Is adding to a warehouse conveyor system a tax-free capital improvement if the conveyor can be removed without damaging the building?

Plain-English summary

McKesson Drug Company asked whether an addition to its existing warehouse conveyor system is a capital improvement excluded from sales tax. The addition is welded to the roof and structure and bolted into the concrete foundation, was engineered specifically for the building, has limited value elsewhere, and is intended to be permanent — but McKesson acknowledged the conveyor can be removed without material damage (removed, it "ceases to exist as a unit and becomes a pile of belts, rollers and motors").

The Department held it is not a capital improvement — installing it is taxable.

• All three criteria are required. Under § 1101(b)(9) and 20 NYCRR 541.2(g)(1), a capital improvement must (i) add value or prolong the property's life; (ii) be permanently affixed so that removal would cause material damage; and (iii) be intended as permanent. Failing any one disqualifies it.
• Bolting and welding aren't enough. The test is not merely whether equipment is affixed, but whether it is affixed so much that it loses its separate identity or can't be removed without material damage. Property is not "materially damaged" just because it is worth less once removed.
• This conveyor is removable. Because McKesson conceded the conveyor can be taken out without material damage — as the courts found for the bolted ski-lift towers in West Mountain Corp. v. Miner and the bolted amusement rides in Charles R. Wood Enterprises v. State Tax Commission — it fails the second criterion. So the installation does not qualify as a capital improvement and is taxable.

What this means for you

"Permanent-looking" and "engineered for this building" don't win the exemption. New York's capital-improvement test hinges on whether the equipment can be removed without materially damaging the property. Welding, bolting, custom engineering, and an intent to keep it in place don't matter if it can still be unbolted and taken out.

Losing value on removal is not "material damage." The fact that a conveyor (or similar machinery) is worth far less once dismantled doesn't make its removal "material damage" to the property. That's a common misunderstanding that this opinion squarely rejects.

Machinery installs are usually taxable — plan for it. Adding production or handling equipment to a building typically counts as a taxable installation, not an exempt capital improvement. Budget sales tax on that work unless the equipment genuinely can't be removed without damaging the building or itself.

Common questions

Q: Our conveyor is welded and bolted into the building. Isn't that a capital improvement?
A: Not if it can be removed without material damage. Bolting and welding alone don't create the required permanence, so installing it is taxable.

Q: It's worth a lot less if we take it apart. Isn't that "material damage"?
A: No. Losing value on removal is not material damage to the property. Material damage means removal would damage the building or the article itself.

Q: Does custom engineering for our building make it a capital improvement?
A: No. Being designed for the site and having limited value elsewhere doesn't satisfy the test if the equipment is still removable without material damage.

Citations and references

Statute, regulation, and cases:

• Tax Law § 1101(b)(9); 20 NYCRR 541.2(g)(1) — three-part definition of a capital improvement
• West Mountain Corporation v. Miner, 85 Misc 2d 416 (1976) — bolted towers removable without material damage
• Charles R. Wood Enterprises, Inc. v. State Tax Commission, 67 AD2d 1042 (1979) — bolted amusement rides not improvements to real property

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_13s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87(13)S
Sales Tax
March 5, 1987

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S861028B

On October 28, 1986, a Petition for Advisory Opinion was received from McKesson Drug
Company, 25 Industrial Park Road, Albany, New York 12206.
The issue raised is whether an addition to an existing conveyer system is a capital
improvement and thus excluded from the imposition of sales tax.
Petitioner describes the addition to the conveyer system as follows:
(1) It is welded to the roof and structure supports of the building as well as being
bolted into inserts in the cement foundation of the basic structure itself.
(2) It is intended to become permanent because the original system has been in place
for over 15 years.
(3) The addition to the system was engineered and designed with multiple consultants
and engineering firms specifically for the building in which it is located.
(4) The addition to the conveyer cannot fit and work as a unit in any other facility
without major modifications which gives the conveyer limited value outside of the building
for which it was designed.
(5) Removal is possible but once this is done, the conveyer system ceases to exist as
a unit and becomes a pile of belts, rollers and motors.
Petitioner acknowledges that the conveyor could be removed from the real property without
material damage.
Sales and Use Tax Regulations section 541.2(g)(1) provides as follows:
(g)

Capital improvement. (1) A capital improvement means 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.

(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.

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

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

-2­
TSB-A-87(13)S
Sales Tax
March 5, 1987

The criteria for a capital improvement must be met in their entirely. The inability to meet
any one of the three conditions will prevent the property in question from qualifying as a capital
improvement.
Conveyers and most other forms of machinery and equipment normally require some form
of affixiation to real property. However, the test is not merely whether such machinery and
equipment is affixed to real property. Rather, the test is whether the machinery and equipment is
affixed to such a degree that it loses its separate identity and becomes part of the real property or to
such a degree that removal would cause material damage to the property or the article. Material
damage is not considered to exist merely because the property in question is worth less when it is
removed than it was worth when it was installed and in operating condition.
Within the context of the real property tax, it has been determined that ski lifts were
removable without material damage where "the towers were attached by long bolts set into poured
foundations and the removal process, simply enough, involved no more than its cutting and
severance of the bolts to permit the towers to be lowered gently to the ground and trucked to its new
site." West Mountain Corporation v. Miner, 85 Misc 2d 416(1976).
Similarly, within the context of the sales tax, it has been held that various amusement park
rides which were all bolted into bases, but which could be readily removed without damage to the
property, were not improvements to real property. Charles R. Wood Enterprises, Inc. v State Tax
Commission, 67 AD 2d 1042(1979).
Based on the above, the mere bolting and welding of equipment to real property does not, in
and of itself, create the degree of permanence necessary to establish that a particular installation is
a capital improvement. Consequently, the installation of Petitioner's conveyer system does not
qualify as a capital improvement.

DATED: March 5, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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