Is installing dry-cleaning equipment in leased space a tax-free capital improvement, and can a contractor accept a capital-improvement certificate after already billing tax?

Plain-English summary

Allied Steam Corp. installed dry-cleaning equipment for a customer who rents its business space. The equipment is bolted to the floor and piped into the building's utilities, but all the connections can be disconnected. The customer issued Allied a Certificate of Capital Improvement after the work, arguing the installation was a tax-free capital improvement to real property. Allied asked (1) whether that's right, and (2) whether it could accept the certificate after it had already billed sales tax on the original contract.

1. Not a capital improvement. A capital improvement must meet all three parts of the test in § 1101(b)(9)(i) and § 541.2(g)(1): it substantially adds value or prolongs the property's life; it becomes part of, or is permanently affixed to, the realty so that removal would cause material damage; and it is intended to be permanent. For a tenant, improvements made to run the leased business are presumed non-permanent — made for the tenant's own use during the lease (100 Park Ave., Inc. v. Boyland). That presumption is overcome only if the lease vests title to the improvements in the landlord at lease end (Merit Oil v. Tax Commission) or the items are so affixed they can't be removed without substantial damage (Flah's of Syracuse v. Tully). Allied showed neither, so the installation is presumed not a capital improvement. The sale and installation are taxable; the buyer owes use tax if it didn't pay sales tax to the seller/installer.

2. A good-faith certificate within 90 days still protects the contractor. Under § 1132(c) and § 541.5(b)(4), when a customer furnishes a properly completed Certificate of Capital Improvement, the burden of proof and the tax liability shift to the customer. A contractor who accepts such a certificate in good faith within 90 days has no duty to investigate or "police" whether the job actually qualifies (Saf-Tee Plumbing v. Tax Commission). But a customer who knowingly or fraudulently issues a false certificate is liable for penalties and interest under § 1145. (Note: a certificate of capital improvement can't be used by a contractor to buy the underlying materials tax-free from a supplier, and if the installed item stays tangible personal property, the contractor must collect tax on the full selling price including installation.)

What this means for you

Tenant installations are usually taxable

If you install equipment for a business that leases its space, assume the work is a taxable sale-and-installation, not a capital improvement — unless the lease actually transfers the improvements to the landlord at the end, or the equipment genuinely can't come out without wrecking it or the building. "Bolted down and plumbed in, but disconnectable" is not enough.

The certificate protects the contractor who takes it in good faith

The flip side is real protection: if the customer hands you a proper Certificate of Capital Improvement within 90 days and you accept it in good faith, you're off the hook even if the classification turns out to be wrong — the customer carries the liability (and the penalties, if the certificate was false). You don't have to argue with customers about whether their job qualifies.

Common questions

Q: Is installing equipment in rented space a capital improvement?
A: Usually no. A tenant's business installations are presumed non-permanent unless the lease vests title in the landlord or the equipment can't be removed without substantial damage. Otherwise the sale and installation are taxable.

Q: Can I accept a capital-improvement certificate after I already charged tax?
A: Yes, if it's properly completed and taken in good faith within 90 days. It shifts the liability to the customer, and you needn't verify the job truly qualifies.

Q: What if the customer's certificate is false?
A: The customer — not the good-faith contractor — is liable for penalties and interest under § 1145.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) — definition of capital improvement (three-part test)
• Tax Law § 1132(c) — presumption of taxability; certificate taken within 90 days
• Tax Law § 1145 — penalties for false certificates
• 20 NYCRR § 541.2(g)(1) — three-part capital-improvement test
• 20 NYCRR § 541.5(b)(4) — effect of a certificate of capital improvement

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
• Saf-Tee Plumbing v. State Tax Commission, 77 AD2d 1

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_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (51)S
Sales Tax
October 23, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900612B

On June 12, 1990 a Petition for Advisory Opinion was received from Allied Steam Corp.,
Myrtle Avenue, Mahopac Falls, New York 10512.
The issue raised by Petitioner, Allied Steam Corp., is whether the sale and installation of dry
cleaning equipment is a capital improvement and whether a contractor may accept a certificate of
capital improvement after the original contract which billed sales tax has been presented to the
purchaser.
Petitioner's customer is a dry cleaner located in rented space, Petitioner's customer contends
that the installation of dry cleaning equipment results in a capital improvement to real property.
After the installation was completed, petitioner's customer issued a certificate of capital improvement
to him. The equipment is bolted to the floor and piped into the utilities in the building. However all
connections can be disconnected.
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

(C)

Is intended to become a permanent installation.

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)

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TSB-A-90 (51)S
Sales Tax
October 23, 1990

In the instant case the Petitioner's customer is the lessee of the premises on which the dry
cleaning equipment 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 dry
cleaning equipment is for use in the customer's dry cleaning business and is not a capital
improvement.
Consequently, the sale and installation of the dry cleaning equipment is subject to the
imposition of sales tax. The purchaser of such equipment would be liable for the use tax on the sale
and installation of the equipment if he did not pay the sales tax directly to the seller and the installer
of the equipment.
With regard to whether Petitioner may accept a Certificate of Capital Improvement, Section
1132(c) of the Tax Law states, in part:
(c) For the purpose of the proper administration of this article and to prevent evasion
of the tax hereby imposed, it shall be presumed that all receipts for property or services of
any type mentioned in subdivisions (a), (b), (c) and (d) of section eleven hundred five,. . . .are
subject to tax until the contrary is established, and the burden of proving that any receipt,.
. .is not taxable hereunder shall be upon the person required to collect tax or the customer.
.[u]nless (1) a vendor, not later than ninety days after delivery of the property or the rendition
of the service, shall have taken from the purchaser a certificate in such form as the tax
commission may prescribe. . .
Section 541.5(b)(4) of the Sales and Use Tax Regulations explains the effect of 1132(c) of
the Tax Law upon the Certificate of Capital Improvement.
(4) Documents; capital improvement contracts. (i) When a properly completed
certificate of capital improvement has been furnished to the contractor, the burden
of proving the job or transaction is not taxable and the liability for the tax rests solely
upon the customer.
(a) The prime contractor should obtain a certificate of capital improvement
from the customer and retain it as part of his records. Copies of such certificate must
be furnished to all subcontractors on the job and retained as part of their records.
(b) A certificate of capital improvement may not be issued by a contractor.
subcontractor or any other person to a supplier on the purchase of tangible personal
property.

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TSB-A-90 (51)S
Sales Tax
October 23, 1990

(ii) Where a contractor does not receive a capital improvement certificate
from a customer, the contract or other records of the transaction will prevail. In such
case:
(a) where the contractor does not receive a capital improvement certificate,
collects tax on the full invoice price and the job is a capital improvement to real
property, the contractor is liable for the tax on the cost of materials incorporated into
the job, plus the tax collected from the customer. The customer is entitled to a refund
of the tax paid to the contractor, or
(b) where the contractor does not receive a capital improvement certificate,
collects no tax on the charges billed to the customer and the job is a capital
improvement to real property, the contractor is liable for the tax on the cost of
materials incorporated into the job performed.
(iii) If a contract includes the sale of tangible personal property which
remains tangible personal property after installation, the contractor must collect the
appropriate New York State and local taxes from the customer on the selling price,
including any charge for installation, of the tangible personal property unless a
properly completed exemption certificate is issued by the customer. The contractor
may apply for a credit or refund of taxes he has paid on purchases of the tangible
personal property that remain tangible personal property after installation.
Therefore where Petitioner has accepted in good faith a Certificate of Capital Improvement
within 90 days, it is not under a duty to investigate or police its customers and has no duty to debate
with its customers as to what constitutes a capital improvement (See: Saf-Tee Plumbing v State Tax
Commission, 77 AD2d 1). However, if Petitioner's customers knowingly or fraudulently issue a false
exemption certificate, they will be liable for penalties and interest in accordance with Section 1145
of the Tax Law.

DATED: October 23, 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.