When is selling an electric thermal storage heating system a taxable sale of goods, and when is installing it a nontaxable capital improvement?

Plain-English summary

Joseph J. Guido, doing business as Guido's Electric & Bldg. Supply, sells electric thermal storage heating units and systems (which store heat during off-peak hours and release it as needed). He asked how four different sale/installation scenarios are taxed.

The Department drew the line at who installs:

• Sold uninstalled to a homeowner (self-install) — taxable. Guido is selling tangible personal property under Tax Law § 1105(a) and must collect state and local sales tax on the total charge to the homeowner.
• Sold uninstalled to a homeowner who hires a third-party contractor — taxable. Same result: a sale of tangible personal property; Guido collects tax on the total charge.
• Sold uninstalled to a contractor — taxable. Guido must collect tax on the total charge because the contractor is the ultimate consumer of the materials (20 NYCRR § 527.7(b)(5)).
• Sold and installed by Guido for a homeowner — capital improvement. This installation meets the three-part capital-improvement test in Tax Law § 1101(b)(9), so Guido does not collect sales tax from the homeowner if the homeowner gives him a properly completed Form ST-124 (Certificate of Capital Improvement). But Guido, acting as the contractor, is liable for use tax on the cost of the unit/system to himself (§ 527.7(b)(5)).

What this means for you

Selling the equipment vs. installing it are taxed differently

If you just sell the unit — to a homeowner or a contractor who will install it — you collect sales tax on the full price; it's a sale of tangible personal property. If you sell and install it as a permanent, value-adding, damage-on-removal installation, that's a capital improvement, and you don't charge the customer sales tax (with a Form ST-124).

Capital-improvement treatment shifts the tax to your cost

When you perform a capital improvement, the customer's charge is tax-free, but you become the consumer of the materials and owe use tax on your cost of the unit and system (§ 527.7(b)(5)). The tax doesn't disappear — it moves from the customer's price to your cost.

Selling to a contractor: collect the tax

When you sell the equipment to a contractor who will install it, the contractor is the ultimate consumer, so you collect sales tax on that sale. The contractor then performs the (tax-free-to-the-customer) capital improvement, having already borne the tax on the materials.

Common questions

Q: A homeowner buys the unit and installs it himself — do I charge tax?
A: Yes. That's a sale of tangible personal property; collect state and local sales tax on the total charge.

Q: I sell and install the unit for a homeowner — do I charge tax?
A: No, if the installation is a capital improvement and the homeowner gives you a Form ST-124. But you owe use tax on your cost of the unit and system.

Q: I'm selling to a contractor — who pays the tax?
A: You collect sales tax on the sale to the contractor, who is the ultimate consumer of the materials.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(9) — definition of capital improvement (three-part test)
• 20 NYCRR § 541.2(g) — capital-improvement test
• 20 NYCRR § 541.5(b)(2) — capital-improvement labor and material charges not taxable with a proper certificate of capital improvement
• 20 NYCRR § 527.7(b)(5) — a contractor making a capital improvement pays tax on the cost of materials as the ultimate consumer

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (30)S
Sales Tax
August 21, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890501A

On May 1, 1989 a Petition for Advisory Opinion was received from Joseph J. Guido d/b/a
Guido's Electric & Bldg. Supply, 112 Park Avenue, Mechanicville, New York 12118.
The issue raised is whether the sale by Petitioner, Joseph J. Guido d/b/a Guido's Electric &
Bldg. Supply, of an electric thermal storage heating unit or system constitutes a capital improvement
when such unit or system is:
1)

sold, uninstalled, to a homeowner who will perform the installation of such unit or
system;

2)

sold, uninstalled, to a homeowner who will hire a third party contractor to perform
the installation of the unit or system;

3)

sold, installed, to a homeowner, where such installation is to be performed by
Petitioner; or

4)

sold, uninstalled, to a contractor.

Petitioner, an electrical and building material supplier, sells electric thermal storage heating
units and systems. The electric thermal storage heating units and systems store heat electrically, such
storage ideally occurring during off-peak periods to take advantage of low cost off-peak electrical
energy.
One system sold by Petitioner is a combination electric/solar storage system which will
function in hydronic, forced air, and central air heat pump applications. This system's components
include storage tanks, an expansion tank, systems electrical control panel(s), an indoor-outdoor
automatic reset aquastat, a high limit control, an outdoor thermostat (for use in heat pump
applications), temperature, pressure and altitude gauges, an insulation package, heating elements,
modular tank seals, solar taps, and an aluminum unit jacket. Options for this system include a heat
pump interface panel (for off-peak control of circulator pump and domestic hot water), a domestic
hot water interface panel, a 6 or 8 gallon per minute domestic hot water heat exchange coil, a remote
control panel and load shedding thermostats.
The heretofore mentioned system may be designed as the primary heating system, or may be
installed as back-up or second stage to a heat pump.
Installation of this system requires that the system be connected to the electrical system by
wires, the plumbing system and, if required, to the duct work.
Petitioner also sells electric thermal storage heaters which are self-contained individual wall
or floor units. These units have a high heat retention feolite brick core which can store heat for up
to 14 hours and then thermostatically release the heat as needed. These units can be installed

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TSB-A-89 (30)S
Sales Tax
August 21, 1989
individually or as a zone system operated by a central microprocessor.
Installation of these units requires that each unit be wired into the electrical system and that
the unit be fastened to the wall or floor by use of lag bolts. If installed for use with a central
microprocessor, each unit must be connected, by use of telephone wires, to the central
microprocessor.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every sale of tangible
personal property.
Section 1101(b)(9) of the Tax Law and Section 541.2(g) of the Sales and Use Tax
Regulations 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."
Section 541.5(b)(2) of the Sales and Use Tax Regulations states:
Labor and material charges. All charges by a contractor to the
customer for adding to or improving real property by a capital
improvement are not subject to tax provided the customer supplies
the contractor with a properly completed certificate of capital
improvement.
Section 527.7(b)(5) of the Sales and Use Tax Regulation states:
Any contractor who is making a capital improvement must pay a tax
on the cost of materials to him, as he is the ultimate consumer of the
tangible personal property.
When Petitioner sells an electric thermal heating unit or system to a homeowner, uninstalled,
and such homeowner will install the unit or system or hire a third-party contractor to perform the
installation, Petitioner is considered to be selling the homeowner tangible personal property which
is subject to sales tax under Section 1105(a) of the Tax Law. Accordingly, Petitioner will be liable
for collecting state and local sales tax on the total charge to the homeowner.
When Petitioner sells a heating unit or system to a contractor, Petitioner must collect state
and local sales tax on the total charge to the contractor pursuant to Section 527.7(b)(5) of the Sales
and Use Tax Regulations.
When Petitioner sells a unit or system, installed, to a homeowner, Petitioner is considered
to be performing a capital improvement, as such installation meets the definition of a capital
improvement as defined in Section 1101(b)(9)(i), (ii) and (iii) of the Tax Law. Accordingly,
Petitioner will not be required to collect sales tax on the charges to the homeowner, provided the
homeowner furnishes Petitioner a properly completed Form ST-124, Capital Improvement

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Sales Tax
August 21, 1989
Certificate. However, Petitioner, as a contractor, will be liable for use tax on the cost of the unit or
system to Petitioner, pursuant to Section 527.7(b)(5) of the Sales and Use Tax Regulations.

DATED: August 21, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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