Are a company's labor and material charges to close its portion of a town-owned landfill subject to New York sales and use tax?

Plain-English summary

James River II Corporation, a paper company, had disposed of paper-mill sludge for years in one section of a landfill owned by the Town of Wilna (Jefferson County). Under a state Department of Environmental Conservation (DEC) consent order, the Town has to close the whole landfill by 1993, and James River committed to closing its sludge section. James River hired a consultant to design the closure and Tug Hill Construction to build it — grading the waste, laying geotextile fabric and a gas-venting sand layer, installing a 40-mil geomembrane cap, protective soils, drainage swales, erosion-control fabric, and a seeded topsoil layer, all costing about $364,520 paid by James River. It asked whether the labor and the materials were taxable.

The Department said neither is taxable:

• Labor — not taxable. Whether a service to real property is taxable "depends on the end result" (Reg. § 527.7(b)(4)). The closure work permanently adds to and prolongs the life of the land, becomes part of it, and is intended to be permanent — so it is a capital improvement under Tax Law § 1101(b)(9), not taxable repair/maintenance under § 1105(c)(5). Labor for a capital improvement is not subject to sales tax.
• Materials — not taxable. Under §§ 1115(a)(15) and 1115(a)(16), materials a contractor buys that become an integral component part of the real property of an organization described in § 1116(a) are exempt. The Town of Wilna is a political subdivision exempt under § 1116(a)(1). Because the materials become part of the Town's land, James River's purchase of them is exempt.

What this means for you

Contractors and property owners doing environmental closures

A landfill cap, and comparable permanent environmental closure work, is a capital improvement — the labor isn't taxed. The analysis turns on the end result: permanent work that adds lasting value and becomes part of the land is a capital improvement, whereas work whose end result is merely repair or upkeep is taxable. Document the permanence and the value/useful-life addition.

When the land belongs to a government body

The materials exemption here works because the improved land belongs to an exempt government owner (the Town). Materials that become an integral part of an exempt organization's real property qualify under §§ 1115(a)(15)–(16), even when a private company (not the government) is footing the bill and hiring the contractor. Keep the paperwork showing the materials became part of the exempt owner's property.

Accountants and tax professionals

Two independent grounds: (1) capital-improvement treatment of the labor under § 1101(b)(9) / § 1105(c)(5) and Reg. § 527.7(b)(4); and (2) the exempt-organization materials exemption under §§ 1115(a)(15)–(16) tied to the Town's § 1116(a)(1) status. The Town's own portion of the closure was separately exempt as a public agency.

Common questions

Q: Is the labor to close a landfill taxable in New York?
A: No. Closing the landfill is a capital improvement to the land, and labor for a capital improvement is not subject to sales tax. What matters is the end result — permanent work that adds lasting value and becomes part of the property.

Q: Are the materials taxable if a private company buys them?
A: Not here. Because the materials became an integral part of the Town of Wilna's land, and the Town is an exempt political subdivision, the purchase is exempt under §§ 1115(a)(15)–(16), even though a private company paid for them.

Q: What makes something a capital improvement rather than a repair?
A: Under § 1101(b)(9) it must substantially add value or prolong the property's useful life, become permanently affixed so removal would cause material damage, and be intended as a permanent installation.

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property)
• Tax Law § 1101(b)(4) (contractor purchases deemed retail sales)
• Tax Law § 1105(c)(5) (tax on maintaining, servicing, or repairing real property, as distinguished from a capital improvement)
• Tax Law § 1101(b)(9) (definition of capital improvement)
• Tax Law § 1115(a)(15) and § 1115(a)(16) (exemption for materials becoming an integral component of an exempt organization's property)
• Tax Law § 1116(a)(1) (exemption for New York State and its political subdivisions)
• Sales and Use Tax Regulations § 527.7(b)(4) (taxability of a service to real property depends on its end result)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_70s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-92 (70) S
Sales Tax
October 22, 1992

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920810B

On August 10, 1992, a Petition for Advisory Opinion was received from James River II
Corporation, 695 West End Avenue, Carthage, New York 13619.
The issue raised by Petitioner, James River II Corporation, is whether labor and material
charges paid in connection with the closing of a portion of the Town of Wilna landfill are subject
to State and local sales and use taxes.
For several years, beginning in 1979, Petitioner had an informal agreement for disposing of
primary paper mill sludge in one portion of the landfill owned by the Town of Wilna in Jefferson
County, New York. In return, Petitioner made a commitment to the Town to close that section of the
landfill devoted entirely to paper mill sludge. The Town of Wilna is required to close the total
landfill by 1993 in accordance with a consent order with the Department of Environmental
Conservation (hereinafter "D.E.C."). In turn, Petitioner is required to close its portion of the landfill
that was used for paper mill sludge.
Petitioner hired Tisdel Associates as its consultant to design the closure in accordance with
D.E.C. regulations. Tug Hill Construction of Felts Mills, New York, was awarded the contract for
closure in June 1992. Construction began in July 1992 and will be completed in September 1992.
The Town of Wilna also hired Tug Hill to close the main municipal landfill within the same time
frame. The Town's part of the closure is tax exempt, since it is a public agency.
The project work to close the landfill will consist of the following:
1.
2.
4.
5.

8.
9.
10.

grading of existing waste on approximately 4.0 acres;
installation of geotextile fabric overlain by a gas venting sand layer; 3. installation
of approximately 500 lineal feet of gas venting lateral and six (6) risers;
installation of approximately 28,000 square yards of 40-mil geomembrance cap;
installation of approximately 19,000 cubic yards of protective soils; 6. installation
of approximately 600 lineal feet of lined drainage swale; 7. construction of
approximately 300 lineal feet of municipal/industrial "tie-in";
installation of approximately 800 square yards of erosion control fabric;
installation of approximately 40 lineal feet of 18-inch corrugated metal pipe:
installation, seeding and mulching of a topsoil layer.

The project cost is $364,520 and will be paid by Petitioner.
TP-9 (9/88)

-2­
TSB-A-92 (70) S
Sales Tax
October 22, 1992

Section 1105(a) of the Tax Law imposes a sales tax upon the receipts from every retail sale
of tangible personal property unless otherwise excluded or exempt.
Section 1101(b)(4) of the Tax Law which defines the term "retail sale" states, in part: "A sale
of any tangible personal property to a contractor, subcontractor or repairman for use or consumption
in erecting structures or buildings, or building on, or otherwise adding to, altering, improving,
maintaining, servicing or repairing real property, property or land ... is deemed to be a retail sale
regardless of whether the tangible personal property is to be sold as such before it is so used or
consumed."
Section 1115(a)(15) and Section 1115(a)(16) of the Tax Law provide exemption from the
sales tax for property sold to contractors, subcontractors or repairman for use or consumption as
described in section 1101(b)(4) of the Tax Law, if such property is to become an integral component
part of the structure, building or real property of an organization described in section 1116(a) of the
Tax Law.
Section 1116(a)(1) of the Tax Law provides exemption from sales tax for "The State of New
York, or any of its agencies, instrumentalities, public corporations (including a public corporation
created pursuant to agreement or compact with another state or Canada) or political subdivisions
where it is the purchaser, user or consumer, or where it is a vendor of services or property of a kind
not ordinarily sold by private persons."
Section 1105(c)(5) of the Tax Law imposes a tax on the receipts from the following services:
"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 .... " (emphasis added)
Section 1101(b)(9) of the Tax Law defines capital improvement in relevant part as follows:
(9) Capital improvement. (i) 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.

-3­
TSB-A-92 (70) S
Sales Tax
October 22, 1992

Section 527.7(b)(4) of the Sales and Use Tax Regulations provide as follows:
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.
The project work listed to close the landfill constitute a capital improvement to real property
pursuant to Section 1101(b)(9) of the Tax Law. Therefore, pursuant to Section 1105(c)(5) of the Tax
Law and Section 527.7(b)(4) of the Sales and Use Tax Regulations since the end result of the service
performed constitutes a capital improvement, the charges for labor to perform such improvement are
not subject to sales tax.
Concerning the materials used to perform the project work, pursuant to Sections 1115(a)(15)
and 1115(a)(16) of the Tax Law property sold to contractors or-subcontractors that will become an
integral component part of a structure, building or real property of an organization described in
Section ll16(a) of the Tax Law is not subject to sales tax. Accordingly, since the Town of Wilna is
an organization described in Section 1116(a)(1) of the Tax Law, the purchase by Petitioner of the
materials used to close the landfill will not be subject to sales tax.

DATED: October 22, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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