When a hotel strips an entire floor down to bare plaster and rebuilds it, are the painting, wall covering, and new carpet installation charges exempt as a capital improvement?

Plain-English summary

A law firm asked about a client's hotel renovation project: remodeling an entire floor at a time, at a cost of $2-3 million per floor. The work is extensive -- demolishing walls (including changes to meet disability-access requirements), stripping all walls to bare plaster, applying new plaster ("skimming"), sanding, stripping metal fixtures to bare metal, painting everything, applying wall coverings, replacing electrical wiring and fixtures, replacing bathroom fixtures, and pulling up all old carpet down to the concrete slab before installing new carpet or tile. The project is capitalized for both book and tax purposes. The question: does this qualify as a tax-exempt "capital improvement" to real property?

The Department split the analysis. For everything except floor covering, the remodeling meets New York's three-part capital-improvement test (substantially adds value, becomes part of the real property such that removal would cause material damage, and is intended as permanent) -- so charges for demolition, plastering, painting, and wall-covering installation are not taxable. But floor covering (carpet, carpet padding, vinyl, and linoleum) has its own special, narrower statutory rule: it only counts as a capital improvement when it's the initial finished floor covering installed as part of new construction, a new addition, or a total reconstruction of a building's major structural elements (roof, load-bearing walls, foundation, and similar elements). A floor-by-floor cosmetic and mechanical remodel -- even an expensive, extensive one -- doesn't meet that higher bar, since it isn't new construction, an addition, or a total reconstruction of the building's structural skeleton. So new carpet installation on the remodeled floor remains fully taxable, even though the painting and wall-covering work on that very same floor is exempt. One more wrinkle: ceramic tile and marble floors are legally NOT "floor covering" under this special rule, so they're evaluated under the ordinary capital-improvement test instead -- and in this remodel, they qualify as exempt.

What this means for you

Hotels, commercial property owners, and general contractors doing major renovations

Don't assume an entire big-ticket renovation gets uniform tax treatment. Even within the same floor and the same contract, walls/paint/wiring can be exempt while new carpet on that same floor stays taxable, because floor covering has its own stricter statutory test that looks at whether the building underwent new construction, an addition, or total structural reconstruction -- not just whether the room was gutted and redone.

Contractors billing for combined remodeling and flooring work

Break out floor-covering charges (carpet, carpet padding, vinyl, linoleum) separately from other capital-improvement work on your invoices, since they may need different tax treatment even in the same job -- and remember that ceramic tile and marble are treated differently than "floor covering" and generally follow the regular capital-improvement rules instead.

Accountants and tax professionals

This is a clean companion to TSB-A-99(5)S (architectural signage capital improvements) from earlier in this corpus -- both apply the three-part capital-improvement test from Tax Law § 1101(b)(9), but this ruling illustrates the special, narrower carve-out for floor covering under § 1101(b)(9)(iii) and 20 NYCRR § 541.14, which requires new construction, a new addition, or total reconstruction (not just any capital improvement) before floor covering itself can be exempt.

Common questions

Q: Is a full gut renovation of a hotel floor automatically a capital improvement for everything installed?
A: No -- floor covering (carpet, padding, vinyl, linoleum) is subject to a separate, stricter test requiring new construction, a new addition, or total structural reconstruction of the building, which an interior remodel typically doesn't satisfy even when extensive.

Q: Are ceramic tile and marble floors treated the same as carpet for this purpose?
A: No -- ceramic tile and marble are not "floor covering" under the special statutory definition, so they're evaluated under the ordinary capital-improvement test, and in this remodel they qualified as exempt.

Q: Does the size or cost of the renovation matter to whether it's a capital improvement?
A: Not directly -- a $2-3 million-per-floor renovation still fails the floor-covering carve-out here because it isn't new construction, a new addition, or a total reconstruction of the building's major structural elements, regardless of cost.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(9) (definition of "capital improvement"; floor covering carve-out)
• Tax Law § 1105(c)(3)(iii) (capital-improvement installation exclusion)
• 20 NYCRR § 541.14 (floor covering)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_91s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(91)S
Sales Tax
December 30, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980901B

On, September 1, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Maria T. Jones, Esq., Kramer, Levin, Naftalis & Frankel, 919 Third Avenue,
New York, New York 10022.
The issue raised by Petitioner, Maria T. Jones, is whether painting and the installation of wall
and floor coverings made in conjunction with the remodeling of an entire floor in a hotel constitutes
a capital improvement for sales tax purposes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner’s client is the owner of a building in New York City in which it operates a hotel.
Petitioner’s client has undertaken to reconstruct several floors of the hotel. Reconstruction requires
the closure of the entire floor from use by the public. The reconstruction consists of the following.
During the demolition process, the contractor demolishes and removes any walls slated for
demolition as determined by the architect and/or designer. Renovations in a few guest rooms include
the removal of walls or parts of walls in order to accommodate new building code requirements with
regard to accommodations for persons with disabilities. Occasionally, other walls are demolished
for reasons consistent with the owner’s use of the floor, for example, changes to service areas.
Unnecessary demolition of walls is avoided as the walls are made of solid plaster and are difficult
and expensive to remove and replace.
Wall and ceiling moldings are removed by the contractor in preparation for installation of
new moldings. All existing electrical fixtures, devices and switches and selected outlets are removed
for the installation of new devices. New wiring is installed, wherever needed.
All walls are stripped to the bare plaster. The contractor removes wall covering and paint
of any type on the existing walls so that the bare surfaces of the plaster are exposed. In order to
prepare the walls for new surfaces, all existing finishes and fixtures are stripped leaving an
"unfinished canvas." All walls, ceilings, soffits and fascias, including all vertical and horizontal
surfaces are then completely covered with a layer of new plaster. This process, the application of
plaster via trowels, is called "skimming." After the new plaster is applied, all the surfaces are
sanded. The process is time consuming and labor intensive.

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December 30, 1998

In conjunction with the skimming process, all existing metal surfaces (inclusive of but not
limited to convector covers, grills in ceilings, doors and frames, etc.) are stripped. The stripping
takes the metal "back to bare metal" to allow a smooth application of new finishes. After the sanding
of all plaster surfaces and the complete stripping of all metal surfaces, the surfaces are cleaned and
prepared for the new finishes.
Paint is applied to all vertical and horizontal surfaces, inclusive of but not limited to
moldings, chair rails, trims, doors and frames, convectors, and ceilings, all of which are physically
and permanently attached to the building. All wall surfaces slated to receive wall covering receive
an application of a special coating followed by the application of the wall covering.
During the demolition process, the contractor removes all existing carpeting, area rugs and
carpet padding so that the building concrete floor slab is exposed. Damage to the concrete floor slab
is corrected, if necessary. New padding and carpeting is installed on all floors. Ceramic tile or
marble is installed if appropriate.
Existing sink and other bathroom fixtures may be removed in preparation for the installation
of new fixtures and other bathroom renovations.
The average cost of the building improvements is from $2 to 3 million per floor, depending
on how many guest rooms are on each floor. The cost of the project is capitalized for book purposes
and tax purposes.
Applicable Law & Regulations
Section 1101(b)(9) of the Tax Law, in part, defines a capital improvement as follows:
(i) 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.
*

*

*

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Sales Tax
December 30, 1998

(iii) Notwithstanding the provisions of subparagraph (i) of this paragraph: (A)
Floor covering, such as carpet, carpet padding, linoleum and vinyl roll flooring, tile,
linoleum tile and vinyl tile, installed as the initial finished floor covering in new
construction or a new addition to or total reconstruction of existing construction shall
constitute an addition or capital improvement to real property, property or land; and
(B) Floor covering, such as carpet, carpet padding, linoleum and vinyl roll
flooring, carpet tile, linoleum tile and vinyl tile, installed other than as described in
clause (A) of this subparagraph shall not constitute an addition or capital
improvement to real property, property or land.
Section 1105(c)(3)(iii) of the Tax Law provides an exclusion from tax "for installing property
which, when installed, will constitute an addition or capital improvement to real property, property
or land, as the terms real property, property or land are defined in the real property tax law as such
term capital improvement is defined in paragraph nine of subdivision (b) of section eleven hundred
one of this chapter."
Section 541.14 of the Sales and Use Tax Regulations provides, in part:
Floor Covering. (a)(1) The installation of floor covering is subject to sales
tax, regardless of the method of installation or the surface over which the floor
covering is installed, unless the installation qualifies for exemption under subdivision
(b) of this section.
(2)(i) The term floor covering includes carpet, carpet tile, carpet padding,
linoleum and vinyl roll floor covering, linoleum tile, vinyl tile and other similar floor
coverings but not area rugs and the like.
(ii) The term floor covering does not include flooring such as wood flooring,
ceramic tile, terrazzo, marble, concrete or other similar flooring. Accordingly, the
provisions of this section do not apply to the installation of flooring. See section
527.7 of this Title for the rules to determine whether such flooring qualifies as a
capital improvement.
(b)(1) The installation of floor covering is exempt from sales tax only if the
following criteria are met:
(i) the installation must be of the initial finished floor covering; and
(ii) the installation must be made in:

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December 30, 1998

(a) the new construction of a building or structure; or
(b) the new construction of an addition to an existing building or structure;
or
(c) the total reconstruction of an existing building or structure.
(2) For purposes of this subchapter:
(i) "New construction of a building or structure" means the original
construction of a building or structure that did not exist before such construction.
(ii) "New construction of an addition to an existing building or structure"
means the original construction of a new room, wing or other discrete, substantial
unit of a building or structure which enlarges the exterior of the existing building or
structure.
(iii) "Total reconstruction of an existing building or structure" means the
complete rehabilitation or replacement of most of the major structural elements of an
existing building or structure, such as the roof, ceiling trusses, floor joists, walls,
support columns, support beams, girders and the foundation.
(3) Floor covering installed as the initial floor covering shall be deemed to be
installed in new construction, a new addition or total reconstruction where it is
installed within six months of the date of completion of the new construction, new
addition or total reconstruction.
(c) Examples.
*

*

*

Example 5: A floor covering contractor removes wall-to-wall carpet and
installs new wall-to-wall carpet padding and carpet as its replacement. The total
charge for the installation and sale of the padding and carpet is subject to sales tax,
as it is not installed as the initial finished floor covering.
Example 6: A tenant enters into a bare-wall lease to rent the entire third floor
of a new office building. The tenant has the right to finish the third floor of the
building to suit its needs. When the lease terminates, all improvements made by the
tenant will become the property of the owner of the building. As part of finishing the
premises, the tenant arranges with a building contractor for the installation of a
suspended ceiling, construction of offices, paneling the walls, installation of

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December 30, 1998

complete electrical, plumbing, heating and air-conditioning systems and for the
installation of wall-to-wall carpet. The new ceiling, offices, paneling and electrical,
plumbing, heating and air-conditioning systems qualify as capital improvements in
accordance with section 527.7 of this Title. The new wall-to-wall carpet qualifies as
a capital improvement in accordance with subdivision (b) of this section because it
is the installation of the initial finished floor covering in new construction.
Example 7: Assume that the tenant in example 6, in the tenth year of the
lease, hires a contractor to renovate the premises. The existing ceiling, overhead
lighting, wall paneling and carpet are to be replaced. The new ceiling, lighting and
paneling qualify as capital improvements in accordance with section 527.7 of this
Title. However, the charge by the contractor for the new carpet and its installation
is subject to sales tax because the renovation is not new construction, an addition or
a total reconstruction.
Opinion
Petitioner’s client owns a hotel that it remodels an entire floor at a time. The remodeling
entails demolition, stripping walls down to the bare plaster, replacing electrical and bathroom
fixtures, skimming, painting, and replacing floor coverings. With the exception of the floor
covering, the remodeling constitutes a capital improvement for sales tax purposes. Charges for
painting and installation of wall coverings that are performed as part of the remodeling, therefore,
are not subject to sales tax. However, the requirements for floor covering to become a capital
improvement are statutorily different than other installations. If the installation of floor covering is
not part of new construction of a building or structure, an addition to an existing building or
structure, or a total reconstruction of an existing building, the installation does not qualify as a
capital improvement. See Hodgson, Russ, Andrews, Woods & Goodyear, LLP, Adv Op Comm
T&F, TSB-A-97(67)S. Since the remodeling in this case does not result in new construction, an
addition or total reconstruction, charges for the installation of floor covering are taxable under
Section 1105(c)(3) of the Tax Law. It should be noted that ceramic tile or marble is not floor
covering for purposes of Section 1101(b)(9)(iii) of the Tax Law. See Section 541.14(a)(2) of the
Sales and Use Tax Regulations. The installation of such floor tile as part of the remodeling
described above would be considered part of the capital improvement, and, therefore, not taxable.

DATED: December 30, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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