NY Sales and Use Tax for Construction IndustryContactors generally perform two types of transactions for sales tax purposes in New York; (1) performance of a capital improvement to real property, or (2) repair and other maintenance services to real property. As simple as it may sound, distinguishing whether a particular project qualifies as a capital improvement and therefore tax exempt, can be quite problematic and potentially significant in terms of tax dollar savings if a project is incorrectly evaluated.

How to Define Capital Improvement Projects

New York utilizes a three-prong test to define a capital improvement. A project will qualify as a capital improvement if it meets all three of the following:

  • 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 of the item itself, and
  • It’s intended to become a permanent installation.

Projects that meet the above criteria are not subject to New York sales tax to the owner. On these projects, the contractor must obtain a properly completed Certificate of Capital Improvement, Form ST-124 from the owner. Once obtained, the contractor will pay sales tax on the purchases of the materials for the project. The use of subcontractors will follow the same principle.  No tax is due on labor charges for the use of subcontractors in a capital improvement project. Subcontractors are required to pay tax on their purchases of materials. Sales tax on the purchases by the contractors are normally passed on to the owner in the total invoice, but the invoice itself is not subject to sales tax.

Note however, the addition of a mobile home to real property is never a capital improvement, regardless of how it is installed. New York also implements special rules in regards to floor coverings. That is, the installation of carpet, padding, linoleum, vinyl roll floor, and other similar floor covering only qualifies as a capital improvement if it’s performed as the initial floor covering. If the floor covering installation is performed in an existing building, or in a building more than six months after the building has been completed, the floor covering and installation charges are deemed as a repair/maintenance and subject to New York sales tax.

How to Define Repair and Installation Projects

If the project is a repair, the contractor must pay sales tax on all the materials purchased for the job. In addition, sales tax is due from the owner based on the contractor’s total invoice for the labor and materials of the job. The contractor may in turn claim a credit on their sales and use tax return for the sales tax paid on the materials that were purchased since sales tax is charged to the owner on the same materials.

To illustrate differences between a capital improvement and a repair/maintenance, below are a few comparisons of work that could be performed:

Capital Improvement

Repair/Maintenance

  • Construction of a building, home, deck, garage
  • Additions to existing structure
  • Complete re-siding of structures
  • Excavation work if for a capital improvement
  • Demolition of a building or structure
  • Installation of new or complete replacement of fences, awnings, gutters, shutters
  • Repair or maintenance of exterior surfaces, patios, roof decks,
  • Repair, replacement, or maintenance of fences, shingles (partial), siding (partial)
  • Installation of canvas awnings, patching cracks
  • Cleaning, refinishing floors, removal of water or debris, replacement of broken glass
  • New structure exterior painting, brickwork,  concrete
  • Re-painting of existing structure, brickwork, concrete
  • Complete wiring or rewiring of structures
  • Additions to wiring systems
  • In-wall installation of electrical wiring for installation of security systems
  • Original installation of: circuit breakers, outlets, switches
  • Original installation or complete replacement of: add-on panels, breaker panels, door bells.
  • Repair of: floor outlets, lighting fixtures, wall boxes, wiring, wall fixtures
  • Replacement of: circuit breakers, fuses, light bulbs, outlets, receptacles, switches.
  • Installation or complete repaving (resurfacing) of driveways, lots, walks
  • Repair/patching holes and cracks, replacing sections of concrete or blacktop driveways, parking lots, restriping, sealing.
  • Original installation or a complete replacement of central air conditioning systems, original installation of ductwork or required additional ductwork
  • Maintenance contracts, repair or replacement of: blowers, coils, compressors, condenser coils, control devices, ductwork sections, fans, filters, refrigerant
  • Complete installation or replacement of bathroom: cabinets, exhaust fans, floor tiles, sinks, toilets, tubs
  • Repair of cabinets, exhaust fans, faucets, toilets, tubs. Replacement of faucets and shower heads

Due to the difference in tax consequence between a capital improvement and repair/maintenance project, it’s imperative for the contractor to make correct determination prior to beginning the project. The contractor must know whether or not to include sales tax on the cost of materials incorporated into the project. If a contractor is performing a combination of a capital improvement and repair/maintenance work, they should separately state the invoice for these jobs, and only charge sales tax on the repair/maintenance work performed.

Understanding sales and use tax can be very cumbersome and mistakes on charging sales tax can be costly. If your business is involved in any construction project or significant expenditures and would like to discuss the potential sales tax rules and exemptions that may apply including capital improvement vs repair, contact our State and Local Tax team by clicking here or calling 716-847-2651.

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