Is the lease of a relocatable modular office building subject to sales tax, even though it is classified as real property for real-property-tax purposes?

Plain-English summary

Hudson River Estates Inc. (a subsidiary of the Delaware and Hudson Railway) leased a Relocatable Modular Office Building (RMOB) for use at a railroad shop. The supplier delivered the modular sections, set them on concrete piers, strapped them to the foundation with metal straps, connected the utilities, and joined the RMOB to an existing building by a hallway. Hudson River Estates noted the RMOB can be removed without damage (and the supplier has done so "on many occasions"), that it owns the land the RMOB sits on, and that the building had not been moved since installation. The three-year lease included a purchase option (100% of rent applied to price). Because the RMOB is classified as real property for real-property-tax purposes, the company argued the lease payments should not be subject to sales tax.

The Department held the lease is taxable — the RMOB is not a capital improvement.

• Capital improvements are exempt, but the three-prong test must be met. Under § 1101(b)(9), an addition to real property is a capital improvement only if it (i) substantially adds value, (ii) becomes part of / is permanently affixed so removal would cause material damage, and (iii) is intended to be permanent. A lease counts as a "sale" (§ 1101(b)(5)), so a taxable lease of the building is at issue.
• Real-property-tax classification doesn't control. Classifying the RMOB as real property for real-estate-tax purposes does not determine its status under the sales tax (Roberson v. State Tax Commission, 65 A.D.2d 898 (1978)).
• Prong (ii) fails — it's removable. Metal strapping and utility connections are insufficient to make the RMOB part of the realty (Koseba, TSB-H-79(49)S), and the petitioner admitted it can be removed without material damage — the same fact that defeated the exemption in Charles R. Wood Enterprises v. State Tax Commission, 67 A.D.2d 1042 (1979).
• Prong (iii) fails — no intent to be permanent. The lessor keeps title, may remove the RMOB at lease end, and the building is designed to be movable; that the building (owned by one corporation) sits on land owned by another shows the requisite permanent-installation intent was absent (Broadway Mobile Home Sales, 67 A.D.2d 1029 (1979); Raised Computer Floors, TSB-H-84(12)S).
• Result. Since the RMOB is not a capital improvement, the lessor (Arthur Industries) must collect sales tax on each lease payment as rental of tangible personal property.

What this means for you

Being taxed as real property doesn't make something a capital improvement for sales tax. New York's two tax regimes use different tests. A structure can sit on the real-property tax rolls yet still be taxable tangible personal property when leased — the sales-tax question is affixation and intended permanence, decided on its own terms.

Removability is often decisive. If a structure can be taken away without material damage — and especially if it actually has been moved — it fails the capital-improvement test. Bolts, straps, and utility hookups aren't enough; the test looks for damage-on-removal permanence.

Lease terms reveal intent. When the lessor keeps title and the right to remove the unit, and the product is designed to be relocated, the arrangement shows no intent to make a permanent installation — so lease payments are taxable rentals of tangible personal property.

Common questions

Q: Our modular building is on the real-property tax rolls. Are the lease payments still subject to sales tax?
A: Yes. Real-property-tax classification doesn't control sales tax. If the building isn't a capital improvement, its lease is a taxable rental of tangible personal property.

Q: It's strapped to piers and hooked to utilities. Isn't that permanently affixed?
A: No. Metal strapping and utility connections aren't enough, especially where the unit can be removed without material damage — and this one had been moved many times.

Q: Would owning the land or adding a purchase option change the result?
A: Not here. The lessor kept title and the right to remove the unit, and the building was designed to be movable, so there was no intent to make it a permanent installation.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property; sales/rentals of real property are not taxed
• Tax Law § 1101(b)(5) — "sale" includes a rental or lease
• Tax Law § 1101(b)(9) — capital improvement: substantially adds value; permanently affixed so removal causes material damage; intended permanent

Authorities cited:

• Roberson v. State Tax Commission, 65 A.D.2d 898 (1978) — real-property-tax classification doesn't determine sales-tax status
• Charles R. Wood Enterprises, Inc. v. State Tax Commission, 67 A.D.2d 1042 (1979) — no exemption where structures removable without material damage
• Broadway Mobile Home Sales Corp. v. State Tax Commission, 67 A.D.2d 1029 (1979) — building on another's land shows no permanent-installation intent
• Koseba, TSB-H-79(49)S; Raised Computer Floors, Inc., TSB-H-84(12)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(2)S
Sales Tax
April 5, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S830107A

On January 7, 1983, a Petition for Advisory Opinion was received from Hudson River Estates
Inc., 40 Beaver Street, Albany, New York 12207.
The issue raised is whether New York sales tax is applicable to the sale or lease of a
Relocatable Modular Office Building (hereinafter "RMOB") which has been classified as real
property for purposes of the New York real property tax.
The pertinent facts are as follows. On October 27, 1982, Hudson River Estates Inc., a wholly
owned subsidiary of the Delaware and Hudson Railway Company (hereinafter "D & H"), leased a
Relocatable Modular Office Building (RMOB) from Arthur Industries Inc. for use by D & H office
personnel at it's railroad shops in Colonie, New York. Arthur Industries, Inc. delivered the RMOB
sections to Petitioner's site by truck, fully installed the building as well as its foundation and made
all utility connections. The installation consisted of concrete piers set into the ground. The modular
sections of the RMOB were set upon the piers by crane and affixed to the foundation by metal straps.
The RMOB was also attached to an existing "steelox" type building on a permanent block foundation
by means of a hallway connecting the two buildings. Petitioner states that the RMOB may be
removed without causing any damage to itself or the existing structure and that Arthur Industries Inc.
has done this on many occasions. Moreover, Petitioner states that D & H owns the realty upon
which the RMOB rests and that it has not been moved since it was installed at the Colonie site.
Although Petitioner is currently leasing the RMOB from Arthur Industries, the lease contains
a purchase option as well as numerous other relevant provisions. The terms of the purchase option
provide that 100% of all rentals paid ($34,492.00 per year) shall be applied to the purchase price so
that if Petitioner exercises the option at the end of the three year rental term, the purchase price will
be $74,858.50. Additionally, the terms of the lease itself put responsibility on the lessee to pay all
taxes, assessments and governmental charges levied upon the RMOB during the term of the lease
as well as to procure various types of insurance. The lessor, on the other hand, retains full legal title
to the RMOB during the term of the lease and retains the right to remove the RMOB from the leased
premises upon expiration of the lease. The lessor also remains responsible for repairing and
maintaining all utility connections and structural components.
Section 1105(a) of the Tax Law imposes a sales tax on "The receipts from every retail sale
of tangible personal property except as otherwise provided in this article." It necessarily follows,
therefore, that the sale of real property is not subject to the tax imposed by section 1105(a) of the Tax
Law. Accordingly, any addition to real property which qualifies as a capital improvement to real
property is exempt from the tax imposed under section 1105(a) of the Tax Law.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

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

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TSB-A-85(2)S
Sales Tax
April 5, 1985

Section 1101(b)(5) defines the term "sale" to include a rental or lease. Section 1101(b)(9)
defines "capital improvement" in pertinent part as follows:
An addition or alteration to real property which:
(i)

Substantially adds to the value of real property, or appreciably
prolongs the useful life of real property; and

(ii)

Becomes part of the real property or is permanently affixed to
real property so that removal would cause material damage to
the property or article itself; and
Is intended to become a permanent
installation. . . . .

(iii)

As the above definition indicates, each of three requirements must be met in order for an addition
or alteration to qualify as a capital improvement and to be exempt from sales tax.
Petitioner contends that the lease payments for the RMOB should not be subject to sales tax
since the building is taxed as real property for purposes of the Real Property Tax Law. This
contention, however, is without merit in light of Roberson v. State Tax Commission, 65 AD 2d 898,
410 N.Y.S. 2d 693 (1978). In Roberson, the Court held that the section of the Real Property Tax
Law classifying structures as real property for real estate tax purposes did not determine the status
of such structures under the sales tax law. Thus, there is no reason to find the classification of
RMOB's under the Real Property Tax Law determinative in this case.
As to the first requirement of Section 1101(b)(9), there is little doubt but that the RMOB
substantially adds to the value of the real property upon which it sits. Indeed, the building is not only
valuable in and of itself, but it also facilitates the Petitioner's business upon premises which the
Petitioner owns.
As to the second requirement of Section 1101(b)(9), however, there is no evidence to indicate
that the RMOB is either permanently affixed to the real property or that removal would cause
material damage to the real property or to the RMOB itself.
Attachment by metal strapping and various utility connections is insufficient to establish that
the RMOB has become part of the real property (See: In the Matter of the Application of Stephen
T. Koseba, Determination of the State Tax Commission, TSB-H-79(49)S). Furthermore, Petitioner
states in its petition that "the RMOB could be removed without any damage to itself or the existing
structure. Arthur Industries has done this on many occasions." In Charles R. Wood Enterprises, Inc.
v State Tax Commission, 67 AD 2d 1042, 413 NYS 2d 765 (1979), the Court denied a sales tax
exemption precisely because the structures in question could be removed without material damage.

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TSB-A-85(2)S
Sales Tax
April 5, 1985

Finally, as to the third requirement of section 1101(b)(9), there is no evidence to indicate that
the installation of the RMOB was intended to be permanent. Rather, all evidence is to the contrary.
The terms of the lease of the RMOB provide that the lessor retains title during the three year
rental term. Additionally, the lessor retained the right to remove the RMOB from the leased
premises upon expiration of the lease. Although an option to purchase was provided, there is no
indication that Petitioner actually intended to exercise the option in order to obtain legal title or that
the lease was a disguised financing arrangement giving the Petitioner an incentive to exercise the
option. The fact that the RMOB, owned by one corporation, was located on property owned by
another corporation indicates that the requisite intention to make a permanent installation was absent.
(See: Broadway Mobile Home Sales Corp., v State Tax Commission, 67 AD 2d 1029, 413 NYS 2d
231 (1979)).
Additionally, the RMOB is specifically designed to be movable. It must be assumed that the
Petitioner intended to use the structure in the manner for which it was designed. The inherently
movable nature of the structure further indicates that the installation was not intended to be
permanent. (See: In the Matter of the Petition of Raised Computer Floors Inc., Decision of the State
Tax Commission, TSB-H-84(12)S).
Accordingly, since the installation of the RMOB fails to meet the second and third
requirements of section 1101(b)(9), it cannot be classified as a capital improvement. Arthur
Industries, Inc. is required to collect sales tax on each lease payment made on the RMOB because
such payments are payments for the rental of tangible personal property.

DATED: March 19, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.