Is a hazardous-waste landfill cleanup -- capping, grading, drainage systems, groundwater collection, and related construction -- a tax-exempt capital improvement to real property, and are the materials used in it exempt from sales tax?

Plain-English summary

A steering committee of 21 industrial and public utility companies that allegedly sent waste to a 140-acre inactive hazardous waste landfill in Cheektowaga, New York agreed, under a consent order with the state Department of Environmental Conservation, to remediate the site. The planned work -- consolidating landfill waste, installing a synthetic-membrane cap and soil layers over it, building a perimeter subsurface barrier wall and drainage/collection systems, installing groundwater pumping and monitoring wells, and related grading, fencing, and landscaping -- was estimated at over $20 million. The committee asked whether this remediation counts as an exempt "capital improvement" to real property (rather than taxable repair/maintenance), and whether the materials used in it are also exempt.

New York's capital-improvement test has three parts: the work must substantially add value or prolong the property's useful life, become a permanent part of the property (removal would cause material damage), and be intended as a permanent installation. The Department found all three satisfied here. The remediation transforms currently unusable contaminated land into land that could support a park, parking, or other future use -- clearly adding value. The system's components (piping, pumping, venting, foundations, fencing) become an integral, non-removable part of the property, much like a septic system. And because the work is state-mandated environmental remediation intended to permanently protect public health and the environment -- with no one retaining any right to later remove it -- the Department found the necessary intent of permanence, even though the current owners plan to eventually transfer the land to a new party (like the Erie County IDA) once the cleanup is done.

Because the remediation qualifies as a capital improvement, the contractor's labor charges for installing it aren't taxable, and the materials the contractor buys that become part of the system are also exempt from sales tax -- but only if whoever pays for the work gives the contractor a properly completed Certificate of Capital Improvement (Form ST-124). The contractor itself, however, still pays tax on its own purchases of those materials, since it's the "ultimate consumer" of the tangible personal property before it becomes part of the real property.

What this means for you

Environmental remediation contractors and the parties who hire them

Large-scale hazardous-site remediation -- capping, drainage, groundwater collection, and similar permanent systems -- typically qualifies as a capital improvement, meaning labor charges aren't taxed and materials that become part of the finished system are exempt, as long as the customer supplies a properly completed Form ST-124. Don't assume remediation automatically counts, though -- confirm each project meets all three statutory criteria, particularly the permanence requirement where the work isn't performed by (or for) the property's ultimate long-term owner.

Multi-party cleanup groups and potentially responsible parties (PRPs)

A steering committee or PRP group paying for remediation on land it doesn't own can still get capital-improvement treatment, as the analysis focuses on the nature and intended permanence of the installed system itself, not on who holds title to the underlying land or whether the payer is also the eventual owner.

Accountants and tax professionals

The permanence analysis here leans on older case law (Tifft v. Horton, and its exceptions in 100 Park Ave. v. Boyland, Merit Oil of NY, and Flah's of Syracuse) about tenant-installed improvements normally being presumed non-permanent -- that presumption can be overcome by facts showing genuine permanent intent, as it was here given the state-mandated, no-removal-rights nature of the project. Also remember the contractor itself remains the taxable "ultimate consumer" of materials purchased to perform the capital improvement, separate from the customer's own exemption on the finished labor/materials charge.

Common questions

Q: Is all environmental cleanup work automatically exempt from sales tax?
A: No. It depends on meeting all three capital-improvement criteria (value/useful-life addition, permanent affixation, and intended permanence) -- routine repair or maintenance-type remediation work could be taxable instead.

Q: Do I need a special form to claim this exemption?
A: Yes -- the customer must give the contractor a properly completed Certificate of Capital Improvement, Form ST-124, for the labor and materials charges to be treated as exempt.

Q: Does the contractor pay tax on the materials it buys for the project?
A: Yes. The contractor is the "ultimate consumer" of materials it purchases to perform a capital improvement and must pay tax on those purchases, even though its charge to the customer for the finished capital improvement is exempt.

Q: Can another remediation project rely on this ruling?
A: No. It binds the Department only as to this petitioner and the facts described. A remediation project without the same permanence and no-removal-rights facts could be analyzed differently.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i) (definition of "capital improvement")
• Tax Law § 1105(c)(3), (5) (tax on installing/maintaining/servicing/repairing tangible and real property)
• Tax Law § 1115(a)(17) (exemption for contractor materials that become an integral part of a capital improvement)
• 20 NYCRR § 527.5(b)(4), § 527.7(b)(4)-(5), § 528.18, § 541.2(g)(2)(i), § 541.5(b)(2) (capital improvement rules)
• 6 NYCRR § 375-1.4(c), § 375-1.8(a)(2)(ii) (class 2 inactive hazardous waste site definitions)
• Matter of Building Contractors Association, Inc. et al v Tully, 87 AD2d 909
• Matter of Tifft et al v Horton et al, 53 NY 377

Prior rulings referenced:

• James River II Corporation, Adv Op Comm T&F, Oct. 22, 1992, TSB-A-92(70)S
• Envirotrac Ltd., Adv Op Comm T&F, July 9, 1996, TSB-A-96(41)S
• KPMG Peat Marwick, LLP, Adv Op Comm T&F, Sept. 12, 1996, TSB-A-96(54)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(21)S
Sales Tax
April 25, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000128B

On January 28, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Pfohl Brothers Landfill Site Steering Committee, 33300 Five Mile Road,
Suite 103, Livonia, Michigan 48154. Petitioner, Pfohl Brothers Landfill Site Steering Committee,
provided additional information pertaining to the Petition on February 17, 2000.
The issues raised by Petitioner are:
(1) Whether services performed in connection with the remediation of a State inactive
hazardous waste site (“Landfill”) will result in a capital improvement to real property and thus be
exempt from the imposition of sales tax under Section 1105(c)(5) of the Tax Law.
(2) Whether charges for tangible personal property used in the remediation of the Landfill
and purchased by Petitioner are exempt from the imposition of sales tax under Section 1115(a)(17)
of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
The Landfill is a 140-acre inactive hazardous waste site located in Cheektowaga, New York.
The Landfill was operated between about 1930 and 1970 for the disposal of municipal, commercial,
and industrial wastes. Studies conducted by the Erie County Health Department, the United States
Environmental Protection Agency, and the New York State Department of Environmental
Conservation (“NYSDEC”) indicated the presence of hazardous substances in soil and groundwater
at the Landfill. As a result, the site is listed as a class 2 site in the New York State Registry of
Inactive Hazardous Waste Disposal Sites, and NYSDEC is overseeing its environmental cleanup.
The Landfill is currently owned by Messrs. William Pfohl, Paul Pfohl, and other private parties, and
will be transferred upon completion of the cleanup to an appropriate party such as the Erie County
IDA.
Petitioner states that both the Landfill owners and the parties responsible for transporting
and/or disposing of hazardous wastes are liable for the cleanup process. Petitioner consists of 21
industrial and public utility companies who allegedly transported and/or disposed of wastes at the
Landfill. Through Petitioner, the companies will be participating in certain remediation efforts at
the Landfill, according to the terms of a consent order that is to be entered into with NYSDEC. In
addition to the companies that comprise Petitioner, site records indicate that the Landfill was also
used by the Town of Cheektowaga and by various other private and public entities for the disposal
of waste.

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Petitioner is currently completing negotiations with NYSDEC regarding the consent order
and agreement by which Petitioner will conduct remedial action at the Landfill. The purpose of the
remediation is to relocate and/or contain the polluted soil in an effort to protect the environment and
the health and well-being of nearby residents. The remedial action plan calls for consolidating
landfill wastes into a smaller area and placing an engineered cap over the final landfill configuration.
The capping system includes a synthetic membrane and various soil layers. The work on the entire
site will include, at a minimum, certain soil grading and excavation services, installation of a
perimeter subsurface flow barrier and surface water controls, as well as wetlands mitigation.
Specifically, the project work to remediate the Landfill will consist of the following:
1.

Consolidation of approximately 30 acres onto the landfill footprint and backfilling
with approximately 71,000 cubic yards of cover soil;

2.

Installation of approximately 10,000 linear feet of perimeter barrier wall and
collection trench piping with approximately 9,500 cubic yards of drainage material,
29 manholes and 6 wet wells;

3.

Installation of approximately 990 linear feet of interior drainage system with
collection piping;

4.

Construction of approximately 960 linear feet of municipal tie-in piping;

5.

Clearing and grading of remaining waste on approximately 100 acres;

6.

Installation of approximately 79,000 cubic yards of gas venting material;

7.

Installation of approximately 473,500 square yards of 40-mil VFPE liner for the
landfill cap;

8.

Installation of approximately 315,700 cubic yards of protective soils;

9.

Installation of approximately 49 gas vents;

10.

Installation of approximately 14 monitoring wells with well screens, riser pipes and
protective casings;

11.

Installation of approximately 75,200 cubic yards of protective soil for lined drainage
swales;

12.

Landscaping of upland transition zone, wet meadow wetlands and emergent wetland;

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13.

Reparation of road cuts with approximately 6,600 cubic yards base course aggregate
and asphalt;

14.

Installation of pre-engineered building and concrete foundations;

15.

Installation of groundwater pumping system with electrical equipment and
instrumentation;

16.

Completion/re-installation of chain-link fence and gates around the perimeter of the
landfill;

17.

Installation, seeding and mulching of topsoil layer.

Petitioner has retained the services of an environmental engineering company to prepare the
remedial design. This design, which is essentially complete and determined to be acceptable to
NYSDEC, was used as the basis for a competitive bidding process for remedial action. Through this
process, the Committee has tentatively selected a contractor to conduct the remedial action. The
environmental engineering company will provide construction monitoring and management. The
total (future) cost of remedial action, including environmental engineering and NYSDEC oversight
costs, is estimated at more than $20 million.
Following remedial action, the Town of Cheektowaga will conduct routine maintenance of
the facility. Petitioner is evaluating means by which lands from which wastes are removed could
be redeveloped or reused. Other areas of the Landfill may be available with NYSDEC permission
for non intrusive use such as open space and parking, provided the underlying land is protective of
the public health and the environment.
Applicable Law and Regulations
Section 1101(b)(4)(i) of the Tax Law provides, in part:
. . . a sale of any tangible personal property to a contractor, subcontractor or
repairman for use or consumption in erecting structures or buildings, or building on,
or otherwise adding to, altering, improving, maintaining, servicing or repairing real
property, property or land . . . is deemed to be a retail sale regardless of whether the
tangible personal property is to be resold as such before it is so used or
consumed. . . .
Section 1101(b)(9)(i) of the Tax Law defines the term “capital improvement” to mean:
An addition or alteration to real property which:

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(A) Substantially adds to the value of the real property, or appreciably
prolongs the useful life of the real property; and
(B) 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
(C) Is intended to become a permanent installation.
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.
Section 1105(c) of the Tax Law imposes a tax on the receipts from every sale, except for
resale, of the following services:
*

*

*

(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith, except:
*

*

*

(iii) for installing property which, when installed, will constitute an addition
or capital improvement to real property, property or land, as the terms real property,
property or land are defined in the real property tax law as such term capital
improvement is defined in paragraph nine of subdivision (b) of section eleven
hundred one of this chapter. . . .
*

*

*

(5) Maintaining, servicing or repairing real property, property or land, as such
terms are defined in the real property tax law, whether the services are performed in
or outside of a building, as distinguished from adding to or improving such real
property, property or land, by a capital improvement as such term capital
improvement is defined in paragraph nine of subdivision (b) of section eleven
hundred one of this article. . . .

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Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(17) Tangible personal property sold by a contractor, subcontractor or
repairman to a person other than an organization described in subdivision (a) of
section eleven hundred sixteen, for whom he is adding to, or improving real property,
property or land by a capital improvement, or for whom he is about to do any of the
foregoing, if such tangible personal property is to become an integral component part
of such structure, building or real property. . . . (Emphasis added)
Section 527.5(b)(4) of the Sales and Use Tax Regulations provides, in part:
Tax is not imposed on the charge for installation of tangible personal property
which, when installed, will be an addition or capital improvement to real
property. . . .
Section 527.7(b) of the Sales and Use Tax Regulations provides, in part:
*

*

*

(4) The imposition of tax on services performed on real property depends on
the end result of such service. If the end result of the services is the repair or
maintenance of real property, such services are taxable. If the end result of the same
service is a capital improvement to the real property, such services are not taxable.
*

*

*

(5) Any contractor who is making a capital improvement must pay a tax on
the cost of materials to him, as he is the ultimate consumer of the tangible personal
property.
Section 528.18 of the Sales and Use Tax Regulations provides, in part:
Tangible personal property sold by a contractor, subcontractor or repairman
to a person, other than an organization exempt pursuant to section 1116(a) of the Tax
Law, for whom he is adding to, or improving real property, property or land by a

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capital improvement, is exempt, if the property sold by the contractor, subcontractor
or repairman becomes an integral component part of the real property.
Section 541.2(g)(2)(i) of the Sales and Use Tax Regulations provides:
A capital improvement does not include a contract for the sale and installation
of tangible personal property which when installed remains tangible personal
property.
Section 541.5(b) (2) of the Sales and Use Tax Regulations provides:
Labor and material charges. All charges by a contractor to the customer for
adding to or improving real property by a capital improvement are not subject to tax
provided the customer supplies the contractor with a properly completed certificate
of capital improvement.
Opinion
In accordance with the terms of a consent order to be entered into with NYSDEC, Petitioner
plans to conduct remedial action in order to mitigate the presence of soil and groundwater
contamination at a New York State Registry “class 2" inactive hazardous waste site (Landfill).
With respect to Issue (1), Section 1105(c)(3) of the Tax Law imposes sales tax upon
installing tangible personal property and maintaining, servicing or repairing tangible personal
property. Section 1105(c)(5) of the Tax Law imposes tax on the receipts from the service of
maintaining, servicing or repairing real property. Charges to Petitioner by its contractor for
installation services performed in the remediation of the Landfill will not be subject to the tax
imposed under either Section 1105(c)(3) or 1105(c)(5), provided the installation of the remediation
system results in or is performed in conjunction with an addition or alteration to real property which
meets the three criteria defining a capital improvement under Section 1101(b)(9)(i) of the Tax Law
(see Matter of Building Contractors Association, Inc. et al v Tully, 87 AD2d 909; KPMG Peat
Marwick, LLP, Adv Op Comm T&F, September 12, 1996, TSB-A-96(54)S).
As a result of the remediation activities, the land, which is currently unutilized due to the
presence of hazardous substances in the soil and groundwater, will be rendered viable for use as a
park, or as a parking lot or some other commercial enterprise. Therefore, the installation of the
remediation system will no doubt substantially add to the value of the real property or appreciably
prolong the useful life of the real property, thus satisfying the first criterion for qualification as a
capital improvement under Section 1101(b)(9) of the Tax Law (see Envirotrac Ltd., Adv Op Comm
T&F, July 9, 1996, TSB-A-96(41)S; KPMG Peat Marwick, LLP, supra). Whether the system
becomes part of the real property or is permanently affixed to the real property so that removal would

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cause material damage to the property or the system itself (i.e., the second statutory criterion) and
whether the system is intended to become a permanent installation (i.e., the third criterion) depends
on the degree of contamination involved, Petitioner’s obligations and preferences, and Petitioner’s
rights in the real property at issue (see Envirotrac Ltd., supra; KPMG Peat Marwick, LLP, supra).
Part 375 of the New York State Environmental Conservation Rules and Regulations
provides guidance as to the nature and extent of the hazardous waste contamination at the Landfill.
In this case, the degree of contamination constitutes a “significant threat” to the environment. See
6 NYCRR §375-1.8(a)(2)(ii) which defines a “class 2" inactive hazardous waste disposal site. The
mere presence of hazardous waste at a site or in the environment is not a sufficient basis for
constituting a significant threat to the environment. See 6 NYCRR §375-1.4(c). Petitioner’s
remediation system is designed to eliminate all significant threats to public health and the
environment, and consists of extensive grading, contouring, trenching, capping, excavation and
construction of groundwater collection facilities which all become an integral component part of the
underlying real property. The system is a permanent installation of considerable expense, the
removal of which would destroy its components and would require extensive restoration of the real
property. It loses its own separate identity much like a septic system and its components include
piping/pumping systems, venting, foundations and fencing. The installation or replacement of each
of these items constitutes a capital improvement (see New York State and Local Sales and Use Tax
Classifications of Capital Improvements and Repairs to Real Property, Publication 862, 5/98).
Therefore, the second statutory criterion is also satisfied (see James River II Corporation, Adv Op
Comm T&F, October 22, 1992, TSB-A-92(70)S).
With regard to the third criterion, where an owner of real property makes improvements of
these types the installation is presumably a permanent one, but improvements made by a person other
than the owner of the property, e.g., a tenant, are presumed not to be permanent since they are made
for that person’s temporary use and enjoyment rather than to permanently enhance the value of the
owner’s estate (see Matter of Tifft et al v Horton et al, 53 NY 377). However, presumptions of
impermanence may be entirely done away with by facts and circumstances which express a contrary
intention (see Matter of 100 Park Ave. v Boyland, 144 NYS2d 88, aff’d 309 NY 685; Matter of
Merit Oil of NY, Inc. v State Tax Commn., 124 AD2d 326; Matter of Flah’s of Syracuse, Inc. v
Tully, 89 AD2d 729; Tifft, supra). Petitioner’s relation to and interest in the Landfill and the terms
of the documents governing the use and remediation of this site are clearly relevant factors in
determining Petitioner’s intent on the permanency of the installation of the remediation system.
Petitioner and the Landfill property owners are being required by NYSDEC to do an environmental
cleanup at the Landfill. In keeping with state mandates, Petitioner will carry out the remedial action
plan approved by NYSDEC and, upon completion of the project, the property will be transferred by
the owners to an appropriate third party. The purpose of the remediation is to render the underlying
real property protective of the public health and environment. Neither Petitioner nor the property
owners will gain, hold or reserve any right to remove the improvement constructed for this purpose

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at any time after its construction. Accordingly, an intention of permanence is found in the unique
nature of the relationship between Petitioner, the Landfill owners, and NYSDEC, and the apparent
purpose for which the remediation system will be installed; thus the third and final criterion for
qualification as a capital improvement under Tax Law Section 1101(b)(9) will be met.
Therefore, the installation of the remediation system meets each of the conditions set forth
in Section 1101(b)(9) of the Tax Law. Since the end result of the services performed in installing
the system will thus constitute a capital improvement, the charges for labor to perform such
improvement are not subject to sales tax (see James River II Corporation, supra; Envirotrac Ltd.,
supra; KPMG Peat Marwick, LLP, supra).
With respect to Issue (2), since the installation of the remediation system is a capital
improvement, Petitioner is exempted under Section 1115(a)(17) of the Tax Law from paying sales
tax on charges by its contractor for materials which become part of the remediation system or
underlying real property (see Section 528.18 of the Sales and Use Tax Regulations). For purposes
of establishing the exempt status of the transaction, Petitioner must give its contractor a properly
completed Form ST-124, Certificate of Capital Improvement.
It is noted that Section 1115(a)(17) of the Tax Law exempts sales of materials by a contractor
for use in performing a capital improvement for a customer rather than to a contractor. Contractors
generally must pay tax on their purchases of materials which become part of capital improvements,
as the contractors are the ultimate consumers of the tangible personal property. See Section
1101(b)(4)(i) of the Tax Law and Section 527.7(b)(5) of the Sales and Use Tax Regulations.

DATED: April 25, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.