Are niche walls, wall fittings, and paneling installed during a retail store's initial build-out taxable fixtures or nontaxable capital improvements?

Plain-English summary

The petitioner runs a retail store in New York City and, during the store's initial build-out, installed niche walls, wall fittings, and paneling -- floor-to-ceiling in-store display shelving for merchandise. The petitioner says removing the niche walls and paneling would require putting up a new wall in their place. Its lease provides that all fixtures, paneling, partitions, railings, and like installations become the landlord's property upon installation and stay with the premises, unless the landlord, shortly before lease-end, elects to have the tenant remove them. The petitioner asked whether these items are capital improvements or taxable furniture and fixtures.

The Office of Counsel concluded they are capital improvements (not taxable):

• The three-part test (1101(b)(9); Flah's of Syracuse v. Tully). An installation is a capital improvement if it (A) substantially adds to the real property's value (or prolongs its life), (B) is permanently affixed so that removal would cause material damage to the property or the item itself, and (C) is intended to be permanent.
• Affixation and damage. From the pictures, the niche walls, fittings, and paneling are so permanently affixed that they couldn't be removed without substantial damage to the walls -- satisfying the first two criteria (the "wall units" label notwithstanding).
• Intent to be permanent. The lease says such installations become the landlord's property upon installation, showing they're intended to become part of the premises. And the landlord's right -- up to 20 days before lease-end -- to require removal does not negate that intent of permanence (TSB-M-83(17)S).

So the niche walls, wall fittings, and paneling are capital improvements and are not subject to sales tax.

What this means for you

Retailers and tenants doing a build-out

Built-in elements like paneling, display walls, and fittings that are permanently affixed (removal would damage the walls) and that your lease says belong to the landlord on installation are generally nontaxable capital improvements -- not taxable furniture/trade fixtures. Two practical points: it's a fact-intensive test (photos and how the items are attached matter), and a lease clause letting the landlord demand removal at the end doesn't by itself make the work taxable. Get a capital improvement certificate to your contractor where the job qualifies.

Free-standing fixtures are different

Items that simply sit in place or bolt on and can be removed and reused (display cases, shelving units that aren't built in) are typically taxable tangible personal property -- the line is permanence and damage-on-removal.

Common questions

Q: We built floor-to-ceiling display walls into our store -- taxable?
A: If they're permanently affixed (removal would damage the walls) and your lease vests them in the landlord on installation, they're nontaxable capital improvements.

Q: Our lease lets the landlord make us remove them at the end -- does that make them taxable?
A: No. A landlord's right to require removal doesn't negate the intent of permanence (TSB-M-83(17)S).

Q: What about free-standing display cases?
A: Items that can be removed and reused without damage are generally taxable tangible personal property, not capital improvements.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1105(c) (installation services)
• Tax Law section 1101(b)(9) (capital improvement)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_24s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel TSB-A-11(24)S

Advisory Opinion Unit Sales Tax
September 30, 2011

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE

ADVISORY OPINION PETITION NO. $101214B

On December 14, 2010, the Department of Taxation and Finance received a Petition for
Advisory Opinion from (.« Petitioner asks whether niche walls, wall
fittings, and paneling that are installed during the initial build-out of a store would be classified as
capital improvements or furniture and fixtures.

Based on the facts and pictures submitted (Appendix A), we conclude that the niche walls,
wall fittings, and paneling are capital improvements and are not subject to sales and use taxes as
tangible personal property.

Facts

Petitioner has a retail store located in New York City, at which it sells high fashion men’s
and women’s shoes, accessories, and other related items. Petitioner installed niche walls, wall
fittings, and paneling at the initial build-out of the store at this location which it leases from Lessor.
Petitioner submitted numerous pictures to show the “wall units,” which are described as floor to
ceiling in-store display shelving for merchandise. Petitioner asserts that removing the niche walls
and paneling would require a new wall to be put up in its place.

Paragraph 3 of the lease between the Petitioner and Lessor states as to alterations that:

[a]ll fixtures and all paneling, partitions, railings and like installations, installed in
the premised at any time, either by the Tenant or by Owner on Tenant’s behalf, shall,
upon installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease, elects to
relinquish Owner’s rights thereto and to have them removed by Tenant, in which
event, the same shall be removed from the premises by Tenant prior to the expiration
of the lease.

Analysis

Section 1105(a) of the Tax Law imposes sales tax on the receipts from the sale of tangible
personal property, except as otherwise provided in Article 28 of the Tax Law. Section 1105(c) of
the Tax Law excludes the installation of property that when installed would be capital
improvements to real property, as defined by paragraph 9 of section 1101(b) of the Tax Law. The
term capital improvement is defined in section 1101(b)(9)(i) of the Tax Law as an addition or
alteration to real property that (A) substantially adds to the value of the real property, or appreciably

TSB-A-11(24)S
-2- Sales Tax
September 30, 2011

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.

As detailed in Matter of Flah’s of Syracuse v. Tully, 89 A.D.2d 729 (3d Dep’t, 1982), the
pertinent criteria to consider in evaluating whether something is a capital improvement as opposed
to a trade fixture are the permanency of the affixation of the improvements to the real property,
whether the improvements can be readily removed without damage to them or the real property, and
whether the improvements are intended as permanent installations. In evaluating the niche walls,
wall fittings, and paneling, it appears that the alterations are so permanently affixed to the real
property that they could not be removed without substantial damage to the walls upon which these
improvements were placed. Petitioner describes the alterations in two ways. The first reference is
to niche walls, wall fittings, and paneling. In contrast, Petitioner also refers to the niche walls, wall
fittings, and paneling as “wall units,” conveying a different image that is more likened to furniture.
However, in reviewing the pictures provided by Petitioner, these alterations to the walls appear to
be designed in such a way that they are not readily removed from the walls and removal would
cause damage to the niche walls, wall units and paneling satisfying the first two criteria.

As to whether the improvements are intended to be permanent, Petitioner’s lease with
Lessor provides that “fixtures, paneling, partitions, railings and like installations” to the property
become the property of the Lessor upon installation. This lease language shows that the niche
walls, wall fittings, and paneling are intended to become part of the premises upon installation, so
these improvements are intended to be permanent. Even though the lease also provides that right up
to twenty days before the expiration of the lease, Lessor can decide the alterations must be removed,
TSB-M-83(17)S made clear that “[a] provision granting the lessor the right to require removal of
the improvement will not negate this demonstration of intention of permanence.”

Accordingly, based on the facts and pictures submitted, the niche walls, wall fittings, and
paneling are capital improvements and are not subject to sales tax.

DATED: September 30, 2011 /S/
DEBORAH LIEBMAN
Deputy Counsel

NOTE: 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.

APPENDIX A

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