Is installing a home water distillation unit a tax-free capital improvement, and how are the sale and installation taxed?

Plain-English summary

Alfred E. Luckette Jr., doing business as Alfran Modern Home Products, asked whether the sale and installation of a home water distillation unit is a capital improvement to real property, and how it should be taxed. The distiller removes all minerals and chemicals (like a water softener) to make water pure and drinkable, and is incorporated into the home's existing water system — connected with a saddle clamp on a cold-water line or by copper or plastic pipe.

The Department held installing the distiller is a capital improvement.

• It meets the capital-improvement test. Under § 1101(b)(9) and 20 NYCRR 541.2(g), a capital improvement must (i) substantially 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. The distiller, plumbed into the home's water system, satisfies all three.
• It matches published examples. Sales Tax Publication 862 classifies items such as additions to piping systems, water softeners, water pumps, and garbage disposals as capital improvements. The water distiller is similar.
• Exempt with Form ST-124. Because installing it is a capital improvement, the receipts from the sale and installation are not subject to sales tax when the customer gives Alfran a properly completed Certificate of Capital Improvement (Form ST-124). (Installing tangible personal property is otherwise taxable under § 1105(c)(3), but capital improvements are carved out.)
• The installer pays tax on its own purchase. When Alfran buys the distiller (and materials) to perform the capital improvement, that purchase is a retail sale to Alfran (§ 1101(b)(4)) and is taxable — the contractor is the taxpayer on what it buys.

What this means for you

Permanently plumbed-in equipment tends to be a capital improvement. A unit integrated into a home's water or piping system — a distiller, softener, or pump — generally qualifies as a capital improvement, so you don't charge the homeowner sales tax on the sale-and-install job.

Get the ST-124, and remember you already paid the tax. Take a Certificate of Capital Improvement (Form ST-124) from the customer to support the exempt job. But you, the installer, owe sales tax on your own purchase of the equipment and materials — that tax becomes a cost of the job, not something you re-charge on top.

Not all installed equipment qualifies. The capital-improvement test turns on permanence — permanent affixation where removal causes material damage. Equipment that unbolts and comes out intact is taxable to install instead. Match each job to the three-part test rather than assuming.

Common questions

Q: Do I charge my customer sales tax to install a water distiller?
A: No, if it's a capital improvement as described here — take a properly completed Certificate of Capital Improvement (Form ST-124) from the customer to support the exempt treatment.

Q: Do I pay tax on the distiller I buy to install?
A: Yes. Your purchase of the unit and materials to perform the capital improvement is a taxable retail sale to you.

Q: What makes it a capital improvement and not a taxable install?
A: It must add value or prolong the property's life, be permanently affixed so removal causes material damage, and be intended as permanent — all three. Plumbing a distiller into the home's water system meets that; removable equipment would not.

Citations and references

Statutes and regulation:

• Tax Law § 1105(c)(3) — taxes installing property, excluding capital improvements
• Tax Law § 1105(a) — taxes retail sales of tangible personal property
• Tax Law § 1115(a)(17) — exempts property becoming an integral component of a capital improvement (non-exempt-entity jobs)
• Tax Law § 1101(b)(4) — a sale to a contractor for a capital improvement is a retail sale to the contractor
• Tax Law § 1101(b)(9); 20 NYCRR 541.2(g) — three-part definition of a capital improvement

Department guidance:

• Sales Tax Publication 862 — classifies water softeners, piping additions, and pumps as capital improvements

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_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87(18)S
Sales Tax
April 28, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO: S870109A

On January 9, 1987, a Petition for Advisory Opinion was received from Alfred E. Luckette
Jr. DBA Alfran Modern Home Products, 7824 Saintsville Road, Hicksville, New York 13082.
The issue raised is whether the sale and installation of a water distillation unit by Petitioner
results in a capital improvement to real property and, if so, the proper treatment of such sale and
installation for sales and use tax purposes.
The water distiller is a unit that changes the condition of water brought into a home. The
distiller removes all minerals and chemicals (similar to a water softener) and makes the water pure
and drinkable.
The distiller is incorporated into the existing water system of a home. The distiller is
connected by using a saddle clamp on any cold water line or it may be installed by means of copper
or plastic pipe.
Section 1105(c)(3) of the Tax Law imposes a tax on the receipts from the following service:
Installing tangible personal property ... or maintaining servicing or repairing tangible
personal property ... except for installing property which, when installed, will
constitute an addition or capital improvement to real property, property or land, as
the terms real property, property or land are defined in the real property tax law as
such term capital improvement is defined in paragraph nine of subdivision (b) of
section eleven hundred one of this chapter ....
Section 1105(a) of the Tax Law imposes tax on "the receipts from every retail sale of tangible
personal property, except as otherwise provided in this article."
Section 1115(a) of the Tax Law states:
Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five ...
(17) Tangible personal property sold by a contractor, subcontractor or repairman to
a person other than an organization described in subdivision (a) of section eleven
hundred sixteen, for whom he is adding to, or improving real property, property or
land by a capital improvement ... if such tangible personal property is to become an
integral component part of such structure, building or real property ....
RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-87(18)S
Sales Tax
April 28, 1987

Section 1101(b)(4) of the Tax Law provides that a sale of tangible personal property to a
contractor for use in making a capital improvement is a retail sale to such contractor.
Section 541.2(g) of the Sales Tax Regulations defines a capital improvement as:
(1)...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 the
article itself; and

(iii)

is intended to become a permanent installation.

Sales Tax Publication 862 (Sales and Use Tax Classifications of Capital Improvements and
Repairs to Real Property), page 17, classifies the following as capital improvements.
Capital Improvement
•
•
•

Additions to piping systems
Insulation of piping systems
Installation or replacement of:
Garbage Disposals
Piping Systems

Sprinkler Systems
Water Softeners

Water Pumps

The water distillation unit is similar to those items classified as capital improvements in
Publication 862 and meets all of the requirements of section 541.2(g) of the sales tax regulations.
Thus, the installation of a water distillation unit as described above is a capital improvement.
Accordingly, receipts from the sale and installation of water distillers which qualify as capital
improvements are not subject to sales tax when the customer submits to Petitioner a properly
completed Certificate of Capital Improvement (Form ST-124). However, when Petitioner purchases
property to perform a capital improvement, Petitioner's purchase of such property is deemed a retail
sale and is, accordingly, subject to tax.

DATED: April 28, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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