Sales Tax on Facade Restoration
I would take the following approach: If I was engaging a contractor to repair some lintels and fix up some surfaces, i would expect to pay sales tax. If I was restoring an entire front exterior, or even replacing the cornice, I would definitely treat that as a leasehold improvement. I would refuse to pay sales tax and I would willingly sign the capital improvement paperwork. I’ve been around too long, and been audited too often to live in fear. They can always try to fight you upon audit, but if you are right you fight back. Big job – capital improvement. Small job, pay the sales tax and be done with it.
brucef
in Facade and Brownstone Repair 13 years and 5 months ago
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dianeg | 13 years and 5 months ago
We have gotten several quotes for restoring the facade on our brownstone. Two of the contractors indicated that they would have to charge us sales tax. Evidently the State is cracking down on contractors not properly charging tax on repairs. (According to the State Sales and Use Tax the restoration of a brownstone (masonry work) is considered a repair as opposed to a capital improvement. ) Other contractors have told us that they do not charge tax on this kind of work. Charging tax on this kind of work seems silly. Interestingly the complete residing of a structure or
installation of new siding is considered a capital improvement. Ergo the installation of vinyl siding is considered a capital improvement. The NYS Dept of Taxation and Finance document explaining all of this can be found at: http://www.tax.ny.gov/pdf/publications/sales/pub862.pdf Has anyone else paid sales tax on a brownstone restoration? Has anyone been charged this tax and successfully argued with the State that this kind of work is a Capital Improvement?
slopemope | 13 years and 5 months ago
It needs to fit the definition of “complete replacement”. I am guessing if you got brand new brownstone slabs from the quarry that would qualify. Otherwise, scraping and patching a brownstone exterior is a repair. Even re-pointing your entire house and chimney doesn’t count. For the ones that aren’t charging you sales tax, might want to make sure they have insurance, i’d be wondering what other corners on my job they might cut.
masterbuilder | 13 years and 5 months ago
NYS Dept. of Taxation and Finance is a faceless entity. I file online. If sales tax is required that’s the end of the story. Contractors must collect from the client and submit on the client’s behalf. Otherwise the contractor is liable for the tax.
stevecym | 13 years and 5 months ago
Ok, some things are repairs/maintenance and some things are capital improvements. There is a page on the NYS Dept of Finance site which will explain what is what. Now, if you want to try to assert that something is capital with these contractors in an effort to avoid sales tax, you may offer to sign the NYS St-124. All contractors not collecting sales tax on a job are supposed to have one of these on file from each homeowner. If the contractor does not have the doc and gets audited, the contractor is liable for the sales tax whether the job was capital or not. The reason I am saying you can assert yourself by offering to sign one of these is because the contractor may be willing to go along with you as you are assuming responsibility by declaring that if the contractor is audited and found to have performed a job that he should have collected sales tax on, you will reimburse him for that tax (unless the job is questionable, I would not try to make a case with the contractor as he has to sign the same document asserting that the description of the job is correct and capital). I have had many a customer tell me something is not taxable until it is time to put the John Hancock on the ST-124 and then they don’t want to sign (which is why we should have that form signed during the quote process). FYI for everyone out there who may wonder how the sales tax system works and why some people are sticklers: we file a sales tax return with the state every year. this return is just like an income tax return and we can be audited just like anyone can on their personal income taxes. As Master Builder says above “if sales tax is required, that’s the end of the story.” Steve
callalily | 13 years and 5 months ago
What is the logic behind taxing repairs and not taxing capital improvements?
masterbuilder | 13 years and 5 months ago
I’ve read some of the fine print contained in capital improvement law, and the definition slips into the complexity of real estate law and tax law fairly quickly. A homeowner needs an incentive to improve a tax lot which in turn increases value and property tax but also depreciates over time. With regard to masonry repair, Local Law 11 mandates inspections and repairs on buildings 6 stories or taller. This is why you see so many masonry buildings shrouded in scaffold and netting. I doubt landlords would maintain facades if they were not required. And in turn the State perhaps sees considerable retail sales tax revenue from this source.
brucef | 13 years and 5 months ago
Capital improvements to a rental property (properly called leasehold improvements) add to the owner’s “basis” in the property. Were the owner to sell the property, the gain or loss on the sale would be the selling price less this “basis”. If the property had been held long enough, that gain would be taxed at the Federal long term capital gains rate, (rather than straight income). Bear in mind that the states generally do not have separate capital gains rates and will charge on the gain at normal income tax rates. Getting back to sales tax versus capital improvement, that same landlord who performs a “repair” and pays sales tax, will be entitled to deduct that “expense” from his current income. Conversely, that same rental landlord who improves his property by performing a leasehold improvement, must depreciate the cost over 27 years. Lord knows if any of us will live that long, but if that rental landlord has no plans to sell the property, the small depreciation per year won’t help that much. The ramifications for the rental landlord are straight forward, but for the owner occupant there is more subtlety. The owner occupant who decides to repair his property does so to receive the intrinsic benefit of the repair. For example “I love my new front door, it’s not drafty like the old one”. But it isn’t deductible. That same owner occupant who performs a capital improvement also can’t deduct, but upon a sale his basis in the property is increased, resulting in reduced capital gain/income tax. With the one time 500K exclusion for primary residence and the multiple ability to roll forward gains on trading up, the consideration of basis is less important in most of the rest of the country. In NYC, this may be a consideration to huddle up with your tax advisor about. Mixed use buildings are apportioned regarding the situations I have described above. Your mileage may vary. This is the first time on Brownstoner that my “day job” as tax software support engineer has come in useful. You never know…
Bklnite | 13 years and 5 months ago
A good rundown of tax rules by brucef … but I still don’t understand the tax policy – why collect tax on a repair and not on a capital improvement (which isn’t taxed immediately, and is added to cost basis so isn’t taxed later as a capital gain)? I suppose capital improvements should eventually result in a higher assesed value which would be a permanent increase in the base for property tax collected by the city (instead of a one time tax collected by the state) and the state would eventually collect a little more on real estate transfer tax.
dianeg | 13 years and 5 months ago
I think the real question is why is this type of work is treated differently than replacing the facade with vinyl siding? In essence the NYS Dept of Taxation and Finance is penalizing owners of historic properties that seek to preserve their properties as opposed to ripping out original detail and installing vinyl siding. The current definition of a capital improvement (according to the NYS State document) specifies:
A _capital improvement_ is 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 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; **and
****-** is intended to become a permanent installation
I believe that restoring the brownstone facade of a building certain adds to the value of the property and appreciably prolongs the useful life of the property. It seems that the current tax treatment of work like this deters owners from doing restoration work on their properties by increasing the cost of an already costly project. (I will note that this is a 4-story owner occupied building.)