Is a utility's payment to relocate underground gas mains and repave the street — forced by city construction — a taxable repair of real property or a nontaxable capital improvement?

Plain-English summary

Brooklyn Union Gas Company distributes natural gas through underground mains in New York City. When the City hires contractors for public-works projects (new water/sewer lines, street reconstruction) that would interfere with the gas mains, State law requires the utility be notified, and it must relocate its mains to avoid the conflict. Relocation means excavating and laying a new main, disconnecting the interfering section, reconnecting services, and hiring a paving contractor to repave the street openings; the old main is abandoned in place. Brooklyn Union asked whether its payments for the relocation and repaving are taxable.

The Department held both the relocation and the repaving are nontaxable capital improvements.

• The statute and the line it draws. Section 1105(c)(5) taxes "maintaining, servicing or repairing real property," but expressly not work "adding to or improving such real property . . . by a capital improvement."
• Capital-improvement test (all three required). Under § 1101(b)(9), a capital improvement (i) substantially adds to the value of the real property or appreciably prolongs its useful life; (ii) becomes part of or is permanently affixed to the property so that removal would cause material damage; and (iii) is intended to be a permanent installation. The Department found the new gas mains "clearly meet each" of these conditions — so laying them is a capital improvement, not a repair.
• Repaving — the "end result" test. Taxability of work on real property turns on the end result (20 NYCRR 527.7(b)(4)): repair/maintenance is taxable, a capital improvement is not. The repaving is a capital improvement too (citing Building Contractors Association, Inc. v. Tully, 87 A.D.2d 909 (1982); Carl A. Morse, Inc., TSB-H-80(144)S).
• How to document it. Brooklyn Union owes no sales tax on the relocation or repaving if it gives the contractor a properly completed Certificate of Capital Improvement (Form ST-124).

What this means for you

Installing new infrastructure is a capital improvement, even when a forced relocation triggers it. The reason for the work (a city project made you move) doesn't matter — what matters is the end result. Laying a new, permanent main that becomes part of the real property is a capital improvement, so the contractor's charge isn't taxable to you.

Repaving to restore the street rides along as capital work here. Under the end-result test, the repaving that completes a capital project is itself treated as a capital improvement, not a taxable repair.

Use Form ST-124 to make the exemption stick. A capital improvement is nontaxable in practice only if you give the contractor a properly completed Certificate of Capital Improvement (Form ST-124). Without it, the contractor will (and should) charge tax. Get the certificate to the contractor for the job.

Common questions

Q: The city's project forced us to move our lines. Is the relocation work taxable?
A: No. Laying the new main is a capital improvement under § 1101(b)(9), not a taxable repair — regardless of what prompted it. Give the contractor a Form ST-124.

Q: Is the repaving taxable even if the new main isn't?
A: No. Under the end-result test, the repaving completing this capital project is also a capital improvement, not a taxable repair.

Q: What do we have to do to avoid the tax?
A: Provide the contractor a properly completed Certificate of Capital Improvement (Form ST-124) for the relocation and repaving work.

Citations and references

Statutes:

• Tax Law § 1105(c)(5) — taxes maintaining, servicing, or repairing real property, as distinguished from a capital improvement
• Tax Law § 1101(b)(9) — capital improvement: (i) substantially adds value/prolongs useful life; (ii) becomes part of/permanently affixed so removal causes material damage; (iii) intended to be permanent

Regulation:

• 20 NYCRR 527.7(b)(4) — "end result" test: repair/maintenance is taxable, a capital improvement is not

Authorities cited:

• Building Contractors Association, Inc. v. Tully, 87 A.D.2d 909 (1982) — repaving as a capital improvement under the end-result test
• Carl A. Morse, Inc., Decision of the State Tax Commission, TSB-H-80(144)S (June 18, 1980)

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_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(7)S
Sales Tax
May 15, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840702B

On July 10, 1984 a Petition for Advisory Opinion was received from the Brooklyn Union Gas
Company, 195 Montague Street, Room 602, Brooklyn, New York 11201.
The issue raised is whether Petitioner's payments for relocation work and related paving work
involved in rerouting its underground gas lines are subject to sales tax.
Petitioner distributes natural gas through a network of underground piping in its franchised
territory, all of which is located in New York City. This piping is subject to real estate taxes. New
York City will, at times, hire private contractors to carry out public works projects on or under city
streets. This may include installation of new water and sewer lines and street reconstruction. When
a project is awarded to a contractor, New York State law requires that for safety reasons Petitioner
be notified. Petitioner's engineers study the city's construction plans and determine the steps required
to avoid any direct interference with the planned construction. Relocation of the company's mains
and services is mandated where such interference exists.
Relocation entails excavating and laying a new main, disconnecting the interfering length of
main and any services branching off from it, and reconnecting the new main to the new or existing
services. A paving contractor is then employed to repave the street openings made during the
relocation process. The interfering facility is abandoned in place and removed in the course of the
city construction.
Section 1105(c)(5) of the Tax Law imposes a tax on the receipts from the following services:
"Maintaining, servicing or repairing real property, property or land, as such terms are defined
in the real property tax law, whether the services are performed in or outside of a building, as
distinguished from adding to or improving such real property, property or land, by a capital
improvement as such term capital improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this chapter, . . ."
Section 1101(b)(9) of the Tax Law defines capital improvement in relevant part as follows:
(9) Capital improvement. 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. . . .

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

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

-2­
TSB-A-85(7)S
Sales Tax
May 15, 1985

Section 527.7(b)(4) of the Sales and Use Tax Regulations provide as follows:
"The imposition of tax on services performed on real property depends on the end result of
such 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." 20 NYCRR 527.7(b)(4).
The addition of new gas mains clearly meets each of the conditions set forth in section
1101(b)(9) of the Tax Law. Accordingly, such addition constitutes a capital improvement to real
property rather than a repair. Petitioner will not be required to pay sales tax on relocation work if it
presents to the contractor a properly completed Certificate of Capital Improvement (Form ST-124).
Additionally, payments for re-paving work also constitute a capital improvement to real
property under the "end result" test set forth in 20 NYCRR 527.7(b)(4). Building Contractors
Association, Inc. v. Tully, 87 A.D. 2d 909, 449 N.Y.S 547 (1982); Carl A. Morse, Inc., Decision of
the State Tax Commission, June 18, 1980, TSB-H-80(144)S. Accordingly, Petitioner will not be
required to pay sales tax on such services if it presents to the contractor a property completed
Certificate of Capital Improvement.

DATED: April 23, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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