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What exactly is a capital improvement?

One of the advantages of being a homeowner is that certain home improvement projects are sales tax free, if they fit the New York State’s guidelines of being a “Capital Improvement”. The tricky part can be determining what exactly qualifies as a capital improvement. The NYS Department of Taxation lays it out like this:

A capital improvement is an addition or alteration to real property that:

  • substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property;
  • 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
  • is intended to become a permanent installation.

Our new house was only wired for an electric dryer and stove, and since our appliances were gas, I had Strykersville Hardware come out to install some new gas lines. While the dryer was easy, the stove was a bit trickier, as running the line involved drilling it under some cabinets. Regardless, they were able to install both lines, shutoff valves, and hook the appliances up to them.

I was surprised when I received the invoice to see that 8.75% sales tax was added on to the entire bill, material and labor both. I called Strykersville Hardware to ask why, and the response I got was that gas pipes were not considered a capital improvement. I might have believed the woman I spoke with, had I not had the same work done at our previous house, where I didn’t pay tax on it. I decided to investigate further, so I went on the NYS Dept of Taxation website and found the document (Publication 862) which said that “additions to piping systems” were considered a capital improvement. So I called Strykersville Hardware back and said that and she said, “Well that’s not how it was explained to me, but if you want to sign the [Certificate of Capital Improvement] form saying it was, then that removes our liability and then you’ll have to deal with it if you get audited.” I told her that was fine with me, since it’s $35 in tax on a $400 bill, and I was pretty confident in my interpretation of the code. But I decided to be really, really sure, and called the Department of Taxation to ask them directly. The person I talked to wasn’t quite sure at first, since the second bullet point above about removing of the pipe may not permanently damage the property. He said that there’s usually no question about water piping, but I pointed out to him that Publication 862 doesn’t distinguish between water and gas piping, it only refers to “Plumbing – piping”. He put me on hold for a minute, and when he returned said, “Yes, if it’s a new piping addition it would be considered a capital improvement.”

We all know that there are a lot of grey areas when it comes to tax codes, but it’s important as a homeowner to be aware of what is and isn’t taxable. Sometimes, even the professionals get it wrong. I have no desire to pay any more taxes than I have to, and I’m sure you don’t either, so be sure to take a second look at that bill the next time you have work done on your house.

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  1. If you read page 8, it says that if you are the property owner and you do the labor yourself, you must pay sales tax to the supplier. It sounds like the only thing you don’t pay tax on is labor for capital improvements.
    Sorry Dude!

  2. Scotty, sorry if I wasn’t clear in my description, but I didn’t do the labor either. Strykersville Hardware did. So I fit the third bullet – “purchases materials and supplies and labor from the contractor, you pay no tax.”

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