When an out-of-state manufacturer fabricates kitchen cabinets or similar built-ins and installs them in New York as a capital improvement, does it have to charge its customer sales tax, and does it instead owe New York use tax on the materials?

Plain-English summary

An accountant asked this question on behalf of several Pennsylvania and New Jersey clients who fabricate products meant to become part of a building -- kitchen cabinets and countertops -- and who sometimes install those products themselves. They buy their raw materials tax-free (as manufacturers), have never made purchases in New York, and had never installed in New York until they started getting requests to do so. The Advisory Opinion assumed those installations would qualify as capital improvements.

New York's rule is that installing tangible personal property is a taxable service, except when the installation results in a capital improvement to real property -- something that substantially adds value or prolongs useful life, becomes a permanent part of the property, and is intended to stay. Cabinets and countertops permanently built into a kitchen fit that description. So the fabricator does not have to collect sales tax from its customer on the installation charge.

But that doesn't make the transaction tax-free -- it shifts who owes the tax and on what. Because the fabricator manufactured the product itself and then used it (by installing it) in New York, the fabricator owes New York's compensating use tax on the product, not the customer. The tax base depends on whether the fabricator also sells the same kind of product uninstalled in the regular course of business (meaning more than 10% of its product, by volume, in a 12-month period): if so, the use tax is based on its catalog/price-list price for the uninstalled item; if not, it's based on the cost of the raw materials that went into it (plus shipping). Either way, the applicable rate is the combined state and local rate where the job site sits. The fabricator should also collect a Certificate of Capital Improvement (Form ST-124) from its customer -- or from the general contractor, if it's working as a subcontractor -- within 90 days of finishing the job, to document that the labor charge is exempt.

What this means for you

Out-of-state manufacturers and fabricators doing installation work in New York

If your product becomes a capital improvement once installed, you don't charge your customer sales tax on the installation -- but you owe New York use tax yourself on the product you fabricated, calculated differently depending on whether you also sell the same item uninstalled. Track whether you cross that 10%-of-product threshold, since it changes your tax base from cost to sale price.

General contractors and subcontractors

Get the Certificate of Capital Improvement in writing and promptly (within 90 days) -- without it, the contractor performing the installation can be held liable for tax on the job. Subcontractors should collect their copy from the general contractor rather than directly from the property owner.

Accountants and tax professionals

This ruling applies the same self-manufactured-property use tax framework (20 NYCRR § 531.3(b)) that governs any manufacturer who fabricates and installs its own product, and cites the Department's own factory-manufactured-home example (Example 12) as a close analogy -- useful precedent for any out-of-state fabricator/installer fact pattern.

Common questions

Q: Does the fabricator ever collect sales tax from the customer here?
A: No -- because the installation is a capital improvement, the fabricator's charge to the customer is exempt from sales tax entirely.

Q: What if the fabricator also sells the same cabinets without installing them?
A: Then its use tax is based on the price it charges for the uninstalled version, not on raw-material cost -- but only if uninstalled sales exceed 10% of its output in a rolling 12-month period.

Q: Who needs to give the Certificate of Capital Improvement, and to whom?
A: The customer (or general contractor, on a subcontracted job) gives it to the installer, ideally before or promptly after the work -- and no later than 90 days after completion, or the installer risks being held liable for the tax.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (retail sale, contractor purchases)
• Tax Law § 1101(b)(9)(i) (definition of capital improvement)
• Tax Law § 1105(c)(3) (tax on installation services, capital-improvement exception)
• Tax Law § 1110 (compensating use tax)
• Tax Law § 1115(a)(17) (exemption for capital-improvement materials)
• Tax Law § 1132(c) (Certificate of Capital Improvement timing)
• 20 NYCRR § 527.7(b)(5) (contractor pays tax on materials)
• 20 NYCRR § 531.1(a), § 531.3(b) (compensating use tax on self-manufactured property)
• 20 NYCRR § 541.5(b) (capital improvement contracts, exemption certificates)

Prior rulings referenced:

• Custom Design Kitchens, Inc., TSB-A-96(66)S (October 7, 1996)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_56s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(56)S
Sales Tax
December 1, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990304A

On March 4, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from William J. McAteer, CPA, c/o Goldenberg Rosenthal, LLP, PO Box 458, Jenkintown,
PA 19046-0458. Petitioner, William J. McAteer, CPA, submitted additional information by
telephone pertaining to the Petition on March 30, 1999.
The issues raised by Petitioner are:

1. Whether Petitioner’s clients are responsible for the collection and/or payment of
   New York State and local sales or compensating use tax on their products which are
   sold on an installed basis as described below.
2. Whether a Certificate of Capital Improvement (Form ST-124) should be obtained
   from the property owner or general contractor if Petitioner’s clients do installation
   work for subcontractors on a capital improvement project.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner has several clients in Pennsylvania and New Jersey that fabricate products to be
   installed as component parts of real property, e.g., kitchen cabinets and counter tops. At times,
   Petitioner’s clients install the products they fabricate.
   When Petitioner’s clients purchase materials used to make their product, they do not pay
   sales tax. Petitioner’s clients do not make any purchases of materials in New York.
   Petitioner’s clients’ installations of their product have not previously occurred in New York.
   However, they have received requests to install their products in New York. It is assumed for
   purposes of this Advisory Opinion that such installation will result in a capital improvement to real
   property.
   Applicable Law and Regulations
   Section 1101(b)(4)(i) of the Tax Law provides, in part:
   ... 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

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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 ....

Section 1101(b)(9)(i) of the Tax Law defines the term "capital improvement" to mean:
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 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby
imposed and there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
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(c) The receipts from every sale, except for resale, of the following services:
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(3) Installing tangible personal property . . . or maintaining, servicing or
repairing tangible personal property . . . not held for sale in the regular course of
business ... 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 . . . .

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Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state on and after June first, nineteen hundred seventy­
one except as otherwise exempted under this article, (A) of any tangible personal
property purchased at retail, (B) of any tangible personal property (other than
computer software used by the author or other creator) manufactured, processed or
assembled by the user, (i) if items of the same kind of tangible personal property are
offered for sale by him in the regular course of business or (ii) if items are used as
such or incorporated into a structure, building or real property by a contractor,
subcontractor or repairman 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, if items of the same kind are not offered for sale as such by
such contractor, subcontractor or repairman or other user in the regular course of
business, . . .
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(c) For purposes of subclause (i) of clause (B) of subdivision (a) of this
section, the tax shall be at the rate of four percent of the price at which items of the
same kind of tangible personal property are offered for sale by the user, and the mere
storage, keeping, retention or withdrawal from storage of tangible personal property
by the person who manufactured, processed or assembled such property shall not be
deemed a taxable use by him.
(d) For purposes of subclause (ii) of clause (B) of subdivision (a) of this
section, the tax shall be at the rate of four percent of the consideration given or
contracted to be given for the tangible personal property manufactured, processed
or assembled into the tangible personal property the use of which is subject to tax,
including any charges for shipping or delivery as described in paragraph three of
subdivision (b) of section eleven hundred one.
(e) Notwithstanding the foregoing, provisions of this section, for purposes
of clause (B) of subdivision (a) of this section, there shall be no tax on any portion
of such price which represents the value added by the user to tangible personal
property which he fabricates and installs to the specifications of 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, over and above the prevailing normal
purchase price prior to such fabrication of such tangible personal property which a
manufacturer, producer or assembler would charge an unrelated contractor who

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similarly fabricated and installed such tangible personal property to the specifications
of an addition or capital improvement to such real property, property or land.
Section 1115(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:
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(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)(5) of the Sales and Use Tax Regulations provides:
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 531.1(a) of the Sales and Use Tax Regulations provides, in part:
Imposition. The compensating use tax is imposed on every person for the
use within New York State of tangible personal property and certain services
described in subdivision (b) of this section, except to the extent they have been or
will be subject to sales tax and except to the extent they are exempt from use tax.
Section 531.3(b) of the Sales and Use Tax Regulations provides, in part:
(b) Tangible personal property manufactured, processed or assembled by the
user.
(1) A compensating use tax is imposed when a manufacturer, processor or
assembler uses its product as such in New York State or incorporates the product into
real property in New York State. This is so whether or not it offers items of the same
kind for sale in the regular course of business and whether the product was

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manufactured, processed or assembled inside or outside New York State. The basis
on which compensating use tax is computed, however, depends on whether the user
offers items of the same kind for sale in the regular course of business. A
compensating use tax is not imposed, however, to the extent the user was required
to pay sales tax without a right to a refund or credit upon the purchase of the
ingredients, parts or materials manufactured, processed or assembled into the product
the use of which is subject to tax.
Example 1: Company A, located in Suffolk County,
manufactures and sells its own brand of garage doors. Approximately
80 percent of the doors are installed by Company A; the balance of
the doors are installed by the purchaser.
Company A pays sales tax to its New York State suppliers of
wood and glass that become part of the doors. When determining the
amount of use tax it owes Company A may take credit for the New
York State and local sales taxes paid on these materials.
(i) If the user offers items of the same kind for sale in the regular course of
business, the basis on which use tax is computed is the price at which items of the
same kind of tangible personal property are offered for sale by the user. The price
at which items are offered for sale is evidenced by a price list, catalog price or record
of sales. In the absence of a catalog price or price list, the average of the prices
charged various customers will be deemed to be the price at which the user would
sell such item during the regular course of business.
(a) Items of the same kind mean that items belong to an identifiable class, but
need not be identical.
Example 2: Windows are items of the same kind when they
are a standard size and materials whether or not they are sold from
inventory or produced to order from a catalog description. A
manufacturer of windows produces from a catalog description square,
round and hexagon shaped windows from various materials. The
windows regardless of shape, size or materials are considered to be
items of the same kind.
When items which are not standard or cataloged are made to
the specifications of a particular job, these will not be considered
items of the same kind with catalog or inventory sales.

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Items made to the specifications of a particular job will not be
considered items of the same kind as items made to the specifications
of another particular job.
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Example 4: A manufacturer produces standard type pre-cast
steps (all of which are installed by the manufacturer), concrete block
and various ornamental pre-cast items.
For purposes of identifying items of the same kind sold by this
manufacturer, the three distinct types of products must be considered
separately. Therefore, the steps, the blocks and the ornamentals are
each items of the same kind.
(b) Offered for sale in the regular course of business means that a person
sells in excess of 10 percent of his product for each 12 month period beginning
December 1st, measured by weight, volume, size or other unit on which the price is
based, to persons other than organizations exempt under section 1116(a) of the Tax
Law. For the purpose of this calculation, the amount of product sold to all persons
except exempt organizations will constitute the numerator of the fraction and the
total amount of the product sold and used in performing work for others, with the
exclusion of products sold to or used in performing work for exempt organizations,
will constitute the denominator. When it is determined that a person is selling in
excess of 10 percent of his product in the regular course of business as defined
herein, he will be considered a person required to pay compensating use tax on the
basis set forth in subparagraph (i) of this paragraph. . . .
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(ii) If the user does not offer items of the same kind for sale in the regular
course of business as described in subparagraph (i) of this paragraph, the basis on
which use tax is computed is the consideration given or contracted to be given for the
tangible personal property manufactured, processed or assembled into the tangible
personal property the use of which is subject to tax, including any charges by the
user's seller to the user for shipping or delivery of that property to the user.
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Example 12: Company A produces factory manufactured
homes at its plant in Vermont. The components are manufactured in
Vermont and the homes are shipped in sections to customer prepared

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sites where Company A erects the home. Company A only sells its
product on an installed basis. It does not sell the individual
components.
Company A owes use tax on the individual building
components manufactured at its plant in Vermont which were used
in erecting homes of customers in New York. The use tax is based on
the cost to Company A of the raw materials it used to manufacture the
building components. The tax due is computed by multiplying the
cost of the raw materials by the tax rate in effect at the site in New
York where the home is erected.
Section 541.5(b) of the Sales and Use Tax Regulations provides, in part:
Capital improvements contracts. (1) Purchases. All purchases of tangible
personal property (excluding qualifying production machinery and equipment exempt
under section 1115(a)(12) of the Tax Law) which are incorporated into, and become
part of the realty or are used or consumed in performing the contract are subject to
tax at the time of purchase by the contractor or any other purchaser. A certificate of
capital improvement may not be validly given by any person or accepted by a
supplier to exempt the purchase of these materials.
(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.
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(4) Documents; capital improvement contracts. (i) 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.
(a) The prime contractor should obtain a certificate of capital improvement
from the customer and retain it as part of his records. Copies of such certificate must
be furnished to all subcontractors on the job and retained as part of their records.
(b) A certificate of capital improvement may not be issued by a contractor,
subcontractor or any other person to a supplier on the purchase of tangible personal
property.

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Opinion
In the case where one of Petitioner’s clients sells kitchen cabinets or other products on an
installed basis in New York State, which results in a capital improvement upon installation,
Petitioner’s client is not required to collect sales tax from its customers. Petitioner’s client would,
however, owe a compensating use tax on the cabinets or other products that it manufactures and
uses in making installations as capital improvements. See Custom Design Kitchens, Inc., Adv Op
Comm T&F, October 7, 1996, TSB-A-96(66)S. If Petitioner’s client offers uninstalled products
of the same kind for sale in its regular course of business, pursuant to Section 1110(c) of the Tax
Law Petitioner’s client is required to pay a compensating use tax with respect to such products based
on the price at which Petitioner’s client offers such uninstalled products for sale. If Petitioner’s
client does not offer uninstalled products of the same kind for sale in its regular course of business,
in accordance with Section 1110(d) of the Tax Law the compensating use tax would be based on the
cost of the materials contained in the cabinets including any charges for shipping or delivery of such
materials to Petitioner’s client. See Section 531.3(b)(1) of the Sales and Use Tax Regulations. The
applicable rate of use tax is the combined State and local tax rate in effect in the locality where the
product is installed.
It is noted that pursuant to Section 531.3(b)(1)(i)(b) of the Sales and Use Tax Regulations,
"offered for sale in the regular course of business" means that a person sells more than 10 percent
of a product during each 12 month period beginning December 1st, measured by weight, volume,
size or other unit on which the price is based, to persons other than organizations exempt under
Section 1116(a) of the Tax Law.
Petitioner’s client should receive from its customer a Certificate of Capital Improvement
(Form ST-124), within 90 days from the date of performing the capital improvement, or Petitioner’s
client may be found to be liable for tax on the sale. See Section 1132(c) of the Tax Law and Section
532.4 of the Sales and Use Tax Regulations. When Petitioner’s client acts as a subcontractor on a
project, it should obtain Form ST-124 from the general contractor. See Section 541.5(b) of the Sales
and Use Tax Regulations.

DATED: December 1, 1999

NOTE:

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

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