Is installing a legally required underground vapor-recovery system at a gas station a capital improvement (so the contractor's charge is not taxable)?

Plain-English summary

Larry E. Tyree Co., Inc. asked whether installing a vapor-recovery system at a gas station is a capital improvement. Starting in early 1988, New York required service stations to install this system — underground piping that captures the fumes released while pumping gasoline and returns them to the underground tanks — as a condition of staying open. Why it matters: if the job is a capital improvement, the contractor's installation charge is not subject to sales tax.

The Department's answer: it can qualify, but only if the installation is intended to be permanent.

New York's three-part capital-improvement test (Tax Law § 1101(b)(9)) asks whether the addition:

• (i) adds value or prolongs useful life — met: the system adds value and makes the property usable as a service station;
• (ii) becomes part of / permanently affixed to the real property so removal would cause material damage — met: it is underground piping;
• (iii) is intended to be a permanent installation — the deciding question here.

On that third test:

• Owned property: underground piping installed by the owner is ordinarily treated as intended to be permanent, by the nature of the installation.
• The catch: if a state or local law requires the system to be removed when the station stops operating, it cannot have been intended as permanent — even though it sits underground.
• Tenants: a tenant's additions are presumed temporary unless permanence is demonstrated. Per TSB-M-83(17)S, a lease clause stating that title to the installation vests in the landlord immediately and that it stays with the premises after the lease shows intended permanence (a landlord's right to require removal does not defeat that). Factors pointing the other way include a lease requiring restoration to original condition, or renting the installed equipment from a third party.

Bottom line: the vapor-recovery system is a nontaxable capital improvement only where the intent to make it permanent is actually shown.

What this means for you

Two out of three isn't enough — permanence is the swing factor. Many installations easily add value and are physically affixed. Whether the contractor should charge you sales tax often comes down entirely to test (iii): was the thing meant to stay for good?

A legal duty to remove can flip the answer. Ironically, a rule requiring you to tear the system out when you close can make the installation not permanent — and therefore not a capital improvement. Watch for removal mandates before assuming a job is tax-free.

Tenants: get it in the lease. If you're improving leased premises, a tenant's work is presumed temporary. A lease clause vesting title in the landlord and leaving the improvement with the building is the clean way to demonstrate permanence and support capital-improvement treatment (and a Form ST-124 for the contractor).

Common questions

Q: The state forced me to install it. Doesn't that make it a permanent, taxable-free improvement automatically?
A: No. A legal mandate to install doesn't decide permanence. If a law also requires removal when you cease operating, that actually shows the system was not intended to be permanent, so it would not be a capital improvement.

Q: I own the property outright. Is my underground piping a capital improvement?
A: Ordinarily yes — underground piping installed by an owner is normally treated as intended to be permanent, so it can qualify (assuming no removal mandate points the other way).

Q: I lease my station. How do I show the system is permanent?
A: A lease provision that (1) vests title in the landlord immediately on installation and (2) leaves the improvement with the premises after the lease demonstrates intended permanence under TSB-M-83(17)S. Otherwise a tenant's installation is presumed temporary.

Citations and references

Statute and guidance:

• Tax Law § 1101(b)(9) — defines "capital improvement" by the three-part test: (i) substantially adds value or prolongs useful life; (ii) becomes part of or is permanently affixed to the real property so removal causes material damage; and (iii) is intended to be a permanent installation
• TSB-M-83(17)S — a lease provision vesting title in the lessor immediately and leaving the improvement with the premises after the lease demonstrates an intention of permanence for a tenant's installation; a lessor's right to require removal does not negate it; factors like a restoration clause or renting the equipment from a third party suggest it is not permanent

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_49s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (49)S
Sales Tax
September 28, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880809A

On August 9, 1988, a Petition for Advisory Opinion was received from Larry E. Tyree Co.,
Inc., 208 Route 109, Farmingdale, New York 11735.
The issue raised is whether the installation of a vapor recovery system pursuant to New York
State Law is a capital improvement within the meaning and intent of Section 1101(b)(9) of the Tax
Law.
Effective in early 1988, New York State Law mandated that service stations install vapor
recovery system: underground piping which returns fumes generated by pumping gasoline back to
the underground tanks. This is required by New York State in order for a service station to remain
open and conduct business.
Section 1101(b)(9) of the Tax Law defines "capital improvement" as 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; 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 installation in question appears to meet the first two requirements of section 1101(b)(9).
The vapor recovery system adds to the value of the real property and makes it suitable for use as a
service station. Secondly, because it consists of underground piping, the vapor recovery system
becomes permanently affixed to the real property since removal would cause material damage to the
property.
Accordingly, the vapor recovery system will qualify as a capital improvement if it also meets
the third requirement, viz., it is intended to become a permanent installation.
Whether an installment is intended to be permanent is necessarily a question which must be
resolved on a case by case basis depending on the totality of circumstances in each case.
Ordinarily, underground piping installed on property owned by a taxpayer will be deemed
to be intended to a permanent by virtue of the nature of the installation. Of course, other
circumstances may indicate a contrary result. For example, if state or local laws mandate the
removal of a vapor recovery system upon cessation of use, such system cannot have been intended
to be permanently installed notwithstanding its installation underground.
TP-9 (9/88)

-2­
TSB-A-88 (49)S
Sales Tax
September 28, 1988
Ordinarily, additions or alterations to real property by a tenant of such property will be
presumed to be temporary in nature unless a contrary intention can be demonstrated. Technical
Services Bureau Memorandum TSB-M-83(17)S provides that:
A specific lease provision which states that: 1) immediately upon
installation, title to such installation vests in the lessor, and 2) the
addition or alteration becomes part of and remains with the premises
after the termination of the lease, will be recognized as a
demonstration of contrary intention (i.e., an intention of permanence).
A provision granting the lessor the right to require removal of the
improvement will not negate this demonstration of intention of
permanence; nor will a provision which states that the improvement
becomes the property of the lessor upon expiration of the lease or
upon termination of the tenancy.
In the absence of a lease provision, other factors such as the nature of
the installation, or written agreements other than a lease provision
may be considered in determining the intention of the parties with
respect to the permanence of the installation. Factors which may
indicate that a tenant installation is not intended to be permanent
include: 1) a lease provision requiring that the leased premises be
restored to their original condition at the termination of the lease; 2)
the rental of the installed property from a third party (someone other
than the lessor of the premises).
Accordingly, a vapor recovery system may qualify as a capital improvement but only under
those circumstances where it is demonstrated that the installation is intended to be permanent.

DATED: September 28, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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