One of my fellow contributors here at SalesTaxSupport.com (Guy Nevers) recently posted an article about the taxability differences between business fixtures and real property in Ohio, and it got me thinking about how real property-related services are treated here in New York State for sales and use tax purposes.
Services to real property in New York State are treated as either nontaxable capital improvements or taxable repair and maintenance services. Now I'm pretty sure I can write a novella on this topic, but for our purposes, I'm going to keep things simple and just summarize some key points here.
A capital improvement means an addition or alteration to real property, which:
- 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.
- is intended to become a permanent installation.
For example, installing a hot water heater for the office or electrical wiring and breaker panels for a new piece of machinery would be considered capital improvements. The contractor performing this work should get a properly completed Form ST-124, Certificate of Capital Improvement from the customer and not collect sales tax on the project. The contractor should keep this exemption certificate in their files to show why no sales tax was charged on the work.
An addition or alteration to real property that qualifies as a capital improvement when made by the owner of the property may be treated differently for sales and use tax purposes if made by a tenant leasing the property. If the lease requires the tenant to return the property to its original state when the lease expires, then any leasehold improvements made by the tenant may be considered temporary in nature and not intended to be permanent, therefore subject to tax.
Charges for repairing, maintaining or servicing real property are subject to sales and use tax. This includes any activities that relate to keeping real property in a condition of fitness, efficiency, readiness or safety, or restoring it to such condition. For example, repairing a hole in a wall, replacing light bulbs, repairing an air conditioner, as well as lawn-care services and garbage removal services would all be considered taxable services.
Contractors purchasing tangible personal property are required by the Tax Law to pay sales tax on these purchases at the point of sale. A contractor cannot use Form ST-120, Resale Certificate to purchase building materials; however there are limited instances where a contractor can use other exemption certificates depending on the circumstances. Contractors can include the sales tax they paid on building materials just like any other expense (i.e., markup or overhead) in the price when they bill a customer for a capital improvement project, however there is no sales tax due on these charges.
On the other hand, when a contractor uses building materials for a taxable repair or maintenance job, the contractor has to charge sales tax to the customer on both the labor and materials. In this situation, the contractor is entitled to a claim a credit for the sales tax paid on these materials on their sales tax return.
New York State has published a number of publications and technical bulletins addressing these issues including Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, which provides detailed information on various types of work and what New York State considers nontaxable capital improvements and/or taxable repair to real property.
Because this is such a complex sales and use tax issue and there are so many facets that simply cannot be covered adequately in this format, my firm, Tronconi Segarra & Associates, will be offering a free webinar entitled New York Sales & Use Tax: Capital Improvements and Repairs to Real Property on Thursday May 7, 2015 from 1:00 - 2:30pm EST to discuss these issues in greater detail. If you are interested in registering for this free webinar, please email Barbara Harmel at firstname.lastname@example.org by May 1, 2015 please.
Other recent “New York (NY)” posts by Tom Mazurek, CPA:
- The Holidays - A Taxing Time for New Yorkers
- New York Manufacturers: Remember Sales Tax Break for Utilities!
- New York: Celebrate Manufacturing Day with Sales Tax Exemptions!
- New York Nexus: For Out-of-State Sellers, No News is Good News
- New York: New Law to Close Loopholes for Related Parties