Are 'start-up' charges and one-year warranty service on newly installed rooftop HVAC units subject to sales tax?

Plain-English summary

Enercon Service, Inc. (Bohemia, New York) performs two services on rooftop heating and air-conditioning units installed by an affiliated company: (1) "start-ups" — checking the units, wiring them to the building, and putting them into operation; and (2) one-year warranty servicing. (When Enercon buys parts for warranty work, it pays sales tax and bills the full amount to the company that installed the unit.) It asked whether these charges are subject to sales tax.

The answer: the start-up isn't taxed; the warranty service is.

• Installing a rooftop HVAC unit is a capital improvement.
• Start-up is part of the installation process, so its charges are not taxable under § 1105(c)(5).
• Warranty service is different. Under § 1105(c)(5) and 20 NYCRR 527.7, taxability depends on the end result of the service: if the end result is repair or maintenance, it's taxable. Warranty service is the maintaining/servicing/repairing of real property, so its charges are taxable — computed on the entire charge.
• Enercon may claim a credit under § 1119(c) for the sales tax it paid on parts it transfers to the customer while performing the taxable warranty service (so the same parts aren't taxed twice).

What this means for you

Commissioning a new system rides along with the exempt installation. Getting a newly installed unit running — wiring, checking, starting it up — is treated as the tail end of the capital-improvement installation, so it isn't taxed like a standalone repair.

Warranty and service-contract work is taxable repair. Once the system is in and running, later servicing keeps real property in good condition — a taxable § 1105(c)(5) service, whether or not it's done under a warranty.

Don't pay tax twice on parts. If you already paid sales tax on parts and then transfer them to your customer as part of a taxable service, § 1119(c) lets you take a credit for that tax — so tax isn't collected twice on the same parts.

Common questions

Q: Why isn't the start-up taxable?
A: Because installing the rooftop HVAC unit is a capital improvement, and the start-up (wiring, checking, putting it into operation) is part of that installation process — not a separate repair service.

Q: Why is warranty service taxable if the install was a capital improvement?
A: Under 20 NYCRR 527.7, taxability turns on the end result of the service. Warranty servicing keeps the property in good condition — its end result is repair/maintenance — so it's taxable under § 1105(c)(5).

Q: I paid tax on the parts I use for warranty work — do I pay again?
A: No. You compute tax on the full warranty charge, but you can claim a § 1119(c) credit for the sales tax you already paid on parts you transfer to the customer.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(c)(5) — taxes maintaining, servicing, or repairing real property, as distinguished from a capital improvement
• 20 NYCRR 527.7 — taxability of services on real property depends on the end result: repair/maintenance is taxable, a capital improvement is not
• Tax Law § 1119(c) — credit for sales tax paid on parts transferred to a customer in connection with a taxable service

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_173s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(173)S
Sales Tax
September 10, 1980

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800611B

On June 11, 1980, a Petition for Advisory Opinion was received from Enercon
Service, Inc., 170 Wilbur Place, Bohemia, New York 11716.
The issue raised is whether or not the charges for the "start-up" of and
warranty work on heating and air conditioning units installed on the rooftops of
new buildings are subject to New York State sales tax.
Petitioner performs two types of service with respect to rooftop heating
and air conditioning units installed by an affiliated company. First, petitioner
performs "start-ups," consisting of checking the units, wiring them to the
building and putting them into operation. Second, Petitioner services the units
under a one year warranty. Where parts are purchased by Petitioner in connection
with the latter service, sales tax is paid by Petitioner and the full amount is
billed to the company which installed the unit.
Section 1105(c)(5) of the Tax Law imposes a tax on the receipts from the
services of "Maintaining, servicing or repairing real property,. . . as
distinguished from adding to or improving such real property, property or land,
by a capital improvement . . . ." Section 527.7 of the Sales and Use Tax
Regulations provides that . . . "Maintaining, servicing and repairing are terms
which are used to cover all activities that relate to keeping real property in
a condition of fitness, efficiency, readiness or safety or restoring it to such
condition . . . . 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." 20 NYCRR 527.7.
The installation of a rooftop air conditioning and heating unit is a
capital improvement. Inasmuch as the "start-up" service constitutes a part of the
installation process the same is not a service the receipts from which are
subject to tax under Section 1105(c)(5) of the Tax Law. However, charges for
service under the warranty are subject to such tax because that service
constitutes the service of maintaining, servicing or repairing real property. Tax
should be computed on the entirety of such charge. Petitioner may claim a credit
under section 1119(c) of the Tax Law for the sales tax paid on any parts
transferred to its customer in connection with such service.

Dated: August 25, 1980

s/ LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR