Are a tenant's contractor-installed heating system, bathroom, plant foundation and water line capital improvements exempt from sales tax?

Plain-English summary

Nelstad Materials Corp., the tenant of a ready-mix cement facility, hired contractors to furnish and install a complete heating system (furnace, piping, radiators) and a bathroom in the office, plus a concrete foundation to support a ready-mix concrete plant, a loading platform, and a new main water line for the plant. It asked whether these leasehold improvements are capital improvements under § 1101(b)(9) — which would make the contractors' installation charges non-taxable.

The Department held these are capital improvements, so the installation charges are not taxable.

• The capital-improvement test. Under § 1101(b)(9), a capital improvement is an addition or alteration to real property that (1) substantially adds to its value or appreciably prolongs its useful life; (2) becomes part of or is permanently affixed to the realty so that removal would cause material damage; and (3) is intended to be permanent.
• Value and permanence were satisfied — even by a tenant. The items substantially add value. The lease's Paragraph 30 said the tenant's "additions and improvements" belong to the landlord; courts read "additions" and "improvements" broadly (even covering things that might otherwise be removable trade fixtures — French v. New York; Levin v. Improved Property Holding Co.). That lease language, plus the nature of the items, showed the parties intended them to be permanent, and the items were affixed and adapted enough to meet the common-law fixture test — so they became part of the real property (citing Beamon Corp., TSB-A-82(32)S).
• Result. The heating system, bathroom, concrete foundation and water line are capital improvements, so the amounts Nelstad paid the contractors to install them are not subject to sales tax under § 1105(c)(3)(iii).

What this means for you

A tenant's improvements can still be tax-free capital improvements. You don't have to own the building. What matters is whether the work permanently adds to the real property and is intended to stay — heating systems, bathrooms, foundations, and water lines typically qualify, so a contractor's charge to install them isn't taxable.

Lease language is real evidence of "permanent intent." A clause saying the tenant's additions and improvements belong to the landlord (like Paragraph 30 here) helps show the parties meant the installations to be permanent — one of the three statutory tests. It can even pull in items that might otherwise look like removable trade fixtures.

Capital improvement vs. repair is the line that decides taxability. Installing something that becomes a permanent part of the building is a non-taxable capital improvement under § 1105(c)(3)(iii). By contrast, ordinary repairs, servicing, or maintenance of real property are taxable — so how a job is characterized matters. (Get a properly completed capital improvement certificate to support exempt treatment.)

Common questions

Q: We're a tenant. Can our leasehold improvements be non-taxable capital improvements?
A: Yes. If the work substantially adds value, becomes permanently part of the building, and is intended to be permanent, it's a capital improvement under § 1101(b)(9) — and the contractor's installation charge isn't taxable under § 1105(c)(3)(iii).

Q: Do a heating system, bathroom, foundation and water line qualify?
A: On these facts, yes. The Department found all four met the capital-improvement test and became part of the real property.

Q: Does it matter that a tenant, not the owner, paid for the work?
A: No. The lease said the tenant's additions and improvements belong to the landlord, which supported permanent intent; the items still qualified as capital improvements.

Citations and references

Statutes:

• Tax Law § 1101(b)(9) — definition of "capital improvement"
• Tax Law § 1105(c)(3)(iii) — installation that constitutes a capital improvement is not taxable

Other authorities referenced:

• Beamon Corporation, State Tax Commission Advisory Opinion, TSB-A-82(32)S
• French v. New York, 29 Barb. 363; Levin v. Improved Property Holding Co., 141 A.D. 106

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(36)S
Sales Tax
July 25, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820428A

On April 28, 1982 a Petition for Advisory Opinion was received from Nelstad Materials
Corp., 40 Huntington Place, New Rochelle, New York 10801.
The issue raised herein is whether certain leasehold improvements constitute capital
improvements, within the meaning of section 1101(b)(9) of the Tax Law.
Petitioner, the lessee of a ready mix cement producing facility, hired a contractor to furnish
and install a complete heating system, including furnace, piping and radiators, and a complete
bathroom in the office located on the leased property.
Petitioner also hired a contractor to furnish and install a concrete foundation to serve as a
base for the erection of a ready mix concrete plant, as well as a loading platform for the cement plant.
A new main water line which provides water for the cement plant was also installed by the
contractor.
Section 1101(b)(9) of the Tax Law defines the term capital improvement as: ". . . An addition
or alteration to real property which: (1) 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."
The items at issue substantially add to the value of the real property.
Paragraph 30 of the lease entered into between Petitioner and the landlord provides as
follows: "Tenant shall have the right, as his own cost and expense, to make alterations, additions and
improvements to the buildings on the demised premises, which additions and improvements made
by Tenant shall belong to Landlord . . . . " The words "additions" and "improvements" when used
in leases have been given a broad meaning by the courts. See French v New York, 29 Barb 363.
Property which might otherwise have been deemed to be a removable trade fixture has been held to
be covered by these terms. See Levin v Improved Property Holding Co., 141 A.D. 106. The items
installed by Petitioner are additions or improvements as these terms have been construed by the
courts. Paragraph 30 of the lease, taken together with a consideration of the items themselves,
indicates the intention of the parties that the subject installations are intended to be permanent. These
items are attached to the real property in a sufficiently secure manner and are sufficiently adapted
to the purposes for which the real property is to be used as to satisfy the common law test for
fixtures. The property installed by Petitioner, therefore,' "becomes part of the real property" for
purposes of section 1101(b)(9) of the Tax Law. See discussion in Beamon Corporation, State Tax
Commission Advisory Opinion, TSB-A-82(32)S.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-83(36)S
Sales Tax
July 25, 1983

As noted in the preceding paragraph, the facts here presented indicate an intention that the
installations at issue are intended to be permanent, thus satisfying the third of the statutory criteria.
The heating system, bathroom, concrete foundation and water line installed by Petitioner
satisfy the requirements of section 1101(b)(9) of the Tax Law and are, therefore, capital
improvements. As a result, the amounts paid by Petitioner to contractors for the installation of such
property are not subject to sales tax. Tax Law, § 1105(c)(3)(iii).

DATED: June 29, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau