Is the installation of large free-standing liquid propane storage tanks a capital improvement to real property, so the installation is exempt from sales tax?

Plain-English summary

Morse Chain Division of Borg-Warner Corporation had 30,000-gallon liquid propane storage tanks installed on its property. Because of safety codes, the tanks are free-standing — they sit on concrete saddles over grease-coated cork so they can expand and contract with outside temperatures (rigidly bolting them down could cause a rupture, fire or explosion) — and they are permanently attached to a distribution system. Morse Chain asked whether the installation is a capital improvement to real property for Article 28 sales-tax purposes.

The Department held it is a capital improvement.

• Capital improvement has a three-part test. Under 20 NYCRR 527.7(a)(3), an addition or alteration to real property is a capital improvement only if it: (i) substantially adds to the value of the real property or appreciably prolongs its useful life; (ii) becomes part of the real property or is permanently affixed so that removal would cause material damage to the property or the article; and (iii) is intended to be a permanent installation.
• The tank installation meets all three. Despite being free-standing for thermal-safety reasons, the tanks are permanently affixed and tied into a distribution system, added to the property, and intended to stay.
• Result: it's a capital improvement under Article 28 and qualifies for the capital-improvement exemptions from sales tax.

What this means for you

"Free-standing" doesn't automatically mean "not permanent." These tanks weren't bolted rigidly to their supports — for safety, they had to be able to move — yet they still counted as a capital improvement because they were permanently affixed in the practical sense (sitting on engineered saddles, tied into a fixed distribution system) and intended to stay. The Department looked at the whole installation, not just whether it was rigidly bolted.

Capital-improvement status is what unlocks the exemption. When an installation is a capital improvement, the property owner isn't charged sales tax on the capital-improvement service; the contractor is generally the taxable consumer of the materials it uses. Get the classification right and you know who bears the tax.

Run the three-part test every time. Value/useful-life, permanent affixation with material damage on removal, and intent to be permanent — all three must be satisfied. A large, integrated, engineered-to-stay installation like these tanks clears the bar; a portable or easily removed item usually won't.

Common questions

Q: The tanks aren't bolted down — how are they a "permanent" installation?
A: The Department found the installation permanently affixed and intended to stay even though the tanks rest (rather than bolt rigidly) on their saddles for safety. They sit on engineered concrete saddles and are permanently attached to a distribution system, satisfying the affixation and permanence tests.

Q: What does capital-improvement status change for the tax?
A: A capital improvement to real property is exempt from sales tax as to the improvement service. The owner isn't charged sales tax on that installation; the contractor generally pays tax on the materials it consumes.

Q: What are the three requirements again?
A: Under 20 NYCRR 527.7(a)(3): (i) it substantially adds value or prolongs the property's useful life; (ii) it becomes part of or is permanently affixed to the property so removal would cause material damage; and (iii) it's intended to be permanent.

Citations and references

Statutes, regulations and authority:

• Tax Law Article 28 — imposes the sales tax and provides exemptions for capital improvements to real property
• 20 NYCRR 527.7(a)(3) — three-part definition of "capital improvement": adds value/prolongs useful life; permanently affixed so removal causes material damage; intended to be permanent

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_10s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(10)S
Sales Tax
August 13, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810112A

On January 12, 1981 a Petition for Advisory Opinion was received from Morse Chain
Division, Borg-Warner Corporation, 620 South Aurora Street, Ithaca, New York 14850.
The issue raised is whether the installation of certain liquid propane gas tanks constitutes a
capital improvement to real property for purposes of the State sales tax imposed under Article 28 of
the Tax Law.
Petitioner has had 30,000 gallon liquid propane storage tanks installed on its property. The
tanks were installed in accordance with standard safety practices, as well as national codes. That is,
the tanks are of a free standing nature, sitting upon concrete saddles on top of cork which has been
thoroughly coated with grease to allow the tanks to expand and contract in accordance with the
varying outside temperatures to which they are subjected. If the tanks were rigidly fastened to their
supports it would not be possible for them freely to expand and contract, possibly resulting in a
rupture of the tanks with a consequent fire or explosion. The tanks have a permanent attachment to
a distribution system.
The Sales and Use Tax Regulations define the term "capital improvement" as an addition or
alteration to real property "(i) which substantially adds to the value of the real property, or
appreciably prolongs the useful life of the real property, and (ii) which 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 (iii) is intended to become a permanent installation." 20 NYCRR
527.7(a)(3).
The installation in question satisfies the criteria set forth in the provision of the Sales and Use
Tax Regulations quoted above. Accordingly, the installation in question constitutes a capital
improvement to real property for purposes of the sales tax imposed under Article 28 of the Tax Law
and qualifies for the exemptions from such tax provided with respect to capital improvements to real
property.

DATED: July 28, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR