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Beyond The Numbers January – February 2010

New York State Sales and Use Tax Rules Regarding Capital Improvements and Repair and Maintenance Services

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by Camille Mullan Tax Manager

In order to gain a basic understanding of the New York State (“NYS”) sales and use tax rules as they apply to capital improvements or repair services, it is first necessary to understand basic terminology as used in the Sales and Use Tax Law (“Law”). The rules regarding capital improvements are similar whether you are a homeowner having work done in your home or a business that is having work done at your business location.

What is real property?

The termreal property means real property or land as defined in the Real Property Tax Law and includes but is not limited to:

  • Land and vegetation growing on the land such as trees, shrubs, bushes, and grass;
  • Buildings and structures erected upon, under, or above land, or affixed to the land;
  • Utility lines, wires, and poles;
  • Mains, pipes and tanks for conducting steam, heat, water, oil, gas, and electricity; and
  • Boilers, heating, ventilating, lighting apparatus, and plumbing.

What is tangible personal property?

The term tangiblepersonal property means corporeal personal property of any nature having a material existence and perceptibility to the human senses, including but not limited to materials, tools, equipment and supplies.

What types of services are performed on real property?

Services to real property are classified as either a capital improvement, repair or maintenance or an installation service. Installation services include the installation of tangible personal property which remains tangible personal property after its installation.

What is the definition of a repair or maintenance service?

Repair or maintenance relates to keeping real property in a condition of fitness, efficiency, readiness and/or safety or to restoring it to such condition.

What is the definition of an installation service?

An installation service is a service related to setting up tangible personal property or putting it in place for use.

If you are a contractor who installs items such as washing machines, clothes dryers, dishwashers, refrigerators, furniture, etc., which when installed or placed in service on real property and do not become part of the real property, you must collect sales tax on your charge for the installation. The individual charge for any of these items sold is also taxable as the sale of tangible personal property.

What is a capital improvement?

Just because something may qualify as a capital improvement for Federal income tax purposes does not necessarily mean the item is automatically considered a capital improvement for NYS sales and use tax purposes. Also, one must keep in mind that a capital improvement is made up of two components: materials and labor. In NYS for sales and use tax purposes, in order to qualify as a capital improvement the completed job must meetall of the following requirements:

  • Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property;
  • 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
  • Is intended to become a permanent installation.

Special rules apply regarding when the installation of a floor covering constitutes a capital improvement.

Are capital improvements subject to sales tax?

No, a capital improvement is not subject to sales tax. However, as a general rule, someone must pay the sales tax on the materials that are installed in a capital improvement job. One of the few exceptions to this rule is when the job is being performed for an organization that is exempt from NYS sales and use tax. If that is the case, then materials can be purchased sales tax free provided a properly completed ST-120.1, Contractor Exempt Purchase Certificate, is issued to the supplier of the materials.

Who is responsible to pay sales/use tax on materials that are installed in a capital improvement job?

The answer to this question depends upon who purchases the materials. In the case of a capital improvement, if you are a property owner who:

  • Purchases materials and supplies only and you perform your own labor, you pay tax to the supplier on the materials and supplies.
  • Purchases materials and supplies and hires a contractor to perform the labor, you pay sales tax to the supplier on the materials and supplies, but you do not pay tax to the contractor for the labor.
  • Purchases materials and supplies and labor from the contractor, you pay no sales tax.
  • In the case of a capital improvement, if you are a contractor who purchases materials and supplies, you pay sales tax to the supplier and you do not collect any sales tax from your customer.

Who is responsible to pay sales tax on materials used in repair or maintenance jobs?

In the case of a job that constitutes repair or maintenance, if you are a property owner who:

  • Purchases materials and supplies only and performs your own labor, you pay sales tax to the supplier on the materials and supplies.
  • Purchases materials and supplies and hires a contractor to perform the labor, you pay sales tax to the supplier on the materials and supplies and to the contractor for the labor.
  • Purchases materials and supplies and labor from a contractor, you pay sales tax to the contractor on the total charge.

In the case of a job that constitutes repair or maintenance, if you are a contractor who:

  • Purchases materials, you pay sales tax to the supplier, even though you are also required to collect sales tax from your customer. However, you are entitled to a refund or credit of the sales tax that you paid on the materials that you transferred to the customer.
  • Purchases supplies, you pay sales tax to the supplier.

Are there special rules for tenants?

Yes, special rules apply to tenants who make leasehold improvements. Further, when a tenant installs trade fixtures, additional rules apply. As a general rule, additions or alterations to real property for or by a tenant with respect to leased premises are presumed to be temporary in nature. Consequently, they do not qualify as capital improvements.

However, these additions or alterations may qualify as capital improvements if there is a demonstrated intention to make them permanent (assuming the other qualifications for a capital improvement are met). For example, an intention of permanence would be demonstrated by a provision in the building lease indicating that immediately upon installation, title to the installation vests with the lessor and the installed property is to remain with the premises after the termination of the lease.

If a lease does not contain these provisions, other factors such as the nature of the installation, or written agreements other than a lease provision may be considered in determining the intention of the parties with respect to the permanence of the installation. Please see New York State TSB-M-83(17)S for further information on leasehold improvements made by tenants.

Should you have any questions concerning the NYS sales and use tax treatment of capital improvements, contact Camille Mul€, Tax Manager, at 631.414.4558 or by email atcamille.mule@marcumllp.com or Steven P. Bryde, J.D., Tax Partner at 212.981.3071 or by email atsteven.bryde@marcumllp.com.

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