The New York Department of Taxation and Finance has issued a sales tax bulletin that discusses what type of work is a nontaxable capital improvement to real property. It also includes information on purchases by contractors and property owners, billing, and the appropriate use of exemption certificates.
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; and
— it is intended to become a permanent installation.
Purchases of materials: Building materials and other tangible personal property purchased for capital improvement work are taxable, whether purchased by a contractor, subcontractor, repairman, or homeowner. The sales tax paid by contractors becomes an expense that can be passed through to the customer as part of the overall charge for the capital improvement. Contractors do not normally sell building materials to customers without installation and, therefore, cannot use Form ST-120, Resale Certificate, to make purchases of building materials exempt from tax. However, in certain circumstances, contractors can use Form ST-120.1, Contractor Exempt Purchase Certificate, to make purchases exempt from sales tax. Purchases of materials in one taxing jurisdiction in New York may be subject to a different tax rate (higher or lower) if the materials are later used in a different jurisdiction in New York.
Exemption certificates: When performing capital improvement work, a contractor should get a properly completed Form ST-124, Certificate of Capital Improvement, from the customer and should not collect sales tax from the customer for the project. Receiving Form ST-124 relieves the contractor from liability for any tax due on the work. The contractor should keep this exemption certificate in his or her records to show why no sales tax was collected on the work. However, if no capital improvement certificate is received, the contract or other records of the project can still be used to establish that the work done constituted a capital improvement. If a contractor hires a subcontractor to work on a capital improvement project, the contractor should give the subcontractor a copy of the capital improvement certificate issued by the customer, so that the subcontractor’s charges will be exempt from sales tax.
Capital improvement billing: When calculating how much to charge a customer, a contractor may include the sales tax paid on building materials just like any other project expense. However, because the work is a capital improvement, there is no sales tax due on the charge to the customer.
Leasehold improvements: Additions or alterations to real property made by or for a tenant, rather than the owner of the property, may be considered to be temporary in nature, rather than permanent. As a result, certain work that may otherwise qualify as a capital improvement may not qualify if the tenant’s lease does not transfer ownership of the improvement to the property owner.
TB-ST-104 , New York Department of Taxation and Finance, July 27, 2012 , ¶407-614