Is removing contaminated soil, done as part of installing new gasoline storage tanks, a nontaxable capital improvement?

Plain-English summary

Stewart's Ice Cream Co., Inc. contracts to have old underground gasoline storage tanks removed and new ones installed at its locations. When an old tank has leaked, it must also remove the contaminated soil, repave (often the whole parking lot), and monitor test wells — cleanup that can run $10,000 to $120,000 on top of about $40,000 for the new tanks. It asked whether the hazardous-waste removal, done as part of installing the new tanks, is a capital improvement (and thus not taxable).

The Department made the answer depend on the tanks.

• The capital-improvement test. Under § 527.7, a capital improvement is an addition or alteration that adds value or prolongs the property's life, is permanently affixed so removal causes material damage, and is intended to be permanent. And the end-result rule (§ 527.7(b)(4)) taxes a service on real property by its end result — repair/maintenance is taxable; a capital improvement is not.
• If the tanks are a capital improvement, the cleanup rides along. Where the new tanks are installed as a permanent capital improvement, the removal of the contaminated material is a constituent part of that capital improvement and is exempt from sales tax. The Department cited Building Contractors Association, Inc. v. Tully.
• If the tanks don't qualify, both are taxable. The tanks are not a capital improvement if the lessor requires their removal at the end of the lease, or a municipal law or ordinance requires removal when the station closes. In that case, the tank installation and the connected hazardous-waste removal are taxable.

What this means for you

Environmental cleanup takes the tax character of the job it's part of

Contaminated-soil removal isn't analyzed in isolation. If it's done as part of installing tanks that are a capital improvement, it's a constituent part of that improvement and comes out tax-free. If the underlying installation is taxable, the cleanup is taxable too. Ask first whether the core installation is a capital improvement.

A removal requirement can defeat capital-improvement treatment

The permanence element is where these jobs often fail. If your lease says the tanks must come out at the end of the term, or a local ordinance requires removal when the gas station closes, the tanks aren't a permanent installation — so they aren't a capital improvement, and the whole job (tanks plus cleanup) becomes taxable. Check the lease and local law before treating a tank job as exempt.

Document the capital-improvement basis

Because the exemption turns on permanence and the absence of a removal requirement, keep the documentation — a Certificate of Capital Improvement and evidence that no lease or ordinance forces removal — to support treating the tank installation and its cleanup as nontaxable.

Common questions

Q: Is removing contaminated soil taxable?
A: It depends on the tank installation it's part of. If the new tanks are a capital improvement, the connected soil removal is a constituent part of it and is exempt. If not, it's taxable.

Q: What makes the new tanks a capital improvement?
A: They must be a permanent installation whose removal would cause material damage, adding value or prolonging the property's life — with no lease stipulation or ordinance requiring their later removal.

Q: What if my lease says I have to remove the tanks when the lease ends?
A: Then the tanks aren't a permanent installation, so they aren't a capital improvement — and the tank installation and the hazardous-waste removal are both taxable.

Citations and references

Statutes and regulations:

• 20 NYCRR § 527.7 — capital improvements; end-result test for services on real property
• Tax Law § 1105(c)(3) — tax on installing, maintaining, servicing, or repairing property, excluding capital improvements

Cited authority:

• Building Contractors Association, Inc. v. Tully, 87 AD2d 909, 449 NYS2d 547

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_27s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90 (27)S
Sales Tax
May 29, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900215A

On February 15, 1990 a Petition for Advisory Opinion was received from Stewarts Ice Cream
Co., Inc., Route 9, Saratoga Springs, New York 12866.
The issue raised by Petitioner, Stewarts Ice Cream Co., Inc., is whether the removal of
hazardous waste, in conjunction with the installation of new gasoline storage tanks, is a capital
improvement to real property.
Petitioner contracts to have old gasoline storage tanks removed from its premises and new
ones installed. If the tanks being removed have leaked, Petitioner must also remove the contaminated
material from the location. The costs associated with a typical installation involve an expenditure
of $40,000 for new tanks and $10,000 to $120,000 for the actual contamination cleanup, repaving,
and subsequent monitoring of required test wells. The product removed is not a byproduct of
Petitioner's normal business but is, in reality, construction debris. Removal of the tanks, which are
underground, causes material damage to the property since Petitioner typically replaces an entire
parking lot in a contaminant situation. The installation of the tanks are intended to become a
permanent installation.
Section 527.7 of the Sales and Use Tax Regulations provides in part:
(3) A capital improvement is 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;
(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.
Additionally, Section 527.7(b)(4) of the Sales and Use Tax Regulation states that:
The imposition of tax on services performed on real property depends on the
end result of such service. If the end result of the services is the repair or maintenance
of real property, such services are taxable. If the end result of the same service is a
capital improvement to the real property, such services are not taxable.
If the tanks are installed in accordance with the above general rules, they are considered a
capital improvement, provided there is no stipulation by the lessor that the tanks must be removed
at the end of the lease or a municipal law or ordinance that requires the removal of the tanks upon

-2­
TSB-A-90 (27)S
Sales Tax
May 29, 1990

the termination of the business as a service station. If the installation of the tanks are considered to
be a capital improvement than the removal of any contaminated material would be considered to be
a constituent part of the capital improvement and exempt from sales tax. Building Contractors
Association, Inc. v Tully, 87 AD2d 909, 449 NYS 2d 547.
However, the installation of gas tanks which do not meet the qualifications of a capital
improvement are, subject to tax as well as any charges for the removal of the hazardous waste in
connection with the installation.

DATED: May 29, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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