NYS Sales Tax Policy Change - Use of Scaffolding on Capital Improvement Projects

By Brian Gordon

New York State Department of Taxation and Finance has recently come out with a new policy memorandum TSB-M-14(15)S effective January 1, 2015, on the application of sales and use tax laws when it involves temporary scaffolding that is used in capital improvement construction projects. Temporary protective pedestrian walkways and temporary hoisting systems are also referred to collectively as scaffolding systems, and are included in this new policy.

The most significant part of this policy is that now, the act of providing scaffolding to a construction site is considered a service (not a rental), and therefore is not subject to sales tax on a capital improvement job.

“Section 541.8(a) of the Sales and Use Tax Regulations provides an exclusion from tax for charges for “the installation of materials and the labor” to provide “temporary facilities at construction sites,” including temporary pedestrian walkways, where the temporary facility is a necessary prerequisite to the construction of a capital improvement to real property…

When a scaffolding company provides temporary scaffolding at a construction site, the general procedure is to install it, leave it in place during the exterior construction process, and then disassemble it when it is no longer needed. The cost for the service may include a charge for the installation, a rental charge for the usage period, and a charge to disassemble. New York State historically focused on the rental aspect of the transaction and considered the entire transaction a rental of tangible personal property which is taxable under the law. The tax department’s position had been made clear in advisory opinions over the years, and has been supported in Administrative Law Judge hearings. More recently, an advisory opinion was issued stating that only the rental portion would be taxable if it was separately stated on the invoice. The new policy memorandum clearly indicates that the entire transaction for the service of providing scaffolding is not subject to sales tax.

So what caused a change in policy?

The new policy memorandum states that it is reflecting a June 2011 decision in a Tax Appeals Tribunal case, in the Matter of L & L Painting Co. Inc. This case involved a similar situation involving the installation of an enclosed platform to contain debris and pollutants under a NYC bridge that was undergoing steel surface restoration and painting work.

While the larger issue in this case was whether or not the process involved in restoring the finish on the bridge was in fact a capital improvement – which it was found to be – the platform system was also at issue. The platform was found to qualify under Regulation Section 541.8(a) as a temporary facility, and necessary part of the capital improvement project.

Apparently the Tax Department saw the similarity between the installation of the temporary platform and the installation of temporary scaffolding, which lead to the change in policy. One important thing to note however, is that the invoice for the platform stated: “supply, install, move and remove”. There was no mention of “rental” as is customary in scaffolding installations. But, should the taxability of scaffolding hinge on semantics? I think not. In both cases, there was an installation of a temporary facility which was necessary for the completion of a capital improvement to real property. The similarity is obvious; therefore, the service of providing temporary scaffolding (including rental if separately stated) at a capital improvement site will not be subject to sales tax in New York.

The policy memorandum goes on to further explain: Since the scaffolding becomes part of a capital improvement and the sale of this service is not taxable, when the scaffolding company purchases the materials, sales tax is due on the purchase.

This is true for all capital improvement jobs. If the sale is a capital improvement (not taxable), then the purchase of the materials going into the project is taxable.

If the scaffolding is used on a job that is a repair – not a capital improvement, then the sale of the scaffolding service is taxable, and the purchase is also subject to sales tax because it is not a resale. (Remember, it is a service, not a rental. We can’t have it both ways.)

Note: The policy memo also states: …the department’s policies applicable to transactions made under a contract entered into before January 1, 2015, remain applicable to transactions made under that contract after January 1, 2015.

While I’m very happy that the NYS Tax Department came out with this new policy effective 2015, this policy was driven by a 2011 Tax Tribunal Decision which is precedent setting. Therefore in my opinion it would be very difficult for NYS to prevail on this issue prior to 2015 based on their policy at the time. Their argument would have to be that scaffolding is not like the temporary platform in the L&L Painting case. That would not make sense, because they stated that the L&L Painting case was the basis for changing their policy.

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