) used
predominantly either in the production phase of farming or in a commercial horse boarding
operation, or in both, as the terms real property, property or land are defined in the real
property tax law; provided, however, no exemption shall exist under this paragraph unless
such tangible personal property is to become an integral component part of such structure,
building or real property.
(16) Tangible personal property sold to a contractor, subcontractor or repairman for
use in maintaining, servicing or repairing real property, property or land (i) of an
organization described in subdivision (a) of section eleven hundred sixteen or (ii) used
predominantly either in the production phase of farming or in a commercial horse boarding
operation, or in both, as the terms real property, property or land are defined in the real
property tax law, provided, however, no exemption shall exist under this paragraph unless
such tangible personal property is to become an integral component part of such structure,
building or real property.
Section 527.7(a) of the Sales and Use Tax Regulations provides, in part:
(1) Maintaining, servicing and repairing are terms which are used to cover all
activities that relate to keeping real property in a condition of fitness, efficiency, readiness
or safety or restoring it to such condition. Among the services included are services on a
building itself such as painting; services to the grounds, such as lawn services, tree removal
and spraying; trash and garbage removal and sewerage service and snow removal.
*

*

*

(3)(i) A capital improvement is an addition or alteration to real property:
(a) which substantially adds to the value of the real property, or appreciably prolongs
the useful life of the real property;
(b) which becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or article itself; and
(c) is intended to become a permanent installation.
Section 527.7(b) of the Sales and Use Tax Regulations provides, in part:
(1) The tax is imposed on receipts from every sale of the services of maintaining,
servicing or repairing real property, whether inside or outside of a building.

-4­
TSB-A-03(10)S
Sales Tax
March 5, 2003
*

*

*

(4) The imposition of tax on services performed on real property depends on the end
result of such service. If the end result of the services is the repair or maintenance of real
property, such services are taxable. If the end result of the same service is a capital
improvement to the real property, such services are not taxable.
*

*

*

(5) Any contractor who is making a capital improvement must pay a tax on the cost
of materials to him, as he is the ultimate consumer of the tangible personal property.
Section 541.3(d) of the Sales and Use Tax Regulations provides, in part:
Contracts with exempt organizations.
(1) Tangible personal property incorporated into real property owned by a
governmental entity or by an exempt organization is exempt, whether the contract is on a
lump sum, time and material, cost-plus, or other basis.
(2) Purchase for contracts (other than agency contracts).
(i) Tangible personal property sold to a contractor, subcontractor, or repairman for
use in erecting, repairing, adding to, or altering a structure or building owned by an exempt
organization, described in section 1116(a) of the Tax Law, is exempt when it is to become
an integral component part of such structure or building.
*

*

*

(v) Documents.
(a) If the customer is a governmental entity, copies of signed contracts and
government purchase orders are sufficient evidence to establish the exempt status of the job
between the governmental entity and the prime contractor. With respect to the documents
required between a prime contractor and the subcontractors, a signed document between
them which identifies the project, location, and exempt owner, will form the basis for tax
exemption of tangible personal property purchased for incorporation into the exempt project.
When purchasing such tangible personal property for the exempt project, the contractor or
subcontractor will issue a properly completed contractor exempt purchase certificate to the
supplier.

-5­
TSB-A-03(10)S
Sales Tax
March 5, 2003
(b) If the customer is an exempt organization other than a governmental entity, the
prime contractor must obtain an exempt organization certification from his customer and
retain it as part of his records. Copies of the certification must also be furnished to all
subcontractors on the job. The subcontractors must retain a copy of the certification in their
records with a copy of the contract which identifies the project and the location. When
purchasing tangible personal property for incorporation into the exempt project, the prime
contractor and subcontractor will issue a properly completed contractor exempt purchase
certificate to the supplier.
Section 541.5 of the Sales and Use Tax Regulations provides, in part:
Contracts with customers other than exempt organizations.
*

*

*

(b) Capital improvements contracts.
(1) Purchases. All purchases of tangible personal property (excluding qualifying
production machinery and equipment exempt under section 1115(a)(12) of the Tax Law)
which are incorporated into and become part of the realty or are used or consumed in
performing the contract are subject to tax at the time of purchase by the contractor or any
other purchaser. A certificate of capital improvement may not be validly given by any person
or accepted by a supplier to exempt the purchase of these materials.
(2) Labor and material charges. All charges by a contractor to the customer for
adding to or improving real property by a capital improvement are not subject to tax
provided the customer supplies the contractor with a properly completed certificate of capital
improvement.
*

*

*

(4) Documents; capital improvement contracts.
(i) When a properly completed certificate of capital improvement has been furnished
to the contractor, the burden of proving the job or transaction is not taxable and the liability
for the tax rests solely upon the customer.
(a) The prime contractor should obtain a certificate of capital improvement from the
customer and retain it as part of his records. Copies of such certificate must be furnished to
all subcontractors on the job and retained as part of their records.

-6­
TSB-A-03(10)S
Sales Tax
March 5, 2003
(b) A certificate of capital improvement may not be issued by a contractor,
subcontractor or any other person to a supplier on the purchase of tangible personal property.
Opinion
Petitioner finishes its asphalt paving projects by “sealcoating” the asphalt pavement with an
industrial grade of sealer. Prior to the sealcoating process, the asphalt must be allowed to cure for a
minimum period of six months. Since the sealcoating must be done in relatively warm weather, it is
performed from six to ten months after the asphalt is laid. Petitioner does not bill the customer for the
sealcoating at the time the customer is billed for the paving but contacts each of its customers after an
appropriate amount of time to advise the customer to have the sealcoating done. Petitioner’s one year
warranty on the paving job is extended by an additional year where Petitioner or the property owner applies
the type of sealer recommended by Petitioner.
The painting of new structures, buildings or additions constitutes a capital improvement to real
property, but the painting of existing structures, or parts thereof, is considered repair and maintenance. See
Sullivan Humes Painting, Adv Op Comm T&F, August 31, 1987, TSB-A-87(31)S. The sealcoating of
asphalt is similar to painting. Based on the facts in this Advisory Opinion, where Petitioner can substantiate
that the particular sealcoating service it has provided relates directly to its installation of asphalt which is
known to have been a capital improvement to real property, and the installation of asphalt occurred within
the twelve-month period immediately preceding the first application of the sealcoating performed on the
asphalt, the initial sealcoating service is considered to be a part of the capital improvement project which
included the installation of the asphalt. Accordingly, under such circumstances, Petitioner’s charges for
such initial sealcoating service will not be subject to sales tax. See Section 1105(c)(3)(iii), (5) of the Tax
Law. Petitioner should receive a properly completed Certificate of Capital Improvement (Form ST-124)
from its customer. See Section 541.5(b) of the Sales and Use Tax Regulations. Petitioner must have a
means of record keeping which associates the invoice for the initial installation of the asphalt and its
properly completed Certificate of Capital Improvement with the subsequent invoice and associated
Certificate of Capital Improvement for the sealcoating performed on the new asphalt. See Technical
Services Bureau Memorandum entitled Records Required to Be Kept by Sales Tax Vendors, July 15, 1981,
TSB-M-81(9)S for information on record keeping requirements.
Petitioner must pay the sales or compensating use tax on its purchases of materials used in capital
improvement projects. Materials incorporated into the real property of organizations or entities exempt
from sales and compensating use tax under Section 1116(a) of the Tax Law may be purchased by Petitioner
exempt from tax. Section 1115(a)(15), (16) of the Tax Law. When purchasing materials actually
incorporated as part of the project into the real property of an organization or entity exempt under Section
1116(a) of the Tax Law, the contractor should issue a properly completed Contractor Exempt Purchase
Certificate (Form ST-120.1) to the supplier to purchase the materials exempt from tax. See Section
1115(a)(15), (16) of the Tax Law and Section 541.3(b) of the Sales and Use Tax Regulations.

-7­
TSB-A-03(10)S
Sales Tax
March 5, 2003
It should be noted that not all installations of new asphalt qualify as capital improvements to real
property. For example, asphalt installed on a parking lot or driveway which is only partially resurfaced is
a taxable repair to real property and does not qualify as a capital improvement. Any sealcoating performed
on such an installation would constitute a taxable repair or maintenance to real property.

DATED: March 5, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are limited to
the facts set forth therein.