Is the sale and installation of a custom closet-organizing system a nontaxable capital improvement?

Plain-English summary

A home-organization retailer sells and installs a custom closet-organizing system. It is placed on the floor (not attached to it), built to the customer's closet measurements, and can add drawers, rods, mirrors, racks and decorative trim. When against a wall, it is held by an anti-tip bracket (two screws per wall) to prevent tipping; optional rear paneling is secured with 2–4 finishing nails. Removing the system leaves only the screw and small nail holes. The retailer separately states the product and installation charges (both with a markup) and asked whether the sale and installation are taxable.

The Office of Counsel concluded the sale and installation are taxable — the product is not a capital improvement:

• Installation is taxable unless it is a capital improvement. Installing tangible personal property is a taxable service under Tax Law section 1105(c)(3), except where the installed property becomes a capital improvement to real property.
• A capital improvement requires all three tests (Tax Law section 1101(b)(9)): (A) it substantially adds value or appreciably prolongs the real property's life; (B) it becomes part of, or is permanently affixed to, the realty so that removal would cause material damage; and (C) it is intended to be permanent.
• This product fails (B) and (C). Removal leaves only small screw/nail holes — no material damage to the wall or the product (failing B). And because it is fastened only for safety (anti-tipping), it is not intended to be permanent (failing C) — "the mere anchoring of shelving to an interior wall does not necessarily result in a capital improvement" (TSB-A-96(32)S; TSB-A-89(15)S).
• So the sale and installation are subject to sales/use tax as tangible personal property and its installation.

The opinion notes the contrast: a custom closet system permanently built in by a builder during new construction can be part of a capital improvement. And if the product is sold to a builder/general contractor for a capital-improvement project, the contractor can buy it for resale with Form ST-120.1, but must charge its own customer sales tax.

What this means for you

Free-standing, safety-anchored fixtures are usually taxable

If your product rests on the floor and is fastened to the wall only to keep it from tipping, it is generally not a capital improvement — its sale and installation are taxable. Leaving just a couple of screw holes on removal is the tell that there is no material damage and no intended permanence.

Capital improvement needs all three tests

Adding value alone is not enough. The installation must also be permanently affixed (removal causes material damage) and intended to be permanent. Fixtures designed to be removable fail this test.

Selling to a contractor on a real capital-improvement job

There, the dynamic flips: the contractor can buy the product for resale (Form ST-120.1) but then collects tax from its customer. Built-in installation during new construction can qualify as a capital improvement.

Common questions

Q: It's custom-built and anchored to the wall — why isn't it a capital improvement?
A: Because removal causes only minor screw/nail holes (no material damage) and it is fastened only for safety, not permanence. A capital improvement must be permanently affixed and intended to be permanent.

Q: Are both the product and the installation taxable?
A: Yes — both, as the sale and installation of tangible personal property.

Q: What if a builder installs it as part of new construction?
A: A custom system permanently built in during new construction can be part of a capital improvement; a contractor buying it for that project can use Form ST-120.1 for resale and then charges its customer 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 retail sales of tangible personal property)
• Tax Law section 1105(c)(3) (installation services; capital-improvement exception)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• Tax Law section 1115(a)(17) (materials becoming integral part of real property via capital improvement)
• 20 NYCRR 541.2(g) (capital improvement)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2016.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a16_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(10)S
Sales Tax
March 30, 2016

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

PETITION NO. S150113A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTED (hereinafter “Petitioner”). Petitioner asks
whether the sale and installation of its new product (the “Product”), which is used to organize
closets, are subject to sales and use tax.
We conclude that the sale and installation of the Product are subject to sales and use tax
because the Product as installed does not constitute a capital improvement to real property.
Facts
Petitioner is a retailer of home organizational products and is introducing the Product to
organize customers’ closets. The Product is placed on the floor but is not attached to the floor.
It can be enhanced to include drawers, hanging rods, retractable dressing mirrors, tie and belt
racks, jewelry trays, hampers and other organizational amenities. Decorative trim can also be
added to give the appearance of built-in cabinetry.
The Product is designed to a customer’s specifications using the customer’s closet
measurements. After the Product is designed, the customer is billed fifty percent of the total cost
for the Product materials and installation charges. Upon receipt of the initial payment, the
Petitioner orders the Product from a supplier, who custom builds the components to the design
specifications. Once the Product components are built, they are shipped to the customer’s
location to be assembled by Petitioner’s subcontractor.
The Product can be positioned against a wall or freestanding in the center of a room.
When the Product is placed against a wall, an anti-tip bracket is used to connect it to the wall
with two screws. The anti-tip bracket is used to prevent damage and injury from tipping.
Generally, one anti-tip bracket is used for each wall. When the Product is free standing, no antitip brackets are used.
Rear paneling can also be added when the Product is positioned against the wall to give
the appearance of an enclosed cabinet. Without rear paneling, the wall the Product is positioned
against is visible between shelves. If rear paneling is used, it is positioned on the floor against
the wall and is secured to the wall using 2 or 4 finishing nails to prevent shifting and tipping.
After the rear paneling is secured to the wall, the Product is placed on the floor adjacent to the
rear paneling and an anti-tip bracket is used to secure the Product to the paneling.

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TSB-A-16(10)S
Sales Tax
March 30, 2016

Once the Product installation is complete, the remaining balance due is collected from the
customer. Petitioner gives the customer a final receipt that separately states charges for the
installation of the Product and Petitioner’s cost for purchasing the Product materials from its
supplier. Both the installation and Product material costs include a profit markup.
Disassembly and removal of the Product are performed by reversing the installation
procedure. When the Product is removed, the only damage to the wall is two screw holes for
each anti-tipping bracket installed and two or four small holes from finishing nails if the
customer used rear paneling.
Analysis
Sales tax is imposed on the sale, except for resale, of tangible personal property. Tax Law
§ 1105(a). When tangible personal property has not or will not be subject to sales tax, unless
exempted, it is subject to use tax for use within this state. Tax Law § 1110(a). Tangible personal
property sold by a contractor who is adding to or improving real property by a capital
improvement is exempt from sales and use tax if the tangible personal property is to become an
integral component part of the real property. Tax Law § 1115(a)(17). Buildings and other articles
and structures are included in the definition of real property. Real Property Tax Law § 102(12).
Additionally, Tax Law § 1105(c) imposes tax upon the receipts from every sale, except
for resale, of certain enumerated services. Included in the services subject to sales tax is the
service of installing tangible personal property, whether or not any tangible personal property is
transferred in conjunction therewith, except where the installed property will constitute an
addition or capital improvement to real property. Tax Law § 1105(c)(3). A capital improvement
is defined as follows:
(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.
Tax Law § 1101(b)(9); 20 NYCRR § 541.2(g). Installations will only be capital improvements if
they meet all three criteria listed in Tax Law § 1101(b)(9). See TSB-A-06(9)S.
When installed by a builder or general contractor in conjunction with the construction of
a new home or commercial building, a custom closet storage system permanently attached to
withstand loads, and to last the life of the structure, will be deemed part of the capital
improvement project and the charges for the sale and installation of the closet storage system by

TSB-A-16(10)S
Sales Tax
March 30, 2016

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a contractor will not be subject to sales tax. See TSB-A-96(32)S; see also TSB-A-06(a)S.
However, “[t]he mere anchoring of shelving to an interior wall does not necessarily result in a
capital improvement.” TSB-A-96(32)S. Shelving is not a capital improvement to real property if
its removal would not cause material damage to the real property or to the shelving itself. See id.
“[I]t [is] necessary to review the specific manner of installation in each case to determine
whether a capital improvement results.” Id. Additionally, where shelving is free standing and is
only fastened to the wall for safety purposes, the installation would not be intended to be
permanent as required by Tax Law § 1101(b)(9)(i)(C). See TSB-A-89(15)S.
Here, when the Product is removed, the only damage to the wall is two screw holes for
each anti-tipping bracket installed and two or four small holes from finishing nails if the
customer used rear paneling. Removal of the Product would not cause material damage to the
real property or to the Product as required by Tax Law § 1101(b)(9)(i)(B). See TSB-A-96(32)S.
Additionally, because the Product is fastened to the wall to prevent damage and injury from
tipping, it is not intended to be permanent as required by Tax Law § 1101(b)(9)(i)(C). See TSBA-89(15)S. Therefore, installation of the Product does not result in a capital improvement and
the sale and installation of the Product are generally subject to sales and use tax as the sale and
installation of tangible personal property. See TSB-A-96(32)S.
If the Product is sold to a builder or general contractor in conjunction with a capital
improvement project, such as the construction of a new home, then the contractor can use Form
ST-120.1 to purchase the Product from Petitioner exempt from sales tax. However, the contractor
must collect sales tax on the charge it imposes on its customer for the Product. See TB-ST-104.

DATED: March 30, 2016

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