Is asbestos removal taxable when it is done only as a necessary step in replacing a home's boiler — a capital improvement?

Plain-English summary

Oscar S. Rothaus replaced a boiler-type furnace in his home. Before the new boiler could go in, a specially licensed contractor had to strip the asbestos coating off the old boiler and nearby pipes and haul it to a special landfill; then a plumber installed the new boiler. The asbestos-removal contractor charged sales tax; the plumber did not. Rothaus asked whether the asbestos removal was actually taxable.

The Department said no — because the removal was part of a capital improvement.

• Asbestos removal alone is a taxable service. Standing on its own, removing asbestos is a taxable service of maintaining, servicing, or repairing real property under Tax Law § 1105(c)(5).
• But here it was a step in a capital improvement. Replacing the boiler is a capital improvement — an addition or alteration that adds value or prolongs the property's useful life, becomes part of the real property, and is intended to be permanent (Tax Law § 1101(b)(9)). New York uses an "end-result" test: if the end result of a service is a capital improvement, the service is not taxable (20 NYCRR § 527.7(b)(4)). And under 20 NYCRR § 541.2(g)(1), Example 3, a subcontractor's charge that is a constituent part of a capital improvement is not taxable. So the asbestos-removal charge is not subject to tax.
• How to handle the paperwork — and get the money back. To avoid being charged tax, Rothaus should have given the removal contractor a Certificate of Capital Improvement (Form ST-124). Since the tax was already paid, he can apply for a refund using Form AU-11 — but must do so within three years of the date the tax was payable.

What this means for you

A taxable service can become nontaxable when it's a step in a capital improvement. New York looks at the end result of the work. Demolition, prep, and abatement steps that would be taxable repairs on their own are not taxable when they are constituent parts of a job whose end result is a capital improvement (like installing a new permanent boiler).

Use Form ST-124 up front. If your project is a capital improvement, give each contractor and subcontractor a Certificate of Capital Improvement (Form ST-124) so they don't charge you sales tax on their services. That's the clean way to prevent the tax from being collected in the first place.

If you were already charged, you have three years to claim it back. File Form AU-11 (Application for Credit or Refund) within three years of when the tax was payable. Miss that window and the refund is lost.

Common questions

Q: My abatement contractor charged me sales tax for asbestos removal. Is that right?
A: Not if the removal was a necessary step of a capital improvement (like replacing your boiler). Under the end-result test, the removal charge isn't taxable in that situation.

Q: Why didn't my plumber charge tax on installing the new boiler, but the abatement contractor did?
A: The boiler installation is a capital improvement, so it's not a taxable service. The asbestos removal is likewise nontaxable as a constituent part of that improvement — the abatement contractor should not have charged tax (a Form ST-124 would have prevented it).

Q: How do I get the wrongly charged tax back?
A: File Form AU-11 (Application for Credit or Refund of State and Local Sales or Use Tax) within three years of the date the tax was payable.

Citations and references

Statute and regulation:

• Tax Law § 1105(c)(5) — imposes sales tax on the service of maintaining, servicing, or repairing real property, as distinguished from a capital improvement
• Tax Law § 1101(b)(9) — defines "capital improvement": an addition/alteration to real property that (i) substantially adds value or appreciably prolongs useful life, (ii) becomes part of or is permanently affixed to the real property so removal would cause material damage, and (iii) is intended to be a permanent installation
• 20 NYCRR § 527.7(b)(4) — the "end-result" test: if the end result of a service is a repair/maintenance it is taxable, but if it is a capital improvement the service is not taxable
• 20 NYCRR § 541.2(g)(1), Example 3 — a subcontractor's charge that is a constituent part of a capital improvement is not subject to tax
• Forms referenced: ST-124 (Certificate of Capital Improvement); AU-11 (Application for Credit or Refund), which must be filed within three years of when the tax was payable

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_10s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-89 (10)S
Sales Tax
March 28, 1989

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S881102A

On November 2, 1988, a Petition for Advisory Opinion was received from Oscar S. Rothaus,
106 Devon Road, Ithaca, New York 14850.
The issue raised is whether the removal of a boiler asbestos lining is subject to sales tax when
such removal is done preliminary to the removal and replacement of a boiler.
Petitioner replaced a boiler type furnace in his home. In doing so, the asbestos coating on the
boiler and nearby pipes had to be removed by a specially licensed contractor and disposed of in
special land fills. After the removal of the asbestos, Petitioner then hired a plumbing contractor to
install a new boiler.
Petitioner was charged sales tax by the asbestos removal contractor but was not charged sales
tax by the plumber who installed the boiler.
Section 1105(c)(5) of the Tax Law imposes a sales tax upon receipts from the services of
"[m]aintaining, servicing or repairing real property... 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...."
Section 1101 (b)(9) of the Tax Law defines capital improvement as follows:
(9) Capital improvement. (3) "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.
Sales and Use tax regulation section 527.7 (b)(4) provides that:
(4) 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

-2­
TSB-A-89 (10)S
Sales Tax
March 28, 1989

result of the same service is a capital improvement to the real
property, such services are not taxable. 20NYCRR 527.7(b)(4)
Example 3 of sales and use tax regulation 541.2 (g)(1) provides:
Example 3:

A homeowner hires a general contractor to remove a portion of a
masonry wall for the purpose of installing a door and window. The
general contractor hires a masonry contractor (subcontractor) to repair
the wall. The charge to the contractor by the subcontractor represents
a constituent part of the services performed in adding to or improving
real property by a capital improvement and therefore is not subject to
tax in accordance with section 527.7(b)(4) of this Title.

The service of asbestos removal by itself is a service subject to tax under Section 1105(c)(5)
of the Tax Law. However, when the service of asbestos removal is performed as a constituent part
of a capital improvement, as is true in the instant case, the charge for such removal is not subject to
sales and use tax.
To avoid paying tax on a capital improvement, Petitioner should have given the asbestos
removal contractor a Certificate of Capital Improvement (Form ST-124). However, since the tax has
already been paid, Petitioner may, within three years from the date that the tax was payable, apply
to the Department of Taxation and Finance for a refund of the sales tax paid by filing an Application
For Credit or Refund of State and Local Sales or Use Tax (Form AU-11).

DATED: March 28, 1989

s/FRANK J. PUCCIA
Director
Technical Services

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