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Sales Tax on Capital Improvements – Are You Secure?

02.18.20 | SALT Chat

While we all know that most jurisdictions have a “carve-out” from the sales tax for capital improvements, often-times mandated services related to such improvements can tag along for the exemption.

For example, the normally taxable service of installing scaffolding at a construction site can be exempt when performed as a prerequisite to the construction of a capital improvement.

I have blogged several times about the application of sales tax to security services, ranging from New York State’s attempt to tax receptionists1 (unsuccessful) to imposing the sales tax on lifeguards2 (successful). While no one has challenged the applicability of the tax to a tried and true security guard, can the capital improvement exemption apply when the guards are mandated to watch over the construction of a building which clearly qualifies as a capital improvement?

New York has again answered the exemption does not apply to protective and detective services purchased in conjunction with capital improvements. A recent ALJ decision, Matter of 608 Franklin, LLC, reiterated the 1996 Appellate Division decision in Matter of Robert Bruce McLane Assocs., Inc. Both decisions rely on the fact that although the guard services were mandated by law and therefore a prerequisite to a capital improvement, since the tax on security services is specifically mandated by the Tax Law, the capital improvement exception does not apply.

Yes, I am as confused as you are about this possible distinction without a difference. Regardless, when the Appellate Division has spoken, especially regarding matters of taxation, it is often impossible to overcome the precedent.

The taxpayer representative in the ALJ proceeding attempted to apply the otherwise viable capital improvement exception but regardless was bound by the prior precedent. Despite the prior cases dismissing the idea of applying the exception to all capital improvement related services, the ALJ was not receptive to representative’s argument “that the attorneys for the petitioners in McLane could’ve done a better job.”

The takeaway; when undertaking major capital improvement projects review the related services invoices carefully. Potential savings may be ignored, and liabilities missed if a careful review isn’t performed.

If you have questions contact me at wberkowitz@berdonllp.com or your Berdon Advisor.

Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

1 https://blogs.berdonllp.com/salt-talk-they-call-it-instant-justice-sales-tax-on-protective-and-detective-services-finally-clarified
2 https://blogs.berdonllp.com/salt-talk-i-wanna-be-a-lifeguard-but-not-in-new-york