Is BP's construction of a wind farm on leased land a capital improvement, and which equipment is exempt?

Plain-English summary

BP Wind Energy North America, Inc. (named in the opinion) plans to build and operate a commercial wind farm in New York on leased land to generate and sell electricity. Under the proposed 40-year lease, BP keeps responsibility for and title to its wind facilities, may move/replace/repair/refurbish them at any time, and must remove everything (including foundations to four feet below grade) within eight months after the lease ends. BP asked whether building and installing the wind farm is a capital improvement and is subject to sales tax.

The Office of Counsel concluded the installations are not capital improvements, but the generating equipment qualifies for the production exemption.

• Not a capital improvement. A capital improvement must be intended as a permanent installation (Tax Law 1101(b)(9)). Tenant installations are presumed temporary unless the lease shows permanence (e.g., title vesting in the landlord on installation) (Flah's of Syracuse). BP's lease does the opposite -- BP keeps title and control and must remove the facilities -- so the wind farm is not a capital improvement (Merit Oil, Emery Air Freight). Its purchases and installation are therefore taxable unless another exemption applies.
• Production exemption rescues the generating gear. BP is generating electricity for sale, so the wind turbine -- rotor blades, hub, nacelle, tower -- is a unitary piece of generating machinery exempt under 1115(a)(12), and assembling and installing it (plus integrally connected SCADA and operational meteorological equipment) is exempt under 1105-B. (Meteorological equipment used to assess a site is not exempt unless used >50% in operations.)
• Production ends at the generator. Under Niagara Mohawk v. Wanamaker, everything after the generator is taxable distribution: internal/external step-up transformers, intra-farm collection cables (with breakers/controls), substations, and other grid-interface equipment (20 NYCRR 528.13(b)).
• Taxable site items. Cement/foundations, meteorological towers (vs. monitoring equipment), poles and conduit, control/maintenance buildings, fencing, and road materials aren't generating machinery and are taxable -- as is their installation/construction (20 NYCRR 541.5(b)(4)(iii)). Construction tools and equipment (e.g., cranes) are taxable.
• Who buys doesn't matter -- for exempt items. Qualifying generating equipment and its installation are exempt whether bought by BP or sold installed by a contractor; nonexempt property is taxable to whoever buys it, and contractors can buy items that stay tangible personal property for resale with an ST-120.1.

What this means for you

Energy developers building on leased land

A long lease that leaves you owning, controlling, and ultimately removing your facilities means your build is not a capital improvement -- so don't expect capital-improvement treatment on the civil works. The value is in the 1115(a)(12) production exemption for the turbine and its installation; the same "production ends at the generator" line that helps a landowner-developer (companion opinion TSB-A-09(59)S) applies here even though BP is a tenant.

Procurement and contractor structuring

The exemption follows the equipment, not the buyer or the land tenure: turbines and qualifying installation stay exempt through contractors, while transformers, cables, substations, foundations, buildings, fencing, and roads are taxable. Use ST-120.1 for resale purchases of nonexempt property that remains tangible personal property.

Common questions

Q: We're building permanent-looking infrastructure on leased land -- isn't that a capital improvement?
A: Not when the lease keeps title and control with you and requires removal at the end. Those installations are presumed temporary and aren't capital improvements.

Q: Does leasing (vs. owning) the land cost us the production exemption?
A: No. The 1115(a)(12) exemption for the turbine and its installation applies either way -- the capital-improvement question is separate.

Q: Which equipment is taxable?
A: Everything past the generator -- transformers, collection cables, substations, distribution -- plus foundations, met towers, buildings, fencing, and roads.

Citations and references

• Tax Law section 1101(b)(9) (capital improvement)
• Tax Law section 1115(a)(12) (exemption for machinery/equipment used directly and predominantly in producing electricity for sale)
• Tax Law section 1105-B (parts/tools/supplies and installation of qualifying production equipment)
• Tax Law section 1105(c)(3) and 1115(a)(17) (installation; capital improvement)
• 20 NYCRR 528.13(b) and 541.5(b)(4)(iii)
• Matter of Flah's of Syracuse v Tully, 89 AD2d 729 (tenant installations presumed temporary)
• Niagara Mohawk Power Corp. v Wanamaker, 286 App Div 446 (production ends at the generator)
• TSB-A-09(59)S (companion wind-farm component opinion)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a09_62s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(62)S
Sales Tax
December 29, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080416A

Petitioner BP Wind Energy North America, Inc. requested an advisory opinion as to whether
its construction and installation of a commercial wind farm on leased premises are considered a
capital improvement and are subject to sales tax.
We conclude that Petitioner’s installations of its equipment on leased property pursuant to
the terms of its lease agreement do not constitute a capital improvement to the leased premises. The
assembly and installation of its wind generation equipment used directly and predominantly in the
generation of electricity for sale may nonetheless qualify for exemption from sales tax pursuant to
the provisions of sections 1115(a)(12), 1105(c)(3) and 1105-B of the Tax Law. The purchases of
property, machinery and equipment (and charges for installation of that property) that do not qualify
for the exemption for machinery and equipment used directly and predominantly in the generation
of electricity for sale are subject to tax.
Facts
Petitioner is contemplating construction and operation in New York of a wind farm to be
engaged in the production and sale of electricity. The potential construction contemplates the
installation of foundations, turbines, transmission lines and towers, interconnection equipment,
electrical transformers, and cable. In addition to the costs directly associated with generation and
transmission equipment, there would be costs related to land development, roads, and operation
buildings. The turbine foundations are anticipated to be approximately 10 feet deep and
approximately 50-60 feet in diameter, requiring 300 cubic yards of concrete. The wind turbine
generators are anticipated to be mounted on a tubular tower of approximately 265 feet. Rotor
blades are expected to be between 127 and 157 feet in length. The turbines weigh in excess of 8
tons. Erection, assembly, and disassembly of the towers require a main crane with a capacity of
between 300 and 750 tons depending on the final design.
The real property on which the wind farm would be constructed would be leased to
Petitioner by an individual ("Lessor"). The prospective terms of the lease are summarized as
follows:
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The term of the lease would be 40 years unless terminated, revised or extended.
Termination of the lease would occur upon expiration of the lease term, written agreement
of the parties to terminate the lease, or material breach by either party.
Lease payments would be comprised of guaranteed payments and/or a percentage of gross
revenues based on the generation of electricity by the facility.
Lessor would be responsible for all real and personal property taxes levied on the premises.
Petitioner would be responsible for all personal property taxes levied on the wind facilities.

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TSB-A-09(62)S
Sales Tax
December 29, 2009

Petitioner would be responsible for all utility services used by the wind facilities or by
Petitioner on the premises.
Petitioner would be responsible for maintaining Petitioner's wind facilities in good condition
and repair, ordinary wear and tear excepted.
All wind facilities that would be constructed, installed, or placed on the premises by
Petitioner pursuant to this lease could be moved, replaced, repaired, or refurbished by
Petitioner at any time.
Upon termination or the end of the lease term, Petitioner would remove all its wind
facilities, including foundations to a depth of 4 feet below grade, within eight months from
termination or expiration.
If Petitioner did not remove all its wind facilities in accordance with the lease terms, Lessor
would have the option to remove these wind facilities from the premises and dispose of
them.

Analysis
Petitioner inquires whether its costs related to the purchase of materials and services relating
to the construction on leased realty of a commercial wind farm that is to be engaged in the
generation of electricity for sale are subject to sales and use tax.
Section 1101(b)(9) of the Tax Law provides that a capital improvement is an addition or
alteration to real property that: (A) substantially adds to the value of the real property, or
appreciably prolongs the useful life of the real property; (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.
When a contractor installs an improvement for the owner of the realty which meets all three
of the conditions set forth in section 1101(b)(9)(i) of the Tax Law, the work is considered a capital
improvement. In that case, charges for those installations are not subject to sales tax. See sections
1105(c)(3)(iii) and 1115(a)(17) of the Tax Law.
Items that are installed for a tenant that would otherwise be a capital improvement may not
qualify as a capital improvement by virtue of the terms of the tenant’s lease. See Matter of Flah's of
Syracuse, Inc. v. James H. Tully, Jr. et al, 89 AD 2d 729. Additions or alterations to real property
for or by a tenant of the property are presumed to be temporary in nature for purposes of the
definition of capital improvement set forth in section 1101(b)(9)(i) of the Tax Law, unless a
contrary intention is demonstrated. Specific lease provisions stating that: 1) immediately upon
installation, title to such installation vests in the lessor, and 2) the addition or alteration becomes
part of and remains with the premises after the termination of the lease, will demonstrate an
intention to make the installation permanent. Neither a provision granting the lessor the right to
require removal of the improvement nor a provision stating that the improvement becomes the
property of the lessor upon expiration of the lease or upon termination of the tenancy will negate
this demonstration of intention of permanence. In the absence of a lease provision, other factors
such as the nature of the installation, or written agreements other than a lease provision, may be
considered in determining the intention of the parties with respect to the permanence of the
installation. Factors that may indicate that a tenant installation is not intended to be permanent

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TSB-A-09(62)S
Sales Tax
December 29, 2009

include a lease provision requiring that the leased premises be restored to its original condition at
the termination of the lease, and the rental of the installed property by the tenant from someone
other than the lessor of the premises. See Taxable Status of Leasehold Improvements for or by
Tenants, Technical Service Bureau Memorandum, June 15, 1983, TSB-M-83(17)S, and Publication
862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property
(4/01), for further details.
Petitioner’s facilities and wind generation and other equipment do not become the property
of Lessor upon their installation. Pursuant to the lease terms, it is Petitioner who will be responsible
for maintaining the tenant improvements. In addition, Petitioner retains the right to move, replace,
restore, and refurbish the tenant improvements at any time. At the end of the lease term or upon
earlier termination of the lease, Petitioner is obligated to remove all the wind facilities, including
foundations to a depth of 4 feet below grade. Based on the described lease provisions, the
installations Petitioner is contemplating are not intended to be permanent and do not qualify as
capital improvements as defined in section 1101(b)(9) of the Tax Law. See also Merit Oil of NY
Inc. v. State Tax Commission, (3 Dept. 1986) 124 AD 2d 326, and Emery Air Freight Corporation
v. Tax Appeals Tribunal, (3 Dept. 1992) 188 AD 2d 772 (installations and improvements to realty
by tenants who were required to remove their installations, did not constitute capital improvements).
Thus, unless eligible for other exemptions, Petitioner’s purchases of the property and installation
services in connection with the wind farm are subject to sales tax.
However, Petitioner is constructing and will operate a commercial wind farm engaged in the
generation of electricity for sale. Tax Law section 1115(a)(12) provides an exemption from sales
tax for machinery or equipment for use or consumption directly and predominantly in the
production of electricity for sale by generating, but not including parts with a useful life of one year
or less or tools or supplies used in connection with such machinery or equipment. Parts with a
useful life of one year or less, tools, and supplies used in connection with generating machinery and
equipment are exempt pursuant to section 1105-B of the Tax Law. Section 1105-B also provides an
exemption from the tax imposed by section 1105(c)(3) of the Tax Law for the services of
maintaining and installing machinery and equipment that otherwise qualify for the exemption
provided for generating equipment in section 1115(a)(12) of the Tax Law.
The operation of a commercial wind farm engaged in the generation of electricity for sale is
an eligible activity for the purposes of the exemptions provided by Tax Law sections 1105-B and
1115(a)(12). Purchases of the machinery or equipment used and consumed directly and
predominantly in generation of electricity for sale and the charges for installing that machinery and
equipment are exempt from sales tax.
Thus, charges for the purchase, assembly, and installation of the electricity generation
equipment are exempt. For the purposes of a commercial wind farm operation, the wind turbine is
machinery or equipment used directly and predominantly in production activities. Without any key
piece of the wind turbine’s machinery and equipment, including the tower (to provide support and
necessary height clearances for the rotor blades) and the rotor blades (to catch the wind to turn the
hub that spins the generator), electricity could not and would not be produced. Only with all the
parts working as an integrated unit is electricity generated. Thus, the purchase, assembly, and
installation of the turbine, including the rotor blades, hub, nacelle (which contains the drive shaft,

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TSB-A-09(62)S
Sales Tax
December 29, 2009

gear box, generator, hydraulics, cooling system, control and monitoring equipment) and tower are
exempt from tax. See Adv Op Comm Tx & Fin, December 9, 2009, TSB-A-09(59)S.
Supervisory Control and Data Acquisition (SCADA) equipment and meteorological
equipment may perform functions that provide for an integrated management of the operation and
control of the wind turbine. Thus, SCADA and meteorological equipment integrally connected to
the operation of the wind turbines may also qualify as exempt electricity generation machinery and
equipment pursuant to the provisions of section 1115(a)(12) of the Tax Law. See T.V. Data Inc,
decision Tx App Trib No. 803016, March 2, 1999 (computers that formed a network [though not all
of the computers were directly connected to the production machinery] to provide commands to
drive the production equipment were exempt.)
However, the use of meteorological equipment to assess a site’s potential as a wind farm is
not an exempt use. Therefore, unless otherwise used directly and predominantly (more than 50% of
the time) in the operation of the wind turbines, the meteorological equipment would not qualify for
the exemption.
For purposes of the sales tax exemptions for machinery and equipment used or consumed
directly and predominantly in the production of electricity for sale by generation, the production
process is considered to have ended at the generating turbine. See Matter of Niagara Mohawk
Power Corporation v George W. Wanamaker, 286 App Div 446(4th Dept 1955), affd 2 NY2d 764,
which supports this conclusion. Thus, items subsequent to the generator are used in the distribution
of and not in the production of electricity. Accordingly, internal step-up transformers within the
wind generator or external transformers at the base of the tower, and intra-wind farm collection
cables (including their circuit breakers and control equipment) are considered part of the
distribution process and are thus subject to the sales tax. See TSB-A-09(59)S. Similarly,
substations and other equipment installed in the wind farm (transformers, breakers, meters, relays,
control and power equipment, grid interface equipment, transmission cables, etc.) are considered to
be used in distribution functions and activities (i.e, used in activities not directly relating to
production) and do not qualify for the production exemption (see Sales and Use Tax Regulations
section 528.13(b); ABB Power Transmission, Inc., Adv Op Comm T&F, July 17, 1990,
TSB-A-90(34)S; Gernatt Asphalt Products, Inc., Adv Op Comm T&F, December 5, 1985, TSB-A85(64)S; Akzo Salt, Inc., Adv Op Comm T&F, January 25, 1993, TSB-A-93(8)S).
Cement and other materials installed in foundations to support the towers and other
equipment are not machinery or equipment. Nor do they have an actual causal effect on the
generation of electricity. The charges for the cement and other materials, and for the installation
(construction) of the foundations, are not exempt under Tax Law sections 1115(a)(12) and 1105-B.
Meteorological towers (as opposed to meteorological monitoring equipment); poles and
conduit; control and maintenance buildings; fencing; and road materials are not machinery and
equipment used directly in generation of electricity. Purchases of these items, and their materials
and installation (construction), are not exempt pursuant to Tax Law sections 1115(a)(12)and
1105-B.

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TSB-A-09(62)S
Sales Tax
December 29, 2009

Sales And Use Tax Regulations section 541.5(b)(4)(iii) provides that where a contract
includes the sale of tangible personal property that remains tangible personal property after
installation, the contractor must collect from the customer the appropriate New York State and local
taxes on the selling price, including any charge for installation, of that tangible personal property.
Accordingly, Petitioner’s purchases of nonexempt machinery, equipment, or other tangible personal
property, such as transformers, cement for the foundations, cable and meteorological towers,
substation equipment anchor bolted to foundations, and overhead poles, and charges for their
installation, are taxable. See West Mountain Corporation v. Miner, 85 Misc 2d 416 (1976) and
Charles R. Wood Enterprises, Inc. v State Tax Commission, 67 AD 2d 1042 (1979).
In general, the property that is exempt from sales tax under section 1115(a)(12) or 1105-B of
the Tax Law will be exempt from tax whether purchased by Petitioner or purchased by and sold to
Petitioner on an installed basis by a contractor or subcontractor. Installation charges that are
exempt from tax under section 1105-B are nontaxable when performed on Petitioner’s behalf by its
contractors or subcontractors. Petitioner's purchases of nonexempt property and installation
services for the nonexempt property are taxable if the property remains tangible personal property
after installation. Petitioner's contractors may purchase nonexempt property and installation service
for resale where the property remains tangible personal property after installation. A contractor
may give its supplier a properly completed Contractor Exempt Purchase Certificate (ST-120.1) in
order to make exempt purchases of qualifying exempt production machinery and installation
services therefore, or nonexempt property that retains its identity as tangible personal property upon
installation and installation services for that property.
Purchases and leases of construction tools and equipment for use by Petitioner, its
contractors, or subcontractors in constructing and erecting the facility are subject to sales tax.

DATED: December 29, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the person
or entity fully and accurately describes all relevant facts. An Advisory
Opinion is based on the law, regulations, and Department policies in effect as
of the date the Opinion is issued or for the specific time period at issue in the
Opinion.