Does a customer's capital improvement certificate relieve an equipment supplier of the duty to collect New York sales tax, and who is liable if the customer won't pay?

Plain-English summary

Superior Restaurant Equipment Co. Inc. sells commercial restaurant equipment — broilers, ovens, ranges, exhaust hoods, work tables. It consolidates an order in its warehouse, delivers it to the job site, uncrates it and sets it in place; then separate trades hired directly by the customer (no affiliation with Superior) hook it up to gas, electric and plumbing. It asked three questions.

Because it sells equipment uninstalled, Superior is a supplier of tangible personal property — not a party performing a capital improvement. That single fact drives all three answers.

• Issue I — a capital improvement certificate doesn't help. Under 20 NYCRR 541.5(b)(1), materials that are incorporated into realty or consumed in performing a contract are taxed when purchased, and a capital improvement certificate "may not be validly given by any person or accepted by a supplier" to exempt those materials. Since Superior is merely a supplier, it may not accept a capital improvement certificate, and accepting one does not relieve its duty to collect tax.
• Issue II — both parties are liable. Every person required to collect tax must collect it and is personally liable (20 NYCRR 532.1, 532.3). And if a customer fails to pay the tax to the vendor, the tax is payable by the customer directly to the Tax Commission (532.1(e)). So if a customer refuses to pay, both Superior and the customer are liable for the tax that should have been collected.
• Issue III — the only collection tool is a lawsuit. Under 20 NYCRR 532.1(d), a vendor has the same right to collect the tax from a customer as if it were part of the price — enforced by an action or proceeding in court, in which the Tax Commission must be joined as a party. So whether or not Superior holds a capital improvement certificate, its only means of collecting the tax from a non-paying customer is a lawsuit.

What this means for you

Selling uninstalled makes you a taxable supplier, full stop. If you drop off and set equipment in place but someone else the customer hired connects it, you haven't done a capital improvement — you've made a taxable retail sale. A capital improvement certificate from the customer is the wrong document and gives you no protection.

A bad exemption certificate leaves you on the hook. Accepting a certificate you're not entitled to accept doesn't move the liability to the customer — you stay personally liable to collect and remit. When the customer eventually refuses to pay, the state can pursue both of you.

If a customer won't pay the tax, your remedy is court. New York gives a vendor the right to sue to recover uncollected tax as if it were part of the price, but you must name the Tax Commission as a party. There's no self-help shortcut, so it's far cheaper to charge the tax correctly at the time of sale.

Common questions

Q: My customer handed me a capital improvement certificate — can I skip the tax?
A: Not if you're selling uninstalled equipment. A supplier of tangible personal property can't validly accept a capital improvement certificate, and accepting one doesn't relieve your duty to collect the tax.

Q: If the customer refuses to pay the tax, is it my problem or theirs?
A: Both. The vendor is personally liable for tax it should have collected, and the customer is directly liable to the Tax Commission for tax it failed to pay the vendor.

Q: How do I recover tax a customer won't pay?
A: By suing — an action or proceeding in court to collect the tax as if it were part of the price, with the Tax Commission joined as a party. That's the only mechanism, whether or not you hold a capital improvement certificate.

Citations and references

Regulations:

• 20 NYCRR 541.5(b)(1) — materials incorporated into realty/consumed in a contract are taxed at purchase; a capital improvement certificate can't be given or accepted to exempt them
• 20 NYCRR 532.1 — duty to collect tax; customer's direct liability when tax isn't paid to the vendor (532.1(e)); vendor's suit to collect, joining the Tax Commission (532.1(d))
• 20 NYCRR 532.3 — personal liability of any person (including corporate officers/employees and partners) required to collect the tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(23)S
Sales Tax
June 9, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860115A

On January 15, 1986, a Petition for Advisory Opinion was received from Superior Restaurant
Equipment Co. Inc., 830 Atlantic Avenue, Baldwin, New York 11510.
Petitioner is engaged in the sales of commercial restaurant equipment. Petitioner's typical
sales include broilers, ovens, ranges, exhaust hoods and work tables.
The issues are: (1) does a certificate of capital improvement supplied by Petitioner's customer
relieve Petitioner of the duty to collect tax on its sales of such equipment; (2) if a customer refuses
to pay sales tax, is Petitioner or his customer liable for such tax; and (3) if Petitioner is in possession
of a capital improvement certificate, does it have any legal means of collecting tax other than a law
suit?
Petitioner normally consolidates all of the equipment ordered in its warehouse and then
delivers it to the job site, at which time it is un-crated, brought inside, and put in its proper place.
It is then hooked up to gas, electric and plumbing lines by the respective trades. These trades have
no affiliation with Petitioner and are hired directly by Petitioner's customers.
Inasmuch as Petitioner merely sells equipment on an uninstalled basis, Petitioner is
considered to be a supplier of tangible personal property and is not performing a capital improvement
to real property.
Issue I
Section 541.5(b)(1) of the Sales and Use Tax Regulations provide that "[A]ll purchases of
tangible personal property... which are incorporated into and become part of the realty or are used
or consumed in performing the contract are subject to tax at the time of purchase by the contractor
or any other purchaser. A certificate of capital improvement may not be validly given by any person
or accepted by a supplier to exempt the purchase of these materials." 20 NYCRR 541.5.
Inasmuch as Petitioner is merely a supplier of tangible personal property, it may not accept
a certificate of capital improvement to exempt the purchase of such materials. The acceptance of
such a certificate by Petitioner does not relieve Petitioner of its duty to collect tax.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-86(23)S
Sales Tax
June 9, 1986

Issue II
Section 532.1(a)(1) of the Sales and Use Tax Regulations provides that "[E]very person
required to collect tax shall collect the tax from the customer when collecting the price... to which
it applies." 20 NYCRR 532.1.
Section 532.3(a)(1) of the Sales and Use Tax Regulations provides that "[E]very person
required to collect any tax imposed by article 28 and pursuant to the authority of article 29 of the Tax
Law shall be personally liable for the tax imposed, collected or required to be collected. Any officer
or employee of a corporation or a dissolved corporation who is required to collect, truthfully account
for, or pay over the tax, and any person who is a member of a partnership may be held personally
liable for the tax as a person required to collect tax." 20 NYCRR 532.3.
Section 532.1(e) of the Sales and Use Tax Regulations provides that "[W]here any customer
has failed to pay sales tax imposed by article 28 and pursuant to the authority of article 29 of the Tax
Law to the person required to collect the tax, such tax shall be payable by the customer directly to
the Tax Commission, and it shall be the duty of the customer to file a return with the Tax
Commission and to pay the tax within 20 days of the date the tax was required to be paid." 20
NYCRR 532.1.
Accordingly, if a customer refuses to pay sales tax, both Petitioner and its customer are liable
for the amount of sales tax which should have been collected.
Issue III
Section 532.1(d) of the Sales and Use Tax Regulations provides that "[E]very person required
to collect any tax imposed by article 28 and pursuant to the authority of article 29 of the Tax Law
shall have the same right in respect to collecting the tax from his customer or in respect to
nonpayment of the tax by the customer as if the tax were a part of the purchase price of the property
or service, amusement charge or rent, as the case may be, and payable at the same time; provided,
however, that the Tax Commission shall be joined as a party in any action or proceeding brought to
collect the tax.
(2) The joining of the Tax Commission as a party in any action or proceeding brought to collect the
tax shall be effected by service upon the Tax Commission of a summons and complaint naming the
Tax Commission as a plaintiff or defendant thereon." 20 NYCRR 532.1(d).

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TSB-A-86(23)S
Sales Tax
June 9, 1986

Accordingly, under the circumstances in question, whether in possession of a certificate of
capital improvement or not, Petitioner's only means of collecting from its customers sales tax which
should have been collected at the time of sale is an action or proceeding in a court of law as provided
in regulation section 532.1.

DATED: June 9, 1986

s/Frank J. Puccia
Director
Technical Services Bureau

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