Which items in a contractor's construction jobs are nontaxable capital improvements, and how is tax handled when one job mixes capital improvement work with a taxable installation?

Plain-English summary

Terco Contracting Corp. performed five construction jobs on a customer's building, each at a single quoted price, and asked whether they were capital improvements exempt from sales and use tax. The jobs ranged from installing a ceiling, a new 100-amp electrical service, and receptacles to building a new entrance and wall and relocating a radiator — and, in one job, building a dispatch table.

Capital-improvement test. Under Tax Law § 1101(b)(9) (and 20 NYCRR 527.7), an addition or alteration to real property is a capital improvement only if it (i) substantially adds to the value of the real property, (ii) becomes part of or is permanently affixed to it so that removal would cause material damage, and (iii) is intended to be permanent. A capital improvement is exempt from tax under §§ 1105(a) and 1105(c)(3).

How each job came out:

• Jobs 2, 3, 4, and 5 — capital improvements (exempt). The new celotex ceiling, the 100-amp electrical service with breaker panel, the two receptacles, and the new entrance/wall with relocated radiator each met all three prongs. They are not taxable if the customer gives Terco a properly completed Certificate of Capital Improvement (Form ST-124). But Terco still owes sales tax on the materials it buys for these projects.
• Job 1 — a mixed transaction. The dispatch table does not qualify as a capital improvement because it is not affixed to the real property, so it is a taxable installation; the rest of job 1 (removing/installing walls, relocating a door, a window, outlets) is a capital improvement.
• The mixed-transaction rule. When a contract has both a nontaxable capital improvement and a taxable installation, the contractor collects tax only on the taxable items — and only if it separately states those charges. If the taxable and nontaxable charges are not separately stated, the contractor must collect tax on the entire contract.

What this means for you

Permanent building work is a capital improvement; freestanding items are not. The dividing line is affixation and permanence. A hardwired electrical service or a built-in wall is a capital improvement; a table that merely sits in the room is taxable tangible personal property, even if you build it on site.

Contractors owe tax on their own materials for capital-improvement jobs. A capital improvement is nontaxable to the customer (with Form ST-124), but the contractor is the end user of the materials and pays tax on them. Don't buy those materials with a resale certificate.

Separately state taxable items on a mixed job — or tax the whole thing. A single lump-sum price that bundles taxable and capital-improvement work forces you to collect tax on the entire contract. Break out the taxable items on the invoice to tax only those.

Common questions

Q: We built a permanent wall and installed electrical service. Is that taxable to our customer?
A: No — those are capital improvements, exempt if the customer gives you a Certificate of Capital Improvement (Form ST-124). But you owe tax on the materials you buy.

Q: One job included a freestanding table plus wall work. How do we bill it?
A: The table is a taxable installation; the wall work is a capital improvement. Separately state the table charge and collect tax only on that. If you don't separate them, you must tax the whole job.

Q: Can we buy our materials tax-free for a capital-improvement job?
A: No. The contractor is the consumer of those materials and owes sales tax on them.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property; capital improvements are exempt
• Tax Law § 1105(c)(3) — tax on installing tangible personal property, except installations that constitute a capital improvement
• Tax Law § 1101(b)(9) — capital improvement: substantially adds value; permanently affixed so removal causes material damage; intended permanent

Regulation:

• 20 NYCRR 527.7 — services to real property; capital improvement; mixed-transaction and separately-stated-charge rules

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_5s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(5)S
Sales Tax
May 15, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830217A

On February 17, 1983, a Petition for Advisory Opinion was received from Terco Contracting
Corp., 42-20 Astoria Blvd., Long Island City, New York 11103.
Petitioner, a contractor, submitted information detailing five construction projects performed
on a customer's building as follows:

1. The construction of a dispatch table, the removal of a wall and the installation of another,
   the relocation of a door, the installation of a window and the installation of electrical outlets.
2. The installation of a new celotex ceiling in two rooms.
3. The installation of a new 100 amp electrical service complete with breaker panel.
4. The installation of two electrical receptacles.
5. The construction of a new entrance and a new wall and the relocation of a radiator.
   A single price was quoted to the customer for each of the five transactions.
   The issue raised is whether the work performed by Petitioner for his customer constituted
   capital improvements to real property and was, therefore, exempt from sales and use tax.
   Section 1105(a) of the Tax Law imposes a tax on receipts from every retail sale of tangible
   personal property. . . . Additions to real property which qualify as capital improvements are exempt
   from the tax imposed under section 1105(a) of the Tax Law.
   Section 1105(c)(3) of the Tax Law imposes a tax on receipts from the sale of "Installing
   tangible personal property. . . except for installing property which, when installed, will constitute
   (a). . . capital improvement to real property. . . ."
   The Tax Law and the Sales and Use Tax Regulations define the term capital improvement
   in pertinent part as "as addition or alteration to real property (i) which substantially adds to the value
   of the real property, and (ii) which 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. . . ." (Tax Law 1101(b)(9); Sales and Use Tax
   Regulations 20 NYCRR 527.7).

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(5)S
Sales Tax
May 15, 1985
Items 2, 3, 4 and 5 described above meet each of the requirements of section 1101(b)(9) and
therefore constitute capital improvements to real property. As such, they are not subject to the taxes
imposed under section 1105(a) and 1105(c)(3) of the Tax Law providing Petitioner's customer
presents to Petitioner a properly completed Certificate of Capital Improvement (Form ST-124).
However, petitioner is liable for payment of sales tax on all of its purchases of materials incorporated
into these projects.
Item 1, as described above, is a mixed transaction. The construction of the dispatch table
does not meet the criteria for a capital improvement since it is not affixed to the customer's real
property. The other work performed under item 1 meets the criteria for a capital improvement.
When a contract includes elements of both a non-taxable capital improvement and a taxable
installation, the contractor should collect sales tax only on the taxable items included in the contract
but only if he has separately stated the charges attributable to the taxable items. If a contractor fails
to separately state the taxable and non-taxable elements of a transaction, he is required to collect tax
on the entire amount of the contract.

DATED: April 18, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.