Is a kitchen and bathroom renovation company that controls the whole job but has its customers separately sign contracts with the installing tradespeople a retailer of the cabinets it sells, or a contractor performing a capital improvement?

Plain-English summary

Marvin Rosenthal asked the Department how to classify his client, a kitchen and bathroom renovation firm ("Company A"), for sales tax purposes. Company A draws up renovation plans, negotiates the overall price, and manages and schedules the whole job. Its customer contracts describe Company A as selling only the cabinets and Corian countertops (with tax charged on that price), while the customer separately signs agreements with the carpenters, electricians and other tradespeople -- but only tradespeople selected by Company A -- for amounts that together add up to the total negotiated renovation price, including installing the countertops. Rosenthal asked whether that structure makes Company A a retailer of cabinets or a contractor performing a capital improvement.

The Department held that Company A is a contractor, not a retailer of the cabinets. Installing or replacing kitchen and bathroom cabinets and countertops is classified as a capital improvement to real property (per the Department's Publication 862), and Company A controls every meaningful aspect of the job -- the design, the choice of materials, the total price, and which tradespeople the customer must use -- even though the paperwork is split across several separately signed agreements. Because a contractor is the retail purchaser of the materials it uses in a capital improvement, Company A itself owes sales and use tax when it buys the cabinets, countertops and other materials. But Company A does not have to collect sales tax from its own customers on the renovation charge, as long as the customer gives it a properly completed capital improvement certificate (Form ST-124) that Company A accepts in good faith.

What this means for you

Renovation contractors and design-build firms

Splitting a renovation into separate customer-facing contracts (e.g., a "materials" contract plus individual tradesperson agreements) doesn't change your tax classification if you're the one controlling the design, pricing and choice of subcontractors -- the Department looks at who really runs the job, not how the paperwork is divided. If your work qualifies as a capital improvement (like installed cabinets and countertops), you pay tax on your own material purchases and don't collect tax from the customer, provided you get a valid ST-124 capital improvement certificate.

Kitchen and bath dealers who also arrange installation

If you merely sell cabinets and countertops without controlling installation, you may be acting as a retailer rather than a contractor, which flips who pays tax and when. The line in this ruling is control: this firm managed the entire renovation and required customers to use its own chosen tradespeople.

Accountants and tax professionals

The opinion applies the standard capital-improvement contractor framework: 20 NYCRR § 541.2(d)-(e) defines "construction contractor" and "contractor" broadly around who performs the installation/renovation work, and § 541.1(b) makes a contractor the retail purchaser of materials regardless of whether they end up incorporated into a capital improvement. The result turns on the degree of Company A's overall control, not on how the customer-facing invoices are itemized.

Common questions

Q: Does it matter that the customer contract says Company A is "only selling cabinets and countertops"?
A: No. The Department looked past that label to who actually controls the renovation -- design, pricing, and subcontractor selection -- and found Company A to be a contractor performing a capital improvement.

Q: Who pays sales tax on the cabinets and countertops?
A: Company A does, as the retail purchaser, when it buys them from its suppliers -- not the end customer.

Q: Does Company A have to charge its customers sales tax on the renovation?
A: No, as long as the customer supplies a properly completed capital improvement certificate (Form ST-124) that Company A accepts in good faith.

Q: Can another renovation business rely on this exact analysis?
A: No. This opinion binds the Department only for the facts Rosenthal described; other businesses with different contract structures should seek their own guidance.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (retail sale; contractor deemed retail purchaser of materials used in construction)
• Tax Law § 1101(b)(9) (definition of capital improvement)
• Tax Law § 1115(a)(17) (exemption for capital improvement charges with a certificate)
• 20 NYCRR § 527.7(a)(3) (capital improvement definition)
• 20 NYCRR § 532.4(f) (certificate of capital improvement)
• 20 NYCRR § 541.1(b) (contractor as retail purchaser of materials)
• 20 NYCRR § 541.2(d)-(e), (g) (construction contractor; contractor; capital improvement)
• 20 NYCRR § 541.5(b)(2) (labor and material charges for capital improvements)
• Publication 862, New York State and Local Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property (classifying cabinet/countertop installation as a capital improvement)

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_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(27)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S961206B

On December 6, 1996, a Petition for Advisory Opinion was received from
Marvin Rosenthal, 88 Sunnyside Boulevard, Plainview, New York 11803. Petitioner,
Marvin Rosenthal, submitted additional information pertaining to the Petition on
February 26, 1997.
The issue raised by Petitioner, Marvin Rosenthal, is whether his client is
a general contractor or a retailer of cabinets that are installed in kitchens and
bathrooms.
Petitioner submits the following facts.
Petitioner's client (hereinafter referred to as "Company A" ) operates a
kitchen and bathroom renovation firm. Company A draws plans, negotiates the
price of the renovation and manages and schedules the renovation work. Company
A's customers sign an agreement that states that Company A is only selling the
customer cabinets and Corian countertops for a certain amount. Tax is charged
on the price of the cabinets and Corian countertops. Company A maintains no
inventory and only orders cabinets and countertops as needed for each job.
Company A has customers sign agreements with carpenters, electricians and other
tradespeople selected by Company A for an amount that in total will equal the
negotiated price of the renovation.
The customer must use only Company A's
carpenter, electrician or his other tradespeople for the renovation work,
including the installation of the Corian countertops.
Applicable Law and Regulations
Section 1101(b) of the Sales and Compensating Use 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 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

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Sales Tax

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 527.7(a)(3)(i) of the Sales and Use Tax Regulations provides:
A capital improvement is an addition or alteration to real
property:
(a) which substantially adds to the value of the real
property, or appreciably prolongs the useful life of the real
property;
(b) which 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 532.4(f) of the Sales and Use Tax Regulations provides:
(f)
Certificate of capital improvement.
(1) A certificate of
capital improvement is used to claim exemption from State and local
sales tax on the purchase of a capital improvement as defined in
section 527.7(a) (3) of this Title. (Emphasis added)
(2) A certificate of capital improvement is properly completed
when it complies with the provisions of subparagraph (ii) of
subdivision (b) (2) of this section.
Section 541.1(b) of the Sales and Use Tax Regulations provides:
(b) The principal distinguishing feature of a sale to a contractor,
as compared to a sale to other vendors who purchase tangible
personal property for resale, is that the sale of tangible personal
property to a contractor for use or consumption in construction is

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Sales Tax

a retail sale and subject to sales and use tax, regardless of
whether tangible personal property is to be resold as such or
incorporated into real property as a capital improvement or repair.
Whenever a contractor uses materials, on which the contractor has
paid sales tax, in a repair or maintenance contract (except interior
cleaning and maintenance contracts of 30 days or more) subject to
the sales tax on services under section 1105(c) of the Tax Law, the
contractor may be entitled to a refund or credit of the portion of
the tax he paid attributable to the materials transferred to the
customer.
Section 54l.2 of the Sales and Use Tax Regulations provides in part:
(d) A construction contractor means any person who engages in
erecting, constructing, adding to, altering, improving, repairing,
servicing, maintaining, demolishing or excavating any building or
other structure, property, development, or other improvement on or
to real property, property or land. (Emphasis added)
(e) Contractor means a construction contractor, subcontractor
or repairman. (Emphasis added)
*
*
(g) Capital improvement. . . .

*

(2)(i) A capital improvement does not include a contract for the
sale and installation of tangible personal property which when
installed remains tangible personal property.
(ii) A capital improvement does not include the sale of tangible
property to a customer under contract if the contractor who sells
the tangible personal property is not responsible for the affixation
or installation of the tangible personal property furnished.
Example 4: A customer enters into an agreement with a supplier to
supply all materials necessary for the framing of a home and enters
into a separate and distinct agreement with a contractor for the
installation of the materials purchased from the supplier. The
customer is liable for the payment of tax on all of the materials
purchased from the supplier as the purchase is a purchase of
tangible personal property and not the purchase of a capital
improvement. Upon the issuance of a capital improvement certificate
by the customer to the contractor, no tax is due on the labor charge
for installing the materials.
Section 541.5(b) of the Sales and Use Tax Regulations provides:
(2) Labor and material charges. All charges by a contractor to the
customer for adding to or improving real property by a capital
improvement are not subject to tax provided the customer supplies
the contractor with a properly completed certificate of capital
improvement. (Emphasis added)

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Sales Tax

Opinion
Section 1101(b)(9) of the Tax Law and Section 527.7 of the Sales and Use
Tax Regulations define a capital improvement. Paragraphs (d) and (e) of Section
541.2 of the Sales and Use Tax Regulations defines a construction contractor and
a contractor.
Publication 862 titled, New York State and Local Sales and Use
Tax Classifications of Capital Improvements and Repairs to Real
Property
classifies the installation or replacement of countertop and kitchen or bathroom
cabinets as capital improvements to real property.
The renovation work performed for Company A's customers in this case may
result in a capital improvement.
Every aspect of the renovation project is
controlled by Company A, including the renovation design, the type of cabinets
and countertops, the negotiation of the price for the entire renovation, and
supervision of the various tradespeople needed for the completion of the project.
Company A's customers are required to sign contracts only with tradespeople
selected by Company A.
Therefore, Company A is a contractor as defined in
Section 541.2 of the Sales and Use Tax Regulations.
Company A, as a contractor, is the retail purchaser of the countertops and
cabinets and is required to pay sales and compensating use tax on their purchase,
as well as the purchase of other materials used or consumed in its renovation
projects. See Section 1101(b)(4)(i) of the Tax Law and Section 541.1(b) of the
Sales and Use Tax Regulations.
Since Company A is a contractor performing
capital improvements for its customers, Company A is not required to collect
sales and compensating use tax on the sale to its customers of the kitchen
renovations described above, if the customer supplies Company A with a properly
completed certificate of capital improvement (Form ST-124) which is accepted in
good faith by Company A. See Section 1115(a)(17) of the Tax Law and Section
541.5(b)(2) of the Sales and Use Tax Regulations.

DATED:

April 24, 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.