When a kitchen contractor sells cabinets, does it collect sales tax from the customer, or pay tax on its own purchase of the cabinets?

Plain-English summary

A kitchen-and-bath contractor buys kitchen cabinets from a manufacturer, which drop-ships them to the contractor's customer. Sometimes a subcontractor installs the cabinets; sometimes the contractor installs them itself. The contractor's accountants asked whether the contractor must collect sales tax on the cabinets.

The Department said the answer turns on whether the contractor installs the cabinets:

• Cabinets sold without installation = a taxable retail sale. If the contractor just sells the cabinets (someone else installs them), it is making a retail sale of tangible personal property and must collect sales tax from the customer (Tax Law 1105(a)). Because a contractor is generally the consumer of its materials and cannot buy them for resale, it will already have paid tax when it bought the cabinets -- so it may claim a credit or refund of that tax (20 NYCRR 534.5(b), 541.1(b)), avoiding double taxation.
• Cabinets the contractor installs = a capital improvement. If the contractor installs the cabinets, it is performing a capital improvement to real property. It collects no sales tax from the customer, but it pays sales tax on its own purchase of the cabinets, as the ultimate consumer (20 NYCRR 527.7(b)(5), 541.1(b)).

What this means for you

Kitchen, bath, and remodeling contractors

The tax treatment flips depending on who installs:

• You install it (capital improvement): you pay tax when you buy the materials and charge the customer no sales tax. Keep a properly completed capital improvement certificate (Form ST-124) from the customer.
• You only sell it (no install by you): you charge the customer sales tax on the sale, and you can recover the tax you paid on your purchase.

Don't try to buy installed-job materials "for resale"

As a contractor doing a capital improvement, you are the consumer of the materials -- you can't use a resale certificate to buy them tax-free. You pay the tax up front. The credit/refund mechanism only applies when you end up making a taxable retail sale of the same property.

Drop-shipping doesn't change the analysis

Here the manufacturer drop-shipped straight to the customer, but the taxability still depended on whether the contractor's job was a sale of goods or an installed capital improvement.

Common questions

Q: I sold cabinets but didn't install them -- do I charge tax?
A: Yes. That's a retail sale under section 1105(a), so you collect sales tax; you can then recover the tax you paid when you bought them.

Q: I installed the cabinets -- do I charge my customer tax?
A: No. Installation is a capital improvement, so you charge no sales tax. Instead you pay sales tax on your own purchase of the cabinets.

Q: Can I buy the cabinets tax-free for resale since I'm reselling to my customer?
A: Not when you're installing them as a capital improvement -- you're the consumer and pay tax on the purchase. The resale route only fits a straight sale of the goods.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner and the facts described. Treat it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(4) (contractor is the consumer of materials used in construction)
• 20 NYCRR 527.7(b)(5) (contractor making a capital improvement pays tax on materials)
• 20 NYCRR 541.1(b) (sale of materials to a contractor is a taxable retail sale)
• 20 NYCRR 534.5(b) (credit/refund when a contractor makes a retail sale of taxed property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (46)S
Sales Tax
September 1, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930430B

On April 30, 1993 a Petition for Advisory Opinion vas received from Maggio & Maggio
CPA's, 285 Middle Country Rd., Smithtown, New York 11787.
The issue raised by Petitioner, Maggio & Maggio CPA's, is whether its client, a contractor,
is required to collect sales tax on the sales of kitchen cabinets.
Petitioner's client is engaged in the business of installing and renovating kitchens and
bathrooms. The client purchases kitchen cabinets from a manufacturer who drop ships them to the
client's customer. The customer then hires a subcontractor to install the cabinets. In addition, in
some cases the client will install the cabinets.
Section 527.7(b)(5) of the Sales and Use Tax Regulations provides that:
Any contractor who is making a capital improvement must pay a tax on the cost of
materials to him, as he is the ultimate consumer of the tangible personal property.
Section 541.1(b) of the Sales and Use Tax Regulations provides that:
The principle distinguishing feature of a sale to a contractor, as compared to a sale
to other vendors who purchase tangible personal property for resale, is that the sale
of tangible personal property to a contractor for use or consumption in construction
is a retail sale and subject to sales and use tax, regardless of whether tangible
personal property is to be resold as such or incorporated into real property as a capital
improvement or repair. Whenever a contractor uses materials, on which the
contractor has paid sales tax, in a repair or maintenance contract (except interior
cleaning and maintenance contracts of 30 days or more) subject to the sales tax on
services under section 1105(c) of the Tax Law, the contractor may be entitled to a
refund or credit of the portion of the tax he paid attributable to the materials
transferred to the customer.
Section 534.5(b) of the Sales and Use Tax Regulations provides that:
A contractor, subcontractor or repairman who makes a retail sale of tangible personal
property upon which tax was required to be paid when purchased by the contractor,
subcontractor or repairman pursuant to the provisions of section 1101(b)(4) of the
Tax Law may apply for a credit or refund of such tax.

-2­
TSB-A-93 (46)S
Sales Tax
September 1, 1993
Accordingly, in a transaction where Petitioner's client sells tangible personal property
consisting of kitchen cabinets without installation, the client is required to collect the sales tax
imposed under Section 1105(a) of the Tax Law. He is then entitled to a refund or credit of any sales
tax which he was required to pay in accordance with the provisions of Sections 534.5(b) and
541.1(b) of the Sales and Use Tax Regulations since as a contractor he was not entitled to purchase
the kitchen cabinets for resale.
However, in those cases where Petitioner's client installs the kitchen cabinets, he is providing
a capital improvement and therefore is not required to collect sales tax from his customers. He is
however required to pay sales tax on his purchases of the kitchen cabinets in accordance with the
provisions of Sections 527.7(b)(5) and 541.1(b) of the Sales and Use Tax Regulations.

DATED: September 1, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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