Does a carpet retailer collect sales tax on installation — and does it matter what's under the carpet?

Plain-English summary

Brockport Carpet & Linoleum Center, Inc. sells floor covering and also installs it. It asked two things: (I) when it installs carpet as a capital improvement, must it collect sales tax on the installation charge; and (II) must the use tax it pays on materials be shown on the customer's bill.

Issue I — It turns on what's under the carpet.

• Over a finished floor = taxable. The Tax Commission has held that laying wall-to-wall carpet over a finished hardwood or tile floor is not a capital improvement — it fails the permanence and "removal causes material damage" tests of § 1101(b)(9) (Staten Island Savings Bank; Norman W. Ayers). So it is the taxable service of installing tangible personal property under § 1105(c)(3), and tax is due on the entire charge (goods + installation), unless the customer is an exempt organization with the proper document.
• Over a bare subfloor = capital improvement. Laying carpet over a subfloor (unpainted concrete, plywood, etc.) that isn't meant to be used without covering is a capital improvement (S & Y Floor Covering), and a contractor's receipts for a capital improvement are not taxed to the customer (20 NYCRR 541.1(c)).
• But a capital improvement isn't fully tax-free. Under Waxlife, the contractor owes use tax on the cost of the materials used (20 NYCRR 541.13) and may pass that along as part of the job price. Because no tax is collected on the whole charge, the customer's exemption effectively covers only the portion above material cost — labor, overhead, and markup. (A consumer who buys the carpet from a retailer but hires a different contractor to install it over subflooring pays tax on the material, but by giving the installer a Certificate of Capital Improvement (Form ST-124) owes no tax on the labor.)

Issue II — The material use tax need not appear on the invoice. Records must show enough detail to determine each sale's taxable status and the tax due, and any exemption must be provable (§ 1132(c); 20 NYCRR 533.2). But beyond that, the law doesn't require breaking out charges. The retailer/contractor's use tax on materials is its own expense — it can absorb it or bundle it into material or labor charges — and because it is neither a taxable receipt nor sales tax due from the customer, it need not be stated on the invoice. (The petitioner's separate complaint that this scheme disadvantages retailer/installers versus sell-only retailers was noted but held outside the scope of an advisory opinion.) Finally, where a § 1116(a) exempt organization buys the capital improvement, the contractor incurs no material use tax if it receives Form ST-119.1 or a governmental purchase order within 90 days of delivery.

What this means for you

For flooring, the subfloor decides the tax. Carpet over a finished floor is a taxable installation on the full price; carpet over a bare subfloor meant to be covered is a capital improvement, and the contractor's charge to the customer isn't taxed. Same product, opposite treatment, depending on the surface underneath.

"Capital improvement" doesn't mean nobody pays tax. On a capital-improvement job the contractor pays use tax on the materials it installs and typically builds that into the price. The customer's savings are real but limited to the labor/overhead/markup portion — not the material cost.

You don't have to reveal your material cost on the bill. The material use tax is your expense, not the customer's tax, so it needn't be itemized. And if your customer is an exempt organization, collect Form ST-119.1 (or a government purchase order) within 90 days to drop even the material tax.

Common questions

Q: Do I charge tax when I install carpet?
A: Over a finished hardwood or tile floor, yes — the whole charge is taxable. Over a bare subfloor that's meant to be covered, no — it's a capital improvement and your charge to the customer isn't taxed.

Q: If it's a capital improvement, is the job completely tax-free?
A: No. You (the contractor) still owe use tax on the materials and can pass that cost along. The customer's exemption only covers the amount above material cost.

Q: Do I have to show the material use tax on the customer's invoice?
A: No. It's your expense, not the customer's sales tax, so it doesn't need to be itemized — you can absorb it or fold it into your prices.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1105(c)(3) — taxes installing property, except installs that become a capital improvement
• Tax Law § 1101(b)(9) — three-part capital-improvement test
• Tax Law § 1132(c) — records/exemption proof and the 90-day document rule
• 20 NYCRR 541.1(c) — capital-improvement receipts are not taxed; 541.13 — contractor owes use tax on materials; 533.2 — recordkeeping

Decisions cited:

• Matter of Staten Island Savings Bank, TSB-H-83(87)S; Matter of Norman W. Ayers, TSB-H-82(162)S — carpet over a finished floor is not a capital improvement
• S & Y Floor Covering, TSB-H-81(50)S — carpet over a subfloor is a capital improvement
• Matter of Waxlife, USA, STH 77-32, aff'd 67 AD2d 1040 — contractor owes use tax on materials in a capital improvement

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(31)S
Sales Tax
July 28, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860404A

On April 4, 1986, a Petition for Advisory Opinion was received from Brockport Carpet &
Linoleum Center, Inc., Brockport Plaza, Brockport, New York 14420.
The issues raised are (I) whether a retailer, when installing in a capital improvement to real
property material of a kind it also offers for sale at retail, must collect sales tax on the installation
charge, and (II) whether its use tax liability for the installed property must be shown on the bill
rendered to the customer.
Petitioner, a retailer in floor covering who also installs the products it sells, submits a sample
invoice containing the following information:
Date,
Customer's Name and Address
Description:
50 sq. yds carpet @ 10.00
50 sq. yds pad @ 2.00
50 sq. yds installation @ 2.75

Tax
Total
*) left blank

$500.00
100.00
137.50
$737.50
)
)

Petitioner asks where on this document should the use tax be added if the charges were for
a capital improvement.
ISSUE I.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every sale of tangible
personal property. Section 1105(c)(3) taxes the services of installing tangible personal property,
except for installing property which, when installed, will constitute an addition or capital
improvement to real property.
Section 1101(b)(9) of the Tax Law defines "capital improvement" as an addition 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

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TSB-A-86(31)S
Sales Tax
July 28, 1986
The State Tax Commission has determined that the installation of wall-to-wall carpeting over
a finished hardwood or tile floor does not meet the criteria of a capital improvement quoted in (ii)
and (iii) above, (Matter of Staten Island Savings Bank, Decision of the State Tax Commission, May
11, 1983, TSB-H-83(87)S, Matter of Norman W. Ayers, Decision of the State Tax Commission,
Dec. 3, 1982, TSB-H-82(162)S), and therefore is taxable as the service of installing tangible personal
property under Tax Law 1105(c)(3), supra. Had the sample invoice been rendered for the
performance of such a job, the applicable state and local sales tax should be collected on the entire
charge, unless the customer is an exempt organization supplying an exemption document prescribed
by the Tax Commission. (See the final paragraph of this Advisory Opinion).
However, when the carpet is laid over a sub-floor (unpainted concrete, plywood, etc.) which
is not intended for use without additional covering, the installation constitutes a capital improvement
to real property. See S & Y Floor Covering, State Tax Commission Advisory Opinion, TSB-H­
81(50)S. Receipts from the performance of a capital improvement to real property by a contractor
are not subject to tax. (20 NYCRR 541.1[c]).
However, the Tax Commission has held in the Matter of Waxlife, USA, Decision of the New
York State Tax Commission, February 28, STH 77-32; affd 67 AD2d 1040, that a capital
improvement is not an exempt transaction, inasmuch as the contractor is responsible for the payment
of tax on his cost of the materials used in the project, (20 NYCRR 541.13), and this tax may be
passed on to the customer as an element in the cost of the job. But, since no tax is collected on the
entire charge for the project, the purchaser of the capital improvement receives a tax exemption on
the portion of the price which is in excess of material cost, such as installation labor, overhead and
mark-up on material.
Moreover, a consumer who buys carpeting from a retailer but employs another contractor to
install it over subflooring, must pay tax on the material; however upon the issuance of a Certificate
of Capital Improvement (Form ST-124) to the installer, such consumer is not required to pay tax on
the labor charges.
ISSUE II.
Pursuant to the Sales and Use Tax Law and Regulations, sales records must provide sufficient
detail to determine the taxable status of each sale and the amount of tax due and collected thereon.
If any receipt is not taxable, the vendor or customer must furnish proof of the exemption. (Tax Law
1132[c]; 20 NYCRR 533.2[a], [b]).
Petitioner states it would prefer not to show the use tax paid on materials on the bill rendered
to the customer since it allows customers to determine Petitioner's cost of the merchandise sold to
the customers. Except as required for compliance with the above quoted provisions, the Tax Law
and Regulations do not require the breakdown of charges on a sales slip, invoice, receipt or other
memorandum of sale. The use tax is an expense the retailer/contractor may choose to absorb
(thereby decreasing its profit margin) or pass on to the customer by increasing charges for material
or labor. Because, in either instance, the use tax neither represents part of a taxable receipt nor sales
tax due from the customer, it need not be stated on the invoice.

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TSB-A-86(31)S
Sales Tax
July 28, 1986
Additionally, Petitioner complains that the Tax Law works to the advantage of carpet retailers
who do not install carpeting because, based upon equal profit margins, such retailers are able to
advertise carpeting at a price which is lower than the price at which a retailer/installer can advertise.
While Petitioner's complaint is undoubtedly true in many cases, the fact remains that this problem
is a result of the favorable treatment provided by the Tax Law for capital improvements. Petition
states that explanations of this favorable treatment to customers only lead to confusion and
misunderstanding. While this has been a longstanding problem for some carpet retailer/installers,
it cannot be resolved within the context of an advisory opinion which is merely "a written
statement...setting forth the applicability to a specified set of facts of pertinent statutory and
regulatory provisions relating to a tax administered by the State Tax Commission." 20 NYCRR
901.1(a). Petitioner's complaint is simply outside the scope of an Advisory Opinion.
Finally, where one of various "exempt organizations" enumerated in Section 1116(a) of the
Tax Law is the purchaser of a capital improvement to real property, the retailer/contractor will incur
no use tax liability for property incorporated in the capital construction if it has received, no later
than 90 days after delivery of the material, a properly completed Exempt Organization Certificate
(Form ST-119.1) or a Governmental Purchase Order. (Tax Law 1132[c]; 20 NYCRR 529, 541.3).

DATED: July 28, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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