Does installing custom-fitted closet and storage systems (with shelving and mirrors) in a new or existing home or office qualify as a tax-exempt capital improvement?

Plain-English summary

Closet Crafters & More designs and installs custom-fitted closet storage systems (shelving, cabinets) and mirrors, measured to each customer's exact closet or wall, using a European hang-rail system anchored to studs with heavy screws or wall anchors every 16 inches. These systems aren't designed to be removed, and taking them out would damage the wall and require replacing something to make the space usable or saleable again.

New York's three-part capital-improvement test asks whether the work (1) substantially adds value or extends useful life, (2) becomes permanently affixed such that removal causes material damage, and (3) is intended as a permanent installation. The Department found Closet Crafters' systems meet all three tests — both when installed as part of new construction AND when retrofitted into an existing home or office. It leaned on prior rulings and cases treating similarly mounted mirrors, wall racks, kitchen cabinets, and bathroom vanities as capital improvements, and specifically noted that bolting, nailing, or gluing something to the wall doesn't defeat "permanent" status.

The practical result: Closet Crafters doesn't have to collect sales tax on its installation charge as long as it gets a properly completed Certificate of Capital Improvement (Form ST-124) from the customer within 90 days of finishing the job, accepted in good faith. But as with every capital-improvement contractor, Closet Crafters is still the "consumer" of the materials it installs and owes sales or use tax on its own material purchases — the certificate never exempts materials, only the customer-facing installation charge. One more wrinkle: this all assumes the work is done for the actual property owner, or for a tenant whose lease says improvements vest in and stay with the landlord; a tenant installation without that lease language could come out differently.

What this means for you

Closet and storage-system installers

Permanently mounted, custom-fitted systems in both new and existing buildings generally qualify as capital improvements — get a Certificate of Capital Improvement from your customer to avoid charging sales tax on the installation. But you still owe tax on your own material purchases as the installing contractor.

Landlords and tenants doing build-outs

If you're installing this kind of system for a tenant rather than an owner-occupant, check the lease: the capital-improvement analysis assumes title to the improvement vests in the landlord and stays part of the premises. Without that lease provision, the analysis may not apply the same way.

Accountants and tax professionals

This ruling extends the "permanent affixation despite bolts/screws/glue" line of authority (Flah's of Syracuse, Empire Vision Center) specifically to closet systems and mirrors, and confirms the capital-improvement analysis applies equally to new construction and retrofits into existing buildings — a useful reference for any built-in storage or fixture contractor.

Common questions

Q: Is installing a custom closet system in an existing home a capital improvement?
A: Yes, if it's permanently affixed such that removal would cause material damage and it's intended as a permanent installation — new construction and retrofits are treated the same way here.

Q: Does the installer still owe tax on materials even with a Certificate of Capital Improvement?
A: Yes — a contractor is always the consumer of materials it installs in a capital improvement and owes sales or use tax on those purchases regardless of any certificate.

Q: Does this apply to installations for tenants, not just homeowners?
A: Only if the lease provides that the improvement's title vests in the landlord and becomes part of the premises; otherwise the analysis may differ.

Q: Can another closet or storage installer rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and the specific installation method described.

Citations and references

Statutes, regulations, and cases:

• Tax Law §§ 1101(b)(9); 1105(c)(3), (5); 1115(a)(15), (17); 1132(c)
• 20 NYCRR 527.7(b); 541.2(g); 541.5(b)
• Flah's of Syracuse, Inc. v Tully, 89 AD2d 729
• Matter of Empire Vision Center, Dec Tax App Trib, Nov 7, 1991, DTA No. 805767

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(9)S
Sales Tax
March 8, 2006

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

PETITION NO. S040727B

On July 27, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Closet Crafters & More Inc., 25 Kraft Avenue, Albany, New York
12205.
The issue raised by Petitioner, Closet Crafters & More Inc., is whether the installation of
custom-fitted closet and storage systems, which may include shelving and mirrors, in an existing
home or commercial building constitutes a capital improvement.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is in the business of designing customized built-in closet storage systems for
new residential construction, existing residential homes, and commercial construction. All closet
storage systems are measured, cut, and made to exact specifications. The closet storage systems
become a permanent part of the real property, as they are designed, measured, and made
specifically to the measurements of a customer’s closet(s) in a particular home or office. Closet
storage systems can double or triple the useful storage space in a closet. Upgraded closets
installed in a home or office are a typical building upgrade included in a property owner’s
construction options and are considered to enhance the property’s value and appeal.
When Petitioner installs a custom closet storage system, laminated shelving is
permanently attached to the real property using a European hang-rail system that is secured to
the wall with large three-inch screws on every stud along with a hang rail bracket for each
vertical. A secondary installation system is provided with wood cleats, which are secured with
screws or heavy-duty wall anchors/mollies. These screws are placed every 16 inches where
possible. These closet systems are not designed or installed to be removed and are generally not
taken by customers if they move. Removal of the shelving would require reinstalling some type
of a storage/shelving unit to restore the home or office to a condition necessary for sale and
occupancy.
Mirrors are installed by Petitioner in a similar manner to the closet storage systems and
are not designed or installed to be removed and taken with customers should they move.
Removal of the mirror would cause damage which would require some type of replacement to
restore the home or office to a condition necessary for sale.
Applicable law and regulations
Section 1101(b)(9) of the Tax Law, in part, defines a capital improvement as follows:

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(i) 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
(C) Is intended to become a permanent installation.
Section 1105(c) of the Tax Law, in part, imposes a tax on 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; . . .
*

*

*

(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:

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*

*

*

(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 or land (A) of such organization . . . 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.
*

*

*

(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 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.
Example 9: The replacement of some shingles or patching of a roof is a repair,
but a new asphalt shingle roof is a capital improvement.
Section 541.2(g) of the Sales and Use Tax Regulations provides, in part:
Capital Improvement. (1) A capital improvement means an addition or alteration
to real property, which:
(i) substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property;

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(ii) 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
(iii) is intended to become a permanent installation.
Example 3: A homeowner hires a general contractor to remove a portion of a
masonary wall for the purpose of installing a door and window. The general
contractor hires a masonary contractor (subcontractor) to repair the wall. The
charge to the contractor by the subcontractor represents a constituent part of the
services performed in adding to or improving real property by a capital
improvement and therefore is not subject to tax in accordance with section
527.7(b)(4) of this Title.
(2)(i) A capital improvement does not include a contract for the sale and
installation of tangible personal property which when installed remains tangible personal
property.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:
Capital improvements contracts. (1) Purchases. All purchases of tangible personal
property . . . 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.
(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:

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(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.
Opinion
Petitioner is in the business of permanently installing custom-fitted closet and storage
systems, which in addition to shelving may include storage cabinets and mirrors, in new and
existing homes and commercial buildings. In order for the installations to be capital
improvements, they must meet all three criteria described in section 1101(b)(9) of the Tax Law.
When installed in a new home or commercial building in conjunction with the
construction of the home or commercial building, Petitioner’s closet storage systems and mirrors,
as described, are deemed to be part of the capital improvement project. (See Home Insulation &
Supply Inc., Adv Op Comm T & F, May 23, 1996, TSB-A-96(32)S.) Accordingly, the charges
for the sale and installation of a closet storage system in a new home or commercial building are
not subject to sales tax pursuant to sections 1105(c)(3)(iii) and 1115(a)(17) of the Tax Law.
The fact that property is installed to the realty by bolts, nails and glue does not preclude a
determination that an improvement is intended to be permanent. (See Flah’s of Syracuse, Inc. v
Tully, 89AD2d 729). The method of installation of Petitioner’s closet storage systems and
mirrors in an existing home or commercial building is similar to the installations of mirrors and
wall racks determined to qualify as capital improvements in Flah’s of Syracuse, supra, and the
installations of cabinets and mirrors similarly found to qualify as capital improvements in Matter
of Empire Vision Center, Dec Tax App Trib, Nov 7, 1991, DTA No.805767. Likewise, kitchen
cabinets and bathroom vanities which are installed in existing buildings are considered
permanent installations adding to the value of the home or commercial building and thus qualify

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as capital improvements to real property. (See Sales and Use Tax Classifications of Capital
Improvements and Repairs to Real Property, Publication 862 (4/01).)
Since Petitioner’s closet storage systems are considered to be permanent installations
which add value to the real property, and it appears that material damage to the system
components and the real property will be caused if the storage systems are removed, such
installations constitute a capital improvement in accordance with section 1101(b)(9) of the Tax
Law.
Petitioner is not required to collect tax on the charges for the installation of custom closet
storage and shelving units when it accepts in good faith a properly completed Certificate of
Capital Improvement, Form ST-124, from its customer within 90 days after completion of
installation. A certificate is accepted in good faith when Petitioner has no knowledge that it is
false. See section 1132(c) of the Tax Law and section 532.4 of the Sales and Use Tax
Regulations. As the contractor engaged in the installation of property which becomes a capital
improvement, Petitioner is deemed to be the retail purchaser and consumer of all materials
incorporated into such installations. See section 541.5(b)(1) of the Sales and Use Tax
Regulations. Thus Petitioner owes sales and use tax on its purchases of the materials it installs
into its customer’s property, except to the extent that the materials are incorporated into realty of,
and become the property of, a qualifying exempt organization. See section 1115(a)(15) of the
Tax Law.
The conclusions in this Opinion as to what installations constitute a capital improvement
are predicated upon the assumption that the installations are made for the owner of the real
property or, where installed for a tenant, that there is a lease which provides that title to
improvements is to vest in the landlord and that the improvements are to become a part of the
premises and remain in the premises. See Beaman Corporation, Adv Op St Tx Comm, Aug. 19,
1982, TSB-A-82(32)S.

DATED: March 8, 2006

NOTE:

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

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