How does New York sales tax apply to a contractor's installation of gas mains and telephone conduit, and to the road-building materials and conduit it buys for those jobs?

Plain-English summary

An accounting firm asked, on behalf of a construction contractor, how New York sales tax applies across a whole utility-installation business: the contractor installs underground natural gas mains and pipes for a gas utility (which supplies the pipe itself, free of charge) and empty telecommunications conduit for a phone company (which the contractor must buy itself), then excavates, backfills, and repaves the disturbed roadway or private property in both cases.

On the output side -- what the contractor charges Gas Company and Phone Company for installation -- the work generally qualifies as an exempt capital improvement (permanent, value-adding, not meant to be removed) whether installed under a private easement or a public franchise, so the contractor doesn't have to collect tax on its installation charge as long as it gets a Certificate of Capital Improvement (Form ST-124) from the utility. On the input side, the picture is more mixed: since Gas Company supplies its own pipes for free, that's simply not a purchase by the contractor at all -- no tax question arises. But the contractor's own purchases of road-building materials (fill, sand, stone, asphalt) used to restore the property, and its purchases of conduit for Phone Company, are ordinary taxable retail purchases -- unless those materials end up as an integral part of real property owned by a governmental or other Tax Law § 1116(a)-exempt entity, in which case the contractor can buy them tax-free (with a Contractor Exempt Purchase Certificate) or seek a refund if tax was already paid. One important negative finding: telecommunications conduit itself does not qualify for New York's telecommunications-equipment exemption (§ 1115(a)(12-a)) -- that exemption is reserved for property used directly in transmitting signals (like the cable eventually run through the conduit), not for the structure that merely houses the cable.

What this means for you

Gas, telecom, and other utility-installation contractors

Map your materials carefully: (1) property the utility supplies for free isn't your purchase at all; (2) property you buy that remains the utility's after installation (like phone conduit) is a taxable purchase, with no relief unless the underlying land is owned by an exempt governmental/nonprofit entity; (3) road-restoration materials follow the ownership of the restored land, not the utility's ownership of the pipe/conduit above it. Get a Certificate of Capital Improvement from your utility customer to keep your own installation charge untaxed, and keep records tying specific material purchases to specific projects and landowners if you want to claim the § 1116(a) exempt-entity exclusion.

Gas and telecommunications utilities

If you want your contractor's installation charges to stay untaxed, provide a properly completed Certificate of Capital Improvement (ST-124) for each qualifying project.

Accountants and tax professionals

This is one of the most comprehensive utility-contractor rulings of its era (cited repeatedly in later 2005 opinions on the same topic) -- a good master reference covering all three material-ownership scenarios (utility-supplied, contractor-purchased-and-utility-retained, contractor-purchased-and-landowner-retained) plus the negative finding that bare conduit doesn't qualify for the telecommunications exemption even though the cable running through it might.

Common questions

Q: Is a contractor's charge for installing gas mains or telecom conduit taxable?
A: Not usually, if the installation qualifies as a capital improvement (permanent, value-adding, not removable without damage) and the utility provides a Certificate of Capital Improvement -- but ordinary repair/maintenance work stays taxable.

Q: Does the contractor owe tax on pipe the gas utility supplies for free?
A: That's not a taxable question at all for the contractor -- it's not the contractor's purchase, since the utility furnishes the pipe itself.

Q: Does the contractor owe tax on telecommunications conduit it buys and installs?
A: Yes, generally -- unless the conduit ends up as an integral part of real property owned by a governmental entity or another § 1116(a)-exempt organization.

Q: Does bare, empty telecommunications conduit qualify for the telecommunications-equipment exemption?
A: No -- that exemption is for property directly used in transmitting signals (like the cable itself), not the structural conduit that merely houses the cable.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1101(b)(4)(i), (9)(i) (retail sale; capital improvement definition)
• Tax Law § 1105(a), (b)(1), (c)(3), (c)(5) (retail sales; utility service tax; installing/maintaining tangible personal property; maintaining real property)
• Tax Law § 1115(a)(12-a) (telecommunications equipment exemption)
• Tax Law § 1115(a)(15)-(17) (exempt-organization capital improvement materials)
• Tax Law § 1116(a) (exempt governmental and nonprofit entities)
• Tax Law § 1119(c), § 1132(c), § 1139(a) (refund/credit; burden of proof; three-year filing period)
• 20 NYCRR 526.6, 527.7(b), 532.4, 541.1(b), 541.5(b) (contractor and capital improvement rules)
• TSB-H-80(144)S (Carl A. Morse, Inc., June 18, 1980)
• TSB-A-85(7)S (Brooklyn Union Gas Company, May 15, 1985)
• TSB-H-87(222)S (Ruston Paving Co., Sept. 15, 1986)
• TSB-A-90(53)S (The Michaels Group, Inc., Oct. 23, 1990)
• Matter of Merit Oil v State Tax Commn., 124 AD2d 326
• Barber v Hudson River Telephone Co., 105 App Div 154

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_20s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(20)S
Sales Tax
May 27, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020213A

On February 13, 2002, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Marcum & Kliegman, LLP, 130 Crossways Drive, Woodbury,
New York, 11714.
The issues raised by Petitioner, Marcum & Kliegman, LLP, relate to sales of services and
purchases of construction materials by a construction contractor, as follows:
1.

Whether the replacement of existing underground pipes, mains or conduit or the
installation of new pipes, mains or conduit as described below constitutes a
capital improvement to real property for sales tax purposes.

2.

Whether the purchase of road building materials including fill, sand, stone, and
asphalt by a construction contractor performing road work for utility companies is
subject to sales and use tax if a private property owner (i.e., an individual
homeowner, developer, business, etc.) takes title to these materials upon
completion of a project.

3.

Whether the purchase of road building materials including fill, sand, stone, and
asphalt by a construction contractor performing installation work for utility
companies is subject to sales and use tax if a governmental entity takes title to
these materials upon completion of a project.

4.

Whether the purchase of conduit materials by a contractor for installation as
infrastructure for the utility company's telecommunications network is subject to
sales and use tax when the utility company obtains title to these materials after
their installation.

5.

Whether a contractor is required to obtain a certificate of capital improvement
(Form ST-124) for each project performed for its customers or whether a signed
contract is sufficient proof that the work being performed qualifies as a capital
improvement.

6.

Whether the contract between a contractor and its customers constitutes sufficient
proof that the materials described above are used in a project for an exempt
governmental entity, or whether additional documentation is required.

Petitioner submits the following facts as the basis for this Advisory Opinion.

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A construction contractor (hereinafter Contractor) is primarily engaged in the business of
installing mains, pipes and conduits used to carry natural gas and communication cables, and, as
an incident to such installations, replacing excavated sections of roadway and other property.
Contractor’s two largest customers are a natural gas utility company (hereinafter Gas Company)
and a telecommunications company (hereinafter Phone Company). Contractor does not have
contracts with entities exempt from sales tax pursuant to section 1116(a) of the Tax Law for
these installations.
For Gas Company, Contractor is engaged to install underground natural gas mains and
pipes under public roads and infrequently under an individual homeowner's property. Gas
Company supplies all of the mains and pipes used. Gas Company does not charge Contractor for
these pipes. Depending on the contract, Contractor will excavate the road, dig down
approximately 4 feet and connect additional pipes to Gas Company’s existing underground
natural gas network. The extent of the work varies from small projects of less than 25 feet in
length to large projects where the natural gas pipes are laid for several blocks.
Contractor then refills the 4 foot deep hole with clean fill, lays approximately 10 inches
of stone and sand, and applies 2 to 4 inches of asphalt as a final cover. This process restores the
road to a condition similar to that prior to the gas pipe installation. Contractor currently
purchases the clean fill, sand, stone, and asphalt. Contractor pays sales tax on the purchase of
these materials. The applicable governmental entity (town, county, city or state) gets title to
most of the road building materials including the fill, sand, stone and asphalt. A private property
owner may get title to a portion of the road building materials. For example, Contractor may run
pipes 200 feet down a street and then run the pipe 10 feet up an individual’s driveway. A portion
of the road materials in this case would be installed on the individual’s property.
Gas Company retains title to the mains and pipes after their installation. There is no
construction contract between either Gas Company or Contractor and any exempt entity or
organization or private property owner.
For Phone Company, Contractor is usually engaged to install conduit under public roads
and on rare occasions under privately owned property. These conduits are usually 8 inches or 12
inches in diameter and are empty when installed. At a later date, Phone Company uses its own
equipment to feed either copper cable, fiber optic cable or other lines through the empty
underground conduit. At the time Contractor installs the conduit, Contractor does not know what
type of cable will be fed through it.
Contractor uses a similar process as detailed for Gas Company installations to install the
conduit used by Phone Company. As with the installations for Gas Company, Contractor
excavates, installs the conduit, and restores the road or other real property to a similar condition
as prior to the telephone conduit installation.
However, in the case of its contracts with Phone Company, Contractor is required to
purchase the conduit that is used in the Phone Company projects from a third party. Phone

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Company obtains title to the conduit upon its installation. The applicable governmental entity
gets title to all of the road building materials including the fill, sand, stone and asphalt used to
restore its property. Private property owners take title to all materials used to restore their
property to its original condition after a conduit is installed. Contractor currently pays sales tax
on the conduit, fill, sand, stone and asphalt.
Neither Phone Company nor Contractor have a construction contract with any exempt
entity or organization or private property owner.
For purposes of this Advisory Opinion, it is presumed that Contractor is making its
installations for its customers, Gas Company or Phone Company, on easements in the case where
such installations cross private property and on franchises where such installations cross public
property.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical, component part of tangible
personal property, or (B) for use by that person in performing the services subject to tax
under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven hundred
five where the property so sold becomes a physical component part of the property upon
which the services are performed or where the property so sold is later actually
transferred to the purchaser of the service in conjunction with the performance of the
service subject to tax. Notwithstanding the preceding provisions of this subparagraph, a
sale of any tangible personal property to a contractor, subcontractor or repairman for use
or consumption in erecting structures or buildings, or building on, or otherwise adding to,
altering, improving, maintaining, servicing or repairing real property, property or land, as
the terms real property, property or land are defined in the real property tax law, is
deemed to be a retail sale regardless of whether the tangible personal property is to be
resold as such before it is so used or consumed . . . .
*

*

*

(9) Capital improvement. (i) An addition or alteration to real property which:

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(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
(C) Is intended to become a permanent installation.
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
(b) (1) The receipts from every sale, other than sales for resale, of the following:
(A) gas, electricity, refrigeration and steam, and gas, electric, refrigeration and steam
service of whatever nature; (B) telephony and telegraphy and telephone and telegraph
service of whatever nature except interstate and international telephony and telegraphy
and telephone and telegraph service . . . (C) a telephone answering service; and (D) a
prepaid telephone calling service.
*

*

*

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

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile home,
not held for sale in the regular course of business, whether or not the services are
performed directly or by means of coin-operated equipment or by any other means, and
whether or not any tangible personal property is transferred in conjunction therewith,
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. . . .

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*

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(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:
*

*

*

(12-a) Tangible personal property for use or consumption directly and
predominantly in the receiving, initiating, amplifying, processing, transmitting,
retransmitting, switching or monitoring of switching of telecommunications services for
sale or internet access services for sale or any combination thereof. Such tangible
personal property exempt under this subdivision shall include, but not be limited to,
tangible personal property used or consumed to upgrade systems to allow for the
receiving, initiating, amplifying, processing, transmitting, retransmitting, switching or
monitoring of switching of telecommunications services for sale or internet access
services for sale or any combination thereof. As used in this paragraph, the term
"telecommunications services" shall have the same meaning as defined in paragraph (g)
of subdivision one of section one hundred eighty-six-e of this chapter.
*

*

*

(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) of section eleven hundred sixteen . . . or (ii) adding to, altering or
improving real property, property or land (A) of such an organization . . . 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 . . . 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

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property is to become an integral component part of such structure, building or real
property.
(17) Tangible personal property sold by a contractor, subcontractor or repairman
to a person other than an organization described in subdivision (a) of section eleven
hundred sixteen, for whom he is adding to, or improving real property, property or land
by a capital improvement, or for whom he is about to do any of the foregoing, if such
tangible personal property is to become an integral component part of such structure,
building or real property; provided, however, that if such sale is made pursuant to a
contract irrevocably entered into before September first, nineteen hundred sixty-nine, no
exemption shall exist under this paragraph.
Section 1116(a) of the Tax Law provides, in part:
Except as otherwise provided in this section, any sale . . . to any of the following
or any use or occupancy by any of the following shall not be subject to the sales and
compensating use taxes imposed under this article:
(1) The state of New York, or any of its agencies, instrumentalities, public
corporations (including a public corporation created pursuant to agreement or compact
with another state or Canada) or political subdivisions where it is the purchaser, user or
consumer. . . .
Section 1119(c) of the Tax Law provides:
A refund or credit equal to the amount of sales or compensating use tax imposed
by this article and pursuant to the authority of article twenty-nine, and paid on the sale or
use of tangible personal property, shall be allowed the purchaser where such property is
later used by the purchaser in performing a service subject to tax under paragraph (1), (2),
(3), (5), (7) or (8) of subdivision (c) of section eleven hundred five or under section
eleven hundred ten and such property has become a physical component part of the
property upon which the service is performed or has been transferred to the purchaser of
the service in conjunction with the performance of the service subject to tax or if a
contractor, subcontractor or repairman purchases tangible personal property and later
makes a retail sale of such tangible personal property, the acquisition of which would not
have been a sale at retail to him but for the second to last sentence of subparagraph (i) of
paragraph (4) of subdivision (b) of section eleven hundred one. An application for the
refund or credit provided for herein must be filed with the commissioner of taxation and
finance within the time provided by subdivision (a) of section eleven hundred thirty-nine.
Such application shall be in such form as the commissioner may prescribe. Where an
application for credit has been filed, the applicant may immediately take such credit on
the return which is due coincident with or immediately subsequent to the time that he
files his application for credit. However, the taking of the credit on the return shall be
deemed to be part of the application for credit. The procedure for granting or denying

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such applications for refund or credit and review of such determinations shall be as
provided in subdivision (e) of section eleven hundred thirty-nine.
Section 1132 of the Tax Law provides, in part:
(a) (1) Every person required to collect the tax shall collect the tax from the
customer when collecting the price, amusement charge or rent to which it applies. If the
customer is given any sales slip, invoice, receipt or other statement or memorandum of
the price, amusement charge or rent paid or payable, the tax shall be stated, charged and
shown separately on the first of such documents given to him. The tax shall be paid to
the person required to collect it as trustee for and on account of the state.
*

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*

(c)(1) For the purpose of the proper administration of this article and to prevent
evasion of the tax hereby imposed, it shall be presumed that all receipts for property or
services of any type mentioned in subdivisions (a), (b), (c) and (d) of section eleven
hundred five . . . are subject to tax until the contrary is established, and the burden of
proving that any receipt . . . is not taxable hereunder shall be upon the person required to
collect tax or the customer. Except as provided in subdivision (h) or (k) of this section,
unless (i) a vendor, not later than ninety days after delivery of the property or the
rendition of the service, shall have taken from the purchaser a resale or exemption
certificate in such form as the commissioner may prescribe, signed by the purchaser and
setting forth the purchaser's name and address and, except as otherwise provided by
regulation of the commissioner, the number of the purchaser's certificate of authority,
together with such other information as the commissioner may require, to the effect that
the property or service was purchased for resale or for some use by reason of which the
sale is exempt from tax under the provisions of section eleven hundred fifteen, and,
where such resale or exemption certificate requires the inclusion of the purchaser's
certificate of authority number or other identification number required by regulations of
the commissioner, that the purchaser's certificate of authority has not been suspended or
revoked . . . or (ii) the purchaser, not later than ninety days after delivery of the property
or the rendition of the service, furnishes to the vendor: any affidavit, statement or
additional evidence, documentary or otherwise, which the commissioner may require
demonstrating that the purchaser is an exempt organization described in section eleven
hundred sixteen, the sale shall be deemed a taxable sale at retail. . . .
Section 1139(a) of the Tax Law provides, in part:
In the manner provided in this section the tax commission shall refund or credit
any tax, penalty or interest erroneously, illegally or unconstitutionally collected or paid if
application therefor shall be filed with the tax commission (i) in the case of tax paid by
the applicant to a person required to collect tax, within three years after the date when the
tax was payable by such person to the tax commission . . . .

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Section 526.6 of the Sales and Use Tax Regulations provides, in part:
Retail sale. (a) The term retail sale or sale at retail means the sale of tangible
personal property to any person for any purpose, except as specifically excluded.
(b) Special rule--sales specifically included as retail sales.
(1) A sale of any tangible personal property to a contractor, subcontractor or
repairman for use or consumption in erecting structures or buildings or adding to,
altering, improving, maintaining, servicing or repairing real property, property or land, is
deemed to be a retail sale, regardless of whether the tangible personal property is to be
resold as such before it is used or consumed. . . .
Section 527.7(b) of the Sales and Use Tax Regulations provides, in part:
Imposition. (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) 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.
Section 532.4 of the Sales and Use Tax Regulations provides, in part:
Presumption of taxability. (a) General. (1) It is presumed that all receipts for
property or service of any type mentioned in subdivisions (a), (b), (c) and (d) of section
1105 of the Tax Law, all rents for occupancy of the type mentioned in subdivision (e) of
said section, and all amusement charges of any type mentioned in subdivision (f) of said
section, are subject to tax until the contrary is established.
*

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*

(b) Burden of proof. (1) The burden of proving that any receipt . . . is not
taxable shall be upon the person required to collect the tax and the customer.
(2) A vendor who in good faith accepts from a purchaser a properly completed
exemption certificate or, as authorized by the Department, other documentation
evidencing exemption from tax not later than 90 days after delivery of the property or the
rendition of the service is relieved of liability for failure to collect the sales tax with
respect to that transaction. The timely receipt of the certificate or documentation itself
will satisfy the vendor's burden of proving the nontaxability of the transaction and relieve
the vendor of responsibility for collecting tax from the customer.

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(i) A certificate or other document is "accepted in good faith" when a vendor has
no knowledge that the exemption certificate or other document issued by the purchaser is
false or is fraudulently presented. If reasonable ordinary due care is exercised,
knowledge will not be imputed to the seller required to collect the tax.
*

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*

(5) A vendor is not relieved of the burden of proof when it failed to obtain an
exemption certificate or accepted an improper certificate, or had knowledge that the
exemption certificate issued by the purchaser was false or fraudulently presented.
Section 541.1(b) of the Sales and Use Tax Regulations provides:
The principal distinguishing feature of a sale to a contractor, as compared to a sale
to other vendors who purchase tangible personal property for resale, is that the sale of
tangible personal property to a contractor for use or consumption in construction is a
retail sale and subject to sales and use tax, regardless of whether tangible personal
property is to be resold as such or incorporated into real property as a capital
improvement or repair. Whenever a contractor uses materials, on which the contractor
has paid sales tax, in a repair or maintenance contract (except interior cleaning and
maintenance contracts of 30 days or more) subject to the sales tax on services under
section 1105(c) of the Tax Law, the contractor may be entitled to a refund or credit of the
portion of the tax he paid attributable to the materials transferred to the customer.
Section 541.5 of the Sales and Use Tax Regulations provides, in part:
Contracts with customers other than exempt organizations.
(a) The term customers in this classification includes, but is not limited to:
(1) residential customers; and
(2) business customers.
(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

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provided the customer supplies the contractor with a properly completed certificate of
capital improvement.
*

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(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.
(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.
(ii) Where a contractor does not receive a capital improvement certificate from a
customer, the contract or other records of the transaction will prevail. In such case:
(a) where the contractor does not receive a capital improvement certificate,
collects tax on the full invoice price and the job is a capital improvement to real property,
the contractor is liable for the tax on the cost of materials incorporated into the job, plus
the tax collected from the customer. The customer is entitled to a refund of the tax paid to
the contractor; or
(b) where the contractor does not receive a capital improvement certificate,
collects no tax on the charges billed to the customer and the job is a capital improvement
to real property, the contractor is liable for the tax on the cost of materials incorporated
into the job performed.
(iii) If a contract includes the sale of tangible personal property which remains
tangible personal property after installation, the contractor must collect the appropriate
New York State and local taxes from the customer on the selling price, including any
charge for installation, of the tangible personal property unless a properly completed
exemption certificate is issued by the customer. The contractor may apply for a credit or
refund of taxes he has paid on purchases of the tangible personal property that remain
tangible personal property after installation.
Example 1: A contractor sells a building he has constructed and, as a part of the
sale agreement, installs free standing water fountains which remain tangible
personal property when installed. The contractor's billing to his customer must

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separately state all charges for tangible personal property included in the sales
agreement. The New York State and applicable local tax rate must be collected on
the total charges for the water fountains including any installation charges. In this
instance, the contractor may purchase the water fountains tax-free using a
contractor exempt purchase certificate. If he pays the tax to his supplier, he is
entitled to a refund or credit of the tax paid on the purchase of the water fountains.
Opinion
Contractor is primarily engaged in the business of installing gas mains and pipes used to
carry natural gas, and conduit used to house telecommunications cables, and, as an incident to
such installations, excavating and replacing sections of roadway and other property.
Contractor’s two largest customers are a natural gas utility company (Gas Company) and a
telecommunications utility company (Phone Company). Contractor does not have contracts with
entities exempt from sales tax pursuant to section 1116(a) of the Tax Law for these installations
and does not enter into contracts with the owners of the properties upon which it performs
services for its customers. Likewise, its customers do not enter into contracts with the owners of
the properties upon which Contractor performs services. Contractor is engaged to install the
underground natural gas mains and pipes used to carry natural gas and conduit used to house
telecommunications cables under public roads and infrequently under an individual homeowner's
private property. Gas Company purchases the mains and pipes which Contractor installs, but
Contractor purchases the conduit which it installs for Phone Company. In both cases, Contractor
purchases the road building materials, including fill, sand, stone and asphalt, it uses. For
purposes of this Advisory Opinion, it is presumed that Contractor is making its installations for
its customers, Gas Company or Phone Company, on easements in the case where such
installations cross private property and on franchises where such installations cross public
property.
Petitioner inquires as to Contractor’s obligations in collecting sales tax from its customers
and as to its liabilities for sales tax when purchasing various materials necessary to complete its
contracts with its customers.
Issue 1 - Taxability of charges for installing mains, pipes and conduits by Contractor to its
customers
Services performed by construction contractors can generally be placed into one of three
categories: capital improvement, repair or maintenance, or installation of tangible personal
property which remains tangible personal property after installation. The contractor performs a
capital improvement to real property when all three of the conditions in section 1101(b)(9)(i) of
the Tax Law are met. If the contractor performs work which becomes an integral component
part of the real property but does not meet the three conditions in section 1101(b)(9) of the Tax
Law, a repair or maintenance service has been performed. Finally, if the contractor performs an
installation which does not become an integral component part of the real property, the

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contractor has performed an installation of tangible personal property which remains tangible
personal property after installation.
Whether or not work performed constitutes a capital improvement to real property must
be determined by application of the three requirements provided in section 1101(b)(9)(i) of the
Tax Law. Each of these three requirements must be met in order for an addition or alteration to
qualify as a capital improvement. Furthermore, the classification of property as real property
under the Real Property Tax Law does not determine whether the installation of such property is
a capital improvement for sales tax purposes. See Matter of Merit Oil v State Tax Commn.,
124 AD2d 326.
The installation of gas mains and pipes used to carry natural gas and conduit used to
house telecommunications cables requires that private property owners must grant an easement
to the particular utility company whose installation crosses their property. Such utility company
must also compensate the property owner for the taking of the easement. This action endows the
utility company with certain rights to use the easement. Easements on private property obtained
by public utility companies are “continuous and unlimited as to time.” (Barber v Hudson River
Telephone Co., 105 App Div 154) Such easements cannot be unilaterally terminated by the
owner of the servient estate (the property owner) (Zunno v Kiernan, 170 AD2d 795). These
easements may be conveyed to the utilities’ assigns or successors for a consideration in an
instrument similar to a deed. See 49 NY Jur 2d, Easements §§ 146 - 157. See also Banach v
Home Gas Co., 12 AD2d 373. Gas Company retains and Phone Company obtains title to the
mains and pipes, and conduit, respectively, installed by Contractor. It appears that each utility
company exercises a power of ownership over its easement which is sufficient for it to make
improvements which enhance the easement’s value to the utility company. It is reasonable to
assume that the utility companies do not intend to remove the mains, pipes or conduits in the
foreseeable future. In addition, the owners of the underlying property cannot unilaterally
terminate the easements or require the utility company to remove the mains, pipes or conduits.
Therefore, an installation or replacement by Contractor of mains, pipes and conduits on
private property pursuant to an easement granted by the property owner to the utility company,
as described in this Advisory Opinion, which otherwise appears to meet the three conditions set
forth in section 1101(b)(9)(i) of the Tax Law, and in the absence of any disqualifying provisions
in the terms of the easement, qualifies as a capital improvement to real property. As a result,
Contractor may accept from its customers, Gas Company and Phone Company, a Certificate of
Capital Improvement (Form ST-124) in lieu of collecting sales tax on its charges for installing
the mains, pipes and conduits on private property subject to an easement.
As the end result of such installations is considered a capital improvement to real
property, the excavations of the property, including driveways, etc., prior to the installation and
the property restoration performed after the installation constitute activities which result in a
capital improvement. See Building Contractors Association, Inc. v Tully, 87 AD2d 909 [1982];
Carl A. Morse, Inc., Dec St Tx Comm, June 18, 1980, TSB-H-80(144)S. Accordingly,

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Contractor will not be required to collect sales tax on its installation services if it is presented
with a properly completed Certificate of Capital Improvement (ST-124).
Utilities generally receive a franchise which permits them to install mains, pipes and
conduit in property owned by New York State or one of its political subdivisions. The franchise
bestows rights on the utility which are similar to those granted by an easement. See 60 NY
Jur 2d, Franchises §§ 1 - 3; In re Gillen Place, 304 NY 215. In the present case, Gas Company’s
mains and pipes and Phone Company’s conduit are installed pursuant to a franchise. The mains,
pipes and conduits remain the property of the respective utility after they are installed. It appears
that each utility company exercises a power over its franchise which is sufficient for it to make
improvements to enhance the franchise’s value to the utility company. In addition, New York
State or one of its political subdivisions cannot unilaterally terminate the franchise. It is
reasonable to assume that the utility companies do not intend to remove the mains, pipes or
conduits from the franchise in the foreseeable future.
If a franchise agreement includes a provision indicating that the installation is not
intended to be permanent; for example, a provision giving the municipality the right to require
the utility to remove the installed property after a fixed period of time, such installation may not
qualify as a capital improvement. However, in the absence of any disqualifying provisions in the
terms of the franchise agreement, an installation or replacement by Contractor of mains, pipes
and conduits on the utility company’s franchise, as described in this Advisory Opinion, which
otherwise appears to meet the three conditions set forth in section 1101(b)(9)(i) of the Tax Law
qualifies as a capital improvement to real property. See Brooklyn Union Gas Company, Adv Op
St Tx Comm, May 15, 1985, TSB-A-85(7)S. Contractor will not be required to collect sales tax
on such installations if it obtains from Gas Company and Phone Company properly completed
certificates of capital improvement.
Issue 2 - Purchases of road building materials used on private property
In general, purchases by a contractor of materials which are actually incorporated into
and become an integral component part of the real property are subject to sales tax as a retail
purchase by such contractor. Such materials are considered to be used or consumed by the
contractor in the performance of its contract. See section 541.1(b) of the Sales and Use Tax
Regulations. A contractor may purchase materials exempt from tax when the materials become
an integral component part of real property owned by an entity or organization exempt from
sales tax pursuant to section 1116(a) of the Tax Law. See sections 1115(a)(15) and (16) of the
Tax Law.
In the present case, Contractor purchases road building materials including fill, sand,
stone, and asphalt, that it uses to restore private property after the installation of mains or pipes
for Gas Company or conduits for Phone Company. The property owner takes title to the portion
of these road building materials used to restore its property upon completion of the project for
Contractor’s customers. The purchase by Contractor of road building materials which become

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an integral component part of private property is a purchase at retail subject to sales tax. See
Ruston Paving Co., Dec St Tx Comm, September 15, 1986, TSB-H-87(222)S.
Issue 3 - Purchases of road building materials used on property owned by governmental
entities exempt from sales tax pursuant to section 1116(a) of the Tax Law
Contractor purchases road building materials including fill, sand, stone, and asphalt, that
it uses to restore roadways and property of governmental entities exempt from sales tax pursuant
to section 1116(a) of the Tax Law, after Contractor installs the mains, pipes or conduits. The
exempt governmental entities who own these roadways and property take title to the road
building materials upon Contractor’s completion of the project for Gas Company and Phone
Company.
Sections 1115(a)(15) and (16) of the Tax Law require that, in order to be exempt from
sales tax, tangible personal property purchased by a contractor must become an integral
component part of real property of an entity exempt from tax pursuant to section 1116(a) of the
Tax Law. The contractor’s purchases may be exempt even though the exempt governmental
entity does not enter into a capital improvement contract with the contractor. In the present case,
road building materials purchased by Contractor are installed in and become part of real property
owned by an exempt governmental entity and title to the road building materials passes to the
exempt entity upon completion of the contract with the respective utility company. Sections
1115(a)(15) and (16) of the Tax Law allow Contractor to make purchases of such road building
materials for use exclusively by Contractor to restore the real property of an entity exempt from
sales tax pursuant to section 1116(a) of the Tax Law without payment of sales tax to Contractor’s
suppliers.
When a contractor purchases materials which are exclusively incorporated into real
property owned by a governmental entity exempt from tax pursuant to section 1116(a) of the Tax
Law, the contractor may issue to its supplier a Contractor Exempt Purchase Certificate (Form
ST-120.1) indicating that the materials will be so incorporated.
It should be noted that not all roads are owned by governmental entities. Roads owned
by private persons are treated as any other private property. See The Michaels Group, Inc., Adv
Op Comm T&F, October 23, 1990, TSB-A-90(53)S. If, at the time of purchase, it is impossible
for Contractor to distinguish between those road building materials that will be used to restore
the property of an exempt entity and of a nonexempt entity, Contractor may not issue a
contractor exempt purchase certificate. Contractor may apply for a refund or credit for the tax
paid on those materials incorporated into the property of an exempt entity, provided such
application is made within 3 years of the date on which the sales or compensating use tax was
payable by Contractor’s supplier. See section 1139(a) of the Tax Law.
It is possible that Contractor may be required to make its installations on private property
owned by an organization exempt from sales tax pursuant to section 1116(a)(4), (5), (6), (7) or
(8) of the Tax Law. In this case, Contractor will be eligible to purchase road building materials

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for incorporation into the above described projects without payment of sales tax in the same
manner that such exempt purchases may be made with regard to such installations on property
owned by an exempt governmental entity. See sections 1115(a)(15) and (16) of the Tax Law.
Issue 4 - Contractor purchases of conduit
Contractor purchases conduit material used to build the infrastructure for Phone
Company’s communication network. The conduit is buried under public roadways and, in some
cases, private property. At a later date, Phone Company uses its own equipment to feed either
copper cable, or fiber optic or other lines through the empty underground conduit. Phone
Company obtains title to the conduit upon completion of the project. It does not transfer title to
the conduit to the owner of the underlying property.
Section 1115(a)(12-a) of the Tax Law provides that purchases of tangible personal
property for use or consumption directly and predominantly in the receiving, initiating,
amplifying, processing, transmitting, retransmitting, switching or monitoring of switching of
telecommunications services for sale are exempt from sales and use tax. There is no longer a
requirement that the tangible personal property constitute “central office equipment.”
The conduit purchased by Contractor is not tangible personal property for use or
consumption directly and predominantly in the transmitting of telecommunications services
provided by its customer, Phone Company. The conduit is, rather, a structure which houses
Phone Company’s wires and cables, and, by itself, is not for use or consumption directly and
predominantly in the receiving, initiating, amplifying, processing, transmitting, retransmitting,
switching or monitoring of switching of telecommunications services for sale as contemplated by
section 1115(a)(12-a) of the Tax Law.
Sections 1115(a)(15) and (16) of the Tax Law state that, “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.” With respect to Contractor’s installations of conduit
on property owned by New York State or one of its political subdivisions, such installation is
performed pursuant to Phone Company’s franchise, and title to the conduit is acquired by and
remains with Phone Company. It is not transferred to the owner of the underlying property. The
conduit, therefore, does not become an integral component part of the property of the
governmental entity. Contractor’s purchases of conduit used in this manner are not exempt from
sales tax under sections 1115(a)(15) and (16) of the Tax Law but, rather, are subject to sales tax
the same as any building material purchased by a contractor, subcontractor or repairman and
incorporated into a capital improvement project. Likewise, purchases by Contractor of conduit
installed on any private property in the manner described above are subject to sales tax.
Issue 5 - Contractor’s acceptance of capital improvement certificate
Contractor should obtain from Gas Company or Phone Company a properly completed
Certificate of Capital Improvement (Form ST-124) for each contract for the installation of mains,

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pipes or conduit that constitutes a capital improvement. If Contractor in good faith accepts a
properly completed certificate within 90 days of the date Contractor renders its installation
service, Contractor has satisfied its burden of proof that the project was a capital improvement
project and that Contractor’s charges to Gas Company or Phone Company are not subject to
sales tax. See section 1132(c)(1) of the Tax Law and section 532.4 of the Sales and Use Tax
Regulations.
Issue 6 - Documentation for project with exempt governmental entity
Petitioner inquires whether Contractor’s agreements with its customers constitute
sufficient proof that the road building materials described above are used in a project for an
exempt governmental entity, or whether additional documentation is required.
In the instant case, no construction contract is in place between either Contractor or its
customer and an entity exempt from sales tax pursuant to section 1116(a) of the Tax Law.
However, Contractor can substantiate that its purchase of road building material is to become an
integral component part of property owned by an entity exempt from sales tax pursuant to
section 1116(a) of the Tax Law by relying on a signed document between Contractor and its
customer which identifies the project, location and owner of the real property upon which the
work is being performed, assuming Contractor’s records allow it to tie in a particular purchase of
road building materials to the contract with the customer. Contractor should provide its suppliers
of road building materials with a properly completed contractor exempt purchase certificate only
for those road building materials which will be installed in property owned by an entity exempt
from sales tax pursuant to section 1116(a) of the Tax Law. Alternatively, Contractor may pay
sales tax on its purchases of road building materials and subsequently apply for a refund or credit
for the tax it paid on those road building materials installed in property owned by an entity
exempt from sales tax pursuant to section 1116(a) of the Tax Law.

DATED: May 27, 2005

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.