When a company sells and installs custom in-ground swimming pools under a lump-sum contract, does it charge its customer sales tax on the installed pool, or does it instead pay tax itself on materials as a contractor?

Plain-English summary

Hawaiian Pools, Inc. sells and installs custom-designed, bi-level in-ground swimming pools ranging from small round pools to pools as large as 20 by 42 feet, priced up to $18,000 for larger models with a 30-year guarantee. Installation requires excavating the ground -- the deep end sits 2 to 4 feet underground -- attaching the pool to concrete block footings, connecting a subterranean drain, and filling dirt around the shell to secure it; a wooden deck is often added on its own buried footings. The company sells pools on a lump-sum, installed basis (financed by the company or a lender and typically secured by a mortgage against the customer's property), and a home improvement permit is usually required. It asked whether it owes sales tax on its own materials as a contractor, or whether it must instead charge its customers sales tax on the sale and installation.

The Department applied New York's three-part capital improvement test: an installation must (1) substantially add to the property's value or extend its useful life, (2) become part of the real property or be so permanently affixed that removing it would cause material damage, and (3) be intended as a permanent installation. Based on how Hawaiian Pools described its pools -- excavated into the ground, tied into concrete footings and drainage, and built with a 30-year expected life -- the Department found the installations qualify as capital improvements.

That classification flips who pays the tax. Charges to install a capital improvement, and the materials that become part of it, are not subject to sales tax -- so Hawaiian Pools' lump-sum charge to its customer is untaxed. Instead, the company itself must pay sales tax on the materials and supplies (the steel panels, resin coating, vinyl liner, piping, and other components) when it purchases them, the same way any contractor pays tax on materials used in a capital improvement job.

What this means for you

Pool installers and other contractors doing permanent in-ground installations

A permanently installed, excavated, footed structure with a long expected life -- like an in-ground pool -- typically qualifies as a capital improvement. That means you pay sales tax on your materials at purchase, and you should not be separately charging your customer sales tax on the installed job.

Homeowners contracting for an in-ground pool or similar permanent structure

If your contract is genuinely for a permanent installation (not an above-ground or removable pool), your final bill for the installed pool generally should not include sales tax, since the contractor is treated as the taxpayer on materials rather than as a retailer selling to you.

Accountants and tax professionals

Whether a specific installation meets Tax Law § 1101(b)(9)'s three-part capital improvement test is largely a factual determination the Department flags as not fully resolvable in an advisory opinion -- it relied on the facts as described. Above-ground, temporary, or easily removable pools would likely reach a different result.

Common questions

Q: Does a homeowner pay sales tax on an installed in-ground swimming pool?
A: Not when the installation qualifies as a capital improvement -- permanently affixed, adding value, and intended to be permanent. The contractor pays tax on materials instead.

Q: What test decides whether an installation is a capital improvement?
A: Three factors: it must substantially add value or extend useful life, become part of the real property (removal would cause material damage), and be intended as permanent.

Q: Would an above-ground or removable pool get the same treatment?
A: Likely not -- the capital improvement exemption depends on permanent affixation and intent; an easily removable installation would probably be treated as a taxable retail sale instead.

Q: Does this ruling apply to my pool installation contract?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Whether your specific installation meets the capital-improvement test depends on its own facts.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(23)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S970304A

On March 4, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Hawaiian Pools, Inc., 120 Interstate North
Parkway East, Suite 426, Atlanta, GA 30339. Petitioner, Hawaiian Pools, Inc.,
submitted additional information pertaining to the Petition on March 13, and June
25, 1997.
The issue raised by Petitioner is whether Petitioner is subject to sales
or use tax on the cost of materials and supplies, as a contractor, or whether it
must collect and remit sales tax on receipts from the sale and installation of
its bi-level swimming pools as a retailer.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is engaged in the business of selling and installing bi-level
swimming pools ranging in size from 15'x4' to 27'x4' round and from 12'x20'x4'
to 20'x42'x10'.
Generally, each pool is custom designed to specifications
dependent upon the size and shape of the purchaser's land.
The pool is made of hot dipped galvanized steel with a resin coating and
vinyl liner. The pool is attached to the ground by means of earth, filtration
piping, and concrete block footings. In most cases, the deep end of the pool is
2 to 4 feet underground and the ground must be excavated in order to install the
pool. After excavation, the pool is attached to concrete block footings and dirt
is filled in around the pool to secure it.
The pool is connected to a
subterranean drain pipe that is generally installed 6 to 9 inches beneath the
bottom of the pool. Generally, at the purchaser’s option, the pool is surrounded
by a wooden deck that is attached to the pool. The posts supporting the deck are
buried in the ground on concrete block footings.
Petitioner's swimming pools vary in cost, with the larger pools costing
between $14,000 and $18,000. Each pool has an estimated useful life of 30 years.
Petitioner sells pools on an installed basis, pursuant to lump sum contracts and
each pool is given a 30 year guarantee.
Petitioner also provides a "lower price option" plan which allows the
purchaser to reduce the cost of labor incurred on the installation of the pool
by Petitioner.
The "lower price option" plan allows the purchaser to self
assemble substantial portions of the pool under the direction and supervision of
Petitioner. The purchaser agrees to provide the labor and to assemble the pool
in accordance with Petitioner's instructions and onsite supervision. However,
Petitioner remains responsible for all aspects of the installation.
Additionally, the 30 year guarantee provided to the customer has the same terms
as that provided to customers who did not elect the "lower price option" plan.

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Sales Tax

The purchase and installation of Petitioner's pools are typically financed
by Petitioner or by a third party lender and are secured by a mortgage or deed
of trust against the purchaser's real estate.
The installation of the pool
usually requires a home improvement permit to be obtained.
Applicable Law and Regulations
Section 1101(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 . . .
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 of buildings, or building on, or
otherwise adding to, altering, improving, maintaining, servicing or
repairing real property, property or land . . . is deemed to be a
retail sale. . ."
*

*

(6) Tangible personal property.
of any nature ....

*
Corporeal personal property

(7) Use. The exercise of any right or power over tangible
personal property by the purchaser thereof and includes, but is not
limited to, ..., any installations any affixation to real or
personal property, or any consumption of such property ....
*

*

*

(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.

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Sales Tax

Section 1105(c)(3) of the Tax Law imposes tax upon receipts from every
sale, except for resale, of the following services:
*

*

*

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, 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 ....
Section 1115 of the Tax Law provides in part:
(a) 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 ... for whom he is adding to,
or improving real property, property or land by a capital
improvement, ... if such tangible personal property is to become an
integral component part of such structure, building or real
property; ...
Opinion
In order to be excluded from sales tax, a swimming pool, when installed,
must satisfy each of the three statutory conditions of a capital improvement.
That is, it must: (1) substantially add to the value of the real property, or
appreciably prolong the useful life of the real property; (2) become part of the
real property or be permanently affixed to the real property so that removal
would cause material damage to the property or article itself; and (3) be
intended to become a permanent installation.
A determination of whether a
particular installation constitutes a capital improvement is generally a factual
question not susceptible to determination in an advisory opinion. However, as

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Sales Tax

described by Petitioner, it appears that the installations of its bi-level pools
constitute capital improvements.
Petitioner’s charges to its customer for
installation of the capital improvements and the materials which become part of
the capital improvement are not subject to sales tax. See Sections
1105(c)(3)(iii) and 1115(a)(17) of the Tax Law.
Petitioner’s purchases of
materials and supplies in connection with the installation of the capital
improvement are subject to sales tax.

DATED: April 6, 1998

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

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