Is installing cellulose and spray-foam insulation in homes and commercial buildings subject to New York sales tax?

Plain-English summary

An energy-audit company finds homes and commercial buildings with missing or insufficient insulation and arranges to install cellulose or spray-foam insulation (in attics and basement rim-joist areas). It subcontracts the actual installation. It asked whether its charge to the property owner is taxable.

The Office of Counsel concluded the installation is a capital improvement, so the company's receipts are exempt from sales tax. Insulation makes the building more energy-efficient and adds value, it's meant to be permanent, and removal isn't contemplated — so it satisfies New York's three-part capital-improvement test (Tax Law § 1101(b)(9)(i)). Installation of property that becomes a capital improvement is carved out of the installation tax (§ 1105(c)(3)). The company is a construction contractor here; it must get a Certificate of Capital Improvement (Form ST-124) from the customer, keep it, and give a copy to its subcontractor (who also keeps it).

The catch is on the materials: any sale of tangible personal property to a contractor or subcontractor for use in construction is a taxable retail sale, even if it gets incorporated into a capital improvement (Tax Law § 1101(b)(4)(i)). So the subcontractor pays sales tax when it buys the insulation. The contractor is the end consumer of the materials; the exemption is only on the installation charge to the owner.

What this means for you

Insulation, weatherization, and energy contractors

Your charge to the property owner for installing insulation is generally exempt as a capital improvement. Collect a Form ST-124 from the owner and retain it; if you sub the work out, give your subcontractor a copy. New construction qualifies the same way.

Don't forget the materials tax

You (or your subcontractor) owe sales tax on the insulation materials when you buy them. You cannot buy those materials tax-free with a resale certificate for a capital-improvement job — the contractor is treated as the consumer of the materials.

Accountants and tax professionals

This is the standard contractor pattern: exempt capital-improvement labor/charge to the owner (§ 1105(c)(3); § 1101(b)(9)(i)), taxable materials to the contractor (§ 1101(b)(4)(i)). The ST-124 flows from owner → prime → subcontractor; each retains a copy. See 20 NYCRR 541 and TB-ST-113.

Common questions

Q: Do I charge the homeowner sales tax to install insulation?
A: No. Installing insulation is a capital improvement, so your charge is exempt. Get a Form ST-124 from the owner.

Q: Can I buy the insulation materials tax-free?
A: No. The contractor/subcontractor pays sales tax on materials bought for a capital-improvement job; you're the consumer of those materials.

Q: What about new construction?
A: Same result — installing the insulation is a capital improvement and the installer's charge is exempt.

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 and certificates.

Citations and references

Statutes and regulations:
- Tax Law § 1105(c)(3) (installing TPP; capital-improvement exception)
- Tax Law § 1101(b)(9)(i) (capital-improvement test); § 1105(a), § 1101(b)(6) (TPP)
- Tax Law § 1101(b)(4)(i) (materials sold to contractor are taxable)
- 20 NYCRR 541.2(d), 541.1(c), 541.5(b)(2), 541.5(b)(4)(i)(a), 541.5(d)(1)(iii)

Decisions and guidance cited:
- TB-ST-113; TSB-A-96(37)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20-7s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(7)S
Sales Tax
May 19, 2020

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance received a Petition for Advisory Opinion
from [ REDACTED ] (Petitioner). Petitioner asks whether receipts from the sales of installation of
cellulose and spray foam insulation, in circumstances where a subcontractor installs the insulation
within attic spaces or in basement rim joist areas of residential homes or commercial buildings,
are subject to sales tax. We conclude that the installation of insulation qualifies as a capital
improvement. Accordingly, Petitioner’s receipts are exempt from sales tax.
Facts
Petitioner performs energy audits of existing homes and commercial buildings. It
sometimes finds no insulation or insufficient insulation in attics or in basement rim joist areas. To
remedy the lack of appropriate insulation, Petitioner is asked by the property owner to install
cellulose or foam insulation.
Petitioner subcontracts such insulation installation. The subcontractor purchases the
insulation material from a vendor, who collects sales tax from the subcontractor. The
subcontractor then installs the insulation and bills Petitioner for its work. The subcontractor does
not charge or collect any sales tax from Petitioner. Petitioner bills the property owner, who
supplies a Certificate of Capital Improvement for the insulation work.
In addition to energy audits of existing structures, Petitioner expects to perform energy
audits for new construction of homes and commercial buildings in the future. Similarly, it
expects to subcontract insulation installation within those homes and buildings as well.
Analysis
Sales tax is imposed on the retail sale of tangible personal property, which includes
insulation materials. Tax Law §§ 1105(a); 1101(b)(6). Further, the installation of such tangible
personal property is a taxable service. Tax Law § 1105(c)(3). However, these receipts are exempt
from sales tax where the installation qualifies as a capital improvement to real property. Tax Law
§ 1105(c)(3). A capital improvement is an addition or alteration to real property that: (1)
substantially adds to the value of the real property, or appreciably prolongs the useful life of the
real property; and (2) becomes part of the real property or is permanently affixed to the real
property such that removal would cause material damage to the property or article itself; and (3) is
intended to become a permanent installation. Tax Law § 1101(b)(9)(i).

-2-

TSB-A-20(7)
Sales Tax
May 19, 2020

The installation of insulation makes a structure more energy efficient and adds to the value
of the real property. Also, the insulation is intended to be permanent and becomes part of the real
property because removal is not contemplated at the time of its installation or at the time of a
subsequent sale of the real property. Accordingly, Petitioner’s installation of insulation qualifies as
a capital improvement. Petitioner’s receipts from its sales of installed insulation are exempt from
sales tax.
Petitioner is acting as a contractor when it agrees to install insulation for property owners.
Accordingly, Petitioner is a construction contractor for sales tax purposes. 20 NYCRR 541.2(d).
Sales tax is not imposed on Petitioner’s receipts because the installation qualifies as a capital
improvement to real property. 20 NYCRR 541.1(c); 20 NYCRR 541.5(b)(2). Petitioner, acting as
the general (or prime) contractor, must obtain a properly completed Certificate of Capital
Improvement from its customer and retain it as part of its records. TB-ST-113. Petitioner, in lieu
of paying sales tax for materials and work performed by its subcontractor (see generally 20
NYCRR 541.2(g) (Example 3)), must provide a copy of that certificate to its subcontractor, who
must also retain it as part of its own records. 20 NYCRR 541.5(b)(4)(i)(a); 20 NYCRR
541.5(d)(1)(iii); TSB-A-96(37)S.
It must be noted that any sale of tangible personal property to a contractor or subcontractor
for use or consumption in construction is a retail sale and subject to sales and use tax, regardless of
whether the tangible personal property is to be incorporated into real property as a capital
improvement. Tax Law § 1101(b)(4)(i); 20 NYCRR 541.1(b); 20 NYCRR 541.5(b)(1). Therefore,
sales and use tax must be paid on the initial purchase of insulation materials.
In conclusion, sales tax must be paid on the initial purchase of insulation by Petitioner’s
subcontractor. Petitioner’s installation of insulation for the property owner is then exempt from
sales tax as a capital improvement pursuant to Tax Law §§ 1105(c)(3) and 1101(b)(9)(i). Petitioner
must obtain from its customer a properly completed Certificate of Capital Improvement. The
certificate must be retained separately by Petitioner and its subcontractor.
DATED: May 19, 2020
/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.