Is a large multi-task garage waterproofing and restoration project a nontaxable capital improvement, or a taxable repair, when some individual tasks look like ordinary maintenance?

Plain-English summary

W P Owners Corp. was about to hire a construction company for a large waterproofing and restoration project on nine one-story garage structures at its property. The 14-item scope of work included removing the old waterproof membrane and installing a new one, replacing or reinforcing steel and concrete in designated areas, new asphalt roof-deck paving, new handrails and drain grates, walkway replacement, foundation crack injection, and -- notably -- some more maintenance-sounding tasks like scraping and painting existing steel and re-striping parking spaces. The owners corporation asked whether it had to pay sales tax on this project.

New York's rule is that services on real property are taxed based on their "end result": pure repair/maintenance is taxable, but a genuine capital improvement (something that substantially adds value, becomes a permanent part of the property, and is intended to be a permanent installation) is not. The Department applied the reasoning from an earlier Tax Appeals Tribunal decision (F.W. Woolworth) holding that a major renovation project must be judged as a whole, not by picking apart isolated tasks -- because the "permanence" and "increased value" of comprehensive work would be lost if each task were evaluated separately. Since the core work here (removing and replacing the waterproof membrane, new asphalt, new concrete walkways, and the related structural work) clearly meets the capital-improvement test, the Department found the entire project -- including individual tasks like steel scraping/painting that might look like ordinary repairs on their own -- comes out as a nontaxable capital improvement, as long as the owners corporation gives the contractor a properly completed Certificate of Capital Improvement (Form ST-124).

What this means for you

Cooperative and condominium boards and property owners

A comprehensive restoration project that includes some individual repair-like tasks isn't automatically split into taxable and nontaxable pieces -- if the project as a whole substantially adds value, becomes a permanent part of the building, and is intended as a permanent installation, the whole job can qualify as a nontaxable capital improvement. But don't stretch this too far: an isolated repair job with no larger capital-improvement context stays taxable on its own.

Contractors performing multi-task restoration projects

Get a Certificate of Capital Improvement (Form ST-124) from your customer before starting a project like this -- without it, you may end up having to prove after the fact that individual tasks add up to a capital improvement as a whole, which is a harder, more fact-intensive argument than having the certificate up front.

Accountants and tax professionals

The controlling authority here is the Tax Appeals Tribunal's F.W. Woolworth decision and its "end result" test -- when a client's project mixes clearly-capital-improvement tasks with maintenance-flavored ones, look at whether the tasks are genuinely part of one major renovation (which gets evaluated as a whole) versus isolated repair work performed on its own (which doesn't).

Common questions

Q: Does every task in a big renovation project need to independently qualify as a capital improvement?
A: No -- per the F.W. Woolworth "end result" reasoning, a major renovation is evaluated as a whole; some individual tasks that look like ordinary repairs can ride along as part of an overall capital improvement.

Q: What paperwork is needed to avoid paying tax on the project?
A: A properly completed Certificate of Capital Improvement (Form ST-124) must be timely provided to the contractor.

Q: Can another property owner rely on this ruling for a similar project?
A: No. This advisory opinion binds the Department only as to W P Owners Corp. and the specific scope of work and drawings/specifications it submitted.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(3), (5) (installation and real property maintenance services)
• Tax Law § 1101(b)(9)(i) (definition of capital improvement)
• Tax Law § 1115(a)(17) (contractor real-property exemption)
• 20 NYCRR § 527.7(b)(4) (end result test for real property services)
• 20 NYCRR § 541.1(c) (capital improvement by a contractor)
• 20 NYCRR §§ 532.4, 541.5 (Certificate of Capital Improvement)

Prior rulings and cases referenced:

• F. W. Woolworth Co., Dec. Tax App Trib, December 1, 1994, TSB-D-94(46)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(13)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S961010A

On October 10, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from W P Owners Corp., c/o Braverman & Associates,
P.C., 331 Madison Avenue, New York, New York 10017.
The issue raised by Petitioner, W P Owners Corp., is whether Petitioner
must pay sales tax in connection with the garage waterproofing and restoration
project to be performed on its property.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is about to enter into an agreement with a construction company,
which covers a garage restoration and waterproofing project on its premises.
Petitioner submitted specifications and drawings outlining the work to be
performed. There are nine one-story garage structures on the premises. The work
to be performed is to include demolition, steel and concrete replacement in
designated areas, installation of a new waterproofing membrane, new asphalt
paving, walkway replacement, new hand railings, stucco facing on the garage
stairways and other miscellaneous work.
The scope of the work to be performed is:
1.

Remove existing asphalt and cold tar pitch waterproof membrane from
concrete roof deck surface.

2.

Replace or reinforce existing steel in designated areas.

3.

Repair or replace concrete roof deck in designated areas.

4.

Install new or replacement handrails and drain grates as shown in the
drawings for the project.

5.

Install new W. R. Grace Bituthene 5000 waterproofing membrane on garage
roof deck parking area (except garage #1).

6.

Install new asphalt surface on garage roof deck.

7.

Install traffic deck coating system and drains on top side of garage #1.

8.

Replace concrete walkways on top of garage.

9.

Apply synthetic resilient surface to top side of garage #8.

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10.

Pressure inject horizontal cold joint at garage foundation.

11.

Repair designated garage slabs, walls, curbs stairs.

12.

Scrape and paint all existing steel in garage.

13.

Install new or replacement light fixtures at garage entrances to match
existing fixtures.

14.

Re-stripe/re-number interior and exterior parking spaces to match existing
spaces.

Except for items 5, 7 and 9, the work described above will be performed on
all nine garages.
Section 1105 of the Tax Law imposes sales tax upon:
(a)
The receipts from every retail sale of tangible personal
property, except as otherwise provided in this article.
*
(c) The receipts from
following services:
*

*
every

sale,

*

*
except

for

resale,

of

the

*

(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:
*

*

*

(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 lands 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

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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 1101(b)(9)(i) of the Tax Law provides as follows:
(9) Capital improvement.
real property which:

(i) An addition or alteration to

(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 1115 of the Tax Law provides, in part:
(a) Receipts from the following shall be exempt from 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; provided, however, that if such sale is made pursuant to
a contract irrevocably entered into before September first, nineteen
hundred sixty-nine, no exemption shall exist under this paragraph.
Section 527.7(b)(4) of the Sales and Use Tax Regulations provides that
"[t]he imposition of tax on services performed on real property depends on the
end result of such services. 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."
Section 541.1(c) of the Sales and Use Tax Regulations provides that
“[r]eceipts from the performance of a capital improvement to real property by a
contractor are not subject to the sales tax.”

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In F. W. Woolworth Co., Dec. Tax App Trib, December 1, 1994, TSB-D-94(46)S
the Tax Appeals Tribunal in affirming the determination of the Administrative Law
Judge for the reasons stated in the determination quoted from the ALJ
determination as follows:
What sets apart repair activities which involve merely keeping
real property in a condition of fitness, efficiency, safety or
restoring it to such condition from activities which constitute a
capital improvement, is the three-prong test of whether such
improvement substantially adds to the value of the real property,
becomes part of the real property such that removal would cause
material damage, and whether the same is intended to become a
permanent installation. The capital improvement criteria include by
their very nature the repair and maintenance functions, i.e., a
contractor is both repairing the real property and maintaining it
while engaged in the process of doing something of a more permanent
nature. Whether the individual facets of the work performed . . .
go beyond the maintenance point depends upon the framework in which
they are viewed, and the result of the application of the three­
prong test. As additional guidance we are afforded the 'end result'
test.

The Tribunal further quoted the Administrative Law Judge’s determination
that:
isolated tasks might very well be deemed repairs and
maintenance; however, where such activities are part of
a major renovation project, a fact well established by
the documents and testimony, the activities must be
viewed in their entire context. To conclude otherwise
would be losing sight of the permanence of the work
done, the increased value to the building and ignoring
the extension of the building’s useful life.
In this case, Petitioner is entering into an agreement with a construction
company for the restoration and waterproofing of nine one-story garage structures
on its premises. The work to be performed is to include demolition, steel and
concrete replacement in designated areas, installation of a new waterproofing
membrane, new asphalt paving, walkway replacement, new hand railings, stucco
facing on the garage stairways and other miscellaneous work.
Applying the
rationale for the decision in F. W. Woolworth Co., supra, to the work to be
performed in this case, clearly certain work to be performed in the restoration
and waterproofing of the nine one-story garage structures meets the capital
improvement criteria. The removal of all existing asphalt and cold tar pitch
waterproof membrane from the concrete roof deck surface and installation of new
asphalt surface and waterproofing membrane on the garage roof deck, as well as
the replacement of concrete walkways, qualify as capital improvements. While
some of the work performed may not on its own merits constitute a capital
improvement, the end result of all the work to be performed will result in a

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capital improvement being made to the real property. Therefore, pursuant to
Sections 527.7(b)(4) and 541.1(c) of the Sales and Use Tax Regulations and F. W.
Woolworth Co., supra, and based on the facts presented as indicated in this
opinion and the specifications and drawings submitted by Petitioner, the project
to restore and waterproof the nine one-story garage structures will not be
subject to sales tax. Charges by the contractor to Petitioner for labor and
materials that become an integral component part of the garage structures are not
taxable. Petitioner must timely provide the contractor with a properly completed
Certificate of Capital Improvement (ST-124). See Sections 532.4 and 541.5 of the
Sales and Use Tax Regulations.

DATED: March 17, 1997

NOTE:

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

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