Is a contractor's charge for temporary electrical service to power a construction site until the permanent system is installed subject to sales tax?

Plain-English summary

Industrial Power and Light Corporation provides "temporary electrical services" — installing a temporary fuse box or circuit breakers, fed from a power line through a meter — to supply power to a construction project until the permanent system is installed. Title to the temporary system passes to the customer, and Industrial Power and Light bills separately for material, labor, overhead and profit. It asked whether these receipts are taxable.

The Department held the charge is not taxable.

• Servicing real property is taxable; a capital improvement is not. Section § 1105(c)(5) taxes maintaining, servicing or repairing real property, as distinguished from adding to or improving it by a capital improvement under § 1105(c)(3) and § 1101(b)(9) (20 NYCRR 527.7(a)(3)).
• Temporary construction power is part of the capital improvement. The State Tax Commission has determined that furnishing this kind of temporary electric service is not maintenance but a necessary prerequisite to the construction of real property, and as such becomes part of the capital improvement within § 1105(c)(3) (Carl A. Morse, Inc., TSB-H-80(144)S). So the charge is receipts from performing a capital improvement and is not subject to sales tax.
• Itemizing the bill doesn't change it. Separately stating material, labor, overhead and profit — the usual components of a capital-improvement charge — does not affect the result.
• The contractor still pays tax on its materials. As a contractor making a capital improvement, Industrial Power and Light is the ultimate consumer of the tangible personal property that becomes part of the project and must pay sales tax on the cost of those materials (20 NYCRR 527.7(b)(5)).

What this means for you

Temporary power for a construction job can ride along as part of the capital improvement. If the temporary electrical service is a necessary prerequisite to constructing the real property, it's treated as part of the nontaxable capital improvement — not a taxable service.

Breaking out labor, materials and profit doesn't create a taxable sale. Itemizing the components of a capital-improvement charge doesn't turn it into something taxable.

You still owe tax on the materials you install. As the contractor making the improvement, you pay sales tax on the tangible personal property that becomes part of the project.

Common questions

Q: I set up temporary power for a construction site. Do I charge my customer sales tax?
A: No, where it's a necessary prerequisite to the construction and becomes part of the capital improvement. It's not taxable maintenance.

Q: I itemize material, labor, overhead and profit on the invoice. Does that make part of it taxable?
A: No. Itemizing the usual components of a capital-improvement charge doesn't change the nontaxable result.

Q: Do I owe any tax on the job?
A: Yes — on your materials. As the contractor making the capital improvement, you pay sales tax on the cost of the materials that become part of the project (20 NYCRR 527.7(b)(5)).

Citations and references

Statutes, regulations and decision:

• Tax Law § 1105(c)(3) — installation tax, capital-improvement exclusion
• Tax Law § 1105(c)(5) — tax on maintaining, servicing or repairing real property
• Tax Law § 1101(b)(9); 20 NYCRR 527.7(a)(3) — definition of "capital improvement"
• Tax Law § 1101(b)(4) — contractor purchases treated as retail sales
• 20 NYCRR 527.7(b)(5) — contractor pays tax on its materials for a capital improvement
• Carl A. Morse, Inc., TSB-H-80(144)S

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_63s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81(63)S
Sales Tax
December 18, 1981

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

PETITION NO. S810505A

On May 5, 1981, a Petition for Advisory Opinion was received from Industrial Power and
Light Corporation, 127 Seneca Street, Buffalo, New York 14210.
The issue raised is whether receipts for "temporary electrical services" are subject to sales
tax.
The provision of temporary electrical services consists of the installation of an electrical
system, such as the erection of a temporary fuse box or circuit breakers, fed from a power line
through a meter. Such temporary systems provide electrical power to a construction project until a
permanent system is installed. In the present instance, title to the property constituting the system
is transferred by Petitioner to the customer. Petitioner's billing to its customers separately states
charges for material, labor, overhead and profit.
Sales tax is imposed on the services of maintaining, servicing or repairing real property (Tax
Law section 1105(c)(5)) as distinguished from adding to or improving real property by a capital
improvement (Tax Law section 1105(c)(3)). The Tax Law and the Sales and Use Tax Regulations
provide as follows:
"A capital improvement is 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 term "Retail Sale" is defined in section 1101(b)(4) of the Tax Law to include: "A sale
of any tangible personal property to a contractor . . . for use or consumption in erecting structures
. . . or . . . improving real property. The Regulations similarly state that "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(b)(5).
The State Tax Commission has determined that the furnishing of temporary electric service
of the nature described by Petitioner is not a maintenance service but rather a necessary prerequisite
to the construction of real property and as such becomes part of the capital improvement within the
meaning and intent of section 1105(c)(3) of the Tax Law. Tax Law § 1101(b)(9) and 20 NYCRR
527.7(a)(3). Carl A. Morse, Inc. TSB-H 80(144)S.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

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

-2­
TSB-A-81(63)S
Sales Tax
December 18, 1981

Consequently, Petitioner's charge for providing temporary electrical services constitutes
receipt from the performance of a capital improvement to real property which is not subject to sales
tax. The fact that Petitioner specifically itemizes its charge among the factors which normally go into
the computation of any charge for the performance of a capital improvement to real property in no
way affects this result. As a contractor who is making a capital improvement, Petitioner must pay
a tax on the cost of materials to him which become part of the project, as he is the ultimate consumer
of this tangible personal property. 20 NYCRR 527.7(b)(5).

DATED: December 3, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau