When a Capital Improvement Isn't

Mark Twain once famously said, “No man’s life, liberty, or property are safe while the New York State legislature is in session.” And that applies to co-ops, too. It’s that time of year again, when co-op and condo boards, in the midst of capital improvements and repairs, should be taking a quick look at what qualifies as what, for tax purposes.

That’s because capital improvements are not subject to sales tax, while repairs are. A downloadable publication from the New York State Department of Taxation and Finance, Publication 862, outlines the differences in 27 pages of small print.

There’s often a fine line between repairs and capital improvements. For example, New York State deems that when you’re doing some façade work – the pointing of an entire building, for instance – that that is a repair, because you’re replacing individual bricks and fixing cracks. Most contractors that do this kind of work, however, tell their clients that it’s a capital improvement. But the state says no – unless you’re replacing the entire wall or facade.

We’re talking big money, because large capital improvement projects – such as those required by Local Laws 10/80 and 11/98 – typically run into the hundreds of thousands of dollars. And the sales tax on a $500,000 job is $44,000, the same 8.75 percent that you’d pay if you were going shopping to buy a pair of shoes. Boards should beware when vendors seek to avoid charging for sales tax, and therefore increasing the cost of the job. It sounds too good to be true, and often is.

“In theory,” says Abe Kleiman an accountant at Kleiman & Weinshank, “the vendor ought to be collecting the sales tax from you. What happens often is the vendor will say, ‘Give me a capital improvement certification.’ You give this to him, he claims the job is a capital improvement, and he doesn’t have to pay sales tax and he’s done with you. But New York State can still come in and say, ‘This work is subject to sales tax and you have to pay it.’ The trouble is that no single contractor wants to tell you you have to pay sales tax when the next guy will tell you, ‘Just give me a capital improvement certificate and you won’t have to pay it.’”

Using an out-of-town vendor on a repair won’t solve your sales tax headache, either. That’s because even though the vendor doesn’t have to pay sales tax, you still have to report the expense to the state and pay a “use fee” which conveniently is the same as the sales tax would have been.

Kleiman thinks that New York State will be more aggressive this year on sales tax audits as budget gaps loom. If the state does audit your repair/improvement job, however, “that doesn’t necessarily mean they’re correct. You can make arguments and you may prevail.”