The New York State Department of Taxation and Finance recently issued Advisory Opinion TSB-A-24(16)S. The Petitioner sought clarification on whether receipts from the sales and installation of its custom window inserts qualify as a capital improvement for sales tax purposes. The Department concluded that installing these window inserts is not a capital improvement. Consequently, the Petitioner's receipts from the sale and installation of the custom window inserts are subject to New York State and local sales and use tax.
Taxability of Custom Window Inserts in New York
The Petitioner sells and installs custom window inserts called "interior storm windows." These storm windows are designed to enhance energy efficiency and noise control. Each insert is custom-made to fit a specific window. As such, the inserts are unsuitable for other window openings.
The interior storm windows are installed by screwing brackets to each side of the existing window frame. These brackets hold a safety chain, preventing accidental removal of the insert. No additional nails, adhesives, or construction work is required on the frame. The inserts are installed on the interior side of the existing windows using a patented compression tubing that expands into the space between the acrylic panel and the window frame.
According to the Petitioner, the window inserts can be easily removed without damaging either the inserts or the property. Despite their removable nature, the Petitioner states that the inserts are intended to be permanent installations and offers a lifetime product warranty.
The DTF’s Analysis
Under New York Tax Law §§1105(a) and 1105(c)(3), sales tax is imposed on the receipts from every retail sale of tangible personal property and on the service of installing tangible personal property, except when the installation results in a capital improvement to real property. A "capital improvement" is an addition or alteration to real property that:
- Substantially adds to the property's value or appreciably prolongs its useful life.
- Becomes part of the real property or is permanently affixed so that removal would cause material damage to the property or the item itself.
- Is intended to become a permanent installation.
While the Petitioner argues that the custom window inserts add significant value and are intended to be permanent, the inserts do not satisfy all the required criteria for a capital improvement. The dispositive factor is the second. The window inserts are not permanently affixed to the property so that removal would cause material damage to the inserts or real property.
Because the inserts can be removed without causing any damage and do not become a permanent part of the real property, they are considered tangible personal property rather than a capital improvement. Therefore, under New York Tax Law, the Petitioner's receipts from the sale and installation of these custom window inserts are subject to State and local sales and use taxes.
Reconsidering the Classification
While the Department concluded that custom window inserts are not capital improvements, there's room to argue otherwise. These inserts are custom-made for specific windows and intended for permanent use, as evidenced by their lifetime warranty. They enhance property value by improving energy efficiency and noise reduction. These benefits are long-lasting and integral to the property's functionality.
The distinction between tangible personal property and capital improvements lies in a three-pronged test used by the DTF. A capital improvement is any addition or alteration to real property that: 1) substantially adds to the property value or appreciably prolongs the useful life of the real property; 2) 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 3) is intended to become a permanent installation. See (TB-ST-104). For example:
- Installing a freestanding appliance like a washing machine is considered a sale of TPP. Both the appliance and the installation service are taxable.
- Installing built-in fixtures like cabinetry or plumbing systems is considered a capital improvement to RP. The customer is not charged sales tax on the installation service, but the contractor pays sales tax on the materials.
For further illustrative purposes, consider a deck installation. A deck can often be removed without damaging the existing structure, yet adding a deck is indisputably considered a capital improvement. See DTF Publication 862. Similarly, the fact that modern installation methods allow for non-destructive removal should not disqualify these window inserts from being considered capital improvements.
Contact a New York Tax Professional for Guidance
New York tax law is complex when determining whether an installation qualifies as a capital improvement. If your business involves selling and installing products like custom window inserts, misclassification can lead to unexpected tax liabilities or missed savings opportunities. Our team of experienced New York tax professionals is here to provide personalized advice and keep your business on the right track.