Is installing easily-relocatable, floor-to-ceiling moveable walls a tax-exempt capital improvement, and can the installer accept a Certificate of Capital Improvement on the sale?

Subject

, are whether the installation of moveable walls in new or old construction is a capital improvement and whether a Certificate of Capital Improvement may be accepted on the sale of such moveable walls.

What this means for you

Clestra Hauserman manufactures and installs floor-to-ceiling moveable walls that, per its own sales materials, can be easily relocated without causing any harm to the building or structure.

New York's capital-improvement test requires an addition or alteration to real property to meet all three of the following: it must substantially add value or extend useful life; it must become part of the property (or be so permanently affixed that removing it would cause material damage); and it must be intended as a permanent installation. All three conditions must be satisfied -- missing even one disqualifies the work from capital-improvement status. Because Clestra's walls don't become part of the real property and aren't intended to be permanent (that's the whole point of "moveable" walls), the installation fails at least two of the three prongs and is a taxable service regardless of whether the building is new or old construction.

On the separate certificate question: a contractor who accepts a Certificate of Capital Improvement from a customer in good faith, within 90 days of completing the job, isn't obligated to investigate or second-guess the customer's characterization -- the burden shifts to the customer, and the contractor isn't liable even if the certificate turns out to be wrong, unless the customer knowingly or fraudulently issued it (which exposes the customer, not the contractor, to penalties and interest). But since moveable walls categorically aren't a capital improvement under this opinion, a customer issuing such a certificate for this specific product would be issuing a factually incorrect certificate -- something contractors in this situation should be aware of even though they can still rely on it in good faith.

Q&A

Q: We sell/install partitions, walls, or fixtures that are marketed as easily removable or relocatable -- does that automatically disqualify them as a capital improvement?
A: Per this opinion's reasoning, yes -- if the product doesn't become part of the real property and isn't intended as a permanent installation, it fails required prongs of the three-part capital-improvement test (Tax Law § 1101(b)(9)(i)), regardless of the building's age or whether it's new or existing construction.

Q: If our customer hands us a Certificate of Capital Improvement for a product like this, are we safe collecting no tax?
A: This opinion confirms a contractor who accepts a properly completed certificate in good faith within 90 days isn't liable even if it's later found incorrect -- the customer bears responsibility for a knowingly false certificate. But since this exact product type isn't a capital improvement, accepting such a certificate here would mean accepting a certificate that doesn't match the facts.

Q: What's the practical difference for a contractor between a capital improvement and a taxable installation?
A: On a capital improvement, the contractor pays tax only on its own materials cost and the customer owes no sales tax on the job; on a taxable (non-capital-improvement) installation, the contractor must collect sales tax from the customer on the full invoice price, including installation charges.

Citations

• Tax Law § 1101(b)(9)(i) -- defines "capital improvement" as an addition/alteration meeting all three of: substantial value-add or useful-life extension; becoming part of / permanently affixed to real property; and intended permanence.
• Tax Law § 1132(c) -- establishes the presumption that receipts are taxable unless the contractor obtains a proper Certificate of Capital Improvement within 90 days.
• 20 NYCRR § 541.5(b)(4) -- implements the certificate procedure, shifting the tax burden to the customer when a proper certificate is accepted, and describing contractor liability when no certificate is obtained.
• Allied Steam Corp., Adv Op Comm T&F, October 10, 1990, TSB-A-90(51)S -- confirms all three capital-improvement prongs must be met, and addresses customer liability for a knowingly false certificate.
• Saf-Tee Plumbing v. State Tax Commission, 77 A.D.2d 1 -- cited for the rule that a contractor accepting a certificate in good faith has no duty to investigate or debate what constitutes a capital improvement.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_43s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (43)S
Sales Tax
September 16, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940502B

On May 2, 1994, a petition for Advisory Opinion was received from Clestra Hauserman, Inc.,
29525 Fountain Parkway, Solon, Ohio 44139.
The issues raised by Petitioner, Clestra Hauserman, Inc., are whether the installation of
moveable walls in new or old construction is a capital improvement and whether a Certificate of
Capital Improvement may be accepted on the sale of such moveable walls.
Petitioner manufactures and installs floor to ceiling moveable walls. As indicated by
Petitioner's sales brochure, the walls are easily moved, and when moved, cause no harm to the
building or structure.
Section 1101 (b)(9)(i) of the Tax Law defines a capital improvement as:
An addition or alteration to real property which:
(A)

Substantially adds to the value of the real property, or appreciably prolongs the useful
life of the real property; and

(B)

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

(C)

Is intended to become a permanent installation.

The criteria for a capital improvement must be met in their entirety. The inability to meet
any one of the three conditions will prevent the property in question from qualifying as a capital
improvement. Allied Steam Corp., Adv Op Comm T & F, October 10, 1990 TSB-A-90(51)S.
Petitioner's moveable walls do not become a part of the real property and their installation is not
intended to become permanent. Since the installation of Petitioner's moveable walls is not a capital
improvement, it makes no difference whether the property in which they are installed is new or old
construction.
With regard to whether a Certificate of Capital Improvement may be accepted, Section
1132(c) of the Tax Law states, in part:
(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

-2­
TSB-A-94 (43)S
Sales Tax
September 16, 1994
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 541.5(b)(4) of the Sales and Use Tax Regulations explains the effect of Section
1132(c) of the Tax Law upon the Certificate of Capital Improvement.
(4)
Documents; capital improvement contracts. (i) When a properly completed
certificate of capital improvement has been furnished to the contractor, the burden of proving
the job or transaction is not taxable and the liability for the tax rests solely upon the
customer.
(a) The prime contractor should obtain a certificate of capital improvement from the
customer and retain it as part of his records. Copies of such certificate must be furnished to
all subcontractors on the job and retained as part of their records.
(b) A certificate of capital improvement may not be issued by a contractor,
subcontractor or any other person to a supplier on the purchase of tangible personal property.
(ii)
Where a contractor does not receive a capital improvement certificate from
a costumer, 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 the 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 the purchases of the tangible personal property that remains tangible personal
property after installation.
Therefore where Petitioner has accepted in good faith a Certificate of Capital Improvement
within 90 days after the completion of the capital improvement, it is not under a duty to investigate
or police its customers and has no duty to debate with its customers as to what

-3­
TSB-A-94 (43)S
Sales Tax
September 16, 1994

constitutes a capital improvement (See: Saf-Tee Plumbing v State Tax Commission, 77 AD2d 1).

However, if Petitioner's customers knowingly or fraudulently issue a false exemption
certificate, they will be liable for penalties and interest in accordance with section 1145 of the Tax
Law. Allied Steam Corp., supra.

DATED: September 16, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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