Does an airline's baggage-handling-system renovation at its leased airport terminal, which becomes city property upon completion, qualify as a tax-exempt capital improvement, and how are the government's own security screening machines treated?

Plain-English summary

JetBlue Airways is the prime tenant at Terminal 6 of John F. Kennedy International Airport, which is owned by the City of New York and operated by the Port Authority of New York and New Jersey. Under its lease, JetBlue must make improvements that become city property once completed. Its renovation project moved TSA baggage-screening operations from the baggage room to the Departure Building: a new 190-foot slope-plate carousel to feed 7 CTX X-ray machines and 11 ETD (explosives trace detection) machines, plus a new conveyor to send screened bags back to the baggage room. This required removing floor sections and making architectural, mechanical, plumbing, sprinkler, and extensive electrical modifications to the terminal itself, with the carousels and conveyors permanently bolted and welded into the building.

The Department worked through several distinct pieces of this project:

The baggage-handling system (carousels and conveyors) itself: This qualifies as a full capital improvement — it substantially adds value, becomes permanently part of the building (removal would cause material damage), and is intended as a permanent installation (confirmed by the lease clause vesting title in the city). Because it's a capital improvement, ALL charges for it — labor and materials — are exempt from sales tax, and JetBlue can give contractors a Certificate of Capital Improvement (Form ST-124) in lieu of paying tax. There's a second, independent exemption too: since JFK belongs to a tax-exempt government entity, any materials actually incorporated into the structure are separately exempt as materials for an exempt organization's real property.

The CTX security screening machines (TSA-owned): These require extensive hardwiring and floor/subfloor modifications, but they remain TSA's own property after installation — they never become part of the real property or the city's property. So bolting/assembling the CTX machines is a taxable installation of tangible personal property (not a capital improvement), while separately stated charges for merely relocating the machines within the building are untaxed transportation charges.

The ETD security screening machines (also TSA-owned): These simply plug into standard 120-volt outlets, like an appliance. Separately stated charges for moving them from place to place aren't an enumerated taxable service at all, so they're untaxed regardless of the capital-improvement question.

TSA's own testing/certification contractors: The specialized companies TSA requires to reconnect CTX wiring and run acceptance tests are paid directly by the TSA, not billed to JetBlue, so those charges weren't addressed in this opinion.

What this means for you

Airlines, airport tenants, and government-facility lessees

A lease clause specifying that your improvements become the property of a government landlord (rather than remaining removable tenant property) is important evidence supporting capital-improvement treatment — the Department specifically cited that lease language as satisfying the "permanent installation" test. Combine that with genuinely permanent, structurally-integrated installation work to secure both the capital-improvement exemption and the separate government-owned-property materials exemption.

Contractors installing government-owned equipment inside privately-leased space

Equipment that stays owned by a third party (like TSA here) after installation generally can't qualify as a capital improvement, even if it requires extensive structural work to install — but simple relocation of plug-in equipment can still escape tax as an untaxed transportation charge if separately stated.

Accountants and tax professionals

This is a useful multi-part fact pattern showing how ownership after installation (not just the extent of structural work) determines whether equipment becomes part of real property. Also flag the "double exemption" angle for government-owned facilities: capital-improvement status AND § 1115(a)(15)/(16)'s separate materials exemption can both apply to the same project.

Common questions

Q: Does a tenant's building renovation qualify as a capital improvement if the tenant doesn't own the building?
A: It can, especially where the lease specifies that the improvements become the landlord's property upon completion — that lease language is important evidence of a genuinely "permanent" installation, one of the three required capital-improvement conditions.

Q: Are the TSA's own security screening machines part of the capital improvement?
A: Not necessarily. Since the CTX machines remain TSA property after installation (they never become part of the real property), assembling/bolting them is a taxable installation of tangible personal property, separate from the exempt capital-improvement work around them.

Q: Is moving equipment from one spot to another inside a building taxable?
A: Simply relocating plug-in equipment (like the ETD machines here) isn't an enumerated taxable service at all if separately stated. Relocating more deeply integrated equipment (like the CTX machines) can be treated as an untaxed transportation charge if separately stated from the installation/assembly work.

Q: Can another airline or airport tenant rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to JetBlue Airways Corporation and the facts and lease terms it described. A different lease structure or ownership arrangement for the installed equipment could change the analysis.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1101(b)(9)(i) (definition of capital improvement)
• Tax Law § 1105(c)(3)(iii) (capital-improvement exclusion from installation tax)
• Tax Law § 1115(a)(15), (16) (materials for exempt organizations' real property)
• 20 NYCRR 527.7(b) (real property maintenance/repair vs. capital improvement)
• Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property, Publication 862 (4/01)

Prior opinions cited:

• Trans World Airlines, Inc., Adv Op Comm T&F, March 26, 1992, TSB-A-92(30)S
• Beaman Corporation, Adv Op St Tx Comm, August 19, 1982, TSB-A-82(32)S
• Buehler Moving Ltd., Adv Op St Tx Comm, February 4, 1982, TSB-A-82(1)C
• Price Waterhouse LLP, Adv Op Comm T&F, September 9, 1998, TSB-A-98(63)S
• Gilbert Displays, Inc., Adv Op Comm T&F, June 24, 2005, TSB-A-05(28)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(15)S
Sales Tax
June 21, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S060629A

On June 29, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from JetBlue Airways Corporation, 19 Old Kings Highway South, Suite 23,
Darien, Connecticut 06820. Petitioner, JetBlue Airways Corporation, provided additional
information pertaining to the Petition on April 3, 2007, and May 18, 2007.
The issues raised by Petitioner are:

1. Whether the project to renovate Terminal 6 at John F. Kennedy International Airport
   constitutes a capital improvement to real property for sales tax purposes.
2. Whether the costs incurred by Petitioner, its contractors or subcontractors during the
   renovation are subject to sales tax.
   Petitioner submits the following facts as the basis for this Advisory Opinion.
   Petitioner is the prime tenant at Terminal 6 at John F. Kennedy International Airport
   (JFK) and currently operates out of Terminal 6. JFK is owned by the city of New York and is
   operated by the Port Authority of New York and New Jersey (Port Authority).
   One of the conditions of the lease between Petitioner and the Port Authority is that
   Petitioner will make certain improvements to Terminal 6 that, according to the lease, will
   become the property of the city of New York upon completion.
   In accordance with its lease of Terminal 6, Petitioner requested permission from the Port
   Authority to reconfigure the baggage-handling system.
   The work involves an alteration to Terminal 6 to move the baggage-screening operation
   performed by the Transportation Security Administration (TSA) from the baggage room to the
   Departure Building. A 190-ft slope plate carousel is to be installed on the west side of the
   Departure Building to service 7 Computer Tomography X-Ray (CTX) machines and 11
   Explosives Trace Detection (ETD) machines that are used to screen baggage. A new conveyor is
   to be installed on the far west side to transport the screened bags to the baggage room. The lease
   between Petitioner and the Port Authority indicates that the baggage-handling system at
   Terminal 6 is part of the leasehold. Title to all construction work passes to the city of New York
   when the property is erected, constructed, or installed and becomes part of the premises.

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The installation of the baggage-handling system requires the removal of sections of the
floor in Terminal 6, along with architectural, mechanical, plumbing, and sprinkler modifications
to the terminal building itself. The baggage-handling system (i.e., carousels and conveyors) is
permanently bolted and/or welded to the terminal building structure. Extensive electrical work is
required during installation to integrate the baggage-handling with the terminal's electrical
system. The baggage-handling system as installed is custom designed for the particular location
where it is situated. It is so customized that it cannot be removed without causing material
damage to both the system and the terminal building.
The CTX machines require special wiring and are hard wired to the building’s electrical
system. If the machines were to be moved, floor repairs would be required due to the electrical
work beneath the floor that supports the CTX machines. Unlike the CTX machines, the ETD
machines are moved like appliances and plug into 120-volt electric receptacles.
Each time a CTX machine is relocated, the manufacturer of the machines (a TSA
mandated company) must disconnect and reconnect the wiring for the machine and its
components. A second TSA mandated company performs the Site Acceptability Test prior to the
permitted use of the machine. The Site Acceptability Test consists of testing the machines once
they are installed to ensure that they are fully operational and functioning properly. The TSA
pays for the services of the TSA mandated companies. Petitioner and its contractors are
responsible for the mechanical breakdown and reassembly (unbolting/ bolting) and relocation of
the machines, and for alterations to Terminal 6, including wiring and structural modifications, to
accommodate the installation of the machines.
Applicable law and regulations
Section 1101(b)(9)(i) of the Tax Law defines the term 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.
Section 1105 of the Tax Law provides, in part:

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Imposition of sales tax. On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property . . . or maintaining, servicing or repairing
tangible personal property . . . 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;
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:
*

*

*

(15) Tangible personal property sold to a contractor, subcontractor or repairman
for use in (i) erecting a structure or building (A) of an organization described in
subdivision (a) of section eleven hundred sixteen . . . or (ii) adding to, altering or
improving real property, property or land (A) of such an organization . . . as the terms
real property, property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such tangible personal
property is to become an integral component part of such structure, building or real
property.
(16) Tangible personal property sold to a contractor, subcontractor or repairman
for use in maintaining, servicing or repairing real property, property or land (i) of an

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organization described in subdivision (a) of section eleven hundred sixteen . . . as the
terms real property, property or land are defined in the real property tax law; provided,
however, no exemption shall exist under this paragraph unless such tangible personal
property is to become an integral component part of such structure, building or real
property.
Section 527.7(b) of the Sales and Use Tax Regulations provides, in part:
(1) The tax is imposed on receipts from every sale of the services of maintaining,
servicing or repairing real property, whether inside or outside of a building.
*

*

*

(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.
Opinion
Petitioner will make improvements to Terminal 6 consisting of reconfiguration and
installation of a baggage-handling system that, according to Petitioner's lease agreement, will
become the property of the city of New York upon completion. Section 1101(b)(9)(i) of the Tax
Law provides that an installation must meet all of the following conditions in order to constitute
a capital improvement:
1) The installation must substantially add to the value of the real property, or appreciably
prolong the useful life of the real property;
2) The installation must become part of the real property or be permanently affixed to the
real property so that removal would cause material damage to the property or article itself; and
3) The installation must be intended to be a permanent installation.
Section 1105(c)(3)(iii) of the Tax Law provides that charges for the service of installing
tangible personal property that results in a capital improvement to real property are not subject to
sales tax. Section 527.7(b) of the Sales and Use Tax Regulations further provides that the
imposition of sales 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.

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In the present case, the baggage-handling system (i.e., the conveyor and carousel)
becomes the property of the city of New York and substantially adds to the value of the real
property, thus meeting the first condition for a capital improvement.
The second condition for a capital improvement is that Petitioner's baggage-handling
system must become part of the real property or be permanently affixed to the real property so
that removal would cause material damage to the property or article itself. The system as
installed is custom designed for the particular location where it is situated. The installation of
wiring for the conveyor and carousel into Terminal 6’s electrical system, the alterations to
Terminal 6’s structure, including modifications to floors to accommodate the baggage-handling
system, and the installation of the baggage-handling system appear to meet this second condition
for a capital improvement. See Trans World Airlines, Inc., Adv Op Comm T & F, March 26,
1992, TSB-A-92(30)S; and Sales and Use Tax Classifications of Capital Improvements and
Repairs to Real Property, Publication 862 (4/01), which provides that the addition or
replacement of add-on panels and additions to wiring systems, and installation or removal of
walls are considered capital improvements for sales tax purposes.
Lastly, Petitioner's installation of the baggage-handling system must be intended to be
permanent. The nature of the baggage-handling system described in this Opinion does not lend
itself to easy removal. It is unlikely that the lessor would remove such equipment except to
replace it. Therefore, the installation of the baggage-handling system appears to meet the third
condition for a capital improvement. See Trans World Airlines, Inc., supra.
Generally, when an installation is made for a tenant, it is presumed that the installation is
not intended to be permanent unless the lease indicates that title to improvements is to vest in the
lessor of the real property and that the improvements are to become a part of the premises and
remain in the premises. See Beaman Corporation, Adv Op St Tx Comm, August 19, 1982,
TSB-A-82(32)S. In the present case, Petitioner's lease with the Port Authority specifies that the
baggage-handling system and other improvements become the property of the city of New York
upon installation.
Since, based on the facts presented in this Opinion, the installation of the baggage­
handling system qualifies as a capital improvement to real property amounts charged to
Petitioner for such installation (including charges for labor and materials) are not subject to sales
tax. See section 1105(c)(3)(iii) of the Tax Law. Petitioner may provide all contractors involved
in the installation of the baggage-handling system, including those involved in dismantling and
moving certain components of the system that are to be reused, with a properly completed
Certificate of Capital Improvement (Form ST-124) in lieu of paying the sales tax. Furthermore,
since Terminal 6 is the property of an exempt governmental entity, any tangible personal
property purchased by Petitioner or its contractors or subcontractors that is actually incorporated
into the capital improvement project and becomes an integral component part of Terminal 6 may

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be purchased without the payment of sales tax. See section 1115(a)(15) and (16) of the Tax
Law; and Trans World Airlines, Inc., supra.
With respect to the CTX and ETD machines, Petitioner states that these machines are
owned and operated by the TSA. The installation of the CTX machines requires extensive
modifications to the building’s electrical system and floors. The ETD machines are moved like
appliances and plug into 120-volt electric receptacles.
Separately stated charges for disconnecting and relocating equipment are not subject to
sales tax. See Buehler Moving Ltd., Adv Op St Tx Comm, February 4, 1982, TSB-A-82(1)C.
As stated above, the ETD machines are moved like appliances and simply plugged into 120-volt
electric receptacles. Accordingly, separately stated charges for moving the ETD machines from
one location to another inside a building so they can be plugged in do not constitute charges for
an enumerated service under Article 28 of the Tax Law, and, therefore, such charges are not
subject to sales tax.
The CTX machines, on the other hand, require extensive installation efforts, including the
addition of special wiring and modifications to the floor and subfloor to accommodate such
wiring. These improvements (the special wiring and modifications to the floor and subfloor)
become the property of the city of New York upon installation and otherwise meet the conditions
set forth in section 1101(b)(9)(i) of the Tax Law, and, therefore, qualify as capital improvements
to real property. Separately stated charges for these improvements are not subject to sales tax.
See Price Waterhouse LLP, Adv Op Comm T & F, September 9, 1998, TSB-A-98(63)S; and
Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property,
Publication 862, (4/01).
The CTX machines are owned by the TSA subsequent to their installation. The CTX
machines, therefore, cannot be said to become a part of the real property or to be permanently
affixed to or installed in the real property as required by section 1101(b)(9)(i) of the Tax Law.
Accordingly, charges to Petitioner for bolting the CTX machines to the floor and otherwise
assembling the machines are subject to sales tax under section 1105(c)(3) of the Tax Law as
charges for installation of tangible personal property that remains tangible personal property after
installation. Separately stated charges to Petitioner by its contractor for moving the CTX
machines within the building are considered to be transportation charges not subject to sales tax.
See Gilbert Displays, Inc., Adv Op Comm T & F, June 24, 2005, TSB-A-05(28)S.
Each time a CTX machine is relocated, a TSA mandated company must handle the
electrical connections and hookups for the machine. A second TSA mandated company must
perform the Site Acceptability Test prior to the permitted use of the machine. The Site
Acceptability Test consists of testing the machines once they are installed to ensure that they are
fully operational and functioning properly. Since the TSA pays for the services of the TSA

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mandated companies, these charges are not included in the charges to Petitioner for the
renovation and are not addressed in this Opinion.

DATED: June 21, 2007

NOTE:

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

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.