Is a solar hot-water heating system taxable when it's installed for the property owner, when it's leased, and when it's sold uninstalled?

Plain-English summary

American Sunsystems, Inc. asked how sales tax applies to solar hot-water heating systems it supplies three different ways: (1) installed for residential and commercial customers who own the real property; (2) leased as installed systems; and (3) sold uninstalled to the general public.

The Department gave a different answer for each.

• Installed for the owner = nontaxable capital improvement. Section § 1105(c)(3) taxes installation, except installing property that becomes a capital improvement to real property. A "capital improvement" (§ 1101(b)(9); 20 NYCRR 527.7(a)(3)) substantially adds value or prolongs useful life, becomes permanently affixed, and is intended to be permanent. The Department's Publication 862 categorizes permanent solar systems as capital improvements. So installing a system for the property owner is not taxable to the customer — but the installer, as the one making the capital improvement, pays sales/use tax on the materials it uses (20 NYCRR 527.7(a)(5)).
• Leasing an installed system = taxable. A leased system is not a capital improvement because it isn't intended to be a permanent installation. Since a lease is a "sale" (§ 1101(b)(5)), the lease receipts are taxable under § 1105(a).
• Selling uninstalled to the public = taxable. An uninstalled sale is a plain retail sale of tangible personal property, taxable under § 1105(a).

What this means for you

Installing a permanent system for the owner is treated as improving the building, not selling goods. Done as a capital improvement, you don't charge the customer sales tax — but you pay tax on your materials as the end consumer.

Leasing flips the result. Because a leased system isn't intended to be permanent, it isn't a capital improvement; the lease is a taxable sale, so you collect tax on the lease charges.

Selling the equipment uninstalled is an ordinary taxable sale. No installation, no capital-improvement treatment — collect tax on the sale.

"Permanent" and "who owns the property" matter. The capital-improvement path here depends on a permanent installation for the property owner; change either fact and the tax answer can change.

Common questions

Q: I install solar systems for homeowners. Do I charge them sales tax?
A: Not on a permanent installation for the owner — that's a capital improvement. But you pay sales/use tax on the materials you install (20 NYCRR 527.7(a)(5)).

Q: I lease systems instead of selling them. Same treatment?
A: No. A lease isn't a capital improvement (not intended to be permanent), and a lease is a taxable "sale," so the lease charges are taxable.

Q: What about selling the equipment without installing it?
A: That's a taxable retail sale of tangible personal property under § 1105(a).

Citations and references

Statutes, regulations and guidance:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(c)(3) — installation tax, with capital-improvement exclusion
• Tax Law § 1101(b)(9); 20 NYCRR 527.7(a)(3) — definition of "capital improvement"
• Tax Law § 1101(b)(5) — "sale" includes a lease
• 20 NYCRR 527.7(a)(5) — contractor pays tax on its own materials for a capital improvement
• Publication 862 — permanent solar systems categorized as capital improvements

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_65s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(65)S
Sales Tax
December 23, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810317A

On March 17, 1981 a Petition for Advisory Opinion was received from American
Sunsystems, Inc., 158 Cherry Street, Milford, Ct. 06460.
The issues raised are whether sales tax is required to be collected on the receipts from: (1)
sales of installed solar hot water heating systems to residential and commercial users who are the
owners of the real property upon which the systems are installed; (2) the leasing of installed solar
hot water heating systems to residential and commercial users; and (3) sales of solar hot water
heating systems, on an uninstalled basis, to the general public.
Section 1105(a) of the Tax Law imposes a tax on receipts from retail sales of tangible
personal property. Section 1105(c)(3) of the Tax Law imposes a tax on receipts from the service of
"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 the term "capital improvement" as "An addition or alteration to real
property which: (i) substantially adds to the value of the real property, or appreciably prolongs the
useful life of the real property; and (ii) 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), 20 NYCRR 527.7(a)(3).
Section 1101(b)(5) of the Tax Law defines the term "sale" to include a lease.
Classifications of Improvements and Repairs to Real Property for Sales Tax Purposes
(Publication 862), published by the New York State Department of Taxation and Finance,
categorizes additions to permanent solar systems and the installation or replacement of permanent
solar systems as capital improvements to real property.
Accordingly, Petitioner's sales of solar hot water heating systems on an installed basis to
residential and commercial users constitute capital improvements to real property, as defined in the
Tax Law and the Sales and Use Tax Regulations, and are, therefore, exempt from sales tax. Tax Law
§1101(b)(9), 20 NYCRR 527.7(a)(3). In such instances, Petitioner is liable for payment of sales and
use tax on purchases and uses of tangible personal property utilized in performing the capital
improvements in question. 20 NYCRR 527.7(a)(5). Petitioner's sales of uninstalled solar hot water
heating systems to the general public are subject to sales tax pursuant to Section 1105(a) of the Tax
Law.

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

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

-2­
TSB-A-81(65)S
Sales Tax
December 23, 1981

Petitioner's leases of installed solar hot water heating systems to residential or commercial
users do not constitute capital improvements to real property because such leased systems are not
intended to be permanently installed. Tax Law §1101(b)(9), 20 NYCRR 527.7(a)(5). Consequently,
such leases are subject to sales tax pursuant to Section 1105(a) of the Tax Law.

DATED: December 7, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau