The New York State Department of Taxation and Finance recently issued Advisory Opinion TSB-A-24(28)S, addressing whether a marina’s purchase of floating cement docks qualify as a capital improvement. This opinion is one of many recent advisory opinions discussing capital improvements and has important sales tax implications for New York business that are involved in the real property and capital improvement space.
Overview of the Floating Cement Dock Sale and Installation
The petitioner operates a full-service marina in an inland basin. Historically, the marina utilized fixed wooden docks secured to pilings embedded in the basin floor.
Recently, the petitioner replaced its wooden docks with new floating cement docks. These new docks were purchased from a marine construction supply company and installed by the marina’s employees.
The project involved removing a wooden dock with 68 boat slips and replacing it with a floating cement dock system. The new dock system's total weight exceeds 633,000 pounds, with installation requiring specialized labor and equipment. The supplier charged and collected New York State and local sales tax on the sale to the Petitioner.
The petitioner contended that the purchase of the floating cement docks should be exempt from sales tax as a capital improvement. The petitioner asserted that the new cement docks increased property value, are intended to be permanent, and would be challenging to remove. Based on these characteristics, the petitioner sought to classify the purchase of the floating cement docks as tax-exempt capital improvements.
Why the Floating Cement Dock Is Subject to Sales Tax
Services related to the installation of tangible personal property are exempt from sales tax if the installation results in a capital improvement to real property. To qualify as a capital improvement, the installation must meet the criteria outlined in Tax Law § 1101(b)(9). § 1101(b)(9) defines a capital improvement as an 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.
However, the Department of Taxation and Finance declined even to consider such factors. In this case, the petitioner’s employees carried out the installation rather than the supplier. Since the purchase was strictly for tangible personal property and did not include installation services, the transaction was taxable.
What If the Department Had Considered the Capital Improvement Factors?
The analysis would have been more nuanced if the New York Department of Taxation and Finance had evaluated the floating cement docks using the criteria outlined in § 1101(b)(9).
A key point of contention lies in the second prong, which requires that the installation "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." The statutory language specifies "would cause damage," not merely "could," which creates a higher standard of proof.
Recent advisory opinions have shown inconsistencies in interpreting this standard, with some opinions requiring clear evidence of damage upon removal and others relying on more speculative considerations of potential damage.
In this case, while the cement docks are heavy and intricately installed, their floating design and the anchoring systems might make it arguable that their removal is less likely to cause material damage.
The third prong, requiring the improvement to be permanent, also poses challenges. The petitioner replaced the previous wooden docks with the new floating cement docks. The fact that the old docks were replaced raises questions about whether the new installation is genuinely permanent. The nature of docks—often upgraded or replaced as part of ongoing marina operations—may suggest a lack of permanence.
If the Department had considered these factors, the floating cement docks would likely still fail to qualify as a capital improvement. For businesses undertaking similar projects, proactively addressing potential gaps in the capital improvement analysis can help maximize tax savings.
New York Sales Tax Implications
This advisory opinion clarifies that intent to use purchased goods as part of a capital improvement is insufficient to exempt a transaction from sales tax. The broader takeaway for businesses is that a purchase's taxability hinges on the transaction's structure, not the buyer’s plans.
Businesses that purchase materials or equipment intending to use them for capital improvements must ensure the seller provides an installation service that meets the legal definition of a capital improvement at the time of sale. Simply intending to use the purchased items to enhance real property permanently does not satisfy the requirements for capital improvement.
This principle applies across industries. Construction companies, property developers, and hospitality, retail, or manufacturing businesses frequently make large purchases for property enhancements.
These transactions could incur significant tax liabilities without careful planning and tax consulting. For instance, a hotel purchasing prefabricated building components or a retail business investing in energy-efficient lighting fixtures must also include installation services by the seller to qualify for the exemption.
Consult a New York Tax Professional Today
Whether upgrading your property, purchasing equipment, or planning a significant improvement, a qualified tax professional can help ensure your transactions comply with the law and maximize potential savings.
Don’t expose your business to costly mistakes. Contact our tax professionals today to discuss your situation and determine what exemptions your business may qualify for.