When is replacing air-conditioning condensing units or thru-the-wall units a nontaxable capital improvement, and when is the work taxable repair of tangible personal property?

Plain-English summary

ANC Heating and Air Conditioning, Inc. asked when its air-conditioning work counts as a nontaxable capital improvement and when it's a taxable service. The answer turns on the three-part test in Tax Law § 1101(b)(9) and 20 NYCRR § 527.7: the work must (i) substantially add value or prolong the life of the real property, (ii) become part of or be permanently affixed so removal would cause material damage, and (iii) be intended to be permanent. Installing a capital improvement is exempt from the installation tax under § 1105(c)(3); other installations and repairs are taxable.

The Department's line-drawing:

• Window and thru-the-wall units — generally not capital improvements. In-window and thru-the-wall air conditioners are not capital improvements, except the original installation replacing a thru-the-wall mounted unit. Repairing or replacing their parts is also not a capital improvement (see Publication 862).
• Central-system condensing units and PTACs — capital improvements. Outside condensing units of central air-conditioning systems, and package terminal air conditioners (a type of central system), that are permanently wired and fastened so removal would materially damage the unit or the realty are capital improvements. So installing them is not taxed as an installation service.
• But repairs to their components are taxable. Repairing or replacing the compressors, condenser coils, condenser fans, controls, and relays in those units is the repair, maintenance, or installation of tangible personal property, taxable under § 1105(c)(3) — even though the overall unit is a capital improvement.

What this means for you

The unit and the repair are taxed differently

Installing a permanently affixed central-AC condensing unit or a package terminal unit can be a tax-free capital improvement, but that status does not carry over to later component work. Swapping a compressor, coil, fan, control, or relay is a taxable repair of tangible personal property, billed with sales tax.

Window and thru-the-wall units are usually taxable

Ordinary in-window and thru-the-wall air conditioners aren't capital improvements, and neither is repairing their parts. The one carve-out is the original installation of a thru-the-wall mounted unit — that first, built-in installation can qualify, but replacements and part repairs generally don't.

Permanence is the pivot

As with other capital-improvement questions, what matters is whether the unit is affixed so that removal would cause material damage. A central condensing unit hard-wired and fastened in place clears that bar; a plug-in window unit does not. Publication 862 is the Department's guide classifying these improvements and repairs.

Common questions

Q: We installed a new outdoor central-AC condensing unit. Do we charge sales tax on the installation?
A: If it's permanently wired and fastened so removal would cause material damage, that installation is a capital improvement and isn't taxed as an installation service.

Q: We replaced the compressor in that same unit. Taxable?
A: Yes. Repairing or replacing compressors, coils, fans, controls, and relays is taxable repair of tangible personal property under § 1105(c)(3), even in a unit that was a capital improvement.

Q: What about a window or thru-the-wall air conditioner?
A: Those generally aren't capital improvements, and repairing their parts isn't either — the only exception is the original installation of a thru-the-wall mounted unit.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9) — definition of capital improvement (three-part test)
• Tax Law § 1105(a) — tax on receipts from retail sales of tangible personal property
• Tax Law § 1105(c)(3) — tax on installing property, except installation constituting a capital improvement
• 20 NYCRR § 527.7 — capital improvements

Referenced guidance:

• New York State Department of Taxation and Finance, Classifications of Capital Improvements and Repairs to Real Property, Publication 862 (7/87)

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_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (47)S
Sales Tax
December 8, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890808B

On August 8, 1989 a Petition for Advisory Opinion was received from ANC Heating and Air
Conditioning, Inc., 104 N. Duane Ave., Endicott, N.Y. 13760.
The issues raised by Petitioner, ANC Heating and Air Conditioning, Inc., are whether the
replacement of air conditioning condensing units required because of an upgrading or a mechanical
breakdown are capital improvements and whether the replacement or repair of thru-the-wall air
conditioners or package terminal air conditioners are capital improvements.
Section 1101(b)(9) of the Tax Law and Section 527.7 of the Sales and Use Tax Regulations
define the term capital improvement as an addition or alteration to real property (i) which
substantially adds to the value of the real property, or appreciably prolongs the useful life of the real
property, and (ii) which 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 1105(a) of the Tax Law imposes a tax on "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article."
Section 1105(c)(3) of the Tax Law imposes a tax on receipts from the service of "Installing
tangible personal property . . . except for installing property which, then installed, will constitute (a).
. . capital improvement to real property. . ."
The installation of in-window or through-the-wall air conditioners other than the original
replacement of through-the-wall mounted units, do not constitute capital improvements within the
meaning of Section 1105(c)(3) of the Tax Law. Likewise the replacement or repair of any parts of
such air conditioners do not constitute capital improvements. See New York State Department of
Taxation and Finance, New York State and Local Sales and Use Tax Classifications of Capital
Improvements and Repairs to Real Property, Publication 862 (7/87), at 4, 5.
Outside condensing units of central air conditioning systems and package terminal air
conditioners, which are a type of central air conditioning system, that are permanently wired to the
electrical system and fastened to the wall or floor in such a way that their removal would cause
material damage to either the air conditioner or the real property are considered to be capital
improvements.
TP-9 (9/88)

-2­
TSB-A-89 (47)S
Sales Tax
December 8, 1989

However, the repair or replacement of compressors, condenser coils, condenser fans, controls and
relays in such units constitute the repair, maintenance or installation of tangible personal property
and thus are subject to the sales tax imposed pursuant to Section 1105(c)(3) of the Tax Law. (See
Publication 862 (7/87) supra.).

DATED: December 8, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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