Is an environmental consulting firm's installation of a petroleum-leak remediation system, its water/soil sampling, and its reports subject to New York sales tax?

Plain-English summary

KPMG Peat Marwick, on behalf of an anonymized environmental consulting and engineering firm ("XYZ"), described work cleaning up petroleum leaks at gas stations across New York: designing and installing remediation systems (filters, air venting apparatus, test wells) to address soil and groundwater contamination from leaking underground storage tanks, often paired with removing contaminated soil, installing fill, repaving, and removing or replacing the leaking tanks themselves. As part of the process, XYZ collects water and soil samples (sending them to an outside lab for the actual scientific analysis, which XYZ doesn't perform itself), monitors test wells, and ultimately issues clients a report interpreting the lab results and recommending remediation actions. XYZ asked whether its charges for the remediation installation, the sampling/review work, and the reports are taxable.

The Department's answer hinges entirely on New York's three-part capital-improvement test (an addition that substantially adds value or prolongs useful life; becomes part of the real property or is permanently affixed such that removal would cause material damage; and is intended as a permanent installation). If XYZ's remediation system installation satisfies all three conditions -- which the Department suggested is likely true for the value/useful-life prong, since environmental cleanup presumably helps the property, but genuinely fact-dependent for the permanence prongs (which can turn on lease terms, municipal ordinances requiring tank removal, or the client's property rights) -- then the INSTALLATION service is untaxed as a capital improvement, though XYZ still pays sales tax on the materials it buys for the job (unless the property owner is a tax-exempt organization). If the installation does NOT qualify as a capital improvement, the same installation service becomes taxable under § 1105(c)(3) or (5) as ordinary maintenance/repair, though XYZ can then claim a refund/credit for tax it already paid on materials it resold as part of that taxable service. Notably, whether tank removal/replacement qualifies as a capital improvement can differ from the surrounding remediation work: if a lease or municipal ordinance requires eventual tank removal, that particular installation flunks the "permanent installation" prong even if the rest of the remediation system passes. The water/soil sampling, review, interpretation, and final reports don't get their own independent tax analysis -- their taxability simply RIDES ALONG with whatever the underlying remediation installation turns out to be (capital improvement = untaxed; ordinary repair/maintenance = taxable). One clean rule that doesn't depend on the capital-improvement question: XYZ's own payments to the outside lab for the scientific analysis are never taxable to XYZ, regardless of how the remediation service itself is classified.

What this means for you

Environmental remediation and engineering firms

Nail down the capital-improvement analysis for each remediation job FIRST -- it controls the tax treatment of everything downstream (the installation itself, sampling/monitoring, and reports), not just the visible construction work. Pay close attention to lease terms and local ordinances requiring tank removal, since those can flip an otherwise-permanent-looking installation out of capital-improvement status. Remember your payments to outside labs for sample analysis are never taxable to you either way.

Gas station and petroleum facility owners commissioning remediation work

Whether you pay sales tax on your remediation contractor's bill depends on the fact-specific capital-improvement determination -- ask your contractor to document why the installation does or doesn't meet the three-part test, since this opinion confirms the Department can't resolve that fact question in the abstract.

Property owners with leased sites, or where tank removal is legally required

Expect a HIGHER chance the remediation work will be classified as ordinary taxable maintenance/repair rather than an untaxed capital improvement, since a lease clause or ordinance requiring removal defeats the "intended to become a permanent installation" prong.

Common questions

Q: Why can't the Department just say whether this remediation work is a capital improvement?
A: Because that's a fact question resolved case-by-case based on the specific circumstances (degree of contamination, client's property rights, lease terms, local law) -- an advisory opinion can lay out the legal test but can't make the ultimate factual determination in the abstract.

Q: If the remediation system installation is a capital improvement, does the environmental firm avoid ALL sales tax on the job?
A: No -- the firm still pays sales tax on the materials it purchases to build the capital improvement (unless the property owner is a tax-exempt organization); only the installation SERVICE itself escapes tax.

Q: Are the water/soil sampling and reports taxed differently from the remediation system installation?
A: No -- their tax treatment simply follows whatever the underlying remediation service turns out to be: untaxed if it's a capital improvement, taxable if it's ordinary repair/maintenance.

Q: Is a firm's payment to an outside lab for sample analysis always untaxed?
A: Yes -- that's the one piece of this opinion that doesn't depend on the capital-improvement analysis.

Q: Can another environmental firm rely on this exact result?
A: No. This advisory opinion binds the Department only as to the facts KPMG Peat Marwick described on behalf of its client; another firm needs its own capital-improvement determination based on its specific job facts.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9) (definition of "capital improvement")
• Tax Law § 1105(c)(3) (tax on installing/maintaining/servicing/repairing tangible personal property)
• Tax Law § 1105(c)(5) (tax on maintaining/servicing/repairing real property)
• Tax Law § 1115(a)(15),(16) (exempt organization capital improvement purchases)
• Tax Law § 1116(a) (exempt organizations)
• Tax Law § 1119(c) (refund/credit for contractor retail sales)
• 20 NYCRR § 527.7(b)(4) (end-result test for real property services)

Prior rulings and cases referenced:

• Building Contractors Association v Tully, 87 AD2d 909
• Stewarts Ice Cream Co., Advisory Opinion, Commissioner of Taxation and Finance, May 29, 1990, TSB-A-90(27)S
• 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 Commn., 128 AD2d 238, aff'd 71 NY2d 931
• Merit Oil of NY v State Tax Commn., 124 AD2d 326
• Flah's of Syracuse v Tully, 89 AD2d 729
• George Industries, Advisory Opinion, Commissioner of Taxation and Finance, April 16, 1990, TSB-A-90(16)S
• Taxability of Certain Laboratory Reports, TSB-M-95(8)S
• Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, Publication 862

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_54s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (54)S
Sales Tax
September 12, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940930A

On September 30, 1994, a Petition for Advisory Opinion was received from KPMG Peat
Marwick, LLP, 345 Park Avenue, New York, New York 10154. Petitioner, KPMG Peat Marwick,
LLP, submitted additional information pertaining to the Petition on September 15, 1995.
The issues raised by Petitioner are as follows:

1. Whether receipts from charges for the remediation services described below are subject
   to sales tax.
2. Whether receipts from charges for the collection of water/soil samples and review and
   interpretation services described below are subject to sales tax.
3. Whether receipts from charges for reports which convey the results of the remediation and
   water/soil sampling services and which are furnished to purchasers of these services are subject to
   sales tax.
   XYZ, Inc. (XYZ) performs environmental consulting and engineering services for various
   clients at sites throughout New York State. The majority of XYZ's work is performed for oil
   companies under contract/purchase orders. Generally, the work involves clean up at a gasoline
   service station that has leakage from an underground petroleum storage system. XYZ designs and
   installs a remediation system to address the leakage into the soil and water beneath the station.
   Generally, XYZ contracts to remove contaminated soil, install new fill and repave the ground surface
   after the installation of the remediation system is completed. As part of its services, XYZ (or a
   subcontractor of XYZ) will sometimes remove leaking oil tanks or install replacement tanks. XYZ
   occasionally contracts with the oil company solely to install a remediation system but not to
   participate in the clean up process.
   The remediation systems include equipment such as filters, air venting apparatus and test
   wells. As part of the remediation services, XYZ monitors the test wells. Additionally, water and soil
   samples are collected by XYZ personnel and are sent to an outside laboratory for analysis. XYZ does
   not perform the scientific laboratory analysis of the water and soil samples. All analyses of the water
   and soil samples are subcontracted to the outside laboratory. Once the analysis is completed, the
   results are reviewed and interpreted by XYZ's engineers/personnel. XYZ's engineers are not licensed
   nor do they hold any specialized credentials certifying their testing and/or research services.
   The length of time spent by XYZ collecting and analyzing the water and soil samples and
   monitoring the test wells at a particular site depends on each applicable state's laws and regulations.
   The sampling and monitoring services are performed on a periodic rather than continuous basis. The
   charges relating to water and soil sampling services may or may not be separately stated on the

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invoices to XYZ's clients.
Generally, the clean up process involves monitoring and observation by XYZ's staff of
hydrogeologists and geologists. Once the remediation and water and soil sampling analysis services
are completed, reports are issued to XYZ's clients. The reports by XYZ contain interpretations of the
data collected from the remediation sites as well as recommendations for actions to be taken for
remediation of the sites.
XYZ's clients are required to have these environmental services performed in order to be in
compliance with federal and state environmental regulatory requirements.
Applicable Law and Regulations
Section ll01(b) of the Tax Law states, 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:
*

*

*

(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 1105(c) of the Tax Law imposes sales tax upon "[t]he receipts from every sale,
except for resale, of the following services":
*

*

*

(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:
*

*

*

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(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 ....
*

*

*

(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 ....
Section 527.7(b)(4) of the Sales and Use Tax Regulations states:
(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.
Opinion
XYZ's receipts from charges to a client for installing a remediation system, or installing a
remediation system and performing additional remediation services, will not be subject to the tax
imposed under either Section 1105(c)(3) or 1105(c)(5) of the Tax Law provided the installation of
the remediation system results in or is performed in conjunction with an addition or alteration to real
property which meets the three criteria defining a capital improvement under Section ll01(b)(9)(i)
of the Tax Law. See, Building Contractors Association v Tully, 87 AD2d 909, Stewarts Ice Cream
Co., Adv Op Comm T&F, May 29, 1990, TSB-A-90(27)S. If the services do not result in a capital
improvement, then they may be taxable under Section 1105(c)(3) or 1105(c)(5) as the repair,
maintenance or servicing of tangible personal property or real property.
A determination as to whether XYZ's installations of remediation systems constitute capital
improvements 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 remediation 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;
Contractors v Tully, supra.) If the installation is found to constitute a capital improvement,

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then XYZ's purchases of materials to perform the capital improvement are subject to tax, unless the
capital improvement is made to property of an exempt organization. (See Sections ll16(a) and
1115(a)(15) and (16) of the Tax Law.)
XYZ's environmental clean up efforts via the installation of remediation systems presumably
add to the value of real property or appreciably prolong the useful life of the real property, which,
if so, would satisfy the first statutory condition for finding a capital improvement. 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 to the systems themselves (i.e., the second
statutory condition) and whether the systems are intended to become permanent installations (i.e.,
the third condition) can vary with the degree of contamination involved, the client's obligations and
preferences, and the client's rights in the real property at issue. (Generally, tenant-installed fixtures
and improvements are not made with the intention of permanency where the lease provides that the
tenant is to remove them when the lease term is up. See, Merit Oil of NY v State Tax Commn, 124
AD2d 326; Flah's of Syracuse v Tully, 89 AD2d 729.)
Accordingly, where XYZ installs a remediation system which loses its separate identity and
becomes part of the real property or which cannot be removed without causing material damage to
the real property or to the system and the installation is intended to be permanent, as is generally the
case with respect 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, XYZ would be liable for sales tax on
its purchases of any tangible personal property purchased at retail for use or consumption in the
installation, unless the purchaser or property owner is an exempt organization. (See Sections ll16(a)
and 1115(a)(15) and (16) of the Tax Law.) Conversely, where XYZ merely installs tangible personal
property 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, or of performing additional remediation services with respect to that property,
would be taxable under Section 1105(c)(3) or 1105(c)(5) of the Tax Law, depending on whether the
services were rendered with respect to tangible personal property or real property, respectively. XYZ
could claim a refund or credit of sales tax which it paid when XYZ purchased the tangible personal
property which it later transfers to the client in conjunction with performing the taxable service. See
Section 1119(c) of the Tax Law.
The installation of a remediation system, performed along with the removal of leaking fuel
tanks and the installation of replacement fuel tanks by XYZ, or a subcontractor of XYZ, will qualify
as a capital improvement where the work is performed for the property owner, as well as where it
is performed for the lessee of the property, provided there is no stipulation in the lessee's lease with
the lessor that the fuel tanks must be removed on termination of the lease, or a municipal law or
ordinance that requires the removal of the tanks upon the termination of business of the service
station. See, Building Contractors Association v Tully, supra, $tewarts Ice Cream, supra. Where the

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terms of the lease or municipal law or ordinance require removal of the fuel tanks, the installation
of the tanks will not meet criterion (C) of Section ll01(b)(9)(i) of the Tax Law since the installation
is not intended to be a permanent installation. In this instance, the installation of the fuel tanks will
not qualify as a capital improvement. Separate and apart from tank removal and replacement, XYZ's
other remediation services may also constitute a capital improvement, if the other remediation
system installed by XYZ satisfies the criteria of Section l101(b)(9).
When XYZ's collection, review and interpretation of water/soil samples are performed in
conjunction with XYZ's performance of remediation services, the sales taxability of XYZ's charges
to its clients for performing water and soil sampling collection, review and interpretation will be
determined by the nature of the remediation service performed by XYZ. If the remediation service
results in the performance of a capital improvement, the charge for the water/soil collection, review
and interpretation services will not be subject to the tax imposed on receipts from the service of
maintaining, servicing or repairing tangible personal property or real property under Section
1105(c)(3) or (5), respectively, of the Tax Law. If the remediation service is determined to be the
service of maintaining, servicing or repairing tangible personal property or real property, the charge
for the water/soil collection, review and interpretation services will be subject to the tax imposed on
receipts from the service of maintaining, servicing or repairing tangible personal property or real
property under Section 1105(c)(3) or (5), respectively, of the Tax Law. It should be noted that
purchases by XYZ of laboratory analysis reports from outside laboratories are not subject to sales
tax.
See Technical Services Bureau Memorandum TSB-M-95(8)S dated July 31, 1995, entitled
Taxability of Certain Laboratory Reports.
Likewise, the sales tax status of XYZ's separately stated charges to clients for reports
conveying the results of the remediation and water/soil sampling services will be determined by the
nature of the remediation services. If the remediation services result in the performance of a capital
improvement to real property, the charges for the reports will not be subject to the tax imposed under
Section 1105(c)(3) or (5) of the Tax Law. However, if the remediation services are determined
to be the service of maintaining, servicing or repairing real property, the charges for the reports will
be subject to the tax imposed under Section 1105(c)(5) of the Tax Law. See, George Industries, Adv
Op Comm T&F, April 16, 1990, TSB-A-90(16)S.

DATED: September 12, 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.