For many taxpayers, the application of the exemption from sales tax for “capital improvements” to real property leads to confusion. As explained more fully below, although an owner of real property is not charged sales or use tax on capital improvements, contractors must pay use tax on the materials purchased by it to construct such improvements. The statute and regulations put forth a nuanced set of rules regarding who must pay sales tax upon the improvement or repair of real property. While taxpayers may in good faith think that they are acting in accordance with the law, a failure to understand the peculiarities of these rules can result in unexpected liabilities. Two recent cases, Costabile1 and NW Sign Industries,2 highlight certain of these issues.
In general, in New York, the retail sale of tangible personal property is subject to sales tax3 or compensating use tax.4 However, the sale of services is only subject to sales or use tax to the extent that such services are specifically enumerated.5 Such enumerated services include “[m]aintaining, servicing or repairing real property,”6 and “[i]nstalling…[,] servicing or repairing tangible personal property”7 but exclude “capital improvement[s].”8
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