The New York State Department of Taxation and Finance has released a memorandum stating a new position that certain temporary scaffolding systems that are provided in conjunction with a capital improvement project are exempt from sales and use tax.1 The memorandum reflects the Tax Appeals Tribunal’s decision in Matter of L & L Painting Co.2 regarding the sales tax exclusion for the installation of a “temporary facility” at a construction site, and provides rules and guidelines for other related sales tax issues affecting the scaffolding systems industry. To the extent that the Department’s policy is new, it is effective January 1, 2015.3
In general, New York State imposes sales tax on every retail sale of tangible personal property, other than sales for resale, and sales of some specific services.4 Taxable services that concern contractors and real property owners include “maintaining, servicing or repairing real property” and “installing tangible personal property” that remains tangible personal property.5 However, this type of service is excluded from tax when it is provided in conjunction with or as part of a capital improvement project. A capital improvement is defined as “an addition or 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 a part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or the article itself; and
- Is intended to become a permanent installation.6 Taxpayers must determine whether services are properly classified as regarding a capital improvement to real property, or alternatively, a repair or maintenance service.
A regulation provides that the imposition of tax on services performed on real property depends on the end result of that service.7 If the end result is the repair or maintenance of real property, the services are taxable. Conversely, if the end result of the same services is a capital improvement to the real property, the services are not taxable.
Temporary Facilities on Construction Sites
Construction projects often require temporary services and installations, including heating, electric, plumbing, protective walkways, scaffolding, and hoisting installations, to facilitate the completion of construction projects. A New York regulation provides a temporary services and facilities exemption for “subcontracts to provide temporary facilities at construction sites, which are a necessary prerequisite to the construction of a capital improvement to real property, [and] are considered a part of the capital improvement to real property.”8 However, this regulation identifies only temporary heating, temporary electric service, temporary protective pedestrian walkways, and temporary plumbing services as nontaxable subcontracts.9
Historically, the Department’s position has been to limit the temporary facilities exemption to the approved services and not include scaffolding or hoisting installations.10 In some instances, however, Department auditors and district office personnel would exempt part or the entire dismantling portion of the scaffolding and hoisting services because dismantling was deemed a nontaxable service.
A significant reevaluation of the scope of the temporary facilities exemption occurred with the New York State Tax Appeals Tribunal’s decision in Matter of L & L Painting Co.11 The Tribunal applied an end result test in finding that a platform to contain debris and pollutants was a temporary facility that was a necessary prerequisite to the construction of a capital improvement bridge project. More importantly, the decision held that examples of temporary facilities provided in the exemption regulation are not intended to be exclusive, but could be read expansively.
Guidelines for Sales Tax Treatment of Scaffolding
In light of Matter of L & L Painting Co. and input from industry trade groups and tax practitioners, the Department has instituted revised guidelines for the sales tax treatment of scaffolding and hoisting services at construction sites. Effective January 1, 2015, the Department will expand its interpretation of the exemption regulation to include scaffolding services as a qualifying temporary service that is not subject to sales tax provided the underlying construction project qualifies as a capital improvement.
The guidance defines scaffolding systems as “fixed structures that are used to support, protect, or convey people or materials during the construction or repair of buildings and other real property.” The only type of hoisting systems that are included within the meaning of scaffolding systems are those similar to elevators or other conveyances found in permanent structures. Further, scaffolding systems do not include “construction equipment that can be readily moved within a construction site (e.g., on wheels or casters), including scaffolding, pedestrian walkways, cranes, or hoists.”
The Department will deem scaffolding on construction sites as a subcontract to provide a service, regardless of whether the subcontract is billed on a lump sum or separately stated basis. All charges made by a subcontractor to the project owner or developer for materials and labor necessary to provide a scaffolding service at a construction site will not be subject to sales tax if the end result of the underlying construction project, when viewed as a whole, qualifies as a capital improvement, and is supported by a validly issued Form ST- 124, “Certificate of Capital Improvement.” Accordingly, scaffolding services will not be considered a rental of tangible personal property on capital improvement projects.
Scaffolding subcontractors will owe sales tax on their purchases or rentals of scaffolding materials and related equipment, and will be ineligible to claim the sale for resale exclusion. Also, purchases or rentals of scaffolding systems for a related entity will be subject to sales tax, and the charge must be reasonable in view of the prevailing market sale or rental prices for the scaffolding system.
Scaffolding Services Provided in Installation, Maintenance or Repair Projects
Scaffolding services provided as part of a taxable installation, maintenance, servicing, or repair project will be deemed a taxable service subject to sales tax, whether billed on either a lump sum or separately stated basis. Moreover, dismantling charges on a taxable repair or maintenance job will be taxable. Subcontractors or repairmen will be liable for the payment of sales tax on their purchases of materials to provide the scaffolding service because they are using materials for their own use to perform construction activities subject to tax. Accordingly, no resale exclusion will be available for this type of use.
Scaffolding Materials Purchased Outside State
Scaffolding materials purchased or rented outside New York State for providing scaffolding services in the state are subject to use tax when the materials are first brought into the state. The subcontractor may be eligible for a reciprocal credit against the use tax due for sales or use tax paid in another state provided the other state has a reciprocal sales tax arrangement with New York State.
Scaffolding Materials Purchased for Reselling or Renting
If scaffolding materials are purchased by a person exclusively for the purpose of reselling or renting the scaffolding materials to others (that is, without the lessor providing any accompanying services), the scaffolding materials may be purchased for resale without the payment of sales tax.
The Department’s issuance of guidance with respect to the sales tax treatment of scaffolding systems is welcome to contractors, real property owners, and sales tax practitioners that have struggled with the uncertain treatment of costs and services attendant to capital improvement projects, particularly when challenged at the audit level. The Department collaborated with the Hoisting and Scaffolding Trade Association, and Art Burkard, a managing director in Grant Thornton’s New York Midtown office, to develop the new guidance, which is designed to bring clarity in this area. Hopefully, the collaborative efforts that have brought about this change in tax policy can be emulated in other, perhaps even more complicated, tax areas in which the Department and taxpayers differ in the interpretation of existing published guidance, or where published guidance has not been developed to date.
The Department’s release also demonstrates the overall importance, for purposes of New York sales and use tax, of determining whether a particular construction project qualifies as an exempt capital improvement or not. The taxability of scaffolding services that are undertaken to facilitate the completion of the project will depend upon the characterization of the construction project, which itself may be subject to considerable interpretation.