Can a customer give a contractor a capital-improvement certificate after the contract is signed and the first tax invoice is paid, and who then owes tax?

Plain-English summary

Action Scale Co., Inc. signed a fixed-price contract with a customer on April 1, 1990. At signing, the customer didn't know whether the project was a capital improvement; the contract said the customer would pay any applicable sales tax on top of the fixed price. Action Scale's first invoice included sales tax, which the customer paid. Then, on May 4, 1990, the customer submitted a Certificate of Capital Improvement and refused to pay sales tax on future invoices. Action Scale asked whether a customer can submit a capital-improvement certificate after a binding contract is entered.

The Department's answer, in layers:

• The customer must prove the exemption. All receipts are presumed taxable (Tax Law § 1132(c); regulation § 532.4), and the burden of proving a transaction is exempt is on the customer. So it's up to the customer to establish capital-improvement status by giving a properly completed exemption certificate.
• A proper certificate relieves the contractor going forward. When Action Scale is presented with a properly completed Certificate of Capital Improvement, it is not liable for collecting sales tax on the covered charges — a vendor "is under no duty to investigate or police its customers" and needn't debate what is a capital improvement (Saf-Tee Plumbing v. State Tax Commission, 77 AD2d 1). So it can stop collecting tax on future invoices.
• But the contractor still owes tax on its materials. Under regulation § 541.5(b)(4), if the job actually is a capital improvement, the contractor is liable for sales/use tax on the cost of the materials it incorporates into the job — regardless of whether the customer agrees it's a capital improvement (Mark S. Klein, TSB-A-91(38)S). (And where a customer was charged tax on a capital-improvement job, the customer may be entitled to a refund of tax paid to the contractor.)
• The contract dispute is for the parties. Whether, under their contract, the customer must reimburse the contractor for any tax the contractor must pay is a question of fact and law to be litigated between them — not something an advisory opinion can answer.

What this means for you

A capital-improvement certificate can come after signing — and even after an invoice

Nothing requires the certificate at the moment of contracting. Once the contractor receives a properly completed Certificate of Capital Improvement, it should stop collecting tax on the covered charges; until then, the presumption of taxability means it must collect.

The certificate protects the contractor's collection duty — not its own material tax

A proper certificate relieves the contractor of the duty to collect tax from the customer. It does not erase the contractor's own liability: on a real capital-improvement job, the contractor owes use tax on the cost of materials it incorporates. Those are two different taxes.

Who ultimately pays is a contract question

Whether the customer must reimburse the contractor for the tax the contractor owes on materials depends on the contract between them. The Department won't resolve that; it's a private matter (potentially for a court).

Common questions

Q: Can a customer hand over a capital-improvement certificate after the contract is signed?
A: Yes. Once the contractor receives a properly completed certificate, it stops being liable for collecting tax on the covered charges going forward.

Q: Does the contractor have to judge whether the job is really a capital improvement?
A: No. Under Saf-Tee Plumbing, a vendor has no duty to investigate or police customers or debate what counts as a capital improvement; a proper certificate suffices.

Q: If the job is a capital improvement, does anyone owe tax?
A: Yes — the contractor owes sales/use tax on the cost of the materials it incorporates into the job (§ 541.5(b)(4)), even if the customer agrees it was a capital improvement.

Q: The customer already paid tax on the first invoice — can that be recovered?
A: On a capital-improvement job, the customer may be entitled to a refund of the tax it paid the contractor; whether the customer must reimburse the contractor's material tax is a contract matter between them.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1132(c) (all receipts presumed taxable until the contrary is established; burden on the person required to collect tax or the customer; exemption-certificate rule)
• 20 NYCRR § 532.4 (presumption of taxability; burden of proof; use of exemption certificates; certificate of capital improvement)
• 20 NYCRR § 541.5(b)(4) (where a job is a capital improvement, the contractor is liable for tax on the cost of materials incorporated; customer refund where tax was collected)
• Saf-Tee Plumbing v. State Tax Commission, 77 AD2d 1 (a vendor has no duty to investigate or police its customers)
• Mark S. Klein, TSB-A-91(38)S (contractor liable for tax on materials on a capital-improvement job regardless of customer agreement)

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_67s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (67)S
Sales Tax
October 16, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910620C

On June 20, 1991 a Petition for Advisory Opinion was received from Action Scale Co., Inc.
6 Interstate Ave., Albany, New York 12205.
The issue raised by Petitioner, Action Scale Co., Inc., is whether a customer can submit to
Petitioner a Certificate of Capital Improvement after a binding contract has been entered into.
On April 1, 1990 Petitioner's customer signed a contract with Petitioner for a fixed amount.
The customer did not know at the time the contract was entered into whether or not the project was
a capital improvement. The contract provided that the customer would pay any applicable sales tax
that would be due and that the fixed amount of the contract would be plus any sales tax due. The first
invoice submitted by Petitioner to the customer included sales tax and was paid by the customer.
On May 4, 1990 the customer submitted a Certificate of Capital Improvement to the Petitioner and
refused to pay sales tax on any future invoices.
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 of 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.

-2­
TSB-A-91 (67)S
Sales Tax
October 16, 1991

(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.
*

*

*

(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:
*
*
*

-3­
TSB-A-91 (67)S
Sales Tax
October 16, 1991

(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
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.
Accordingly, pursuant to Section 1132(c) of the Tax Law and Section 532.4 of the Sales and
Use Tax Regulations, it is incumbent upon the customer to establish that the transaction is exempt
from sales tax by presenting Petitioner 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, Petitioner 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, 77
AD2d 1, Petitioner 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, Petitioner is not liable for collecting sales tax. However,
pursuant to Section 541.5(b)(4) of the Sales and Use Tax Regulations, regardless of whether a
customer agrees that Petitioner performed a capital improvement, if Petitioner performed a capital
improvement Petitioner is liable for sales or use tax on the cost of material incorporated into the job
performed. Mark S. Klein, Adv Op Comm of T&F, May 9, 1991, TSB-A-91-(38)S.
It is a matter of fact and law to be litigated between Petitioner and its customer as to whether,
under the terms of the contract between the Petitioner and its customer, the customer is liable for the

-4­
TSB-A-91 (67)S
Sales Tax
October 16, 1991

payment to Petitioner of any sales or use tax that must be paid by the Petitioner if the project is
considered to be a capital improvement. It is not a question that can be answered through an
Advisory Opinion.

DATED: October 16, 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.