Is installing a hard-wired access control security system a tax-exempt capital improvement, or a taxable sale of tangible personal property?

Plain-English summary

SI Technologies installs access control security systems — card readers, biometric readers, or PIN pads at doors, gates, and turnstiles, wired to a control panel and alarm sensors, plus a stand-alone desktop computer and prewritten software that runs the whole system (and can also control an optional closed-circuit TV feed). The readers, sensors, and control panel are physically screwed, bolted, or recessed into the building and hard-wired to its electrical system. The computer, by contrast, just plugs into the control panel and can be supplied by either SI Technologies or the customer.

New York's capital-improvement test has three parts: the work must (1) substantially add value or extend the property's useful life, (2) become part of the property or be permanently affixed so removal would cause material damage, and (3) be intended as a permanent installation with the installer keeping no ownership or removal rights. The Department found the hard-wired components — readers, sensors, control panel — can satisfy all three tests, the same way circuit breaker panels, in-wall wiring, and light fixtures do, AS LONG AS the system stays fully functional without needing an off-site monitoring connection and the installer doesn't retain any right to remove the equipment or its parts. If those conditions are met, that portion of the installation is an exempt capital improvement — not a taxable sale of tangible personal property.

But the stand-alone computer is different: it's merely plugged in, easily removable without damage, and separately priced (since the customer can supply their own), so its installation does NOT qualify as a capital improvement — it stays taxable tangible personal property. And because the prewritten software only runs on that computer (which itself isn't part of the real property), the software likewise remains taxable tangible personal property rather than becoming part of an exempt capital improvement.

What this means for you

Security system installers

Break your invoice into components: the hard-wired readers, sensors, and control panel can be billed as an exempt capital improvement (no sales tax charged to the customer, but you owe tax on your own materials/labor cost as the improver) if the customer gets full, unremovable ownership and the system works without needing central monitoring — but keep the computer and software on a separate, taxable line, since they don't become part of the real property no matter how integrated the system feels to the end user.

Building owners and commercial tenants

If you're the one paying for installation, ask your vendor to itemize the hardwired components separately from the computer and software — that itemization is what lets each piece get taxed correctly, and it protects you from paying capital-improvement-exempt tax treatment on a computer that legally doesn't qualify.

Accountants and tax professionals

This is a clean template for any hardware/software bundle where some components are affixed to a building and others are merely plugged in nearby: apply the three-part capital-improvement test component-by-component rather than to the system as a marketed whole, and remember that ownership/removal-rights language in the contract is what satisfies the "permanence" prong, not just how the equipment is physically installed.

Common questions

Q: Is installing a security system always exempt as a capital improvement?
A: No — only the components that are permanently affixed, add value without needing off-site monitoring, and vest fully in the property owner with no installer removal rights. A stand-alone computer that's just plugged in doesn't qualify.

Q: What about the software that runs the system?
A: It stays taxable tangible personal property, because it's tied to the non-qualifying computer rather than to the affixed, capital-improvement-qualifying hardware.

Q: Does connecting the system to an off-site monitoring station matter?
A: The opinion notes the system must be able to substantially add value on its own — i.e., function fully — whether or not it's connected to central monitoring, to meet the "adds value" prong of the test.

Q: Can I rely on this ruling for my own installation?
A: Not automatically. It binds the Department only for the petitioner and facts it addresses; your contract terms on ownership and removal rights need to be checked against the same three-part test.

Citations and references

Statutes and publications:

• Tax Law § 1101(b)(6) (tangible personal property; prewritten software)
• Tax Law § 1101(b)(9)(i) (capital improvement, three-part test)
• Tax Law § 1101(b)(14) (prewritten computer software)
• Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property

Prior rulings/cases referenced:

• Matter of ADT Co. v State Tax Commission, 113 AD2d 140
• Merit Oil of New York, Inc. v State Tax Commission, 124 AD2d 326
• Supermarket General Corp. Pathmark Stores, Tax App Trib, DTA No. 819768
• Beaman Corporation, TSB-A-82(32)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_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(9)S
Sales Tax
March 26, 2007

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

PETITION NO. S040830A

On August 30, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from SI Technologies, Inc., 11 Walker Way, Albany, New York 12205.
Petitioner, SI Technologies, Inc., provided additional information pertaining to the Petition on
October 28, 2004.
The issue raised by Petitioner is whether the installation of an access control security
system constitutes a capital improvement to real property for purposes of New York’s sales and
compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
An access control security system allows people and vehicles to enter and exit a facility
through a door, entryway, parking gate, turnstile, etc., and monitors such entry and exit. The
system consists of a credential reader, a control panel, connecting wiring, alarm sensors attached
to windows and other access points, a desktop computer, and prewritten computer software. The
system’s credential readers can be either swipe card readers, biometric readers, or numeric pin
pads. These units (except for the computer and computer software) are attached to a building or
access point either by screws or bolts or by being recessed into a wall and are hard wired to the
electrical system of the facility where installed. The credential reader is hard wired to the control
panel. Petitioner may also install a closed-circuit television system as part of the access control
security system if required by the customer.
The control panel is attached to a wall, usually in a utility closet, and is connected to a
stand-alone desktop computer. This computer may be provided by Petitioner or the customer,
depending upon the customer’s preference. Petitioner provides and installs the prewritten
software on the computer used to operate the system to control access in and out of the facility
and to detect violations signaled by the alarm sensors attached to access points. The prewritten
software may also be used to control the closed-circuit television system if one is installed.
These systems are monitored by the customer’s security staff and are generally not connected to
an off-site central monitoring station. Petitioner provides the software as part of the total
installation package. Petitioner does not sell the software separately and the software is not
functional without being installed on a computer used to operate the access control security
system.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, in part:

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When used in this article for the purposes of the taxes imposed by subdivisions
(a), (b), (c) and (d) of section eleven hundred five and by section eleven hundred ten, the
following terms shall mean:
*

*

*

(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam. Such
term shall also include pre-written computer software, whether sold as part of a package,
as a separate component, or otherwise, and regardless of the medium by means of which
such software is conveyed to a purchaser. . . .
*

*

*

(9) Capital improvement. (i) 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.
*

*

*

(14) Pre-written computer software. Computer software (including pre-written
upgrades thereof) which is not software designed and developed by the author or other
creator to the specifications of a specific purchaser. The combining of two or more pre­
written computer software programs or pre-written portions thereof does not cause the
combination to be other than pre-written computer software. Pre-written software also
includes software designed and developed by the author or other creator to the
specifications of a specific purchaser when it is sold to a person other than such
purchaser. Where a person modifies or enhances computer software of which such person
is not the author or creator, such person shall be deemed to be the author or creator only
of such person’s modifications or enhancements. Pre-written software or a pre-written
portion thereof that is modified or enhanced to any degree, where such modification or
enhancement is designed and developed to the specifications of a specific purchaser,
remains pre-written software; provided, however, that where there is a reasonable,
separately stated charge or an invoice or other statement of the price given to the

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purchaser for such modification or enhancement, such modification or enhancement shall
not constitute pre-written computer software.
Opinion
Petitioner asks whether charges for the installation of its access control security system
constitute charges for a capital improvement to real property.
The system consists of a credential reader, a control panel, connecting wiring, alarm
sensors attached to windows and other access points, a desktop computer, and prewritten
computer software. These units (except the computer and computer software) are attached to the
building or access point (door, window, gate, etc.) either by screws or bolts or by being recessed
into walls and are hard wired to the electrical system of the facility where installed.
When Petitioner installs an access control security system that meets all three of the
conditions set forth in section 1101(b)(9)(i) of the Tax Law, the installation is considered to be a
capital improvement. Thus, an installation that 1) substantially adds to the value or prolongs the
useful life of the real property, 2) 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 the article
itself, and 3) is intended to be permanent constitutes a capital improvement.
The first condition for a capital improvement set forth in section 1101(b)(9)(i)(A) of the
Tax Law requires that an installation must “substantially add to the value of the real property, or
appreciably prolong the useful life of the real property.” An access control security system
cannot be said to appreciably prolong the useful life of the real property, but it is reasonable to
conclude that it may substantially add to the value of the real property. In order to substantially
add to the value of the real property, the access control security system must remain fully
functional after installation whether or not the system is connected to an off-site central
monitoring station. When a property owner has an access control security system installed that
does not require connection to a central monitoring station to be fully functional, the system may
substantially add to the value of the real property; therefore, the installation of the system would
meet the first requirement under section 1101(b)(9)(i) of the Tax Law to qualify as a capital
improvement to real property.
The second condition for a capital improvement set forth in section 1101(b)(9)(i)(B) of
the Tax Law requires that the access control security system be installed in such a manner as to
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 system itself. Installations of circuit breaker
panels, in-wall wiring, additional circuits to electrical systems, main power boxes, and light
fixtures are considered to qualify as capital improvements. See Sales and Use Tax
Classifications of Capital Improvements and Repairs to Real Property, Publication 862 (4/01).
The swipe card readers, biometric readers, or numeric pin pads (collectively, credential readers);
alarm sensors attached to access points; and the control panel, when wired and installed in a

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similar manner as the building’s electrical system, circuit breaker panels, and other items listed
above are considered to be permanently affixed to the real property unless a contrary intention is
shown. When such credential readers, alarm sensors, and control panels are installed so that they
become a part of the real property, their installation would meet the second requirement under
section 1101(b)(9)(i) of the Tax Law to qualify as a capital improvement to real property.
The third condition for a capital improvement set forth in section 1101(b)(9)(i)(C) of the
Tax Law is that the access control security system must be intended to become a permanent
installation. In order to meet this condition, the system vendor or installer cannot retain any
rights of ownership or rights of removal of the installed property and the access control security
system must become the property of the real property owner upon its installation. When a
person other than the owner of the real property upon which the system is installed retains
ownership of the system or its components or retains a right to remove the system or its
components from the property owner’s premises, it has been held that the installation lacks the
intention of permanence required to satisfy the third condition under section 1101(b)(9)(i) of the
Tax Law and such installation does not qualify as a capital improvement to real property. See
Matter of ADT Co. v State Tax Commission, 113 AD2d 140, 142; Merit Oil of New York, Inc. v
State Tax Commission, 124 AD2d 326, 328; Supermarket General Corp. Pathmark Stores, Tax
App Trib, November 9, 2006, DTA No. 819768. If the installation is made for a tenant of the
real property, the installation may qualify as a capital improvement if the lease provides that title
to improvements is to vest in the landlord upon installation and that the improvements are to
become a part of the premises and remain on the premises. See Beaman Corporation, Adv Op St
Tx Comm, August 19, 1982, TSB-A-82(32)S. Accordingly, when an access control security
system becomes the property of the real property owner and is sold without the vendor retaining
any rights of ownership or rights of removal of the system or any of its components, the
installation will meet the third requirement under section 1101(b)(9)(i) of the Tax Law to qualify
as a capital improvement to real property.
The control panel is attached to the wall, usually in a utility closet, and a stand-alone
desktop computer is connected to the control panel. The customer may purchase this computer
from Petitioner or may provide its own computer, depending upon the customer’s preference.
Presumably, the computer is merely plugged into the control panel and is not affixed to the real
property so that removal would cause damage to it or the real property. A separate price can be
determined for the computer since the customer has the option of providing its own computer or
purchasing one from Petitioner. The computer is a separate component of the system, and its
installation does not meet the conditions set forth in section 1101(b)(9)(i) of the Tax Law to
qualify as a capital improvement to real property. The installation of the computer is, therefore,
an installation of tangible personal property that remains tangible personal property after
installation.
Petitioner, as part of its installation of an access control security system, provides the
customer with prewritten software that coordinates and works with the system. Prewritten
software is tangible personal property for sales tax purposes. See section 1101(b)(6) of the Tax

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Law. The software is provided to customers for installation on the computer that is connected to
the system whether the computer is provided by Petitioner or the customer. Since the computer
is not a capital improvement when installed but remains tangible personal property, the software
appears to be tangible personal property that is not a capital improvement to the real property.

DATED: March 26, 2007

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.