How should an HVAC contractor handle sales tax when customers give it exemption certificates or direct-pay permits instead of capital-improvement certificates, and can it buy repairs to rented equipment for resale?

Plain-English summary

Mark S. Klein, for a client "X" — a seller of refrigeration/heating/cooling equipment that sometimes installs or repairs it — asked how to handle sales tax across four situations. X buys its inventory for resale and, when it performs a capital improvement, owes use tax on the parts and supplies; when its work isn't a capital improvement, it charges the customer tax (or takes an exemption/direct-pay certificate).

The Department's framework:

• Certificates shift the burden. Under § 1132(c) and § 532.4, receipts are presumed taxable and the customer must prove an exemption with a properly completed certificate given within 90 days. Once X holds a proper certificate, it is not liable to collect tax, and under Saf-Tee Plumbing v. State Tax Commission it has no duty to investigate or police the customer or to debate whether the work is a capital improvement.
• But a real capital improvement always costs X use tax on materials. Under § 541.5(b)(4), regardless of whether the customer agrees the work was a capital improvement, if X performs a capital improvement it is liable for use tax on the cost of the materials incorporated into the job.

Applying that to the four transactions:

• 1 — No capital-improvement certificate within 90 days. X correctly collects tax on the full job (labor and materials). But if it's later determined the work was a capital improvement and the customer is entitled to a refund, X must pay use tax on its material cost (§ 541.5(b)(4)(ii)(a)).
• 2 — Customer gives an exemption certificate (e.g., manufacturing or R&D) instead. X correctly does not collect tax. But if the customer wasn't entitled to issue that certificate and the job was a capital improvement, X owes use tax on its materials (§ 541.5(b)(4)(ii)(b)).
• 3 — Customer gives a direct-pay permit (claiming the work isn't a capital improvement — e.g., a rooftop unit to be removed in a year or two). X correctly does not collect tax. But if it's later determined the customer should have issued a capital-improvement certificate, X owes use tax on its materials.
• 4 — Repairs to rented equipment. When X, acting as a contractor, rents equipment to perform the job and maintains dominion and control over it, X must pay the tax on repairs to that equipment under § 541.9(d)(4). X cannot buy the repair for resale even though it re-bills the customer: the repair is an expense X incurred in making its sale (§ 526.5(e)), so it is part of X's receipt and cannot be resold — and separately stating it on the customer's bill does not change that.

What this means for you

A proper certificate protects you from collecting — but not from your own use tax on a capital improvement

For a contractor, this is the crucial split. A properly completed exemption certificate, resale certificate, or direct-pay permit relieves you of the duty to collect tax from the customer, and (per Saf-Tee) you don't have to second-guess the customer. But if the job is actually a capital improvement, you remain the consumer of the materials and owe use tax on their cost — no certificate the customer hands you changes that. Price your jobs knowing the material-cost use tax can land on you.

The customer's wrong call can boomerang to your use-tax bill

In each scenario, a customer who mislabels the work (skipping the capital-improvement certificate, or handing you an invalid exemption certificate or a direct-pay permit) can leave you owing use tax on materials once the truth comes out. Keep the contract and job records; where the customer supplies no capital-improvement certificate, those records control the characterization.

You can't turn your own cost of doing the job into a resale

Repairs to equipment you rent and control to perform a contract are your expense. You owe the tax on them and cannot buy them for resale, even if you itemize and re-bill the customer. Separately stating a cost you incurred to make the sale doesn't convert it into a resale (§ 526.5(e)).

Common questions

Q: If a customer gives me a proper exemption certificate, am I off the hook for sales tax?
A: You are relieved of collecting tax from the customer, and you needn't police the customer (Saf-Tee). But if the job was a capital improvement, you still owe use tax on the cost of the materials you incorporated (§ 541.5(b)(4)).

Q: A customer gave me a direct-pay permit instead of a capital-improvement certificate. Can I rely on it?
A: Yes, to avoid collecting tax. But if it later turns out the job was a capital improvement, you owe use tax on your materials.

Q: I rent equipment to do a job and re-bill the customer for a repair to it. Can I buy the repair for resale?
A: No. The repair is your expense in making the sale (§ 526.5(e)); you owe the tax on it (§ 541.9(d)(4)) and cannot resell it, even if separately stated.

Citations and references

Statutes, regulations, and case:

• Tax Law § 1132(c) — presumption of taxability; customer's burden; 90-day certificate rule
• 20 NYCRR § 532.4 — exemption, resale, exempt-use, and capital-improvement certificates and burden of proof
• 20 NYCRR § 541.5(b)(4) — contractor's use-tax liability on materials incorporated into a capital improvement when no (or an invalid) certificate is received
• 20 NYCRR § 541.9(d)(4) — tax on repairs to rented/leased equipment used by a contractor with dominion and control
• 20 NYCRR § 526.5(e) — expenses of making a sale are part of the receipt and not resalable
• Saf-Tee Plumbing v. State Tax Commission, 77 AD2d 1

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_38s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (38)S
Sales Tax
May 9, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S901219A

On December 19, 1990, a Petition for Advisory Opinion was received from Mark S. Klein,
Hodgson, Russ, Andrews, Woods and Goodyear, 1800 One M & T Plaza, Buffalo, New York 14203­
2391.
The issues raised by Petitioner, Mark S. Klein, are:
1.

Whether Petitioner's client is correctly collecting sales tax from its customer where
the customer does not provide a Certificate of Capital Improvement and whether the
client may in the future be required to pay a use tax on its original purchase of
equipment and supplies.

2.

Whether Petitioner's client is correctly accepting a tax exempt certificate where the
client believes it has performed a capital improvement and whether the client may in
the future be required to pay a use tax on its original purchase of equipment.

3.

Whether Petitioner's client can rely upon customer's classification of work that client
performs and that, if the customer provides client with a Direct Pay Permit, client can
rely upon that Permit in the event it is audited.

4.

Whether Petitioner's client when acting as a contractor can purchase for resale repair
service of rental equipment used in performing improvements where such service is
being resold to its customer as part of a taxable transaction.

X, is a seller of refrigeration, heating and cooling equipment who occasionally provides
services (repair or installation work) in connection with the equipment. Since X never knows when
its services will be required, it keeps an inventory of items in its offices. All equipment is purchased
for resale with the recognition that, if X performs a capital improvement, a use tax is due on all parts
and supplies. If X's services are not capital improvements, X charges its customers sales tax for its
work. X either receives the tax payment from its customer (and remits it to the Tax Department) or
receives an exemption certificate or direct pay certificate, if applicable.
X performs the following transactions:

1. X performs services that it believes are capital improvements. However, its customer
   either fails or refuses to provide a certificate of capital improvement within 90 days. In these
   situations, X invoices its customers for tax on the full cost of the job (labor and materials).
   Petitioner requests confirmation that X is correctly collecting tax from its clients and will not be
   required to, itself, pay a use tax on its original purchase of equipment and supplies.

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2. X performs services that it believes are capital improvements. However, its customer
   either fails or refuses to provide a certificate or capital improvement within 90 days. Instead, the
   customer provides an exemption certificate (e.g. stating that the property is used in manufacturing
   or for research and development) to X. Petitioner requests confirmation that X is correctly accepting
   tax exempt certificates and will not be required to, itself, pay a use tax on its original purchase of the
   equipment.
3. X performs services that its clients tell it are not capital improvements. For example, X
   may install a rooftop air conditioning unit (which is generally considered a capital improvement) but
   is advised by its customer that it will be removed after one or two years of use without damage to
   it or the roof. Instead of providing X with a certificate of capital improvement, X's customers provide
   it with a direct pay permit based on the customer's position that the work does not constitute a capital
   improvement, because it is not intended to be a capital improvement and is fully taxable, but that it
   may be exempt on some other basis (e.g. possibly manufacturing equipment or research and
   development equipment). Petitioner requests confirmation that it may rely on its customer's
   classification of the work and that, if the customer provides it with a direct pay permit, X can rely
   upon that permit in the event it is audited.
4. In connection with its services X rents a piece of equipment and charges this cost to its
   customer. During the performance of its services, the rented property becomes damaged and must
   be repaired. X is billed for the repair. At the conclusion of the work, X bills its customer for the
   service, the rental of the equipment and for the repair to the equipment. Petitioner requests
   confirmation that X may properly purchase the repair service for resale as it is being resold to its
   customer as part of a taxable transaction.
   Section 1132 of the Tax Law provides, in part, as follows:
   (c)
   For the purpose of the proper administration of this article and to
   prevent evasion of the tax hereby imposed, it shall be presumed that all receipts for
   property or services of any type mentioned in subdivisions (a), (b), (c) and (d) of
   section eleven hundred five,. . .are subject to tax until the contrary is established, and
   the burden of proving that any receipt,. . .is not taxable hereunder shall be upon the
   person required to collect tax or the customer. .[u]nless (1) a vendor, not later than
   ninety days after delivery of the property or the rendition of the service, shall have
   taken from the purchaser a certificate in such form as the tax commission may
   prescribe.
   Section 532.4 of the Sales and Use Tax Regulations provides, in part, as follows:
   Presumption of taxability. (a) General. It shall be presumed that all receipts
   from sales of property or service of any type mentioned in subdivisions (a), (b), (c)
   and (d) of section 1105 of the Tax Law, all rents for occupancy of the type mentioned
   in subdivision (e) of said section, and all amusement charges of any type mentioned
   in subdivision (f) of said section, are subject to tax until the contrary is established.

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(b) Burden of proof. (1) The burden of proving that any receipt,
amusement charge, or rent is not taxable shall be upon the person
required to collect tax or the customer.
(2)
When the vendor makes a sale which is exempt
because the property purchased is for resale, or for an exempt use, or
the purchaser is an exempt organization, as proof of the exemption
the vendor shall, at the time of sale, obtain a properly completed
exemption certificate from the purchaser and retain the certificate in
his files. Such certificate satisfies the vendor's burden of proof.
(3)
When the vendor is furnished with a properly
completed exemption certificate, the burden of proving a transaction
is not taxable shall be solely upon the customer.
(4)
The vendor shall not be relieved of the burden of proof
when no exemption certificate or an improper certificate has been
furnished him, or when the vendor has actual knowledge that a
certificate furnished is false or fraudulent.
(c)
Use of exemption certificates. (1) To enable purchasers
entitled to an exemption from the sales and compensating use tax to
avail themselves of the exemption and for administrative purposes,
the Department of Taxation and Finance provides various exemption
forms, the use of which is governed by the conditions under which
they are issued. A vendor is not required to collect tax from a
purchaser who furnishes a properly completed exemption certificate.
*
*
*
(d)
Resale certificate. (1) A resale certificate is used to claim
exemption from tax on purchases of tangible personal property or
services which will be resold or transferred to a customer when the:
(i) tangible personal property is for resale as such or as a
physical component part of tangible personal property;
(ii) tangible personal property is for use in performing taxable
services under paragraph (1), (2), (3) or (5) of subdivision (c) of
section 1105 of the Tax Law where such property becomes a physical
component part of the tangible personal property upon which the
services are performed or will be actually transferred to the purchaser
of the service in conjunction with the performance of the service; or
*

*

*

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Sales Tax
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(3)
When property or services are intended for resale and
purchased tax exempt with a resale certificate, but later are used or
consumed rather than resold, the purchaser must pay a tax on the
purchase price.
*

*

*

(e)
Exempt use certificate. (1) In exempt use certificate is
used to claim exemption from State and local sales tax on purchases
of tangible personal property or services to be used for an exempt
purpose.
*

*

*

(f)
Certificate of capital improvement. (1) A certificate of capital
improvement is used to claim exemption from State and local sales
tax on the purchase of a capital improvement as defined in section
527.7(a)(2) of this Title.
(2)
A certificate of capital improvement is properly
completed when it complies with the provisions of paragraph (c)(2)
of this section.
Further, Section 541.5(b)(4) of the Sales and Use Tax Regulations provides, in part, as
follows:
*
*
*
(ii) Where a contractor does not receive a capital improvement certificate
from a customer, the contract or other records of the transaction will prevail. In such
case:
(a)
where the contractor does not receive a capital improvement
certificate, collects tax on the full invoice price and the job is a capital improvement
to real property, the contractor is liable for the tax on the cost of materials
incorporated into the job, plus the tax collected from the customer. The customer is
entitled to a refund of the tax paid to the contractor, or
(b)
where the contractor does not receive a capital improvement
certificate, collects no tax on the charges billed to the customer and the job is a
capital improvement to real property, the contractor is liable for the tax on the cost
of materials incorporated into the job performed.
(iii) If a contract includes the sale of tangible personal property which remains
tangible personal property after installation, the contractor must collect the
appropriate New York State and local taxes from the customer on the selling price,
including any charge for installation, of the tangible personal property unless a

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Sales Tax
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properly completed exemption certificate is issued by the customer. The contractor
may apply for a credit or refund of taxes he has paid on purchases of the tangible
personal property that remain tangible personal property after installation.
Section 541.9(d)(4) of the Sales and Use Tax Regulations provides:
Charges for repairs on rented or leased equipment and motor vehicles are taxable to
the contractor-lessee when the contractor is responsible for any repairs incurred. The
contractor owes the tax due on repairs performed on the equipment and motor
vehicles made within this State and, if such equipment or motor vehicle is repaired
outside this State for a resident contractor, when the equipment or motor vehicle is
subsequently returned to this State.
Section 526.5 of the Sales and Use Tax Regulations provides, in part, as follows:
(e)
Expenses. All expenses, including telephone and telegraph and other
service charges, incurred by a vendor in making a sale, regardless of their taxable
status and regardless of whether they are billed to a customer are not deductible from
the receipts.
*
*
*
Example 2:

An appliance repairman charges $10 per hour plus expenses when on a
service call. The customer is billed as follows:
3 hrs. at $10
Travel
Parts
Meals
Total due

$30
15
20
5
$70

Receipt subject to tax is $70
In the matter, Saf-Tee Plumbing v. State Tax Commission, 77 AD2d 1, the court held that
where a contractor accepted in good faith a Certificate of Capital Improvement within 90 days of the
service performed, the contractor was not under any duty to investigate or police its customer and
had no duty to debate with its customer as to what constituted a capital improvement.
Accordingly, pursuant to Section 1132(c) of the Tax Law and Section 532.4 of the Sales and
Use Tax Regulations, in transactions "1", "2" and "3" it is incumbent upon the customer to establish
that the transaction is exempt from sales tax by presenting X with a properly completed exemption
certificate. Pursuant to Section 1132(c) of the Tax Law and Sections 532.4 and 541.5(b)(4) of the
Sales and Use Tax Regulations, X must collect sales tax from its customer unless a properly
completed exemption certificate is furnished. As set forth in Saf-Tee Plumbing v. State Tax
Commission, X is under no duty to investigate or police its customers and has no duty to debate with
its customers as to what constitutes a capital improvement. Therefore, when presented with a
properly completed exemption certificate, X is not liable for collecting sales tax. However, pursuant

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Sales Tax
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to Section 541.5(b)(4) of the Sales and Use Tax Regulations regardless of whether a customer
concurs that X performed a capital improvement, if X performs a capital improvement X is liable
for use tax on the cost of material incorporated into the job performed.
Therefore, in transaction "1" X is correct in collecting sales tax from its customer in those
cases in which the customer does not present a certificate of capital improvement. However, if the
customer pays the sales tax to X on the improvement performed and it is subsequently determined
that the work done was a capital improvement and that the customer is entitled to a refund of the
sales tax paid to X, then in such a case X would be required to pay use tax based on its cost on the
materials incorporated into the capital improvement in accordance with Section 541.5(b)(4)(ii)(a)
of the Sales and Use Tax Regulations.
Similarly, in transaction "2" X is correct in not collecting sales tax from its customer in those
cases in which the customer presents an exemption certificate. However if it is subsequently
determined that the customer was not entitled to issue an exemption certificate, other than a
certificate of capital improvement, then in such a case X would be required to pay use tax based on
its cost on the materials incorporated into the capital improvement in accordance with Section
541.5(b)(4)(ii)(b) of the Sales and Use Tax Regulations.
Likewise, in transaction "3" X is correct in not collecting sales tax from its customer in those
cases in which the customer presents a direct pay permit instead of a capital improvement certificate,
based upon the customer's representation that the work done does not constitute a capital
improvement. However, if it is subsequently determined that the customer was not entitled to issue
a direct pay permit, but should instead have issued a certificate of capital improvement, then X
would be required to pay use tax based on its cost on the materials incorporated into the capital
improvement in accordance with Section 541.5(b)(4)(ii)(6) of the Sales and Use Tax Regulations.
Concerning transaction "4", if X is acting as a contractor and it leases equipment to perform
the contract, and it maintains dominion and control over the equipment, then it must pay sales tax
on any repairs that it has done on the equipment pursuant to Section 541.9(d)(4) of the Sales and Use
Tax Regulations.
X is required to pay the sales tax on the repair, even if in billing its customer it separately
states its charge for the service and its charge for the repair, since the repair is an expense incurred
by X in connection with its sale of its service and thus the repair service may not be resold in
accordance with Section 526.5(e) of the Sales and Use Tax Regulations.

DATED: May 9, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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