My company waterproofs leaking basement wall cracks by injecting a clay-based sealant through drilled holes and covering the crack with a vinyl moisture barrier panel -- is that an exempt capital improvement or a taxable repair to real property under New York sales tax?

Plain-English summary

R. M. D. U. Enterprises, Inc., doing business as Utech Basement Waterproofing, of Cheektowaga, New York, sells a system for stopping water that leaks into basements through cracks in poured-concrete foundation walls. The company installs it by temporarily removing a section of the basement floor next to the crack (at least 2 feet wide, running 8 to 10 inches out from the wall) to expose the drain tile and crushed stone under the floor. Workers then drill a staggered series of at least five three-quarter-inch-diameter holes through the wall on both sides of the crack, from near floor level down to at least 12 to 16 inches below outside ground level. A clay-based material is pumped through these holes so it is forced permanently between the foundation and the surrounding soil, sealing the crack from the outside; once in place, the clay cannot be removed or altered without digging up the ground on the exterior. The access holes are then plugged with hydraulic cement to keep the clay from flowing back into the basement, a vinyl moisture barrier panel is glued on with urethane adhesive and riveted permanently over the crack and holes, and the floor is re-cemented up to the panel before debris is hauled away.

Utech asked the Department of Taxation and Finance whether this process is an exempt "capital improvement" to real property or a taxable "repair" service, for sales tax purposes.

The Department held it is a taxable repair, not a capital improvement. Tax Law §1101(b)(9)(i) defines a capital improvement as an addition or alteration to real property that substantially adds value or prolongs useful life, becomes permanently affixed such that removing it would cause material damage, and is intended as a permanent installation. Tax Law §1105(c)(5) taxes services that maintain, service, or repair real property, and Sales and Use Tax Regulations §527.7(a)(1) and (b)(4) explain that the tax turns on the end result of the work: if the end result is restoring the property to a condition of fitness (a repair), the charge is taxable; if the end result is a genuine addition or alteration (a capital improvement), it is not.

The Department distinguished Utech's process from its own earlier opinion in Sta Dry Systems Inc., TSB-A-96(42)S, where a basement waterproofing system was found to be a capital improvement because it involved an actual addition to the basement's drainage system -- a drainage tube installed in the wall and connected to the under-floor drainage system. Department Publication 862 confirms that additions to piping/drainage systems are capital improvements. Utech's method makes no such addition: it simply fills the existing crack with clay-based material and covers it with a vinyl panel so the wall no longer leaks, restoring the wall to a sound condition rather than adding anything new to the property. That makes it a repair under §527.7(a)(1), and the receipts from it are taxable under §1105(c)(5).

The opinion adds one important carve-out: if Utech's waterproofing work is installed as part of a larger project that itself qualifies as a capital improvement (the ruling gives the example of a complete basement remodel), then the entire charge for that capital-improvement project -- including the waterproofing work bundled into it -- would be exempt from sales tax, citing Saf-Tee Plumbing v State Tax Commission, 77 AD2d 1, and regulation §527.7(b)(4).

What this means for you

Basement waterproofing contractors

If your crack-repair method fills or seals an existing crack (with clay, epoxy, hydraulic cement, panels, etc.) without adding a new drainage component to the property, expect to charge and collect sales tax on it under §1105(c)(5) -- the Department treats that as a repair regardless of how permanent or effective the seal is. If instead your system adds a genuinely new drainage element (like the drainage tube in Sta Dry Systems), it may qualify as a non-taxable capital improvement -- but that turns on the specific mechanics of your system, not on marketing language.

Contractors bidding on basement remodeling projects

If your waterproofing work is performed as part of a larger capital-improvement project -- for example, a full basement remodel that otherwise meets the capital-improvement definition -- the entire job, including the waterproofing portion, can be billed tax-free. Structuring and documenting the waterproofing as part of that larger capital project (rather than as a standalone service call) can change the tax result.

Homeowners hiring a waterproofing contractor

Expect a standalone basement crack-sealing job to include sales tax on the total charge. If you're doing a broader basement renovation and the waterproofing is done as part of that capital improvement, ask your contractor whether the whole project -- including the crack sealing -- can be treated as an exempt capital improvement.

Accountants and tax professionals

This opinion is a useful, fact-specific illustration of the end-result test in §527.7(b)(4): compare the Sta Dry Systems precedent (capital improvement, because a new drainage-system component was added) against this case (repair, because nothing was added -- the crack was simply sealed). When advising a waterproofing or foundation-repair client, the dispositive question is whether the work adds a new permanent component to the property's structure/systems, or merely restores an existing condition.

Common questions

Q: Is sealing a basement wall crack with a clay-based injection and a vinyl panel a taxable service in New York?
A: Yes. The Department held this specific method is a taxable repair to real property under Tax Law §1105(c)(5), because it restores the wall to a leak-free condition without adding anything new to the property.

Q: Why did the Department treat this waterproofing system differently from the one in Sta Dry Systems Inc., TSB-A-96(42)S?
A: In Sta Dry Systems, the waterproofing system added a new drainage tube connected to the basement's under-floor drainage system -- an actual addition to the property, which made it a capital improvement. Utech's method makes no comparable addition; it just fills the crack and covers it, which is a repair.

Q: Can basement waterproofing ever be exempt from sales tax?
A: Yes, in two situations described in Department guidance: (1) if the system itself adds a new permanent component such as a drainage system (as in Sta Dry Systems), or (2) if the waterproofing work is installed as part of a broader project that independently qualifies as a capital improvement, such as a complete basement remodel -- in which case the entire project charge, including the waterproofing, is exempt.

Q: Does the permanence of the clay-based seal (which can't be removed without exterior excavation) make it a capital improvement?
A: No. The Department found that permanence alone does not convert a repair into a capital improvement -- the crack-sealing still just restores the wall to a sound, non-leaking condition rather than adding to or altering the real property, so it remains a taxable repair under §527.7(a)(1).

Q: Does this ruling apply to every basement waterproofing contractor in New York?
A: Not automatically. This is an Advisory Opinion binding only on R. M. D. U. Enterprises, Inc., DBA Utech Basement Waterproofing, and only as to the specific method and facts it described. A contractor using a different method (e.g., one that adds a new drainage component) could reach a different result.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(9)(i) (definition of "capital improvement")
• Tax Law §1105(c)(3)(iii) (exception for installing property that becomes a capital improvement)
• Tax Law §1105(c)(5) (tax on maintaining, servicing, or repairing real property)
• Sales and Use Tax Regulations §527.7(a)(1) (maintaining, servicing, and repairing defined)
• Sales and Use Tax Regulations §527.7(b)(1) and (b)(4) (tax imposed on real property services; end-result test)

Prior opinions and cases referenced:

• Sta Dry Systems Inc., Adv Op Comm T&F, July 9, 1996, TSB-A-96(42)S (basement waterproofing system with an added drainage-tube component held a capital improvement)
• Publication 862, Sales and Use Tax Classifications of Capital Improvements and Repairs to Real Property (4/01) (additions to piping systems are capital improvements)
• Saf-Tee Plumbing v State Tax Commission, 77 AD2d 1 (charges for installing a capital improvement, including bundled work, are excluded from sales tax)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-08(37)S
Sales Tax
August 21, 2008

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080523A

On May 23, 2008, the Department of Taxation and Finance received a Petition for
Advisory Opinion from R. M. D. U. Enterprises, Inc., DBA Utech Basement Waterproofing,
3236 Genesee Street, Cheektowaga, New York 14225. Petitioner, R. M. D. U. Enterprises, Inc.,
DBA Utech Basement Waterproofing, provided additional information relating to the Petition on
May 30, 2008.
The issue raised by Petitioner is whether Petitioner's method of waterproofing basement
wall cracks constitutes a capital improvement or a taxable repair service to real property for sales
tax purposes.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner’s waterproofing system is used on leaking poured-concrete basement wall
cracks. Petitioner’s waterproofing system is designed to permanently prevent water infiltration
through cracks in poured-concrete foundation walls by stopping the water at its source.
Petitioner installs its system by temporarily removing a section of the floor adjacent to
the wall at the site of the crack. This is intended to expose the drainage system under the
basement floor (i.e., drain tile and crushed stone). This section is at least 2 feet wide and 8 to 10
inches out from the wall. A series of at least 5, three-quarter inch diameter access holes are
drilled through the wall; the first hole near floor level and the last to be at least 12 to 16 inches
below exterior grade (i.e., ground level). The holes are spaced in a staggered manner on either
side of the crack. A clay-based material is pumped through the holes in the wall, forcing the
material permanently between the foundation and outside soil and effectively filling the crack at
the exterior preventing water from leaking through the crack. The clay-based material cannot be
removed or altered without excavation at the exterior. The access holes are then filled with a
hydraulic cement to prevent the clay-based material from flowing back into the basement and
ensuring that the clay-based material remains at the exterior.
A vinyl moisture barrier panel is fitted to the wall over the crack and access holes to
below floor level with a urethane adhesive, and riveted to the wall, and is permanently anchored
to the wall. The hole cut into the floor is then re-cemented up to the vinyl moisture barrier panel.
The job related debris is removed from the job site.
Applicable law and regulations
Section 1101(b)(9)(i) of the Tax Law defines the term capital improvement as:

-2­
TSB-A-08(37)S
Sales Tax
August 21, 2008

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:
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; . . .
*

*

*

(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

-3­
TSB-A-08(37)S
Sales Tax
August 21, 2008

term capital improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this article, . . .
Section 527.7(a)(1) of the Sales and Use Tax Regulations provides, in part:
Maintaining, servicing and repairing are terms which are used to cover all
activities that relate to keeping real property in a condition of fitness, efficiency,
readiness or safety or restoring it to such condition. Among the services included
are services on a building itself such as painting; services to the grounds, such as
lawn services, tree removal and spraying; trash and garbage removal and
sewerage service and snow removal.
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 installs a waterproofing system for cracks in poured-concrete foundation walls
that leak water into basements. Essentially, Petitioner fills the crack with a clay-based material
and covers the crack with a vinyl moisture barrier panel.
Section 1101(b)(9) of the Tax Law describes a capital improvement as “An addition or
alteration to real property” that meets certain conditions. Section 1105(c)(5) of the Tax Law
imposes sales tax on the services of maintaining, servicing, or repairing real property. Section
527.7(a)(1) of the Sales and Use Tax Regulations describes the terms maintaining, servicing and
repairing as terms that are used to cover all activities that relate to keeping real property in a
condition of fitness, efficiency, readiness, or safety or restoring it to such condition.
In Sta Dry Systems Inc., Adv Op Comm T & F, July 9, 1996, TSB-A-96(42)S, the
petitioner's basement waterproofing system was determined to be a capital improvement. The
waterproofing system in that case consisted of an addition to the basement drainage system in the
form of a drainage tube installed in the wall and connected to the basement drainage system
under the basement floor. Sales and Use Tax Classifications of Capital Improvements and
Repairs to Real Property, Publication 862 (4/01), provides that additions to piping systems

-4­
TSB-A-08(37)S
Sales Tax
August 21, 2008

constitute capital improvements to real property. In the present case, Petitioner makes no such
addition or alteration and merely repairs the crack with a clay-based substance and covers the
crack in the wall with a vinyl moisture barrier panel so that it no longer leaks.
Accordingly, Petitioner’s method of waterproofing cracks in foundation walls is a repair
as contemplated in section 527.7(a)(1) of the Sales and Use Tax Regulations. Receipts from the
sale of such repair services are subject to sales tax under section 1105(c)(5) of the Tax Law. See
section 527.7(b) of the Sales and Use Tax Regulations.
Note that if Petitioner's basement waterproofing system was installed or incorporated as
part of a project that qualifies as a capital improvement to real property (e.g., complete
remodeling of a basement room), the entire charge or charges for the service of installing the
capital improvement, including the installation of Petitioner's basement waterproofing system,
would be excluded from sales tax. See Saf-Tee Plumbing v State Tax Commission, 77 AD2d 1
and section 527.7(b)(4) of the Sales and Use Tax Regulations.

DATED: August 21, 2008

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance 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.