New York Advisory Opinion TSB-A-96(41)S: Does an environmental contractor's installation of soil and groundwater treatment systems at contaminated gas station sites qualify as a tax-exempt "capital improvement" to real property?

Plain-English summary

Envirotrac Ltd. is an environmental consulting and contracting company that separately bills clients for consulting services and for actual cleanup work. Its cleanup service can involve installing soil and/or groundwater treatment systems -- pumps and pump houses, water treatment facilities, wells, and treatment buildings ranging from doghouse-sized to a 12'x25' wood-frame structure with electric and water hookups, similar in concept to a septic system. Its clients include major oil companies and small gas station owners dealing with contamination. Envirotrac asked whether these installations qualify as tax-exempt "capital improvements" to real property.

The Department explained that whether a specific installation is a capital improvement is a factual question that can't be resolved in the abstract in an advisory opinion -- it depends on the degree of contamination, the client's obligations and preferences, and the client's rights in the property. But it laid out the governing three-part test from Tax Law § 1101(b)(9): the work must (1) substantially add value or prolong the property's useful life, (2) become part of the real property such that removal would cause material damage, and (3) be intended as a permanent installation. The Department said Envirotrac's cleanup work easily satisfies the first condition. The second and third conditions are where it varies: if a treatment system is installed to the point that it loses its separate identity and becomes part of the real property, and is meant to be permanent (like a septic system), it's a capital improvement -- Envirotrac's charge to the client is then exempt from sales tax, though Envirotrac itself owes tax on the materials it buys to build the system, since a capital-improvement contractor is the "ultimate consumer" of its own materials. But if Envirotrac merely installs equipment -- like a portable pump inside a free-standing wooden structure -- that remains tangible personal property after installation, the job isn't a capital improvement; the installation charge is instead a taxable service under Tax Law § 1105(c)(3), though Envirotrac can later claim a refund or credit for sales tax it already paid on materials it transferred to the client as part of that taxable installation. The opinion also flags a legal presumption worth knowing: tenant-installed fixtures are presumed NOT intended to be permanent, which can tip a borderline case toward "not a capital improvement" when the client is a tenant rather than the property owner.

What this means for you

Environmental remediation contractors

Classify each job on its own facts using the three-part test -- a heavily built-in, permanent-feeling system (fixed pump houses, wells, hardwired treatment buildings meant to stay for the life of the remediation) points toward capital-improvement treatment, while more portable, removable equipment points toward a taxable installation service. Get a properly completed Certificate of Capital Improvement (Form ST-124) from the client whenever you're treating a job as exempt -- accepting one in good faith shifts the burden of proving taxability onto the client.

Gas station owners and oil companies hiring remediation contractors

If you're a tenant (rather than the property owner) at the contaminated site, be aware there's a legal presumption against permanency for tenant-installed fixtures, which can push a borderline system toward taxable rather than exempt treatment -- discuss this with your contractor before assuming a system will be tax-exempt.

Common questions

Q: Why can't the Department just say whether Envirotrac's systems are capital improvements?
A: Advisory opinions don't resolve factual disputes -- they apply the law to facts the petitioner describes. Since the degree of permanency and integration varies by site (a fixed 12'x25' treatment building is very different from a portable pump in a small shed), the Department gave the legal test rather than a blanket yes/no.

Q: If the system is a capital improvement, who pays the sales tax?
A: The contractor does -- as the "ultimate consumer" of the materials it buys to build a capital improvement, Envirotrac pays sales tax on those materials, but doesn't charge its client sales tax on the job itself.

Q: What if the system is NOT a capital improvement?
A: Then Envirotrac's installation charge to the client is a taxable service under Tax Law § 1105(c)(3). Envirotrac can claim a refund or credit under Tax Law § 1119(c) for tax it already paid on materials that ended up transferred to the client as part of performing that taxable service.

Q: Does being a tenant (rather than owner) of the contaminated property matter?
A: Yes -- there's a rebuttable legal presumption that tenant-installed fixtures and improvements are NOT intended to be permanent, which weighs against capital-improvement treatment for a system installed at a leased gas station site, though the presumption can be overcome with contrary facts.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (definition of retail sale)
• Tax Law § 1101(b)(9) (definition of capital improvement)
• Tax Law § 1105(a), (c)(3), (c)(5) (sales tax imposition on installation/maintenance services)
• Tax Law § 1115(a)(17) (capital improvement materials exemption)
• Tax Law § 1119(c) (refund/credit for materials transferred with a taxable service)
• 20 NYCRR 527.7(a)(3)(i), 527.7(b) (capital improvement definition; end-result test)
• 20 NYCRR 541.2(g)(1), 541.2(g)(2)(i) (capital improvement definition; personal property exclusion)
• 20 NYCRR 541.5(b)(4)(i) (Certificate of Capital Improvement)
• 20 NYCRR 541.8 (temporary construction facilities)

Prior rulings and cases referenced:

• George W. Long, Advisory Opinion, Commissioner of Taxation and Finance, July 24, 1992, TSB-A-92(56)S
• Rochester Gas and Electric v. State Tax Commission, 128 A.D.2d 238, aff'd 71 N.Y.2d 931
• Building Contractors Association v. Tully, 87 A.D.2d 909
• Merit Oil of NY v. State Tax Commission, 124 A.D.2d 326
• Flah's of Syracuse v. Tully, 89 A.D.2d 729
• Saf-Tee Plumbing v. Tully, 77 A.D.2d 1

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_41s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (41)S
Sales Tax
July 9, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960205B

On February 5, 1996, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Envirotrac Ltd., 561 P. Acorn Street, Deer Park, New York 11729.
Petitioner, Envirotrac Ltd., provided additional information pertaining to the Petition on April 17,
1996.
The issue raised by Petitioner is whether its environmental cleanup efforts and restoration
of property values via the installations of soil and/or groundwater treatment systems constitute
capital improvements to real property, property or land and are thus exempt from sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is an environmental consulting and contracting company. Clients may purchase
either Petitioner's consulting service or its cleanup service or both services. Petitioner separately
charges its clients for these services and raises no questions or concerns regarding its consulting
activities. Cleanup efforts include the installation of soil and/or ground-water treatment systems.
These systems include pumps and pump houses, water treatment facilities, well installations, and
treatment buildings including electric and water hookups. Treatment buildings range in size from
nothing more than the size of a dog house to a 12' x 25' free standing wood frame structure. The type
of systems provided by Petitioner is similar to a septic system. Petitioner's client base consists of
both major oil companies and owners of small gas stations.
Applicable Law and Regulations
Section ll01(b) of the Tax Law provides in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*
*
*
(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property, or (B) for use by that person in performing the services subject to
tax under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five where the property so sold becomes a physical component part

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of the property upon which the services are performed or where the property so sold
is later actually transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax. Notwithstanding the preceding provisions
of this subparagraph, 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, as the terms real property, property or land
are defined in the real property tax law, is deemed to be a retail sale regardless of
whether the tangible personal property is to be resold as such before it is so used or
consumed ....
*
*
*
(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.
Section l105(a) of the Tax Law imposes tax upon:
The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
Section 1105(c) of the Tax Law imposes tax upon receipts from every sale, except for resale,
of:
*
*
*
(3) Installing tangible personal property ... or maintaining, servicing or
repairing tangible personal property ... 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:
*
*
*
(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,

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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 ....
*
*
*
(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 ll15(a) of the Tax Law provides in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*
*
*
(17) Tangible personal property sold by a contractor, subcontractor or
repairman to a person other than an organization described in subdivision (a) of
section eleven hundred sixteen, for whom he is adding to, or improving real property,
property or land by a capital improvement, or for whom he is about to do any of the
foregoing, if such tangible personal property is to become an integral component part
of such structure, building or real property ....
Section 1119(c) of the Tax Law provides in part:
A refund or credit equal to the amount of sales or compensating use tax
imposed by this article and pursuant to the authority of article twenty-nine, and paid
on the sale or use of tangible personal property, shall be allowed the purchaser where
such property is later used by the purchaser in performing a service subject to tax
under paragraph (1), (2), (3), (5), (7) or (8) of subdivision (c) of section eleven
hundred five or under section eleven hundred ten and such property has become a
physical component part of the property upon which the service is performed or has
been transferred to the purchaser of the service in conjunction with the performance
of the service subject to tax or if a contractor, subcontractor or repairman purchases
tangible personal property and later makes a retail sale of such tangible personal

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property, the acquisition of which would not have been a sale at retail to him but for
the second to last sentence of subparagraph (i) of paragraph (4) of subdivision (b) of
section eleven hundred one ....
Sections 527.7(a)(3)(i) and 541.2(g)(1) of the Sales and Use Tax Regulations codify the
statutory definition of "capital improvement." Section 527.7(b) of the regulations provides in part:
*
*
*
(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 result of the same
service is a capital improvement to the real property, such services are not taxable.
(5) Any contractor who is making a capital improvement must pay a tax on
the cost of materials to him, as he is the ultimate consumer of the tangible personal
property.
Section 541.2(g)(2)(i) of the regulations provides:
A capital improvement does not include a contract for the sale and installation
of tangible personal property which when installed remains tangible personal
property.
Section 541.5(b)(4)(i) of the regulations provides in part:
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.
Section 541.8 of the regulations provides in part:
(a) General. Subcontracts to provide temporary facilities at construction sites,
which are a necessary prerequisite to the construction of a capital improvement to
real property, are considered a part of the capital improvement to real property.
Charges for installation of materials and the labor to provide temporary heat,
temporary electric service, temporary protective pedestrian walkways, and temporary
plumbing by a subcontractor are therefore not subject to tax provided the
subcontractor receives a copy of the properly completed certificate of capital
improvement issued by the customer to the contractor.
*

*

*

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(b) The subcontractor is liable, however, for the tax on the purchase of the
materials used to provide the temporary facilities at construction sites described in
subdivision (a) of this section.
Opinion
A determination as to whether each of Petitioner's installations of soil and/or ground-water
treatment systems constitutes a capital improvement is a question of fact based on the circumstances
in each instance and cannot be made in an Advisory Opinion. (See, George W. Long, Adv Op Comm
T&F, July 24, 1992, TSB-A-92(56)S; Tax Law, Section 171, subd. Twenty-fourth; 20 NYCRR part
2376.) However, to the extent that an installation satisfies each of the three statutory conditions of
a capital improvement, or to the extent that the completion of a capital improvement project cannot
be accomplished without the installation of a soil and/or ground-water treatment system, receipts
from the sale of such an installation are not subject to sales tax. (See, Rochester Gas and Electric v
State Tax Commn., 128 AD2d 238, affd 71 NY2d 931; Building Contractors v Tully, 87 AD2d 909.)
Petitioner's environmental cleanup efforts and restoration of property values via the
installation of soil and/or ground-water treatment systems no doubt substantially add to the value of
real property or appreciably prolong the useful life of the real property as required by the first
statutory condition. Whether the systems become part of the real property or are permanently affixed
to the real property so that removal would cause material damage to the property or systems
themselves (i.e., the second statutory condition) and whether the systems are intended to become
permanent installations (i.e., the third condition) will vary with the degree of contamination
involved, the client's obligations and preferences, and the client's rights in the real property at issue.
(It is noted that a rebuttable presumption exists that tenant-installed fixtures and improvements are
not made with the intention of permanency. See, Merit Oil of NY v State Tax Commn., 124 AD2d
326; Flah's of Syracuse v Tully, 89 AD2d 729.)
Accordingly, where Petitioner installs a soil and/or ground-water treatment system to such
a degree that it loses its separate identity and becomes part of the real property or that its removal
would cause material damage to the real property or system and the installation is intended to be
permanent, similar to the installation or replacement of a septic system, the installation would
constitute a capital improvement (see, Sales and Use Tax Classifications of Capital Improvements
and Repairs to Real Property, Publication 862). In such a case, Petitioner would be liable for sales
tax on any tangible personal property purchased at retail for use or consumption in the installation.
Conversely, where Petitioner merely installs tangible personal property (such as a portable pump in
a free standing wooden structure) and after the installation the property remains tangible personal
property, the installation in and of itself would not be a capital improvement. In that case, the service
of installing the tangible personal property would be taxable under Section 1105(c)(3) of the Tax
Law. Petitioner could claim a refund or credit of sales tax which it paid on tangible personal property
transferred to the customer in conjunction with the performance of the taxable service. See Section
1119(c) of the Tax Law.

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Where Petitioner accepts a properly completed Certificate of Capital Improvement (ST-124)
in good faith, the burden of proving that an installation of a soil and/or ground-water treatment
system is not subject to tax is upon Petitioner's client. (See, Saf-tee Plumbing v Tully, 77 AD2d 1.)

DATED: July 9, 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.