Contractors in New York provide a wide range of services and materials involving real property that can create varying tax issues and concerns. The combination of materials and services you provide will lead to different compliance obligations as well as opportunities to claim refunds, credits, and exemptions. Central to this conversation is how New York’s Tax Department classifies the nature of your services, which can either be a capital improvement or a project involving repairs, maintenance, or installations. Be proactive in your compliance as we explain how New York sales tax applies to your contracting business along with important issues to remember for mitigating the risk of tax penalties.
How Does NY Sales Tax Apply to the Materials You Purchase for a Contractor Project?
The Department of Taxation and Finance generally views contractors in New York as the consumer of the materials you buy and use to complete a project. This is true even though you likely pass some of those materials to your customers (e.g., hardware, lumber, flooring). The result is you are responsible for paying sales tax to your suppliers at the time of purchase. See TB-ST-129.
The exception to this general rule is if you provide an Exempt Purchase Certificate (ST-120.1) to your supplier because those building materials will transfer to a tax-exempt organization such as a charity, church, or government entity.
Claiming a New York Sales Tax Credit for Tax Paid on Qualifying Materials
Under qualifying conditions, you can claim a sales tax credit on some material purchases used as a contractor. See TB-ST-130. The following must be true about the purchased materials to successfully claim a sales tax credit:
- You paid sales tax on the purchased materials to your supplier.
- You transferred the purchased materials to your customer (i.e., you can’t claim a credit for materials that you keep and use for future projects like a hammer or another tool).
- The materials are part of a taxable contractor project involving a repair, maintenance, or installation service and not a capital improvement. You can read more on this below.
- You charged and collected sales tax from your customer.
Capital Improvements Vs. Repairs, Maintenance, and Installations
Your sales tax issues exist on two levels as a contractor. We just discussed the first, which is when you purchase materials for use in a project. The second is knowing when you should collect sales tax from a customer for the cost of your labor services. To answer this second question, you need to know the category of your service, which will either be a capital improvement or a project involving repair, maintenance, or installation.
Real property contractors will likely perform services that involve both types of projects depending on the circumstances. You can review Publication 862 for specific guidance on how New York classifies certain services (e.g., bathrooms, heating, landscaping, walls, electrical). If a particular service is not listed or you have questions, consider speaking with one of our consultants.
Charges for Capital Improvement Projects Are Exempt from New York Sales Tax
Capital improvements are alterations to real property that do the following:
- Substantially add to the value of the property or appreciably prolong its useful life.
- Become a part of the real property or become permanently affixed to it so that removal would cause damage.
- Are meant to become a permanent installation. See TB-ST-104.
Although you pay sales tax to suppliers for purchased materials on a capital improvement, you won’t generally charge or collect sales tax from the customer because these projects are tax-exempt. Rather, your customer should submit a completed Certificate of Capital Improvement (Form ST-124) that you will retain for your records and provide to any subcontractors on the project.
If your customer fails to provide a Certificate of Capital Improvement, then you should collect and remit sales tax to the Tax Department. You can usually obtain a sales tax refund or credit in cases where you remit the tax to the Department and your customer later provides a Certificate of Capital Improvement. However, contractors must be careful to only claim a refund or credit for the sales tax paid on the labor charges and not on purchased materials. Remember, you are the consumer of purchased materials and are liable for that sales tax.
New York Sales Tax Applies to Repair, Maintenance, and Installation Projects
If your work under a contract does not qualify as a capital improvement project, then it will classify as a repair, maintenance, or installation project. Repair and maintenance projects are those that keep a real property in a safe and working condition (e.g., staining a deck). Installation projects refer to services that involve connecting tangible personal property to real property (e.g., installing a kitchen appliance). Again, Publication 862 has a detailed list explaining which types of projects qualify as repair, maintenance, or installation work as opposed to a capital improvement.
General Issues for New York Contractors Working on Real Property
Real estate contractors should keep detailed records of their business transactions (e.g., receipts, invoices, etc.) to document sales and use tax activity on their return(s) with the New York Department of Taxation and Finance. You will likely file an annual, quarterly, or monthly sales tax return depending on the value of your taxable receipts over a given period. See TB-ST-275.
Contractor work is one of the most complex areas of sales tax because of the many different rules at play. Some other areas where contractors might find trouble or confusion when trying to comply with their sales tax obligations include:
- Correctly distinguishing a project as a capital improvement vs. repair, maintenance, or installation work.
- Completing necessary exemption certificates and maintaining those records.
- Failing to apply the proper local sales tax rate on purchased materials. You must apply the rate of the county where you use the purchased materials. See TB-ST-130, page 3.
- Improperly charging sales tax to a customer for materials used in capital improvement.
Consultation, Audit Defense, and Tax Challenges for Real Property Contractors
Real property contractors often find themselves the subject of a New York tax audit because of the many challenges in classifying their projects given uncertainties in the rules. Even contractors with good systems and recordkeeping practices may experience trouble and forced interactions with the Tax Department from time to time. Whether it’s audit defense, claiming a sales tax refund or credit, or challenging a tax assessment in New York, our sales tax consultants are here to help. Our years of experience and exclusive work on sales tax matters allow us to provide a cost-effective solution for real property contractors and other business owners who need help resolving issues with their local tax authorities.
Check out our New York Sales Tax & Audit Guide for more compliance information.