Is installing in-ground water pipe to a property a tax-free capital improvement?

Plain-English summary

Thompson's Mobile Manor, a trailer park, hired a contractor to install in-ground water pipe from the end of the existing main line to and throughout the park (the pipe becomes the town's property once installed). The contractor charged sales tax on both the pipe and its installation. The park, which had given the contractor a signed certificate of capital improvement, asked whether the installation is a capital improvement exempt from sales tax.

The Department held the installation is a capital improvement, and the whole contract price is exempt.

• It meets the capital-improvement test. Under § 1101(b)(9), a capital improvement must (i) substantially add value or prolong the property's life; (ii) be permanently affixed so that removal would cause material damage; and (iii) be intended as permanent. In-ground water pipe clearly meets all three (see Publication 862), so it is a capital improvement, not a repair.
• The installation charge is exempt. Installing tangible personal property is normally taxable (§ 1105(c)(3)), but capital improvements are excluded. With a properly completed Certificate of Capital Improvement, all of the contractor's charges for the capital improvement are exempt (§ 1115(a)(17); 20 NYCRR 541.5(b)(2)).
• No tax on the pipe either. The contractor should have paid sales tax on the pipe when it purchased the material. Having received the capital improvement certificate, the contractor cannot now collect that tax from the park. So the entire contract price is not subject to sales tax.

What this means for you

Underground utility work is classic capital improvement territory. Permanently installing in-ground pipe (or similar fixed infrastructure) generally qualifies as a capital improvement, so you shouldn't be charged sales tax on the installation.

The certificate is what protects you. Give your contractor a properly completed Certificate of Capital Improvement. That documents the exempt treatment and stops the contractor from adding sales tax to your bill — on the labor or on the materials.

The contractor — not you — pays tax on the materials. On a capital improvement job, the contractor pays sales tax when it buys the materials and shouldn't pass a separate materials tax to you. Watch your invoice: with a valid certificate, the full contract price should be tax-free.

Common questions

Q: Is installing in-ground water pipe a taxable service?
A: No. It's a capital improvement to real property, so the installation charge is exempt when you give the contractor a Certificate of Capital Improvement.

Q: The contractor charged me tax on both the pipe and the labor. Is that right?
A: No. With a valid capital improvement certificate, the whole contract price is tax-free. The contractor pays tax on the materials at purchase and can't re-charge it to you.

Q: What makes it a capital improvement rather than a repair?
A: It must add value or prolong the property's life, be permanently affixed so removal causes material damage, and be intended as permanent. In-ground water pipe meets all three.

Citations and references

Statutes and regulation:

• Tax Law § 1101(b)(9) — three-part definition of a capital improvement
• Tax Law § 1105(c)(3) — taxes installing property, excluding capital improvements
• Tax Law § 1115(a)(17) — property becoming an integral component of a capital improvement
• 20 NYCRR 541.5(b)(2) — contractor's labor and material charges exempt with a capital improvement certificate

Department guidance:

• Publication 862 — Classifications of Improvements and Repairs to Real Property for Sales Tax Purposes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(15)S
Sales Tax
March 27, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S861219A

On December 19, 1986, a Petition for Advisory Opinion was received from Thompson's
Mobile Manor, Clinton Street, New York Mills, New York 13417.
The issue raised is whether the charge for installation of water pipe constitutes a capital
improvement to real property within the meaning of section 1101(b)(9) of the Tax Law and is,
therefore, exempt from sales tax.
Petitioner, partner in a trailer park operation, entered into a contract with a contractor for the
installation of water pipe from the end of the existing main water line to and throughout Petitioner's
trailer park. The water pipe is installed in ground along a city street, thereby furnishing the trailer
park and its occupants with water. The water pipe installed from the existing main water line to the
Petitioner's trailer park becomes the property of the town when installed.
The contractor charged sales tax on both the cost of the water pipe, which the contractor
purchased, and the charge for its installation.
Petitioner submitted a signed certificate of capital improvement to the contractor.
Section 1105(c)(3) of the Tax Law imposes a tax on the receipts from the following service:
Installing tangible personal property,. . . or maintaining, servicing or repairing
tangible personal property . . . except . . . for installing property which, when
installed, will constitute an addition or capital improvement to real property, property
or land, as the terms real property, property or land are defined in the real property
tax law 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
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-87(15)S
Sales Tax
March 27, 1987

Section 1105(a) of the Tax Law imposes tax on:
"The receipts from every retail sale of tangible personal property, except as
otherwise provided in this Article"
Section 1115(a) of the Tax Law states:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:

repairman

(17) Tangible personal property sold by a contractor, subcontractor or
to a person other than an organization described in subdivision (a) of
section eleven hundred sixteen, for whom he is adding to, or
improving real property, property or land by a capital improvement,.
. . if such tangible personal property is to become an integral
component part of such structure, building or real property. . . .

Section 541.5(b)(2) of the Sales and Use Tax Regulations provides:
Labor and material charges. All charges by a contractor to the customer for
adding to or improving real property by a capital improvement are not subject to tax
provided the customer supplies the contractor with a properly completed certificate
of capital improvement. 20 NYCRR 541.5(b)(2).
The installation of in ground water pipe clearly meets each of the conditions set forth in
section 1101(b)(9) of the Tax Law. See: Publication 862 Classifications of Improvements and
Repairs to Real Property for Sales Tax Purposes. Consequently, such installation constitutes a
capital improvement to real property rather than a repair. By virtue of this classification Petitioner
is exempted from paying sales tax on the installation charge. Tax Law 1115(a)(17).
Additionally, Petitioner is not liable for sales tax on the price charged by the contractor for
the water pipe used in this capital improvement. Sales tax on the cost of these materials should have
been paid by the contractor at the time of purchase. The contractor cannot now collect sales tax from
the Petitioner on the cost of the material since Petitioner presented a completed Certificate of Capital
Improvement to the contractor pursuant to sales and use tax regulation section 541.5(b)(2).

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TSB-A-87(15)S
Sales Tax
March 27, 1987

Accordingly, the installation of in ground water pipe satisfies the requirements of section
1101(b)(9) of the Tax Law and is therefore, a capital improvement. As a result, the contract price
paid by the Petitioner is not subject to sales tax.

DATED: March 27, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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