Are installed wood/coal stoves, fireplace inserts, boilers and solar energy systems capital improvements that escape New York sales tax?

Plain-English summary

M & C Stove World, Inc. sells fireplace inserts, wood- and coal-burning stoves, boilers and solar energy systems — about 90% installed, 10% sold over the counter. A solar system here is roof-mounted collector panels piped down to and connected with the home's existing hot-water heating system. It asked whether these installed sales are capital improvements exempt from sales tax.

The Department drew a line: free-standing units are taxable; permanently connected boilers and solar systems are capital improvements.

• Capital improvement has a three-part test. Under § 1101(b)(9) (and 20 NYCRR 527.7(a)(3)), an installation is a capital improvement only if it substantially adds to the property's value or prolongs its life, becomes part of or is permanently affixed to the realty so removal would cause material damage, and is intended to be permanent.
• Free-standing stoves and inserts fail the test. Installing a free-standing wood or coal stove or a fireplace insert is not a capital improvement, so the installation is taxable under § 1105(c)(3), and selling the units uninstalled is taxable under § 1105(a). (See Publication 862.)
• A permanently connected boiler or solar system passes. Installing a coal/wood boiler or a solar energy system permanently connected to the structure's heating system is a capital improvement. The receipts aren't taxable to the property owner, so M & C doesn't collect tax from them — but M & C, as the contractor and ultimate consumer, owes tax on the cost of the materials it installs (20 NYCRR 527.7(a)(5)).
• Uninstalled sales are always taxable. Selling any of these units uninstalled — including to other contractors — is a taxable retail sale under § 1105(a).

What this means for you

"Installed" doesn't automatically mean "capital improvement." The unit has to be permanently affixed so that removing it would materially damage the property. A stove or insert that sits in place and can be taken out isn't a capital improvement, so installing it is taxable — even though you did install it.

When it is a capital improvement, the tax doesn't disappear — it moves to you. You don't charge the homeowner sales tax on a capital-improvement job, but you (the contractor) pay tax on the materials you buy and incorporate, because you're treated as the ultimate consumer. Build that materials tax into your pricing.

Publication 862 is the reference for close calls. New York's Pub 862 classifies specific improvements and repairs as capital improvements or taxable work. Check it (and get a Certificate of Capital Improvement from the customer) before treating a job as a nontaxable capital improvement.

Common questions

Q: I installed a wood stove — isn't installation a nontaxable capital improvement?
A: Not for a free-standing stove or fireplace insert. Those aren't permanent parts of the realty, so the installation is taxable under § 1105(c)(3), and an uninstalled sale is taxable under § 1105(a).

Q: A solar system or boiler I permanently connect to the heating system — do I charge the homeowner tax?
A: No. That's a capital improvement, so you don't collect tax from the owner — but you owe sales tax on the materials you install, as the ultimate consumer (20 NYCRR 527.7(a)(5)).

Q: What about units I sell uninstalled, including to other contractors?
A: Those are taxable retail sales under § 1105(a), regardless of who buys them.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(c)(3) — tax on installation; capital-improvement exclusion
• Tax Law § 1101(b)(9) — capital improvement (three-part test)
• 20 NYCRR 527.7(a)(3), 527.7(a)(5) — capital improvement; contractor pays tax on materials
• Department Publication 862

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_42s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(42)S
Sales Tax
October 28, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810330B

On March 30, 1981 a Petition for Advisory Opinion was received from M & C Stove World,
Inc., 630 N. Broadway, Rt. 110, Amityville, New York 11701.
The issue raised is whether Petitioner's sales of fireplace inserts, coal and wood burning
stoves and solar energy systems and components constitute capital improvements to real property
which are exempt from sales tax.
Petitioner is involved in selling fireplace inserts, coal and wood burning stoves, boilers and
solar energy systems. Ninety percent of these sales are on an installed basis and ten percent are over
the counter on an uninstalled basis. A solar energy system consists of collector panels mounted on
the roof of a home. Installed pipe is run from the collectors to the basement and connected to the
home's present hot water heating system.
Section 1105(a) of the Tax Law imposes a tax on: "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." Section 1105(c)(3) imposes
a tax on "Installing tangible personal property . . . except for installing property which, when
installed, will constitute an addition or capital improvement to real property . . ."
The Tax Law and the Sales and Use Tax Regulations define a "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.'' Tax Law
§1101(b)(9) and 20 NYCRR 527.7(a)(3). The Regulations further state: "Any contractor who is
making a capital improvement must pay a tax on the cost of materials to him, as he is the ultimate
consumer of the tangible personal property." 20 NYCRR 527.7(a)(5).
The installation of a free-standing wood or coal burning stove or fireplace insert does not
meet the requirements of a capital improvement to real property and is subject to tax pursuant to
section 1105(c)(3) of the Tax Law. See Department of Taxation and Finance Publication 862,
Classifications of Improvements and Repairs to Real Property for Sales Tax Purposes. Sales of these
units on an uninstalled basis are also subject to tax. Tax Law § 1105(a).

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

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

-2­
TSB-A-81(42)S
Sales Tax
October 28, 1981

The installation of a coal or wood burning boiler or a solar energy system which is
permanently connected to the heating system of a structure constitutes a capital improvement to real
property. When installing these units, Petitioner is liable for tax on the cost of all materials
incorporated in the installation. 20 NYCRR 527.7(a)(5). However, since receipts from the sale of
capital improvements are not subject to tax, Petitioner is not required to collect tax from the property
owner. Tax Law §1105(c)(3). Petitioner's sales of these units to contractors or others, uninstalled,
are subject to tax. Tax Law § 1105(a).

DATED: October 7, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau