New York Advisory Opinion TSB-A-96(37)S: A contractor who hires a plumber and mason as subcontractors on a pool job asks whether he has to pay sales tax to those subcontractors, or whether he can instead give them a Contractor Exempt Purchase Certificate (Form ST-120.1).

Plain-English summary

Ang Pallaria is hired by a pool owner to do work and, before starting, hires a plumber and a mason as subcontractors. He plans to bill the pool owner for his own work, the two subcontractors' work, and sales tax. He asked the Department whether he has to pay sales tax to his subcontractors, or whether he can instead hand them a Contractor Exempt Purchase Certificate (Form ST-120.1) so their services come to him tax-free.

The answer turns on how Petitioner's own work for the pool owner is classified. If Petitioner's work is a taxable service -- an installation of tangible personal property that doesn't become part of real property, or a repair/maintenance job that isn't a capital improvement (Tax Law § 1105(c)(3) and (5)) -- then Petitioner is registered to collect sales tax and is buying the subcontractors' services for resale, so he can properly issue Form ST-120.1 to each subcontractor and instead collect sales tax from the pool owner on the full combined charge. But if Petitioner's work instead qualifies as a "capital improvement" to real property under Tax Law § 1101(b)(9) -- work that substantially adds value or prolongs useful life, becomes a permanent part of the property, and is intended to be permanent -- then Form ST-120.1 is the WRONG form. Instead, Petitioner should get a Certificate of Capital Improvement (Form ST-124) from the pool owner and give a copy to each subcontractor, and no sales tax is due on the capital-improvement work at any level of the job. A subcontractor is never legally required to accept an exemption certificate; one who does accept a properly completed certificate in good faith within 90 days is protected from liability even if the certificate is later misused, but if a subcontractor refuses and Petitioner ends up paying tax on a resale or capital-improvement item, he can apply for a refund or credit under Tax Law § 1139.

What this means for you

General contractors who use subcontractors

Figure out first whether your OWN job for the customer is a capital improvement or a taxable repair/installation -- that answer, not the subcontractor's trade, determines which certificate to use. Use Form ST-120.1 only when you're reselling a taxable service and are yourself registered to collect sales tax; use Form ST-124 (passed through from your customer) only when the whole job is a capital improvement. Using the wrong form, or none at all, risks paying tax you didn't need to (recoverable later via a refund claim) or under-collecting tax you owed.

Subcontractors (plumbers, masons, and similar trades) accepting exemption certificates

You're not required to accept a certificate from a general contractor, but if you accept a properly completed one in good faith within 90 days of finishing the work, you're protected from liability even if it turns out to have been misused.

Common questions

Q: How do I know if my work is a "capital improvement" rather than a taxable repair?
A: The three-part test under Tax Law § 1101(b)(9) and 20 NYCRR 541.2(g) asks whether the work substantially adds value or prolongs the property's useful life, becomes a permanent part of the real property (removal would cause material damage), and is intended as a permanent installation. This opinion doesn't decide whether a pool installation meets that test -- it depends on the specific facts of the job.

Q: What happens if my subcontractor won't accept my exemption certificate?
A: Nothing forces them to. If you end up paying sales tax to a subcontractor on work that was really for resale or was part of a capital improvement, you can apply to the Department for a refund or credit under Tax Law § 1139 rather than eating the cost.

Q: Can I just use Form ST-120.1 for all my subcontractor purchases to be safe?
A: No -- the Department is explicit that ST-120.1 should NOT be used when the underlying job is a capital improvement; the correct form there is the Certificate of Capital Improvement (Form ST-124), passed through from your customer to your subcontractors.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9) (capital improvement definition)
• Tax Law § 1105(c)(3), (5) (taxable installation, maintenance, and repair services)
• Tax Law § 1132(c)(1) (presumption of taxability; exemption certificate timing)
• Tax Law § 1139 (refund or credit)
• 20 NYCRR 532.4 (good-faith acceptance of exemption certificates)
• 20 NYCRR 541.2(g) (capital improvement definition)
• 20 NYCRR 541.5(b)(4) (Certificate of Capital Improvement)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_37s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-96 (37)S
Sales Tax
July 2, 1996

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960122C

On January 22, 1996, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ang Pallaria, 414 Valley View Road., New Hartford, New York 13413.
The issue raised by Petitioner, Ang Pallaria, is whether he must pay sales tax to a
subcontractor he hired or may he issue a Contractor Exempt Purchase Certificate in lieu of paying
the sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion. Petitioner is
hired to do work for the owner of a pool. Petitioner hires two subcontractors before doing any of his
work. The two subcontractors are a plumber and a mason. Petitioner stated that he will bill the pool
owner for his work, including charges for the two subcontractors' work and the sales tax.
Section l101(b)(9) of the Tax Law defines a capital improvement as follows:
(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.
Section 1105 of the Tax Law provides in part:
Sec. 1105. Imposition of sales tax.--.., there is hereby imposed and there shall
be paid a tax ... upon:
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(c) The receipts from every sale, except for resale, of the following services:
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(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith, except:
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TSB-A-96 (37)S
Sales Tax
July 2, 1996
(iii) for installing property which, when installed, will constitute an addition or
capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital
improvement is defined in paragraph nine of subdivision (b) of section eleven
hundred one of this chapter, ...
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(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, but excluding services rendered by an individual who
is not in a regular trade or business offering his services to the public ....
Section 1132(c)(1) of the Tax Law provides in part:
For the purpose of 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. Except as provided in subdivision (h) or (k)
of this section, unless (i) 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 resale
or exemption certificate in such form as the commissioner may prescribe . . . the sale
shall be deemed a taxable sale at retail. Where such . . . a resale or exemption
certificate . . . has been furnished to the vendor, the burden of proving that the receipt
. . . is not taxable hereunder shall be solely upon the customer. . . .
Petitioner may give to his subcontractor a Contractor Exempt Purchase Certificate, Form ST­
120.1 in order to purchase services exempt from tax which Petitioner will resell to his customer.
Petitioner should not use Form ST-120.1 unless Petitioner is performing a taxable service for its
customer, and is purchasing services from a subcontractor for resale. Examples of taxable services
are (1) the installation of tangible personal property that does not become a part of real property upon
installation and (2) repairs of real property. See Section 1105(c)(3) and (5) of the Tax Law. Petitioner
must be registered with the New York State Department of Taxation and Finance as a person
required to collect sales tax in order to furnish Form ST-120.1 to his subcontractors.

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TSB-A-96 (37)S
Sales Tax
July 2, 1996
Petitioner should not use Form ST-120.1 if Petitioner is performing work for his customer
that constitutes a capital improvement to real property. See Section l101(b)(9) of the Tax Law and
Section 541.2 (g) of the Sales and Use Tax Regulations for definition of capital improvement. In this
case, Petitioner should receive from his customer a properly completed Certificate of Capital
Improvement, Form ST-124, and give a copy of this completed certificate to each of his
subcontractors. See Section 541.5(b)(4) of the Sales and Use Tax Regulations.
Where Petitioner's subcontractors have accepted in good faith a properly completed
exemption certificate issued by him within 90 days after the completion of the service provided, they
are under no duty to investigate the certificate and they are not liable for the sales tax that may arise
out of misuse of the certificate. See Section 532.4 of the Sales and Use Tax Regulations. It should
be noted that the Tax Law contains no provision that requires a vendor, such as a subcontractor, to
accept any exemption documents. If a subcontractor refuses to accept an exemption certificate and
Petitioner pays sales tax to the subcontractor on a service purchased for resale or which constitutes
a capital improvement, Petitioner may apply for a refund or credit as provided in section 1139 of the
Tax Law.

DATED: July 2, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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