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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 2022

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.

NJ sales tax home improvement

A contractor’s bill should separately state the charges for materials and for labor. The contractor charges Sales Tax on the labor portion of the bill only when he/she performs a taxable capital improvement, repair, maintenance, or installation service. (There is no Sales Tax due on the charge for labor when the contractor’s work results in an exempt capital improvement. See Exempt Capital Improvement Services.) The contractor may not charge you Sales Tax on the cost of the materials and supplies used for the job. However, if the contractor charges you a lump sum for the taxable capital improvement, repair, maintenance, or installation service without separating the charge for materials from the charge for labor, you are required to pay the Sales Tax on the total amount of the bill. People often ask ‘is there sales tax on roof replacement’, in some situations, the difference between a repair and a capital improvement is the extent of the work that is done. For example, replacing a few loose bath tiles or a portion of a leaky roof is a repair to the existing real property. However, replacing all of the tiles or the entire roof with upgraded or improved materials would be an exempt capital improvement. Click here for more details

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

If a contractor performs a capital improvement for a customer and the customer provides the contractor with a properly completed Form NYS capital improvement ST 124, no sales tax is required to be collected from the customer. You must give the contractor a properly completed NYS ST 124 (capital improvement form NY)  within 90 days after the service is rendered.

Handyman exemption in PA

In Pennsylvania, a "home improvement" is any "repair, replacement, remodeling, demolition, removal, renovation, installation, alteration, conversion, modernization, improvement, rehabilitation or sandblasting done in connection with a private residence." This includes the construction, replacement, installation or improvement of driveways, swimming pools, pool houses, porches, garages, roofs, siding, insulation, flooring, patios, fences, gazebos, sheds, cabanas, painting, doors and windows, according to the Pennsylvania Home Improvement Consumer Protection Act.

Anyone who performs home improvement work for money in Pennsylvania is considered a contractor. Although the title implies a bit of informality, so long as a handyman is paid for his services, he is considered a contractor in Pennsylvania. There is no registration required if a handyman is not paid for his work, is employed by a contractor that has a net worth exceeding $50 million or if the handyman earned less than $5,000 in the previous year for home improvement work. Homeowners are, of course, free to work in their own homes without being registered.

Sales tax on labor in PA

Fees for labor are taxed when the labor is expended on a taxable item. For example, repairs to a vehicle, appliance or jewelry are taxable. Labor charges to install or repair items that become part of real estate – such as repairs to a water heater, boiler or new roof – are not taxable.

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 TFX