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New York State Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property


By Donald Bender and Jennifer Safran

For contractors and property owners it may be difficult to distinguish whether services performed are a capital improvement to real property or if they constitute repairs, maintenance, or installation services to real property.  Depending on how the service is classified, contractors must follow the rules set forth by New York State to collect and/or pay sales and use tax.

For New York sales and use tax purposes, a capital improvement is any addition or alteration to real property that meets all three of the following conditions:

  • It substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property.
  • It 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.
  • It is intended to become a permanent installation.

If a contractor performs a capital improvement on real property and if the property owner submits a properly completed Form ST-124, Certificate of Capital Improvement to the contractor, no sales tax is required to be collected from the customer.  This executed form is evidence that the work to be performed will result in a capital improvement to real property.

However, when a contractor performs a job that is considered a repair, maintenance or installation service to real property, sales tax must be collected from the property owner unless the contractor receives a properly completed Form ST-119.1, Exempt Organization Certification.

In general, the addition of a mobile home to real property is never a capital improvement, regardless of how it is installed. In addition, there are special rules regarding the installation of a floor covering which are further discussed in New York State Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property.

The definition of a capital improvement for New York State sales and use tax purposes differs from the definition for federal income tax purposes, which confuses many taxpayers.  Taxpayers should be aware of this and make sure to research the rules for each jurisdiction.

The term real property in the definition of a capital improvement mentioned above means real property, 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, or lighting apparatus, and plumbing.

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 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 tax.

In the case of capital improvements, if you are a contractor who purchases materials and supplies, you pay tax to the supplier and you do not collect any sales tax from your customer.

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

For more information, refer to New York State Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property.

 


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