Are incidental repairs during a capital improvement taxable, and does a good-faith capital improvement certificate protect the contractor?

Plain-English summary

The petitioner is a general contractor on capital-improvement projects (new construction, alterations, tenant fit-outs). Plans often require reusing existing equipment in "like new" condition and repairing existing components (masonry, flooring, plaster, steel). When an HVAC subcontractor finds it must replace minor parts (e.g., a fan motor) on a reused rooftop A/C unit, it bills a distinct repair charge. The petitioner asked (1) whether such incidental repairs during a capital improvement are taxable, and (2) what happens when a subcontractor refuses the capital improvement certificate the petitioner accepted in good faith from its customer.

The Office of Counsel concluded:

• The test is the "end result" / integral-to-the-improvement. Maintaining, servicing, or repairing real property is taxable (Tax Law 1105(c)(5)) as distinguished from a capital improvement (1101(b)(9)). Whether a service is taxable turns on its end result (20 NYCRR 527.7(b)(4)). A contractor can do both taxable repairs and capital-improvement work on one job.
• Integral repairs = exempt. Services that would be taxable alone become part of the capital improvement when integral to it -- e.g., repairs to masonry so a new glass facade attaches, subfloor prep for new flooring, wall prep for new finishes, corrective work for damage caused by the improvement, "cleaning up after the trades," repainting a wall after a doorway is closed (20 NYCRR 541.1(f); TSB-A-02(60)S; TSB-A-07(1)S). Not taxable.
• Stand-alone repairs = taxable. Replacing a failed/near-end-of-life fan motor, control board, or refrigerant to restore an existing A/C unit -- where the unit isn't being replaced and is physically distinct from the ductwork being renovated -- is a routine repair not necessitated by the improvement. It's taxable. Work isn't integral when it isn't necessitated by the improvement and there's a clear physical separation.
• Good-faith certificate protects you (mostly). Timely, good-faith acceptance of a capital improvement certificate (within 90 days of completion) releases the contractor from collecting tax (Tax Law 1132(c); Saf-Tee Plumbing); there's no duty to police customers. But if the contractor knows the work isn't a capital improvement, or the Tax Department has put it on notice (here, this very opinion did, as to the HVAC repair), it can no longer accept a certificate in good faith for that work and must collect tax.
• Subcontractor mechanics. A subcontractor that receives a copy of the certificate may rely on the GC's good-faith acceptance (20 NYCRR 541.5(d)(1)(iii)) -- but it may demand sales tax if it believes its work is taxable, and then the GC must pay. The GC can then apply for a refund (granted unless the Department shows the GC didn't accept the certificate in good faith).

What this means for you

Contractors and subcontractors

On a capital-improvement job, separate the integral work from stand-alone repairs. Prep and corrective work tied to the improvement is exempt; routine equipment repairs on items you're merely reusing are taxable -- collect tax on those. Once the Department (or this kind of guidance) puts you on notice that a task isn't a capital improvement, a certificate won't protect that task.

Certificates and refunds

Accept capital improvement certificates in good faith and timely (within 90 days of completion) and keep them. If a subcontractor insists on charging you tax for work you believe is exempt, pay it and claim a refund rather than fighting at the invoice.

Common questions

Q: Are repairs done during a capital-improvement project automatically exempt?
A: No. Only repairs integral to the improvement (necessitated by it, no clear separation) are exempt. Stand-alone repairs -- like replacing a failing motor in a reused A/C unit -- are taxable.

Q: Does a capital improvement certificate always protect me?
A: Generally yes, if accepted in good faith and timely. But not for work you know isn't a capital improvement, or that the Tax Department has told you isn't one.

Q: A subcontractor won't accept my certificate and charges me tax -- what do I do?
A: Pay the tax, then apply for a refund. You should get it unless the Department shows you didn't accept the certificate in good faith.

Citations and references

• Tax Law section 1105(c)(5) (sales tax on maintaining/servicing/repairing real property)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• Tax Law section 1132(c) (good-faith acceptance of exemption certificate)
• 20 NYCRR section 527.7 (services to real property; end-result test)
• 20 NYCRR section 541.5(d) (subcontractor reliance on capital improvement certificate)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_25s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(25)S
Sales Tax
September 9, 2013

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

PETITION NO. S120307A

The Department of Taxation and Finance received a Petition for Advisory Opinion from name
and address redacted. Petitioner asks whether the receipts for incidental and ancillary repairs or part
replacement(s) it performs while constructing a capital improvement to real property are subject to
sales tax. Petitioner also asks whether it must pay sales tax to a subcontractor who has refused to
accept a capital improvement certificate that Petitioner has itself accepted in good faith from its
customer.
We conclude that incidental and ancillary repairs or part replacement(s) to real property that are
not integral to the construction of a capital improvement constitute distinct repair or maintenance
services subject to sales tax. Petitioner must collect sales tax on the receipts for these services even
though its customer provided Petitioner an executed capital improvement certificate, if the Tax
Department has informed Petitioner that the work does not constitute a capital improvement or
Petitioner has knowledge that the service work is not integral to the capital improvement work. In all
other circumstances, if Petitioner has accepted a capital improvement certificate from a customer in
good faith, it is not obligated to collect sales tax.
Facts
Petitioner is a general contractor that performs capital improvement projects, such as new
construction, alterations, and tenant fit-outs for commercial, retail and other non-residential
property owners.
A Certificate of Capital Improvement executed by Petitioner’s customer is provided to every
subcontractor on the project regardless of the size of the subcontract. Sales tax is collected by the
vendor on the purchase of all materials. In general, the plans and specifications for alterations and
tenant fit-outs (including those in previously occupied spaces) dictate that Petitioner reuse certain
existing equipment (e.g., fans, air conditioners, plumbing fixtures), and make certain that this
equipment is in "like new condition" upon completion. Additionally, the plans and specifications may
direct Petitioner to repair existing building components, such as masonry, flooring, plaster, or steel,
that are to remain and/or act as a substrate for new building components.
Petitioner issues contracts to air-conditioning subcontractors to provide for all heating,
ventilation and air-conditioning work in accordance with the plans and specifications. In addition to
providing for new equipment and sheet metal ductwork, the plans may call for the reuse of a rooftop
air conditioner, which, upon completion, is to be put into "like new condition."
After beginning work, the subcontractor may find that certain miscellaneous parts have to be
replaced, the cost of which is insignificant to the overall cost of the capital improvement project. When

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this happens, Petitioner will issue a change order to the subcontractor to make these repairs and replace
some parts on the air-conditioning unit. The subcontractor will bill a distinct charge for these repairs.
Petitioner contends that when the contractor performing the HVAC work on a capital
improvement project needs to replace a fan motor and make repairs to an existing air conditioner in
order to make it work "like new", the cost of these repairs are part of the capital improvement project
and should not be taxed as ordinary repairs. Petitioner also contends that repairs to masonry to ensure
that a new glass facade is attached to a structurally sound building, repairs to a subfloor so that the new
floor will be properly installed, or the preparation of existing walls to make certain finishes have a
suitable substrate, are part of and included in the capital improvement project, and are not deemed to
be ordinary repairs.
Analysis
Section 1105(c)(5) of the Tax Law imposes sales tax upon the receipts from every sale, except
for resale, of the service of “maintaining, servicing or repairing real property, property or land, . . . as
distinguished from adding to or improving such real property, property or land, by a capital
improvement.”
The term “capital improvement” is defined as:
An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real
property so that removal would cause material damage to the property or
article itself; and
(C) Is intended to become a permanent installation.
Tax Law § 1101(b)(9)(i). “Maintaining, servicing and repairing” covers “all activities that relate to
keeping real property in a condition of fitness, efficiency, readiness or safety or restoring it to such
condition,” including painting, and services to the grounds, such as lawn services, tree removal and
spraying, trash removal, sewerage service, and snow removal. See 20 NYCRR § 527.7(a). Whether a
service to real property is subject to sales tax depends on the “end result” of the 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.”
20 NYCRR § 527.7(b)(4).
A contractor can perform both capital improvement work and taxable services to real property
for a customer. See TSB-A-09(10)S; TSB-A-05(7)S; TSB-A-87(30)S, TSB-A-85(5)S. However,
services that by themselves would constitute taxable services become a component of capital
improvement work if the services are integral to capital improvement work. For example, corrective
work necessary to repair damage to real property caused by capital improvement work is itself a
component of capital improvement work. See 20 NYCRR § 541.1(f). Another example is cleaning that
occurs during the completion of the building and prior to the occupancy. This type of cleaning is
known in the construction industry as “cleaning-up after the trades.” The purpose of the cleaning is to

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remove all construction residue including packaging and protective materials, plaster, paint, compound
and dust. These cleaning services will qualify as part of the capital improvement. See TSB-A02(60)S. Similarly, if an interior doorway is removed and the resultant opening in the wall is closed,
the repainting of that wall will qualify as a capital improvement. See TSB-A-07(1)S.
If servicing of real property is not integral to the completion of capital improvement work, the
service is distinct from the capital improvement work, and the receipts for the service are subject to
sales and use tax. Service work is not integral to capital improvement work when the servicing is not
necessitated by the capital improvement work and a clear physical separation exists between the
property being serviced and the capital improvement.
Repairs to masonry to ensure that a new glass facade is attached to a structurally sound
building, repairs to a subfloor so that the new floor will be properly installed, and the preparation of
existing walls to make certain finishes have a suitable substrate are all integral parts of a capital
improvement project.
Consequently, Petitioner’s receipts for these components of capital
improvement work are not subject to sales tax.
The replacement of a fan motor, microprocessor control board, refrigerant or similar
components of an air conditioning unit to restore the unit to a condition of fitness and efficiency if the
component being replaced has failed or is near the end of its useful life, do not constitute a capital
improvement. This type of service is routinely performed by itself. Further, the replacement of
components of the air conditioning unit in question by Petitioner’s subcontractor is not necessitated by
the capital improvement work that Petitioner is performing based on the facts outlined above. The air
conditioning unit containing the components is not itself being replaced and is clearly distinct from the
duct work and other components of the HVAC system that Petitioner is renovating as part of its capital
improvement work. Because the service work is not integral to the capital improvement work, receipts
for the service are subject to sales tax.
Petitioner's timely receipt of a capital improvement certificate in good faith releases it from the
obligation to collect sales tax from its customer. See Tax Law § 1132(c). That is, if Petitioner has
accepted in good faith a certificate of capital improvement within 90 days after the completion of the
capital improvement, it is not under a duty to investigate or police its customers, and has no duty to
debate with its customers as to what constitutes a capital improvement. See Saf-Tee Plumbing v State
Tax Commission, 77 AD2d 1 (3rd Dept 1980). An exemption 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.” 20 NYCRR § 532.4(a)(2)(i). Thus, Petitioner is
not required to collect sales tax from a customer who has issued a capital improvement certificate
pertaining to construction so long as Petitioner has no knowledge that the project does not qualify as a
capital improvement.
If a contractor has been put on notice directly by the Tax Department that specific work does
not qualify as a capital improvement, the contractor cannot accept in good faith a capital improvement
certificate from a customer for such work and must collect sales tax from the customer on the receipts
for the work. See Matter of Hydronic Fabrications, Inc., Tax Appeals Tribunal, December 1, 1988,
TSB-D-88(44)S. Because Petitioner is now on notice that the repair work on the air conditioning unit

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described in this Advisory Opinion does not qualify as a capital improvement, it can no longer accept
in good faith a capital improvement certificate for work that is identical in all relevant aspects to the
HVAC repair described in the fact section of this Advisory Opinion. This requirement extends to any
such work for which Petitioner has not received payment from its customer as of the date of its receipt
of this Advisory Opinion.
If a contractor accepts in good faith a capital improvement certificate from a customer, any
subcontractor that receives a copy of the certificate may rely on the general contractor’s good faith
acceptance of the capital improvement certificate from its customer and is not obligated to collect sales
tax from the general contractor. See 20 NYCRR § 541.5(d)(1)(iii). However, a subcontractor has the
right to demand sales tax from the general contractor if the subcontractor believes that the work it
performs is taxable. That is, a subcontractor is not obligated to accept the general contractor’s
assertion that the work performed by the subcontractor is part of a capital improvement project. If a
subcontractor demands sales tax from Petitioner, Petitioner must pay the tax. Petitioner, however, may
apply for a refund of the sales tax paid to the subcontractor, and should be granted a refund unless the
Tax Department can establish that Petitioner did not accept the capital improvement certificate in good
faith. In this case, Petitioner may be entitled to a refund of tax it paid to a subcontractor for the HVAC
repairs prior to the issuance of this Advisory Opinion. However, Petitioner would not be entitled to a
refund of tax on that type of service after this AO is issued.

DATED: September 9, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this document does not cover every situation
and is not intended to replace the law or change its meaning.