Is repaving over trenches that were cut to install new gas lines a nontaxable capital improvement, and does the paving contractor still owe tax on the materials it uses?

Plain-English summary

Technipaving Corp. repaved trenches that the Long Island Lighting Company had cut and filled in the course of installing new gas lines to its customers. Technipaving asked whether its charge for that paving is a capital improvement to real property and therefore exempt from sales tax.

The Department held the paving is a nontaxable capital improvement — but Technipaving still owes tax on the materials it buys.

• Servicing real property is taxable, but a capital improvement is not. Section § 1105(c)(5) taxes maintaining, servicing or repairing real property, "as distinguished from adding to or improving such real property . . . by a capital improvement."
• The paving met the three-part capital-improvement test. Under § 1101(b)(9), a "capital improvement" (i) substantially adds to the value or appreciably prolongs the useful life of the real property, (ii) becomes part of or is permanently affixed to it so that removal would cause material damage, and (iii) is intended to be a permanent installation. The Department found the paving project satisfied that definition.
• The "end-result" test controls. Under 20 NYCRR 527.7(b)(4), taxability depends on the end result of the service: if the end result is repair or maintenance, it is taxable; if it is a capital improvement, it is not. So the charge for Technipaving's paving is not subject to sales tax.
• The contractor pays tax on its own materials. A contractor making a capital improvement is the ultimate consumer of the tangible personal property it uses and must pay sales tax on the cost of its materials (20 NYCRR 527.7(b)(5)).

What this means for you

A capital improvement is billed tax-free — but you eat the tax on your materials. When your work is a capital improvement, you don't collect sales tax from the customer, but you pay sales tax when you buy the materials you install.

The "end result" decides it, not the label. Ask what the finished work is: a permanent addition or improvement to the real property (capital improvement, not taxable) versus keeping existing property in working order (repair/maintenance, taxable service).

Run the three-part § 1101(b)(9) test every time. All three prongs — added value or longer life, permanent attachment, and intent to be permanent — must be met for work to qualify as a capital improvement.

Common questions

Q: If my paving is a capital improvement, do I charge the customer sales tax?
A: No. A capital improvement is not a taxable service under § 1105(c)(5), so you do not collect sales tax on that charge.

Q: Do I owe any tax at all on a capital-improvement job?
A: Yes — on your materials. As the contractor making the improvement, you are the ultimate consumer and pay sales tax on the cost of the materials you buy (20 NYCRR 527.7(b)(5)).

Q: How do I tell a capital improvement from a taxable repair?
A: Apply the end-result test and the three prongs of § 1101(b)(9). If the finished work permanently adds to or improves the real property, it's a capital improvement; if it just maintains or repairs existing property, it's a taxable service.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(5) — tax on maintaining, servicing or repairing real property, as distinguished from a capital improvement
• Tax Law § 1101(b)(9) — three-part definition of "capital improvement"
• 20 NYCRR 527.7(b)(4) — end-result test
• 20 NYCRR 527.7(b)(5) — contractor making a capital improvement pays tax on its materials

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(7)S
Sales Tax
January 29, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810814A

On August 14, 1981 a Petition for Advisory Opinion was received from Technipaving Corp.,
366 Moffitt Boulevard, Islip, New York 11751.
The issue raised is whether the charge for paving over trenches, which were cut and filled
by the Long Island Lighting Company in the course of installing new gas lines to its customers,
constitutes a capital improvement to real property and is, therefore, exempt from sales tax.
Section 1105(c)(5) of the Tax Law imposes a tax on the receipts from the sale of the service
of "(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 term capital improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this chapter . . . . "
"Section 1101(b)(9) of the Tax Law, referred to in the foregoing, defines the term "capital
improvement" as follows:
"(9)

Capital improvement. 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."

Section 527.7(b) of the Sales and Use Tax Regulations provides, in relevant part, as follows:
"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." 20 NYCRR 527.7 (b)(4).

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

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

-2­
TSB-A-82(7)S
Sales Tax
January 29, 1982

"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 paving project performed by Petitioner satisfies the statutory definition of "capital
improvement." Accordingly, the charge for such service is not subject to sales tax. Such tax is due,
however, on Petitioner's purchases of materials to be used by it in performing the service.

DATED: January 5, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau