Is a hotel's floor-by-floor reconstruction project -- including wall demolition, skimming, painting, wall coverings, and new carpet -- exempt from New York sales tax as a capital improvement?

Plain-English summary

Hilton Hotels Corporation, owner of the Waldorf Astoria in New York City, undertakes floor-by-floor hotel reconstructions costing $2-3 million per floor, taking each floor entirely out of service for 5-10 weeks. The work includes demolishing walls (sometimes for disability-access code compliance), removing wall/ceiling moldings and electrical fixtures for replacement, stripping all walls down to bare plaster, applying and sanding a new layer of plaster ("skimming"), stripping and refinishing metal surfaces, painting every vertical and horizontal surface, applying wall coverings, and replacing carpeting, padding, and floor tile — plus renovating bathroom fixtures.

The Department applied the "end result test": whether real-property services are taxable turns on whether the finished project is a capital improvement or mere repair/maintenance, judged as a whole rather than service-by-service. Because this project substantially adds value, the changes would cause material damage if removed, and the scale and permanence of an owner's own renovation are presumed permanent, the overall reconstruction — including the demolition, skimming, painting, and wall-covering installation — qualifies as a capital improvement. Under the end result test, that means the painting and wall-covering charges, even though they might look like ordinary maintenance in isolation, are swept into the exempt capital-improvement project and aren't taxed. Floor covering, though, plays by different rules: New York only treats carpet, vinyl, and similar floor covering as part of a capital improvement when it's installed as the initial covering in brand-new construction, a new addition, or a total structural reconstruction (replacing major elements like the roof, floor joists, or foundation) — a renovation like this one, however extensive, doesn't meet that higher bar, so the new carpeting and floor covering remain taxable. Ceramic tile and marble, notably, aren't "floor covering" under that special rule at all, so if the project used those instead of carpet, they'd be treated as ordinary flooring and swept into the exempt capital improvement along with everything else.

What this means for you

Hotels and other property owners undertaking major renovations

Under the end result test, services that look like ordinary repair or maintenance in isolation (painting, wall covering) can become part of an exempt capital improvement if they're genuinely part of a larger permanent renovation project — evaluate the whole project, not each task individually.

Anyone planning to replace carpet or other floor covering as part of a renovation

Don't assume new carpet gets the same exempt treatment as the rest of your renovation. Floor covering (carpet, vinyl, linoleum, and similar materials) only qualifies as a capital improvement in genuinely new construction, a new addition, or a total structural reconstruction — a floor-by-floor cosmetic/systems renovation, even a very expensive one, doesn't clear that bar. Ceramic tile, marble, wood flooring, and similar hard flooring aren't subject to this special rule at all, and can qualify as part of the ordinary capital improvement.

Accountants and tax professionals

This is a clean illustration of the end result test (20 NYCRR § 527.7(b)(4); W P Owners Corp.) working alongside the separate, stricter floor-covering rule in § 1101(b)(9)(iii) and 20 NYCRR § 541.14 — two different tests applying within the very same renovation project, producing different tax outcomes for adjacent line items on the same contractor's invoice.

Common questions

Q: Is painting part of a hotel renovation project taxable?
A: Not here — under the end result test, painting performed as part of a genuine capital-improvement project is treated as part of that exempt project, not taxed separately.

Q: Is installing wall covering as part of the same renovation taxable?
A: No, for the same reason — it's swept into the exempt capital improvement under the end result test.

Q: Is new carpet installed as part of the renovation taxable?
A: Yes. Floor covering only qualifies as a capital improvement in new construction, a new addition, or a total structural reconstruction — a renovation project alone doesn't meet that stricter standard.

Q: What about ceramic tile or marble flooring instead of carpet?
A: Those aren't considered "floor covering" under the special rule and would be treated as ordinary capital-improvement flooring, exempt along with the rest of the project.

Q: Can another hotel or property owner rely on this exact capital-improvement/floor-covering split?
A: No. This opinion binds the Department only for this petitioner's specific facts, though it illustrates a general, frequently-applied framework.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9)(i), (iii) (capital improvement; floor-covering rule)
• Tax Law § 1105(c)(3)(iii) (capital improvement installation exclusion)
• 20 NYCRR § 527.7(b)(4) (end result test)
• 20 NYCRR § 541.14 (floor covering exemption criteria)
• TSB-M-83(17)S (Taxable Status of Leasehold Improvements for or by Tenants)

Case law and prior opinions cited:

• Matter of Flah's of Syracuse v. Tully, 89 A.D.2d 729
• TSB-A-97(67)S, Hodgson, Russ, Andrews, Woods & Goodyear, LLP, Nov. 4, 1997
• TSB-A-98(91)S, Maria T. Jones, Esq., Dec. 30, 1998
• TSB-A-97(13)S, W P Owners Corp., Mar. 17, 1997

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(9)S
Sales Tax
May 31, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010523A

On May 23, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Hilton Hotels Corporation, c/o Maria T. Jones, Esq., Kramer, Levin, Naftalis &
Frankel, LLP, 919 Third Ave., New York, NY 10022.
The issue raised by Petitioner, Hilton Hotels Corporation, is whether costs incurred for the
painting and installation of wall coverings in connection with the reconstruction of several floors
in its hotel are exempt from the imposition of New York State sales and compensating use taxes as
qualifying capital improvements under Sections 1101(b)(9) and 1105(c)(3)(iii) of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is the owner of a building located at 301 Park Avenue in New York City in which
it operates a hotel known as The Waldorf Astoria. Petitioner has undertaken to reconstruct several
floors of the hotel. Reconstruction requires the closure of the entire floor from use by the public.
As a result, no revenue is generated for the duration of the construction period. The floor is out of
service generally from 5 to 10 weeks. The reconstruction consists of the following.
During the demolition process, the contractor demolishes and removes any walls slated for
demolition as determined by the architect and/or designer. Renovations in a few guest rooms
include the removal of walls or parts of walls in order to accommodate new building code
requirements with regard to accommodations for persons with disabilities. Occasionally, other walls
are demolished for reasons consistent with Petitioner’s use of the floor, for example, changes to
service areas. Unnecessary demolition of walls is avoided as the walls are made of solid plaster and
are difficult and expensive to remove and replace.
Wall and ceiling moldings are removed by the contractor in preparation for installation of
new moldings. All existing electrical fixtures, devices and switches and selected outlets are
removed for the installation of new devices. New wiring is installed wherever needed.
All walls are stripped to the base plaster. The contractor removes wall covering and paint
of any type on the existing walls so that the bare surfaces of the plaster are exposed. In order to
prepare the walls for new surfaces, all existing finishes and fixtures are stripped, leaving an
“unfinished canvas.” All walls, ceilings, soffits and fascias, including all vertical and horizontal
surfaces, are then completely covered with a layer of new plaster. This process, the application of
plaster via trowels, is called “skimming.” After the new plaster is applied, all the surfaces are
sanded. The process is time consuming and labor intensive.

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In conjunction with the skimming process, all existing metal surfaces (inclusive of but not
limited to convector covers, grills in ceilings, doors and frames, etc.) are stripped. The stripping
takes the metal “back to the bare metal” to allow a smooth application of new finishes. After the
sanding of all plaster surfaces and the complete stripping of all metal surfaces, the surfaces are
cleaned and prepared for the new finishes.
Paint is applied to all vertical and horizontal surfaces, inclusive of but not limited to
moldings, chair rails, trims, doors and frames, convectors, and ceilings, all of which are physically
and permanently attached to the building. All wall surfaces slated to receive wall covering receive
an application of a special coating followed by the application of the wall covering.
During the demolition process, the contractor removes all existing carpeting, area rugs and
carpet padding so that the building concrete floor slab is exposed. Damage to the concrete floor slab
is corrected, if necessary. New padding and carpeting are installed on all floors. Floor tile is
installed if appropriate.
Existing sink and other bathroom fixtures may be removed in preparation for the installation
of new fixtures and other bathroom renovations.
The average cost of this building improvement is from $2 million to $3 million per floor,
depending on how many guest rooms are on each floor. The cost of the project is capitalized for
book purposes and tax purposes.
Applicable Law and Regulations
Section 1101(b)(9)(i) of the Tax Law defines “capital improvement” as:
An addition or alteration to real property which:
(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.
*

*

*

(iii) Notwithstanding the provisions of subparagraph (i) of this paragraph: (A)
Floor covering, such as carpet, carpet padding, linoleum and vinyl roll flooring,

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carpet tile, linoleum tile and vinyl tile, installed as the initial finished floor covering
in new construction or a new addition to or total reconstruction of existing
construction shall constitute an addition or capital improvement to real property,
property or land; and
(B) Floor covering, such as carpet, carpet padding, linoleum and vinyl roll
flooring, carpet tile, linoleum tile and vinyl tile, installed other than as described in
clause (A) of this subparagraph shall not constitute an addition or capital
improvement to real property, property or land.
Section 1105(c)(3)(iii) of the Tax Law provides an exclusion from tax “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.”
Section 527.7(b)(4) of the Sales and Use Tax Regulations provides, in part:
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.
Section 541.14 of the Sales and Use Tax Regulations provides, in part:
Floor Covering. (a)(l) The installation of floor covering is subject to sales
tax, regardless of the method of installation or the surface over which the floor
covering is installed, unless the installation qualifies for exemption under subdivision
(b) of this section.
(2)(i) The term floor covering includes carpet, carpet tile, carpet padding,
linoleum and vinyl roll floor covering, linoleum tile, vinyl tile and other similar
floor coverings but not area rugs and the like.
(ii) The term floor covering does not include flooring such as wood flooring,
ceramic tile, terrasso, marble, concrete or other similar flooring. Accordingly, the
provisions of this section do not apply to the installation of flooring. See section
527.7 of this Title for the rules to determine whether such flooring qualifies as a
capital improvement.
(b)(1) The installation of floor covering is exempt from sales tax only if the
following criteria are met:

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(i) the installation must be of the initial finished floor covering; and
(ii) the installation must be made in:
(a) the new construction of a building or structure; or
(b) the new construction of an addition to an existing building or structure;
or
(c) the total reconstruction of an existing building or structure.
(2) For purposes of this Subchapter:
(i) "New construction of a building or structure" means the original
construction of a building or structure that did not exist before such construction.
(ii) "New construction of an addition to an existing building or structure"
means the original construction of a new room, wing or other discrete, substantial
unit of a building or structure which enlarges the exterior of the existing building or
structure.
(iii) "Total reconstruction of an existing building or structure" means the
complete rehabilitation or replacement of most of the major structural elements of
an existing building or structure, such as the roof, ceiling trusses, floor joists, walls,
support columns, support beams, girders and the foundation.
(3) Floor covering installed as the initial finished floor covering shall be
deemed to be installed in new construction, a new addition or total reconstruction
where it is installed within six months of the date of completion of the new
construction, new addition or total reconstruction.
Opinion
Petitioner owns and operates The Waldorf Astoria Hotel in New York City. Petitioner plans
to reconstruct several floors of the hotel. The reconstruction project consists of the demolition of
walls and parts of walls, replacing electrical and bathroom fixtures, stripping walls down to the base
plaster, skimming, painting, installation of wall coverings, and replacing floor coverings, all at a cost
of from $2 million to $3 million per floor.
These improvements substantially add to the value of the real property and their removal
would cause damage to both the real property and to the items themselves. See Hodgson, Russ,
Andrews, Woods & Goodyear, LLP, Adv Op Comm T&F, November 4, 1997, TSB-A-97(67)S.

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Where an owner of real property makes these kinds of improvements to the real property, the
installation is presumably permanent in nature. SeeMatter of Flah’s of Syracuse v. Tully,
89 AD2d 729. Accordingly, the remodeling of Petitioner’s hotel floors, with the exception of the
floor covering, meets the criteria set forth by Section 1101(b)(9) of the Tax Law for a capital
improvement. See Maria T. Jones, Esq., Adv Op Comm T&F, December 30, 1998, TSB-A-98(91)S.
Where services such as painting and the installation of wall coverings are part of a major
renovation project they must be viewed in the context of the entire project, in accordance with the
“end result test” of Section 527.7(b)(4) of the Sales and Use Tax Regulations. See W P Owners
Corp., Adv Op Comm T&F, March 17, 1997, TSB-A-97(13)S. Under the end result test, services
performed on real property under a capital improvement project are treated as part of the project and
are, therefore, not subject to sales tax. Accordingly, the contractor’s charges to Petitioner for
painting and for the installation of wall coverings that are performed as part of the reconstruction
project are not subject to sales tax. See W P Owners Corp., supra; Maria T. Jones, Esq., supra.
The requirements for floor covering to become a capital improvement are statutorily different
than other installations. See Section 1101(b)(9)(iii) of the Tax Law and Section 541.14 of the Sales
and Use Tax Regulations. Petitioner’s carpeting and other floor covering do not meet the criteria
of such Sections 1101(b)(9)(iii) and 541.14 since they are not part of the new construction of a
building or structure, an addition to an existing building or structure, or a total reconstruction of an
existing building or structure. Therefore, charges to Petitioner for the installation of floor covering
are subject to sales tax. See Maria T. Jones, Esq., supra; Hodgson, Russ, Andrews, Woods &
Goodyear, supra. It should be noted that ceramic tile or marble is not floor covering for purposes
of Section 1101(b)(9)(iii) of the Tax Law. See Section 541.14(a)(2) of the Sales and Use Tax
Regulations. The installation of ceramic tile or marble as part of the remodeling described above
would be considered part of the capital improvement and, therefore, not taxable.

DATED: May 31, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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