Is selling and installing a steam boiler for a dry-cleaner in leased space a tax-free capital improvement?

Plain-English summary

Allied Steam Corp. sold and installed a high-pressure steam boiler for a customer that runs a dry-cleaning operation in rented space. The boiler supplies steam to the garment-processing equipment; on cold nights it is left running, and the heat from its machinery and piping keeps the building from freezing. Allied asked whether this sale and installation is a capital improvement exempt from sales and use tax.

The Department held it is not. A capital improvement must satisfy all three parts of the test in § 1101(b)(9)(i) and § 541.2(g)(1) (adds value/prolongs life; permanently affixed so removal causes material damage; intended to be permanent). For a tenant, business improvements to leased premises are presumed non-permanent (100 Park Ave., Inc. v. Boyland) unless the lease vests title in the landlord at the end (Merit Oil v. Tax Commission) or the item is so affixed it can't be removed without substantial damage (Flah's of Syracuse v. Tully). Allied showed neither.

Crucially, the boiler's primary purpose is generating steam for the dry-cleaning business; the fact that it incidentally heats the building at night does not convert it into a capital improvement. So the sale and installation are taxable, and the purchaser owes use tax if it didn't pay sales tax to the seller/installer.

This opinion is a companion to TSB-A-90(51)S, issued to the same petitioner (Allied Steam Corp.) on related dry-cleaning-equipment installations, which applied the same tenant/capital-improvement analysis and also addressed acceptance of a Certificate of Capital Improvement.

What this means for you

A tenant's process equipment isn't a capital improvement

Even large, plumbed-in machinery like a steam boiler stays taxable when installed for a tenant to run its business. Unless the lease actually gives the improvements to the landlord, or the equipment can't be pulled without wrecking it or the building, the installation is a taxable sale.

An incidental second use doesn't create an exemption

The boiler also heated the building — a genuine benefit to the realty — but that secondary function didn't matter, because the equipment's primary role was serving the tenant's dry-cleaning business. Don't rely on an incidental "helps the building" effect to reclassify business equipment as a capital improvement.

Common questions

Q: Is a steam boiler installed for a dry-cleaner a capital improvement?
A: Not on these facts. It served the tenant's business, wasn't shown to be non-removable or to transfer to the landlord, so its sale and installation are taxable.

Q: The boiler also heats the building — doesn't that make it part of the realty?
A: No. Its primary purpose was generating steam for the business; the incidental building heating wasn't enough to make it a capital improvement.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) — definition of capital improvement (three-part test)
• 20 NYCRR § 541.2(g)(1) — three-part capital-improvement test

Cited authority:

• 100 Park Ave., Inc. v. Boyland, 144 NYS2d 88, aff'd 309 NY 685
• Merit Oil of New York v. New York State Tax Commission, 124 AD2d 326
• Flah's of Syracuse v. Tully, 89 AD2d 729

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_48s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(48)S
Sales Tax
October 10, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900612A

On June 12, 1990 a Petition for Advisory Opinion was received from Allied Steam Corp.,
Myrtle Avenue, Mahopac Falls, New York 10542.
The issue raised by Petitioner, Allied Steam Corp., is whether the sale and installation of dry
cleaning equipment consisting of a high pressure steam boiler is a capital improvement exempt from
the imposition of sales and use tax.
Petitioner sold a high pressure steam boiler which supplied steam to equipment used to
process garments in a dry cleaning operation conducted in rented space. During the cold months of
the year, the boiler is left on during the night and the heat emitted by its machinery and piping keeps
the building from freezing.
Section 1101(b)(9)(i) of the Tax Law defines a capital improvement as:
An addition or alteration to real property which:
(A)

Substantially adds to the value of the real property, or appreciably prolongs the useful
life of the real property; and

(B)

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
Is intended to become a permanent installation.

(C)

Section 541.2(g)(1) of the Sales and Use Tax Regulations provides that:
A capital improvement means 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.

(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.

The criteria for a capital improvement must be met in their entirety. The inability to meet any
one of the three conditions will prevent the property in question from qualifying as a capital
improvement.
TP-9 (9/88)

-2­
TSB-A-90(48)S
Sales Tax
October 10, 1990

In the instant case the Petitioner's customer is the lessee of the premises on which the boiler
is located. Improvements made to leased premises for the purposes of conducting the business for
which the realty is leased are presumed not to be permanent and to be made for the sole use and
enjoyment of the tenant during the term of the lease, 100 Park Ave., Inc. v Boyland, 144 NYS2d 88,
affd 309 NY 685. Such improvements will be presumed not to be capital improvements unless the
lease vests title to the improvements in the lessor upon termination of the lease, Merit Oil of New
York v New York State Tax Commission, 124 AD2d 326 or the improvements are so affixed to the
realty so that they cannot be removed without substantial damage to them, Flah's of Syracuse v.
Tully, 89 AD2d 729. Since Petitioner has failed to show that its customer has met these two latter
conditions, it must be presumed that the installation of the boiler for the primary purpose of
generating steam for use in the customer's dry cleaning business is not a capital improvement.
Furthermore the fact that the boiler may on occasion secondarily generate energy to heat the building
is not sufficient to bring its sale and installation within the definition of a capital improvement as set
forth in Section 1101(b)(9)(i) of the Tax Law and Section 541.2(g)(1) of the Sales and Use Tax
Regulations.
Consequently, the sale and installation of the boiler is subject to the imposition of sales tax.
The purchaser of the boiler would be liable for the use tax on the sale and installation of the boiler
only if he did not pay the sales tax directly to the seller and installer of the boiler.

DATED: October 10, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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