Are a contractor's charges to update a kitchen (new cabinet doors, countertop, sink, molding) a tax-exempt capital improvement?

Plain-English summary

The petitioner runs a business updating ("refacing"/refreshing) kitchens. A typical job, sold as a set-price package, includes: removing old cabinet doors/hinges; painting the existing cabinet frames; installing new cabinet doors, hidden hinges, knobs/pulls, and molding (painted to match); and replacing the countertop, sink, and faucet. It offers one package for owner-occupied homes and another for rental properties (contracting with the owner, not the tenant). The renovation is only offered as a complete package, designed to add substantial value. The petitioner asked whether it must charge sales tax.

The Office of Counsel concluded the packaged renovation is a capital improvement -- installation not taxable. Sales tax applies to tangible personal property and to charges to install it (Tax Law 1105(a), 1105(c)(3)), but 1105(c)(3)(iii) excepts installations that are capital improvements (Tax Law 1101(b)(9)) -- additions/alterations that (i) substantially add value (or prolong useful life), (ii) become part of / permanently affixed to the realty so removal would cause material damage, and (iii) are intended to be permanent. The petitioner's package (closely matching Nu-Look Specialists) meets all three, so the renovation is a capital improvement and the installation charges are not taxable. The rental-property package qualifies too (and because the petitioner contracts with the owner, no leasehold-permanence question arises).

Two qualifications:

• Add-ons: a backsplash and painting offered at extra cost are part of the capital improvement only if provided as constituent parts of the original package. Flooring that is not part of new construction, a new addition, or a total reconstruction is not a capital improvement, so the petitioner's charges to install it are taxable (1101(b)(9)(iii)).
• Paperwork and materials: the petitioner won't have to collect tax on the package installation if it gets a properly completed Certificate of Capital Improvement (Form ST-124) within 90 days; a good-faith ST-124 shields it from liability (Tax Law 1132(c)). But as the one making the capital improvement, the petitioner is the ultimate consumer and pays sales tax on its own materials at purchase (20 NYCRR 527.7(b)(5)).

What this means for you

Remodelers and cabinet-refacing contractors

A genuine renovation package that permanently upgrades a kitchen is a capital improvement -- you don't charge the customer sales tax on the job (collect a Form ST-124), but you do pay tax on the materials you buy to do it. Bundle add-ons like painting and a backsplash into the original package if you want them treated as part of the capital improvement.

Watch flooring

Stand-alone flooring (not part of new construction, an addition, or a total reconstruction) is not a capital improvement -- charge sales tax on that installation even when it's added to a qualifying kitchen package.

Common questions

Q: Is my kitchen-refresh package taxable to the customer? A: No. As a complete package it's a capital improvement, so the installation isn't taxable -- get a Form ST-124 within 90 days.

Q: Do I still pay tax on anything?
A: Yes. As the one making the capital improvement, you're the ultimate consumer and pay sales tax on the materials you buy.

Q: What about adding a backsplash, painting, or flooring? A: Painting and a backsplash count only if they're part of the original package. Flooring that isn't part of new construction/an addition/a total reconstruction is taxable.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1105(c)(3) (installing tangible personal property; capital improvement exception)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• Tax Law section 1132(c) (good-faith capital improvement certificate)
• 20 NYCRR section 527.7(b)(5) (contractor pays tax on materials as ultimate consumer)

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_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(4)S
Sales Tax
January 8, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S111026A

The Department of Taxation and Finance received a Petition for Advisory Opinion from name and address redacted (Petitioner). Petitioner asks whether he must charge his customers New York State sales tax on the services he performs in updating kitchens for his customers. We conclude that the services as described, when they are provided as a complete package, satisfy the statutory requirements for a capital improvement and as such, Petitioner’s installation charges will not be subject to sales tax. Facts The Petitioner has a business updating kitchens in homes occupied by the owner(s). When he updates a kitchen, he performs the following services:
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Removing the old cabinet doors and hinges
Painting the existing kitchen cabinet frames
Installing new cabinet doors and new hidden hinges
Painting the new cabinet doors and drawer fronts
Installing new knobs or pulls on the cabinet doors (cabinet hardware) Replacing the old countertop with a new countertop Replacing the old faucet and sink with a new faucet and sink Replacing the old cabinet molding with new cabinet molding, which is painted to match the other improvements.

Petitioner advertises an installation package of a certain number of cabinet doors, drawer fronts along with new cabinet hardware, up to 14 feet of new countertops, a new faucet, and molding for a set price. If a particular project requires it, Petitioner will provide additional doors, fronts, and countertop at an additional rate. For owner-occupied properties, the installation is only provided as a complete package. Petitioner states that the renovation is designed to be done in its entirety in order to add substantial value to a house. Petitioner also advertises a name redacted for rental properties. The package offered at a set price includes new raised-panel doors, a new laminate countertop, new sink and faucet, and new hardware on the cabinets. This renovation is also intended to be done in its entirety in order to add substantial value to the property. For an additional cost, a customer may also add a backsplash, painting, or flooring to the contract. Petitioner represents that, regarding rental

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TSB-A-13(4)S
Sales Tax
January 8, 2013

property, he will contract with the owner of the property and not the tenant for purposes of the facelift.1 Analysis Whether or not Petitioner’s receipts from the installation of a name redacted are taxable depends on whether or not they are deemed capital improvements under the Tax Law. Tax Law
§1105(a) imposes sales tax upon the receipts from every retail sale of tangible personal property except as otherwise provided under this article. Sales tax is also imposed on charges to install tangible personal property. See Tax Law §1105(c)(3). Tax Law §1105(c)(3)(iii) provides an exception for installing tangible personal property that will constitute a capital improvement to real property, property, or land as defined in §1101(b)(9). See 20 NYCRR §527.5(b)(4). Tax Law §1101(b)(9) defines capital improvement as 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; and (ii) Becomes a 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. Petitioner’s package of services for homeowner kitchen remodeling includes installing new cabinet doors and drawer fronts, as well as a new countertop, new moldings, and a new sink and/or faucet. Petitioner also paints all the exposed wood surfaces (including the cabinet frames) to match the color scheme selected by the customer. Petitioner’s kitchen and cabinet renovation package is substantially similar to that at issue in Nu-Look Specialists, Inc., (Division of Tax Appeals, TAT (November 3, 1988). Petitioner’s renovation package therefore (1) substantially adds to the value of the real property; (2) the new products become part of the customer’s real property or are permanently affixed to the customer’s real property so that removal would potentially cause damage to the property or article itself; and (3) the installations are intended to become permanent additions to the real property. See Tax Law §1101(b)(9)(i). As such, the renovation project is a capital improvement and thus not subject to sales tax. See Matter of Nulook-Specialists, Supra. Petitioner’s advertised name redacted for rental dwellings includes new cabinet doors and hinges, new cabinet hardware, new countertops, and new sink and faucets. Like the improvements for the owner-occupied homes, the renovations are offered only as a package and as such will also qualify as a capital improvement and not be subject to sales tax. Additional 1

Because the services Petitioner performs on rental properties will be done for the owner of the property, it is not necessary to discuss whether the existence of a leasehold affects the permanence requirement of the statute and regulations.

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TSB-A-13(4)S
Sales Tax
January 8, 2013

items may be added to the package at additional costs: a backsplash, flooring, and painting. The backsplash and painting offered at additional costs must be provided as constituent parts of the original package in order for them to be part of the overall capital improvement package. Flooring which is not part of new construction, new addition, or a total reconstruction is not a capital improvement, and Petitioner’s installation charges are subject to sales tax. See Tax Law
§1101(b)(9)(iii).
Accordingly, Petitioner will not be required to collect sales tax on the installation services in the packaged plans if he is presented with a properly completed Certificate of Capital Improvement (ST-124) within 90 days from the date of performing the capital improvements. See TSB-A-03(23)S. If Petitioner obtains a properly completed ST-124 in good faith, Petitioner cannot be held liable for sales tax he did not collect from his customer. See Tax Law §1132(c). Petitioner, in making a capital improvement, must pay tax on his cost of materials, as he is the ultimate consumer of the tangible personal property. See 20 NYCRR §527.7(b)(5). Generally, a contractor must pay sales tax on such materials at the time of purchase in accordance with
§1101(b)(4) of the Tax Law.

DATED: January 8, 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.