Is a contractor's installation of permanently affixed electrical switchgear a nontaxable capital improvement, and what happens to the materials and field-service charges if it can't get a Form ST-124?

Plain-English summary

The Petitioner is a supply-chain/distribution company that occasionally acts like a prime contractor. Here it contracts (through the owner's property manager) to replace the medium-voltage electrical switchgear in a building's switch house. The switchgear is bolted to the floor and hard-wired into the building's electrical system, is not meant to be moved, and removing it would cut power/lights/alarms/cooling and damage the premises. The job also involves "field services": on-site engineering and design drawings, site prep, demolition of the old switchgear, a temporary-power plan, coordination meetings, design review, and start-up testing. The Petitioner asked, across five scenarios, whether it must collect tax -- especially if it cannot obtain a Form ST-124 (Certificate of Capital Improvement).

The Office of Counsel concluded:

• The installation is a capital improvement. Under section 1101(b)(9), a capital improvement (a) substantially adds value/prolongs life, (b) becomes part of / is permanently affixed to the realty so removal would cause material damage, and (c) is intended to be permanent. The switchgear meets all three.
• So the charges to the customer are not taxable. Under 20 NYCRR 541.5(b), a contractor's charges (labor and material) for a capital improvement are not taxed; the contractor is the retail purchaser and pays sales tax on its own purchases of the installed materials. Here the Petitioner (or its subcontractor) pays tax on what it buys.
• Field services are part of the capital improvement. Even items that alone wouldn't be a capital improvement (e.g., demolition of old switchgear) are exempt because they are necessary elements of a project that results in a capital improvement -- under the end-result test (20 NYCRR 527.7(b)(4)) -- whether or not separately stated, and whether billed itemized (Q1) or lump sum (Q2).
• The ST-124 affects proof, not the outcome. Accepting a properly completed Form ST-124 in good faith relieves the contractor from collecting tax (and puts the liability on the customer). Failure to obtain the ST-124 does not make a genuine capital improvement taxable (Q3-Q5) -- it just shifts the burden of proof onto the contractor to show the job was a capital improvement. (20 NYCRR 541.5(b)(4) spells out the consequences if tax is or isn't collected and a refund path for the customer.)

What this means for you

Contractors installing permanently affixed equipment

If what you install becomes a permanent part of the building (bolted/hard-wired, removal damages the property, meant to stay), it's a capital improvement: don't charge the customer sales tax on the materials or installation. Instead, you pay sales tax on the materials you buy for the job.

Field/soft services ride along

Engineering, drawings, demolition, temporary power, testing, start-up and similar field services that are necessary to a capital-improvement project are exempt too -- even if separately stated or billed lump sum -- under the end-result test.

Get the ST-124, but don't panic if you can't

A good-faith Form ST-124 relieves you of collecting tax and moves liability to the customer. If you can't get one, the job doesn't suddenly become taxable -- but the burden is on you to prove it was a capital improvement, so keep contracts and records. (Remember: a contractor can't use a capital-improvement certificate to buy materials tax-free from a supplier.)

Common questions

Q: Is installing hard-wired switchgear a capital improvement?
A: Yes -- it's permanently affixed, removal would damage the property, and it's intended to be permanent. The customer charges aren't taxable; you pay tax on your material purchases.

Q: Are the demolition and start-up "field services" taxable?
A: No. As necessary parts of a capital-improvement project, they're exempt under the end-result test, separately stated or not.

Q: We couldn't get a Form ST-124 -- do we owe tax?
A: A real capital improvement stays nontaxable, but without the ST-124 you carry the burden of proving it. A good-faith ST-124 would have relieved you of collecting tax.

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(a) (sales tax on tangible personal property and enumerated services)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• 20 NYCRR section 541.5(b) (contractors; capital improvement charges not taxable, contractor is retail purchaser)
• 20 NYCRR section 541.5(b)(4) (effect of furnishing or not furnishing a capital improvement certificate)
• 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_24s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(24)S
Sales Tax
May 29, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120612A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTED “Petitioner”. Petitioner asks whether certain sales of equipment it makes and
services it provides to its customers in New York State are subject to New York State and local sales tax.
We conclude that Petitioner’s installation of equipment constitutes a capital improvement and, therefore,
its charges to its customers for the field equipment and the service of installing it are not subject to sales
and use taxes.
Facts
Petitioner specializes in supply chain management services and distribution of high-quality
components, equipment and materials for the electrical and telecommunications industries. Petitioner
procures, warehouses, and delivers various kinds of electrical, communications and data products,
components, and related services for its New York State customers. Petitioner is a distributor, but on
occasion acts in a role similar to a “prime contractor” in connection with certain capital improvements for
property owners.
A property owner (Property Owner) seeks an electrical distribution system upgrade at its New
York facility, which will include the furnishing and installation of electrical equipment to replace existing
medium voltage switchgear assemblies in the switch house of that facility. Petitioner asserts this project
will constitute a “capital improvement,” because it involves an addition or alteration to real property that
is intended to become a permanent part of the realty and that either substantially adds to the value of the
real property or appreciably prolongs its useful life. Property Owner hires a property manager (Property
Manager) to act as its agent in connection with this capital improvement.
Property Manager enters into a contract with Petitioner (in this instance acting like a prime
contractor) to provide all materials and labor necessary to replace the switchgear equipment at Property
Owner’s New York State facility. Switchgear equipment is the combination of electrical disconnect
switches, fuses or circuit breakers that are used to control, protect and isolate electrical equipment. The
switchgear appears as a metal enclosure that houses the main power to the building. There are conduits
with cable that feed this enclosure, plus cables that extend out into the building itself. The switchgear is
affixed to the building and located in a separate, locked room. The switchgear is bolted or otherwise
attached to the floor of the room. This equipment is hard wired into the building’s electrical system and is
not intended to be moved or used elsewhere.
The labor charges include not only electrical installation services, but also “field services” that
include: on-site engineering and design drawings; preliminary site work and coordination; demolition of
old switchgear; development of a temporary power plan; coordination meetings with Property Owner and
utility companies; design review of final switchgear, control wiring, and relaying; and start-up. Start-up
testing includes inspection of the gear and wiring to make sure all connections are made properly and
testing of the meters and circuit breakers for proper operation to make sure no shipping damage has
occurred.

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TSB-A-15(24)S
Sales Tax
May 29, 2015

Property Manager issues a purchase order to Petitioner for the cost of materials and related field
services to complete the project. Property Manager, as agent for Property Owner, completes Form ST124, Certificate of Capital Improvement and timely provides it to Petitioner, who is listed as the
contractor on the certificate. Property Owner also completes Form ST-124 and timely provides it to
Property Manager, who is listed as the contractor on the certificate.
Upon receipt of the purchase order from Property Manager, Petitioner contracts with an electrical
subcontractor (Subcontractor) to provide all materials and field services called for in Property Manager’s
order in connection with the capital improvement on Property Owner’s premises. Subcontractor intends
to supply the equipment, perform the work, and bill Petitioner for both material and labor charges
incurred.
Although Petitioner states that it receives the Form ST-124, Petitioner asks the following
questions, including what happens if it is not successful in acquiring the Form ST-124 from Property
Manager:
1. The charges for materials and field services are separately stated from each other on Petitioner’s
invoice to Property Manager and Petitioner timely accepts in good faith a completed Form ST-124
certificate from Property Manager. Must Petitioner collect sales tax on any portion of the invoice?
2. The charges for materials and field services are not separately stated on Petitioner’s invoice to
Property Manager, but Petitioner timely accepts in good faith a completed Form ST-124 certificate
from Property Manager. As the contract is a “capital improvement,” may Petitioner refrain from
charging sales tax on this invoice, even though the invoice is billed as a lump sum amount?
3. The charges for materials and field services are separately stated on Petitioner’s invoice to Property
Manager. However, Petitioner is unsuccessful in acquiring a Form ST-124 certificate from Property
Manager. Although the overall contract performed at Property Owner’s facility is a “capital
improvement,” must Petitioner charge sales tax on the materials portion of the invoice?
4. The charges for materials and field services are separately stated on Petitioner’s invoice to Property
Manager. However, Petitioner is unsuccessful in acquiring a Form ST-124 certificate from Property
Manager. Although the overall contract performed at Property Owner’s facility is a “capital
improvement,” must Petitioner charge sales tax on the labor or field services component of the
invoice?
5. Petitioner is unsuccessful in acquiring a Form ST-124 certificate from Property Manager and the
invoice is for a lump sum amount with the field services not separately stated from the materials on
the invoice. Although the overall contract performed at Property Owner’s facility is a “capital
improvement,” must Petitioner collect sales tax on the entire invoice amount?
Analysis
New York State and local sales and use taxes are imposed on all sales of tangible personal
property, unless otherwise exempt, and on certain enumerated services. See Tax Law §1105(a) and (c). If
Petitioner sells tangible personal property that it installs and that remains tangible personal property after
installation, Petitioner is selling tangible personal property at retail and the sales are taxable.
However, any charges by a contractor (including charges for labor and material) to a customer for
adding to or improving real property by a capital improvement are not subject to tax. See 20 NYCRR §
541.5(b)(2). The charges to the customer for tangible personal property that becomes part of a capital

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TSB-A-15(24)S
Sales Tax
May 29, 2015

improvement are not subject to sales tax because the contractor is the retail purchaser of such property.
See 20 NYCRR §541.5(b)(1). When Petitioner acts as a contractor in installing tangible personal property
that becomes part of a capital improvement, its receipts for such tangible personal property will not be
subject to sales tax because Petitioner would not be selling tangible personal property at retail. In those
situations, Petitioner (or Subcontractor, as the case may be) must pay sales tax on its purchases of tangible
personal property to be installed as part of a capital improvement.
Tax Law §1101(b)(9) defines “capital improvement” as:
(i) 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.
See also 20 NYCRR § 527.7(a)(3).
In addition, 20 NYCRR § 527.7(b), provides:
(4) The imposition of tax on services performed on real property depends on the
end result of such 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.
Whether a particular installation constitutes a capital improvement depends on the circumstances
of a particular product and its installation. See TSB-A-94(43)S. Here, the first factor in the definition of
“capital improvement” is satisfied, because the installation of the electrical switchgear would add to the
value of the real property.
Petitioner also states that the switchgear assemblies will become a permanent part of the switch
house. Removal would cause material damage to the real property and to the capital improvement affixed
to it and is intended to become a permanent installation. The switch gear assemblies are bolted and
otherwise affixed to the floor of the switch house and are hard wired to the premises. Petitioner notes that
the switch gear is not intended to be moved or used elsewhere and is vital to the premises as it is directly
linked to the building’s electricity supply. Petitioner further notes that if the switch gear were removed,
doing so would remove power, lights, alarms, cooling and heat to the premises, which would cause
damage to the premises (for instance, loss of power to the sump pump would cause water damage).
Accordingly, based on the information provided by Petitioner, we conclude that the installation of
the switch house assemblies would qualify as a capital improvement to the real property for purposes of
sales and use taxes under Articles 28 and 29 of the Tax Law. Although some elements of Petitioner’s
charges for “field services” would not by themselves constitute capital improvements (e.g., demolition of
old switchgear), these services nevertheless qualify as a capital improvement, whether or not the charges
for these services are separately stated, because they are necessary elements of a construction project that
results in a capital improvement. The charges for the installed materials and field services therefore
would be exempt, whether or not they are separately stated on the invoice (Questions 1 and 2).

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TSB-A-15(24)S
Sales Tax
May 29, 2015

Petitioner’s acceptance of Form ST-124 from Property Manager in good faith would relieve it from
collecting any sales tax on the transaction.
With respect to Questions 3 through 5, 20 NYCRR § 541.5(b)(4) sets forth what happens if a
certificate of capital improvement is or is not furnished to a contractor. The regulation provides:
(4) Documents; capital improvement contracts.
(i) When a properly completed certificate of capital improvement has been
furnished to the contractor, the burden of proving the job or transaction is not taxable and
the liability for the tax rests solely upon the customer.
(a) The prime contractor should obtain a certificate of capital improvement from
the customer and retain it as part of his records. Copies of such certificate must be
furnished to all subcontractors on the job and retained as part of their records.
(b) A certificate of capital improvement may not be issued by a contractor,
subcontractor or any other person to a supplier on the purchase of tangible personal
property.
(ii) Where a contractor does not receive a capital improvement certificate from a
customer, the contract or other records of the transaction will prevail. In such case:
(a) where the contractor does not receive a capital improvement certificate,
collects tax on the full invoice price and the job is a capital improvement to real property,
the contractor is liable for the tax on the cost of materials incorporated into the job, plus
the tax collected from the customer. The customer is entitled to a refund of the tax paid to
the contractor; or
(b) where the contractor does not receive a capital improvement certificate,
collects no tax on the charges billed to the customer and the job is a capital improvement
to real property, the contractor is liable for the tax on the cost of materials incorporated
into the job performed.
(iii) If a contract includes the sale of tangible personal property which remains
tangible personal property after installation, the contractor must collect the appropriate
New York State and local taxes from the customer on the selling price, including any
charge for installation, of the tangible personal property unless a properly completed
exemption certificate is issued by the customer. The contractor may apply for a credit or
refund of taxes he has paid on purchases of the tangible personal property that remain
tangible personal property after installation.
The mere failure by Petitioner to obtain a properly executed ST-124 from its customer does not
change the exempt nature of a capital improvement. While receipt of Form ST-124 in good faith relieves
Petitioner from the obligation to collect sales tax on the transaction, failure to obtain this form places the
burden on Petitioner to prove that the transaction was a capital improvement.

DATED: May 29, 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.