Is removing or abandoning a disused oil tank as part of an oil-to-gas heating conversion subject to NY sales tax?

Plain-English summary

The Petitioner removes or abandons disused oil tanks and also does oil-to-gas heating conversions for homes. A removal cleans out and hauls away the old tank (filling any void); an abandonment in place cleans the tank and fills it with sand, foam, or concrete so it's sealed and harmless, leaving it in the ground. Usually this follows a conversion to gas -- the old tank doesn't interfere with the new gas system, but owners want the void filled or the tank gone (sometimes later, e.g., when selling the home). The 2010 Fire Code requires that a permanently out-of-service oil tank be removed or abandoned.

The Office of Counsel concluded:

• Default: taxable. Oil-tank removal or abandonment-in-place is "maintaining, servicing or repairing real property" under section 1105(c)(5) -- so it's taxable by default.
• Exception: part of a capital improvement. Under the end-result test (20 NYCRR 527.7(b)(4)), a service that would otherwise be taxable becomes part of a capital improvement if it is integral to, or a constituent part of, that improvement. Installing a new gas heating system (or originally installing/replacing an oil tank) is itself a capital improvement (Pub. 862). So removal/abandonment can ride along as nontaxable if it's a necessary part of the oil-to-gas conversion. (The opinion cites Bldg. Contractors Ass'n v. Tully -- debris removal is part of a capital improvement -- and the rule that work legally or physically required is included.)
• The one-year rule. Because the Fire Code requires removing/abandoning tanks out of service over a year, the Department will assume a removal/abandonment commenced or contracted for within one year of the new gas-system install is part of that capital improvement (not taxable). If it's contracted for more than a year later, it's not treated as part of the capital improvement and is taxable -- unless the owner shows circumstances that prevented starting within the year (citing TSB-A-08(48)S).
• Fire Code mandate isn't enough. That the Fire Code requires removal/abandonment does not by itself make the service exempt.

What this means for you

Oil-tank / heating-conversion contractors

Standing alone, oil-tank removal or abandonment is taxable real-property maintenance -- collect tax. It becomes nontaxable only when it's a genuine part of a capital improvement, like the oil-to-gas conversion it accompanies.

Mind the one-year clock

Do (or contract for) the removal/abandonment within a year of installing the new gas system and the Department will treat it as part of the capital improvement -- not taxable. Wait more than a year and it's taxable, unless you can document why it couldn't be done sooner.

"Required by law" doesn't equal exempt

A Fire Code (or other legal) mandate to remove/abandon the tank does not by itself exempt the charge. The exemption comes from being part of a capital improvement, tested by the end result and the one-year timing -- not from the legal requirement.

Common questions

Q: Is removing an old oil tank taxable?
A: By itself, yes -- it's taxable real-property maintenance under section 1105(c)(5). It's nontaxable only when it's a necessary part of a capital improvement, like an oil-to-gas conversion.

Q: We did the conversion now and the owner wants the tank gone next year -- taxable? A: If contracted within a year of the gas install, treat it as part of the capital improvement (not taxable). More than a year later, it's taxable unless you can show circumstances that prevented doing it sooner.

Q: The Fire Code requires removal -- doesn't that make it exempt? A: No. A legal mandate doesn't itself exempt the service; the exemption depends on its being part of a capital improvement.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(c)(5) (sales tax on maintaining, servicing, repairing real property)
• Tax Law section 1105(c)(3) (sales tax on installing/servicing tangible personal property; exception for capital improvement)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• 20 NYCRR section 527.7(b)(4) (end-result test for services on real property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(22)S
Sales Tax
May 28, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S140801A

The Department of Taxation and Finance received a Petition for Advisory Opinion from REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED (“Petitioner”). Petitioner asks whether the sale of an oil tank removal or abandonment service, as described herein, done as part of converting a home-heating system from oil to gas, is subject to sales and use tax. We conclude that such a service is subject to sales tax as a real property maintenance service under Tax Law § 1105(c)(5) unless it is done as a constituent part of a capital improvement project as described below. Facts Petitioner provides oil tank removal or abandonment services to residential customers, and also performs oil to gas conversions for home heating systems. An oil tank may be located below or above-ground in the basement, or outside, a few inches away from the home. Petitioner performs one of two services in connection with oil tanks that have been placed out of service: a removal service or an abandonment in place service. A removal service involves the cleaning and removal of the disused oil tank along with filling in any void. An abandonment in place service requires cleaning and filling the disused oil tank with sand, foam, or concrete, to ensure that the tank is sealed and rendered harmless, and leaving it in place. In most cases, oil tank removal or abandonment follows a conversion of a home’s heating system from an oil to a gas heating system. Generally, the operation of the new gas system does not necessitate the removal or abandonment of the disused oil tank, as the presence of the disused tank does not interfere with the operation of the new gas system. The purpose of an abandonment in place is to prevent the collapse of a void underground and ensure that no oil is left in the tank, thereby preventing future leakage or contamination of the surrounding real property. The removal or abandonment service is often requested by the property owner right after the conversion. In some cases, however, tank removal or abandonment occurs at a later date, perhaps at the time the home is being sold. The 2010 Fire Code of New York State requires that an oil tank that is permanently taken out of service be abandoned in place or removed. The required procedures are similar to the removal or abandonment procedures described above. See Fire Code of the State of New York § 3404.2.13.3. Executive Law § 379 authorizes local governments to impose “higher or more restrictive standards” than the State Fire Code. The Department of State’s regulations incorporate by reference the 2010 Fire Code of New York State. See 19 NYCRR § 1225.1.

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TSB-A-15(22)S
Sales Tax
May 28, 2015

Analysis
Tax Law § 1105(c)(3) imposes sales tax on the receipts from the services of installing, maintaining, servicing, or repairing tangible personal property. Sales tax will not apply where the tangible personal property installed becomes part of a capital improvement. See § 1105(c)(3)(iii). Tax Law § 1105(c)(5) imposes tax on receipts from the services of 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. The term “capital improvement” is defined as an addition or alteration to real property that (a) substantially adds value to or prolongs the life of real property; (b) becomes part of the real property or is permanently affixed to real property so that removal would cause material damage to the property or article itself; and (c) is intended to become a permanent installation. See Tax Law § 1101(b)(9)(i). The imposition of sales tax on a service performed on real property depends on the end result of such service. See 20 N.Y.C.R.R. § 527.7(b)(4). If the end result of the service is the repair or maintenance of real property, such service is taxable. If the end result of the same service is a capital improvement to the real property, such service is not taxable. Id. Services that by themselves would be taxable become a component of capital improvement work if the services are integral to, or a constituent part of, a capital improvement. In Bldg. Contractors Ass'n, Inc. v. Tully (87 A.D.2d 909, 911 [1982]), the Appellate Division applied the end result test to hold that waste-removal from a construction site is part of the capital improvement “[s]ince the completion of a capital improvement project generally cannot be accomplished without removal of construction and demolition debris.” See also TSB-A-13(25)S (“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”). Under the “end result test,” a capital improvement includes both work that is legally required as part of a capital improvement, as well as work that physically required. See Matter of Robert Bruce McLane Associates, Inc., Tax Appeals Tribunal, August 31, 1995 (confirmed 232 AD2d 826 (3d Dep’t 1996). Generally, the original installation or replacement of an oil tank, as well as the installation of a gas system, qualify as capital improvements and, accordingly, are not subject to sales tax. See Publication 862, Sales and Use Tax Classification of Capital Improvements and Repairs to Real Property. Oil tank removal or abandonment in place services constitute “maintaining, servicing or repairing real property” under Tax Law § 1105(c)(5) and will be taxable unless the oil tank removal or abandonment service is a necessary part of a capital improvement under the end result test. See 20 N.Y.C.R.R. § 527.7(b)(4); Bldg. Contractors Ass'n, Inc. supra. The question here then is when will an oil tank removal or abandonment service be considered sufficiently related to the conversion of an oil-based heating system to a gas system as to qualify as part of that capital improvement under the end result test? The State Fire Code provides that oil tanks that have been out of service for more than a year must be removed or abandoned. See State Fire Code §§ 3404.2.13.1.3; 3404.2.13.2.3. Thus, the Department will assume that an abandonment or removal of an oil tank commenced or contracted for within a year of the installation of the new gas heating system is related to and a necessary part of that installation. Removal or abandonment services contracted for more than a

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TSB-A-15(22)S
Sales Tax
May 28, 2015

year after the installation of the new gas heating system will not qualify as sufficiently related to that capital improvement unless the property owner can show circumstances that prevented the commencement of the oil tank removal or abandonment service within a year of the completion of the installation of the new gas system. See TSB-A-08(48)S [work on real property done in 1999, even if a capital improvement, found to be irrelevant in determining the taxability of remediation work done on the same property nine years later].

DATED: May 28, 2015

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.