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Don’t pay sales tax for home improvements - NY, NJ, PA

Don’t pay sales tax for home improvements - NY, NJ, PA
Ines Zemelman, EA
21 February 2018

New Yorkers - don’t pay sales tax for home improvement

We all want a new bathroom, kitchen, or other improvement to our home. None of us, however, want to pay tax on these improvements. The good news is that you don’t have to (at least in New York, New Jersey, or Pennsylvania)

What is a capital improvement?

A capital improvement is any addition or alteration to real property that meets all three of the following conditions:

  • Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property
  • 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
  • Intended to become a permanent installation.
    •  For example, if a renter’s lease stipulates that the premises must be returned to original condition, this work would not count as a capital improvement.
  • For example, building a deck, installing a hot water heater, or installing kitchen cabinets are all capital improvement projects.

Repairs or Maintenance are not Capital Improvements

On the other hand, when a contractor performs a job that constitutes a repair, maintenance, or installation service to real property, sales tax must be collected from the customer,

Materials vs. Labor- Capital Improvement

Property Owner

purchases materials and supplies only and you perform your own labor,

you pay tax to the supplier on the materials and supplies

Property Owner

purchases materials and supplies and hires a contractor to perform the labor,

you pay tax to the supplier on the materials and supplies, but you do not pay tax to the contractor for the labor

Property Owner

purchases materials and supplies and labor from the contractor,

you pay no tax

 

Contractor

Purchases materials and supplies

Supplier pay sales tax, do not collect sales tax from customer

 

Materials vs. Labor- Repair & Maintenance

 

Property Owner

purchases materials and supplies only and performs your own labor

you pay tax to the supplier on the materials and supplies

Property Owner

purchases materials and supplies and hires a contractor to perform the labor

you pay tax to the supplier on the materials and supplies and to the contractor for the labor

Property Owner

purchases materials and supplies and labor from a contractor

you pay tax to the contractor on the total charge

Contractor

purchases materials,

you pay tax to the supplier, even though you are also required to collect tax from your customer. However, you are entitled to a refund or credit of the tax that you paid on the materials that you transferred to the customer

Contractor

purchases supplies,

you pay tax to the supplier

 

 

 

Rules for New York, Pennsylvania,and NJ

If a contractor performs a capital improvement for a customer and the customer provides the contractor with a properly completed Form ST-124, Certificate of Capital Improvement, no sales tax is required to be collected from the customer.

States not named NY, NJ, or PA

Many states may have more complex rules governing the application of sales and use tax on kitchen cabinet installation.

  • Factors affecting tax exemption may be whether cabinet installed are custom made or custom (Massachusetts)
  • In Connecticut, sales and use tax rules depend on the contract type (fixed price or time and material).

Check with your state Tax Department to find out if the large capital improvement project may be exempt from sales and use tax.

Ines Zemelman, EA
founder of Taxes for Expats