Is Labor Taxable in New York? A Contractor's Guide to Form ST-124

Why New York Contractors Are a Standing DTF Audit Target

The Capital Improvement Exemption Is Real, and DTF Knows Contractors Rely on It

New York does not levy taxes on labor for capital improvements on real property. This is an important rule. If a contractor bills $80,000 for labor on a window replacement job, and that job is exempt from the tax, then the contractor would not have to collect any sales tax on that labor. The three-tiered test outlined in NY DTF Tax Bulletin TB-ST-104 states that the work performed must satisfy each of the following: (1) increase the value of the real property or prolong its useful life, (2) become part of the property and/or be permanently affixed to the extent that the removal would cause damage to the property, and (3) be intended to be permanent. Replacement of windows, heating systems, and roofing are all examples that satisfy these criteria.

DTF knows this money is out there. Auditors do not randomly select a contractor's file to open and review. Rather, they already know the exposure exists.

What DTF Looks for When They Open a Contractor File

In my experience, most of these companies do legitimate capital improvement work. That work qualifies from a sales tax perspective. The technical qualification of the work is not the issue. They are usually dealing with the same problems: the general contractor in business fifteen years, HVAC companies that do hundreds of contracts, window installers who have never spoken to their accountant about sales tax. They know the service is exempt; the certificates were never an issue as they never came up.

Then one day, when DTF decides to audit a specific contractor for sales tax, their document request is extremely thorough: job files for the entire audit period, contracts, invoices, and exemption certificates going back three to seven years. Auditors look for ST-124s that are missing, unsigned, or just not sufficiently completed. Contracts that use the phrase "capital improvement" do not substitute for the certificate. As indicated in TB-ST-104, if the certificate is not on file, DTF will consider the work to be a repair and levy the sales tax.

Your instinct when you get that notice is to call the auditor, be cooperative, and hope for a no-change letter. Overproviding records and over-answering questions without a plan can do serious harm. Speak with a New York sales tax attorney before you respond to anything. Our New York audit defense page walks through what to expect from a DTF examination and how representation changes the outcome.

How a Missing Form Turns Into a Six-Figure DTF Assessment

The Sample Period and the Extrapolation

DTF does not review every job. They choose a sample period, usually a quarter or a year, and review that period's files in detail. Every job in the sample without a valid ST-124 gets reclassified as taxable repair work under TB-ST-129. The auditor then calculates a tax on that labor, establishes an error rate for the sample, and projects it across the full audit window, typically three years, sometimes extended when the audit drags long enough for DTF to tack on another year to keep it current. A company that may have owed little to nothing with proper documentation can end up with a mid-six-figure preliminary assessment.

One point worth noting separately: building materials are taxable to the contractor regardless of whether the project qualifies as a capital improvement. TB-ST-104 is clear: contractors pay sales tax on materials at purchase and cannot use a resale certificate for real property improvement jobs. The labor exemption and the materials taxability rule operate independently.

The DTF Auditor Is Not on Your Side

Here is what is important to know ahead of time: the DTF auditor works for the State of New York. Their goal is to find more tax. Accepting this as the reality, not based on the character of any individual auditor, is the most important thing a contractor can know going in.

Why the Preliminary Assessment Is Not the Number You Actually Owe

Missing the Certificate Is a Documentation Problem, Not Always a Lost Case

What many contractors do not understand upon seeing that preliminary amount: a missing ST-124 does not prevent the exemption from applying. TB-ST-104 states that "the contract or other records of the project can still be used to establish that the work done constituted a capital improvement" in the absence of a valid certificate. The missing certificate shifts the burden of proof from DTF to the contractor. You now have to present other evidence of the capital improvement: job contracts, building permits, architect drawings, customer statements, installation photos.

The defense is a job-by-job analysis. Rebuild the documentation trail on the jobs where you have supporting records, challenge DTF's reclassification of each disputed job in the sample period, and the extrapolated assessment collapses in proportion to the jobs you recover. If you have received that stop-your-heart preliminary assessment from DTF, there are still meaningful ways to fight: through the auditor, on conciliation, at the Tax Tribunal, and beyond. Keep fighting until the number is one you can live with. If you need legal representation for that fight, Sales Tax Legal handles DTF contractor audits, conciliation, and Tax Tribunal representation.

Personal Liability: Why the Owner Cannot Wait

No article on a New York contractor audit is complete without addressing personal liability. DTF regularly pursues responsible parties, the owners, when the business cannot satisfy the assessment. Under NY Tax Law sections 1131(1) and 1133(a), DTF can issue a separate Notice of Determination to the owner personally once the entity has limited ability to pay. That liability is joint and several. An officer or managing member who controlled the company's financial decisions during the audit period has real personal exposure. Get representation before DTF locks in the sample period. That is when the most room exists to fight. If you want to understand your exposure before an audit arrives, our nexus and compliance review is the right starting point.

The Takeaway

New York sales tax audits for contractors are, in many ways, a gotcha situation. DTF will assess aggressively if the paperwork is not there. The good news is that imperfect paperwork is not the end of the case. With the right defense, job by job, document by document, the preliminary number can be brought down significantly.

If you have received a DTF audit notice as a NY contractor, HVAC company, or window installer, do not respond to the information document request without representation. Call (866) 458-7966 or reach out through our contact form before the first document deadline passes.

Frequently Asked Questions

Is labor taxable in New York for contractors?

Labor on a capital improvement to real property is exempt from sales tax in New York, but only when the contractor holds a properly completed Form ST-124. Without it, DTF treats the labor as taxable repair work on audit.

What is Form ST-124 and when does a contractor need it?

ST-124 is the Certificate of Capital Improvement. The customer completes and signs it, the contractor countersigns and keeps a copy, and subcontractors on the same job need a copy as well. Get it before work starts or at time of service.

What if I did capital improvement work in New York but never got an ST-124?

TB-ST-104 is explicit that contracts, permits, and other project records can still support the exemption defense. The missing cert shifts the burden to you. It does not automatically lose the case if the underlying work was legitimate and documented.

Can I be personally liable for my company's DTF assessment?

Yes. Under NY Tax Law sections 1131(1) and 1133(a), DTF can issue a Notice of Determination directly to any officer or managing member who controlled the company's financial decisions. That liability is joint and several.

How far back can DTF audit a New York contractor?

The standard lookback is three years. DTF can extend it when the audit runs long enough to add another period, which happens more often than contractors expect. Businesses with gaps across multiple years can end up with a preliminary assessment covering four or more tax periods.

What is the difference between a repair and a capital improvement in New York?

DTF's three-part test in TB-ST-104: the work must increase the property's value or extend its useful life, become permanently affixed to the point where removal would cause damage, and be intended as permanent. Roofing, window replacement, and heating system installation typically qualify. Routine maintenance does not.

What happens if the customer refuses to provide Form ST-124?

The contractor carries the risk. Without ST-124 in the file, DTF will assess tax on that labor as a repair if the job gets pulled in a sample. Do not start work on any job claiming the capital improvement exemption without the signed certificate in hand first.

About the Author

Gerald J. "Jerry" Donnini II is a sales tax attorney and the founder of Sales Tax Helper, a national platform that helps businesses find, fix, and prevent sales tax exposure before it becomes a problem. Over a 15-year career, he has represented businesses in more than 5,000 sales tax audits, appeals, and disputes across 40+ states. He holds an LLM in Taxation from New York University, is co-author of a CCH treatise on state sales and use tax, and serves as an adjunct law professor. Jerry has saved businesses more than $500 million in sales tax assessments. His framework, Find It. Fix It. Defend It., guides businesses from initial nexus diagnosis through voluntary disclosure and, when necessary, full audit defense.