Is a tenant's installation of a fire-sprinkler system in leased premises a nontaxable capital improvement to real property?

Plain-English summary

Eilen Nassau Corporation, a tenant, hired a contractor to furnish and install a fire-sprinkler system in its leased premises. The system was installed in the ceilings, through the walls, in the basement, through hallways, in dropped ceilings, and connected underground to the municipal water supply. The lease provides that all alterations, additions, or improvements the tenant or landlord makes become the landlord's property and are surrendered with the premises at the end of the term. Eilen Nassau asked whether the installation is a capital improvement — which would make it nontaxable.

The Department held the sprinkler system is a capital improvement, so its installation is not taxable.

• Installation of a capital improvement isn't taxed. Section § 1105(c)(3)(iii) excludes from tax the installation of property that constitutes a capital improvement to real property.
• All three parts of the § 1101(b)(9) test are met:
  • (i) Adds value. The system substantially adds to the value of the real property.
  • (ii) Material damage on removal. From the description, removing the sprinkler system would cause material damage to the property it is affixed to.
  • (iii) Intended permanence. Both the manner of installation and the lease — under which title to improvements vests in the landlord and they remain with the premises — show the system was intended as a permanent installation (100 Park Avenue v. Boyland; Flah's of Syracuse; Beaman Corp., an August 19, 1982 Advisory Opinion). As the court noted in Flah's, title vesting in the landlord immediately on installation establishes that the improvements were intended as permanent.
• Result: no tax. The installation is a capital improvement, so the receipts from installing the system are not subject to sales or use tax.

This is the same conclusion the Department reached the same day for another tenant's fire-sprinkler system in TSB-A-83(14)S (Improv, Inc.).

What this means for you

A built-in building system is the classic capital improvement. A fire-sprinkler system plumbed into the ceilings, walls, and municipal water supply adds value, can't be removed without material damage, and is meant to stay — so its installation is nontaxable, even when the one paying for it is a tenant rather than the building owner.

The lease can prove "intended permanence." A clause vesting improvements in the landlord, to remain with the premises, is strong evidence of intended permanence — exactly what the Department relied on here and in its companion sprinkler opinion. The same lease language recurs across New York's capital-improvement rulings.

Permanence, not just cost, is the test. The item has to become part of the realty; removable equipment a tenant brings in for its own trade can be taxable even under a similar lease. Match your project to all three statutory factors before treating the install as tax-free.

Common questions

Q: We're a tenant who installed a fire-sprinkler system. Is the installation taxable?
A: No. The Department held it's a capital improvement — it adds value, causes material damage on removal, and is intended to be permanent — so § 1105(c)(3)(iii) makes the installation nontaxable.

Q: What are the three requirements for a capital improvement?
A: Under § 1101(b)(9): it must substantially add value, become part of or be permanently affixed so removal causes material damage, and be intended as a permanent installation.

Q: Does my lease matter if I'm only the tenant?
A: Yes. A lease vesting improvements in the landlord, to remain with the premises, helps show intended permanence — a key factor the Department relied on here even though a tenant, not the owner, paid for the work.

Citations and references

Statutes:

• Tax Law § 1101(b)(9) — three-part definition of "capital improvement"
• Tax Law § 1105(c)(3)(iii) — installation of a capital improvement is excluded from tax

Authorities cited:

• 100 Park Avenue v. Boyland, 144 N.Y.S.2d 88, aff'd 309 N.Y. 685; Flah's of Syracuse (1982); Beaman Corp., State Tax Commission Advisory Opinion (Aug. 19, 1982) — intended permanence shown by lease vesting title in the landlord

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(7)S
Sales Tax
March 8, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820315A

On March 15, 1982 a Petition for Advisory Opinion was received from Eilen Nassau
Corporation, 533 Middle Neck Road, Great Neck, N.Y. 11023.
The issue raised is whether Petitioner's installation of a fire sprinkler system constitutes a
capital improvement for purposes of the sales and use taxes imposed under Article 28, and pursuant
to Article 29, of the Tax Law. It is concluded herein that it does constitute such a capital
improvement, and that the cost thereof is accordingly not subject to tax.
Petitioner, a tenant, hired a contractor to furnish and install a fire sprinkler system in the
leased premises occupied by Petitioner's business. The system was installed in the ceilings, through
the walls, in the basement, through hallways, in dropped ceilings and connected underground to the
municipal water supply system. The lease entered into between Petitioner and the landlord provides
as follows: "All alterations, additions or improvements made by Tenant or Landlord in or to the
demised premises shall become the property of Landlord and shall remain upon and be surrendered
with the premises as a part thereof at the end or other termination of the term."
Section 1101(b)(9) of the Tax Law defines the term capital improvement as: " . . . An
addition or alteration to real property which: (i) Substantially adds to the value of the real property,
or appreciably prolongs the useful life of the real property; and (ii) 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 (iii) Is intended to become a permanent installation."
The installation in question substantially adds to the value of the real property, thus satisfying
the criterion set forth in subparagraph (i) of the quoted statutory provision. Further, it appears from
Petitioner's description that removal of the fire sprinkler system would cause material damage to the
real property to which it is affixed. The requirement contained in subparagraph (ii) is thus satisfied.
Finally, it appears from both the manner of installation and the above-quoted lease provision that the
installation is intended to be permanent. 100 Park Avenue v. Boyland, 144 NYS 2d 88, aff'd 309
N. Y. 685; Flah's of Syracuse, _ A. D. 2d _ (1982); Beaman Corporation, State Tax
Commission Advisory Opinion, August 19, 1982. As the court noted in Flah's, supra, "pursuant to
petitioner's leases, title to the improvements vested in petitioner's landlords immediately upon their
installation with the improvements to become part of and remain in the premises, thereby
establishing that the improvements were intended as permanent installations. The third and final

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-83(7)S
Sales Tax
March 8, 1983

requirement is thus satisfied. Accordingly, the subject installation constitutes a capital improvement
within the meaning of section 1101(b)(9) of the Tax Law, and the receipts from the installation of
such system are not subject to sales or use tax. Tax Law, § 1105(c)(3)(iii).

DATED: February 16, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau