Is a company's sale and installation of a private telephone interconnect system on a customer's property a tax-exempt capital improvement, and must the installer collect a Certificate of Capital Improvement (ST-124)?

Plain-English summary

U.T.C. Group Inc. (Latham, New York) sells and installs telephone equipment — entire systems, and sometimes individual units to add to an existing system. It asked two things: (1) whether installing a private telephone interconnect system is always a tax-exempt capital improvement when sold directly to a taxable customer, and (2) whether it must collect a Certificate of Capital Improvement (ST-124) from the buyer.

The answer: the install is a capital improvement, and no ST-124 is required.

• § 1105(a) taxes receipts from retail sales of tangible personal property, and § 1105(c)(3) taxes installation services — except installing property that, once installed, becomes a capital improvement to real property.
• A private telephone interconnect system — a power unit, cabling run inside the customer's property, and peripheral equipment such as telephones — that the customer buys and has installed on the customer's own property is a capital improvement. So the receipts from the sale and installation are not taxed under § 1105(a) or § 1105(c)(3).
• Because a capital improvement carries no tax at all, none should be collected whether or not a certificate is on hand — so U.T.C. is not required to take an ST-124 from its customers.
• The exemption runs to the customer's purchase. Under § 1101(b)(4), U.T.C. itself must pay sales tax on the equipment and materials it buys to perform the job, because it is the ultimate consumer of them.

What this means for you

A system that becomes part of the building is a capital improvement. When an installer sells and installs a telephone system that is wired into the customer's own property, the whole charge is treated as improving real property — not as a taxable sale of equipment plus a taxable install.

You still pay tax on your own materials. The exemption is for your customer, not for you. When you buy the power unit, cable, and phones to do the job, you owe sales tax on those purchases as the end user.

Don't collect tax on a capital improvement just because a certificate is missing. Since no tax is due on a capital improvement, the ST-124 certificate is not a precondition here — you should not be charging tax that isn't owed. (Keep good records showing the job was a capital improvement.)

Common questions

Q: Is every telephone-system install a capital improvement?
A: This opinion treats the described interconnect system — power unit, in-property cabling, and peripherals bought and installed on the customer's property — as a capital improvement. Whether a particular job qualifies still depends on its own facts (whether it becomes a permanent part of the real property).

Q: Do I have to get an ST-124 from the customer?
A: No. Because the job is a capital improvement on which no tax is due, the certificate is not required — the Department says no tax should be collected regardless of whether a certificate is present.

Q: Do I owe any sales tax at all on this work?
A: Yes — on your side. You must pay sales tax on the equipment and materials you purchase to build and install the system, because you are the ultimate consumer of them (§ 1101(b)(4)).

Citations and references

Statutes and authority:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1105(c)(3) — taxes installation services, but excludes installations that become a capital improvement to real property
• Tax Law § 1115(a)(17) — exempts tangible personal property that becomes an integral component part of a capital improvement
• Tax Law § 1101(b)(4) — defines retail sale; a contractor's purchase of materials to perform its own work is a taxable retail sale to the contractor

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_261s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-H-80(261)S
Sales Tax
December 28, 1980

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800718A

On July 18,1980, a Petition for Advisory Opinion was received from U.T.C.
Group Inc., Plaza Seven, Latham, New York 12110.
The issue raised are (1) whether the installation of telephone systems by
a private inter-connect company constitutes a capital improvement in all cases
when sold to a taxable entity directly, so as to exempt the receipts therefrom
from the sales tax imposed under Article 28 of the Tax Law, and (2) whether in
such cases the vendor is required to obtain from the purchaser a certificate of
Capital Improvement (ST-124).
Petitioner sells and installs telephone equipment, including entire systems
and, on occasion, individual units to complement existing systems.
Section 1105(a) of the Tax Law imposes a tax on "The receipts from every
retail sale of tangible personal property, except as otherwise provided in this
article." Section 1105(c)(3) of the Tax Law imposes a tax on receipts from the
service of "Installing tangible personal property...except 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...."
Section 1115(a)(17) of the Tax Law exempts from the sales tax receipts from
the sale of "Tangible personal property sold by a contractor, subcontractor or
repairman to a person... for whom he is adding to, or improving real property,
property or land by a capital improvement, or for whom he is about to do any of
the foregoing, if such tangible personal property is to become an integral
component part of such structure, building or real property...."
The sale and installation of a private telephone inter-connect system, such
as one consisting of a power unit, cabling inside the customer's property and
peripheral equipment such as telephones, constitutes a capital improvement,
within the meaning of the statutory provisions quoted above, where the system is
purchased by the customer and installed on the customer's property. The receipts
from such sale and installation are not subject to the taxes imposed under
sections 1105(a) or 1105(c)(3) of the Tax Law. It should be noted that these
exemptions are applicable to the purchase by the customer of the inter-connect
company. Such company must itself pay sales tax on the property purchased for the
purpose of the sale and installation. Tax Law, §1101(b)(4).
Petitioner inquires whether it is required to take from its customers
completed certificates of capital improvement. Petitioner is not subject to such
a requirement. Where a capital improvement is rendered no sales tax is due and
none should be collected, irrespective of the presence or absence of a
certificate of capital improvement.
DATED: December 12, 1980

TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR