Is replacing an underground fuel oil storage tank a nontaxable capital improvement, even though it can eventually be taken out of service?

Plain-English summary

Galesi Enterprises replaced the original underground fuel oil storage tank at an office building it owns (a backup heat source). The new tank is set on a poured concrete slab, buried under earth fill, and covered with asphalt, and is intended as a permanent installation that will extend the property's useful life. Galesi asked whether the tank replacement is a capital improvement (and therefore not subject to sales tax).

The Department said yes — it's a capital improvement, not taxable. Under Reg. § 527.7(3), a capital improvement must (i) substantially add value or appreciably prolong the property's useful life, (ii) become part of or be permanently affixed to the real property so that removal would cause material damage, and (iii) be intended as a permanent installation. And under § 527.7(b)(4), whether a real-property service is taxable turns on its end result — a capital improvement is not taxable.

The tank clearly met conditions (i) and (ii). The only question was permanence (condition (iii)): a tank installation is a capital improvement unless a municipal law or ordinance requires the specific removal of the tank when it's taken out of use. Here the municipality has no ordinance requiring removal; it relies on New York DHCR Reg. § 1164.5, which lets an out-of-service tank be either removed or safely abandoned in place. Because removal is not absolutely required, the tank met the intent-of-permanency requirement. So the installation is a capital improvement and not subject to State or local sales tax.

What this means for you

Property owners and tank contractors

Replacing a buried, permanently affixed storage tank generally qualifies as a nontaxable capital improvement — but the permanence element has a specific trap: if a local law or ordinance requires the tank to be removed once it's out of service, the "permanent installation" element fails and the work can be taxable. Where the applicable rules let you abandon the tank safely in place (as New York's DHCR Reg. § 1164.5 does) rather than mandating removal, the permanence requirement is satisfied.

Check the local ordinance, not just the state rule

The decisive fact wasn't the physical installation — it was that no municipal ordinance forced removal. Before treating a tank installation as a capital improvement, confirm the local jurisdiction doesn't require removal on abandonment.

Accountants and tax professionals

Standard capital-improvement analysis under Reg. § 527.7(3) and § 527.7(b)(4). The nuance is condition (iii) permanence for storage tanks: a mandatory-removal ordinance defeats permanence, while an abandon-in-place option (DHCR Reg. § 1164.5) preserves it. Result here: nontaxable capital improvement.

Common questions

Q: Is replacing an underground fuel tank taxable in New York?
A: No, on these facts. It's a capital improvement — permanently affixed and value-adding — so the installation isn't subject to sales tax.

Q: Why did the Department focus on whether the tank must be removed?
A: Permanence (intent of a permanent installation) is a required element of a capital improvement. If a local ordinance requires removing the tank when it's out of service, it isn't truly permanent. Here no ordinance required removal, so permanence was satisfied.

Q: What if my municipality does require removal of abandoned tanks?
A: Then the permanence element may fail, and the installation could be taxable rather than a capital improvement. Check your local ordinance.

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Sales and Use Tax Regulations § 527.7(3) (definition of capital improvement — value/useful life, permanent affixation, intent of permanence)
• Sales and Use Tax Regulations § 527.7(b)(4) (taxability of services on real property depends on the end result)
• New York State Division of Housing and Community Renewal Regulations § 1164.5 (abandonment or removal of liquid storage tanks — allows safe abandonment in place)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_61s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (61) S
Sales Tax
August 14, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S920513B

On May 13, 1992 a Petition for Advisory Opinion was received from Galesi Enterprises, P.O.
Box 98, Guilderland Center, New York 12085.
The issue raised by Petitioner, Galesi Enterprises, is whether the replacement of an
underground fuel oil tank is a capital improvement and therefore not subject to sales tax.
Petitioner, Galesi Enterprises, entered into a contract for the installation of an underground
fuel oil storage tank which is to be used as a backup heat source for an office building owned by
Petitioner. The new fuel oil storage tank is located on the premises of the office building and
replaces the original fuel oil tank which was installed when the building was constructed in 1971.
The tank is installed underground and permanently affixed to the real property in that it is secured
to a poured concrete slab, surrounded and covered with earth fill, then covered with asphalt. The
replacement will extend the useful life of the property. Petitioner anticipates the useful life of the fuel
oil tank to meet or exceed that of the previous one. Petitioner's intent is that the installation of the
fuel tank will be 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.

TP-9 (9/88)

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TSB-A-92 (61) S
Sales Tax
August 14, 1992

Where a tank is installed in accordance with the above general rules, such installation is
considered to be a capital improvement, provided that there is no municipal law or ordinance
requiring the specific removal of the tank upon termination of use of the tank.
The municipality in which the tank was installed does not have a local ordinance pertaining
to the removal of tanks which are temporarily out of service or abandoned. However, the
municipality does rely upon Section 1164.5 of the New York State Division of Housing and
Community Renewal Regulations for enforcing proper procedures regarding the safeguarding of
tanks which are temporarily out of service or which are abandoned.
Section 1164.5 of said Regulations provides as follows:
1164.5 Abandonment or removal of any class I, II or III liquid storage tank.
(a) Storage tanks rendered temporarily out of service for a period of 30 days
to one year shall be made safe by capping the fill line, gage opening, and pump
suction and securing against tampering.
(b) Storage tanks not placed back in service within one year must be removed
or abandoned in place with proper safeguarding.
(c) All storage tanks abandoned in place shall be made safe by removing
flammable or combustible liquids from the tank and connecting lines; disconnecting
the suction, inlet, gage and vent lines; filling the tanks completely with an inert, solid
material; and capping the remaining piping.
In the instant case, the installation of the tank was a capital improvement. The installation
unquestionably satisfied conditions (i) and (ii) of Section 527.7(3) of the Sales and Use Tax
Regulations. Because Section 1164.5 of the Division of Housing and Community Renewal
Regulations does not absolutely require removal of a tank due to the tank being temporarily out of
service or abandoned but offers the option of either leaving the tank in place with the exercising of
proper safeguarding or removing the tank, the installation of the tank at issue is considered to meet
the intent of permanency required under condition (iii) of Section 527.7(3) of the Sales and Use Tax

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TSB-A-92 (61) S
Sales Tax
August 14, 1992

Regulations. Accordingly, the installation of the tank is considered to be a capital improvement and
therefore not subject to State or local sales taxes in accordance with Section 527.7(b)(4) of the Sales
and Use Tax Regulations.

DATED: August 14, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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