Is the service of pumping accumulated water out of a landfill's required liners a taxable real-property maintenance service, or a tax-free capital improvement?

Plain-English summary

110 Sand Company mines sand and gravel and also operates a landfill accepting clean fill and demolition debris. The New York State Department of Environmental Conservation required it to install two 60-mil liners beneath the landfill; those liners accumulate water that must be removed. 110 Sand hires a company to pump the water out and haul it to another landfill, and asked whether that removal service is taxable.

The Department held the water-removal service is taxable maintenance of real property.

• The tax. Tax Law § 1105(c)(5) taxes services of maintaining, servicing, or repairing real property, as distinguished from a capital improvement.
• The end-result test. 20 NYCRR § 527.7(b)(4): taxability depends on the end result — maintenance/repair of real property is taxable, a capital improvement is not. § 527.7(a)(1) defines maintaining/servicing/repairing as all activities that keep real property in a condition of fitness, efficiency, readiness, or safety (or restore it to that condition). § 527.7(a)(3) sets the three-part capital-improvement test (substantially adds value or prolongs useful life; becomes part of/permanently affixed so removal would cause material damage; intended to be permanent).
• The result. The end result of pumping out the water is keeping the property in a condition of fitness, efficiency, readiness, or safety — i.e., servicing/maintenance, not a capital improvement. So the service is subject to sales tax.

What this means for you

Ongoing services that keep a property functioning are taxable maintenance — even when the property itself is a regulatory-required installation. The fact that DEC mandated the liners (and that water removal is necessary to operate the landfill) doesn't turn the recurring pumping service into a capital improvement. New York taxes it because its end result is keeping the real property fit and operational.

Apply the end-result test. Ask what the service accomplishes: if it keeps or restores the property to a condition of fitness, efficiency, readiness, or safety, it's taxable maintenance. Only a service whose end result is a genuine capital improvement — meeting all three prongs (adds value/prolongs life, permanently affixed, intended to be permanent) — is exempt.

Recurring "removal/pump-out" services usually land on the taxable side. Because they're inherently about upkeep rather than a permanent addition, expect them to be treated as taxable real-property maintenance.

Common questions

Q: We pay a company to pump required drainage/leachate water out of our landfill. Is that taxable?
A: Yes. New York treats it as taxable maintenance of real property, because its end result is keeping the property in a condition of fitness, efficiency, readiness, or safety.

Q: The liners were required by DEC — doesn't that make the related work a capital improvement?
A: No. The regulatory mandate doesn't change the analysis. The recurring water-removal service is upkeep, not a capital improvement, so it's taxable.

Q: How do I tell taxable maintenance from a tax-free capital improvement?
A: Use the end-result test. Maintenance/repair (keeping or restoring the property to a fit, efficient, ready, or safe condition) is taxable; a capital improvement must add substantial value or prolong useful life, be permanently affixed, and be intended to be permanent.

Citations and references

Statute and regulation:

• Tax Law § 1105(c)(5) — taxes services of maintaining, servicing, or repairing real property, as distinguished from adding to or improving it by a capital improvement (as defined in Tax Law § 1101(b)(9))
• 20 NYCRR § 527.7(b)(4) — the imposition of tax on services performed on real property depends on the end result: maintenance/repair is taxable; a capital improvement is not
• 20 NYCRR § 527.7(a)(1) — maintaining, servicing, and repairing cover all activities that keep real property in a condition of fitness, efficiency, readiness, or safety, or restore it to such condition
• 20 NYCRR § 527.7(a)(3) — a capital improvement (i) substantially adds value or appreciably prolongs useful life, (ii) becomes part of or is permanently affixed so that removal would cause material damage, and (iii) is intended to become a permanent installation

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_12s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-88(12)S
Sales Tax
January 25, 1988

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S870924A

On September 24, 1987, a Petition for Advisory Opinion was received from 110 Sand
Company, 170 Cabot Street, West Babylon, New York 11704.
The issue raised is the taxability of the service of removal of water from Petitioner's landfill.
Petitioner mines sand and gravel for sale to its customers. In addition, Petitioner operates a
landfill accepting clean fill including demolition debris. Petitioner states that the New York State
Department of Environmental Conservation has required it to install two 60 mill liners beneath its
landfill. These liners accumulate water which must be removed. Petitioner hires a company to pump
this water out of its landfill and remove it to another landfill. The charge for this removal service is
the subject of Petitioner's inquiry.
Section 1105(c) of the Tax Law imposes tax upon receipts from the sale, except for resale,
of the following services:
*

*

*

(5) 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 527.7(b)(4) of the sales and use tax regulations provides:
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.
Section 527.7(a)(1) of the regulations provides that the terms "[m]aintaining, servicing and
repairing are terms which are used to cover all activities that relate to keeping real property in a
condition of fitness, efficiency, readiness or safety or restoring it to such condition."

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-88(12)S
Sales Tax
January 25, 1988

Section 527.7(a)(3) provides that:
A capital improvement is an addition or alteration to real property:
(i)
which substantially adds to the value of the real
property, or appreciably prolongs the useful life of the real
property;
(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.

The end result of the service here at issue is obviously the servicing or maintenance of real
property rather that a capital improvement since the service relates to keeping real property in a
condition of fitness, efficiency, readiness or safety. Accordingly such services are subject to tax.

DATED: January 25, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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