Is an extensive building facade restoration a nontaxable capital improvement or a taxable repair?

Plain-English summary

The owner of a terra-cotta-clad building undertook an extensive facade restoration: replacing about 98% of the steel windows with new aluminum ones, replacing and reconstructing deteriorated terra-cotta blocks, restoring/replacing steel components (sills, frames, lintels, mullions, column covers), repointing mortar, and replacing roof coping. Nearly every facade face is being restored (96–100%), the new components are permanently affixed (removal would damage them or the building), and the work is expected to last ~50 years. It asked whether the project gives rise to sales tax.

The Office of Counsel concluded the project is a capital improvement and is not subject to sales tax:

• Tax Law section 1105(c)(5) taxes maintaining, servicing or repairing real property — but not work that adds to or improves real property by a capital improvement.
• A capital improvement (Tax Law section 1101(b)(9)) must (A) substantially add value or appreciably prolong the property's life; (B) become part of, or be permanently affixed to, the realty so that removal causes material damage; and (C) be intended to be permanent.
• Whether a service to real property is taxable depends on the "end result" (20 NYCRR 527.7(b)(4)): a repair/maintenance result is taxable; a capital-improvement result is not.
• Here, the project substantially adds value (including improved energy efficiency), installs components permanently affixed (removal would cause damage), and is intended to be permanent — satisfying all three tests (citing L&L Painting; F.W. Woolworth; Publication 862 — "installation or complete replacement of complete windows" is a capital improvement).
• Context matters: even though many individual tasks look like repairs in isolation (and may be treated that way for accounting), they are part of, and occasioned by, a major restoration, so viewed in their entire context they are a capital improvement, not separate repairs (F.W. Woolworth).

What this means for you

Major restorations can be capital improvements as a whole

A comprehensive restoration — replacing most windows, cladding, structural steel and coatings — can qualify as a nontaxable capital improvement even though some line items, taken alone, would look like taxable repairs. New York applies an "end-result" test and looks at the whole project in context.

All three capital-improvement tests must be met

The work must add value/prolong life, be permanently affixed (removal causes material damage), and be intended to be permanent. Complete window replacement and permanently installed new components point toward a capital improvement; isolated patching may not.

Get the paperwork right

On a capital-improvement job, the owner typically gives the contractor a Certificate of Capital Improvement (Form ST-124) so the contractor's labor charge is not taxed (the contractor still pays tax on the materials it buys).

Common questions

Q: A lot of this is patching and repointing — isn't that a taxable repair?
A: Individually those tasks resemble repairs, but they are part of a major restoration. Viewed in the context of the whole project, the end result is a capital improvement, which is not taxable.

Q: What makes window replacement a capital improvement?
A: Complete replacement of complete windows is treated as a capital improvement (Publication 862); the new windows are permanently affixed and intended to be permanent, and they add value/energy efficiency.

Q: Does the contractor pay any tax?
A: Yes — on a capital improvement, the labor is not taxed to the owner (with Form ST-124), but the contractor pays sales tax on the materials it purchases.

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) (maintaining, servicing, repairing real property)
• Tax Law section 1101(b)(9) (definition of capital improvement)
• 20 NYCRR 527.7(b)(4) (end-result test for services to real property)

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_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(1)S
Sales Tax
February 17, 2016

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S140318B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner REDACTEDREDACTED (“Petitioner”).
Petitioner asks whether its façade
restoration project for a building (“the Building”) gives rise to sales tax liability under Article 28
of the Tax Law. We conclude that the work being done to the Building constitutes a capital
improvement and therefore is not subject to sales tax.
Facts
Petitioner owns a terra-cotta clad building, the façade of which requires extensive
restoration. To effect that restoration, Petitioner entered into a contract with a contractor (“the
Contractor”) for the restoration of the façades of the Building. Due to the passage of time and
penetration of the terra cotta blocks by moisture, the terra cotta blocks, pointing, windows and
underlying steel structure have deteriorated. The restoration taking place is to all exterior
façades from the second floor to the upper roof, including replacement of 98% of the building’s
steel windows with new aluminum windows (the remaining 2% of the windows are fire stair
windows, which only require restoration). The total portions of each façade face being restored
are: North: 96%; South: 97%; East: 100%; West: 100%. Other aspects of the work being done to
the Building include removal and replacement of failing sealant and backing materials near
windows and removal and replacement of upper roof coping with new lead‐coated copper to
match the original. There is no work being performed on the interior of the building; nor is there
any work being done on the first floor storefronts and loading dock area façades.
Without this restoration project, the terra cotta blocks would continue to deteriorate,
resulting eventually in damage to the steel structure of the building. The new windows and
improved insulation being installed as part of this project will add to the building’s energy
efficiency.
All of the new components being installed are permanently affixed for the duration of
their useful life such that their removal would cause damage to the Building or to those
materials. The replaced and/or restored components are anticipated to last 50 years, with the first
10 to 20 of those years protected by a manufacturer and installer guarantee.
The detail of the work being done is as follows:
Terra Cotta. The portions of terra cotta blocks that are beyond repair are being replaced
with new terra cotta blocks, which are designed to match the original. Blocks that are severely
damaged but do not require replacement are reconstructed and re-glazed. When the damage to
the blocks is limited to the surface, those blocks undergo field-glazing, which restores the outer
surface of the block. Pointing, which is the removal and replacement of damaged mortar joints,

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February 17, 2016

occurs as needed throughout all façade faces. Finally, all terra cotta blocks and mortar surfaces
are being thoroughly cleaned.
Steel Work. The other major aspect of the work involves the resurfacing, restoration
and/or replacement of many steel components of the Building, which include segments of
window sills, frames, lintels, mullions and column covers. Restoration includes the application
of patching compounds, finished to match the original, where limited damage has occurred.
Resurfacing includes stripping 20‐plus layers of lead‐based paint down to raw, original steel and
coating the steel with a new 3‐coat high‐performance system to match the original. Where
damage to a steel component, such as a column cover or window lintel, is more than 50%,
complete replacement is considered at each location. When replacement is necessary, it requires
surgical cutting and complete removal of damaged segments, welding of new steel segments per
industry standards to precisely match the original, and coating of all parts for a monolithic finish.
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:
(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 Tax Law § 1101(b)(9)(i). 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.” See 20 NYCRR § 527.7 (b)(4).
Given the extent of the improvements detailed above and the resulting enhanced energy
efficiency of the Building, the project will substantially add value to the Building. The new terra
cotta blocks, new steel components of the window frames, and new surface coatings are
permanently affixed to the building such that their removal would cause damage to the Building
or to those materials. Finally, the alterations to the building are being done on behalf of the
building’s owner and are intended to be permanent. Accordingly, the restoration project
constitutes a capital improvement. See Matter of L&L Painting Co., Tax Appeals Tribunal, June
2, 2011; Matter of F.W. Woolworth Co., Tax Appeals Tribunal, Dec. 1, 2004; Publication 862,
Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property
(“[i]nstallation or complete replacement of complete windows” is a capital improvement). It is
noted that, even though many of the tasks would be viewed as repairs in isolation, and may even
be treated as such for accounting purposes, these activities are part of, and occasioned by, a

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major restoration project. Thus, when viewed in their entire context, these activities are part of a
capital improvement rather than being individual repairs. See Matter of F.W. Woolworth Co.,
supra.

DATED: February 17, 2016

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.