Quick answer: A signed Form ST-124 stops you charging your customer sales tax on a capital improvement. It does nothing for the tax you already paid on the materials, and New York allows no credit or refund for that. On a taxable repair job the rule flips and the same tax becomes recoverable. Most contractors bid both jobs identically and quietly lose the sales tax rate in margin on every capital improvement.

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Capital Improvement or Repair? A contractor’s reference sheet

The three-part test, which jobs qualify and which are taxable repairs, the materials trap that costs contractors money, the 90-day rule and the penalty for misuse.

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Why New York sales tax trips up so many contractors

Sales tax is one of the quietest ways a profitable New York contractor loses money. Get it wrong in the customer’s favor and you eat the tax the state says you should have collected. Get it wrong the other way and you overcharge customers, damage relationships, and still face an assessment. And because the rules turn on a judgment call — capital improvement versus repair — two similar-looking jobs can have opposite tax treatment.

The New York State Department of Taxation and Finance actively audits contractors. When it does, it looks for two things: did you collect tax when you should have, and do you have the paperwork to prove it when you didn’t? A contractor who cannot produce a valid exemption certificate for a job billed without tax is generally held liable for the tax that should have been collected — plus penalty and interest.

The three-part capital improvement test

Under New York rules (see the state’s Publication 862 and the capital improvements guidance), work qualifies as a capital improvement only if it meets all three of these conditions:

It substantially adds to the value of the real property, or appreciably prolongs its useful life.
It becomes part of the real property or is permanently affixed so that removal would cause material damage to the property or the item itself.
It is intended to become a permanent installation.

Miss any one of the three and the job is not a capital improvement — it is a taxable repair, maintenance, or installation service. New building construction, a new roof, a new deck permanently attached, a new central air system, and new bathroom fixtures typically qualify. A patch, a service call, a cleaning, or a like-for-like fix usually does not.

What New York treats as a taxable repair or maintenance

Work that keeps property in good condition rather than improving it is taxable, and sales tax applies to the whole charge. Full lists of qualifying and non-qualifying jobs are in how to fill out Form ST-124.

Form ST-124: your audit shield on capital improvement jobs

Form ST-124, Certificate of Capital Improvement, is the single most important document on any exempt job. When a customer gives you a properly completed ST-124, you are relieved of liability for not collecting sales tax on that work. No certificate, no protection. Handle it like this:

Get it in writing, up front. Have the customer complete and sign Form ST-124 before or at the time of the job — not after an auditor asks for it.
Confirm the work truly qualifies. The certificate does not turn a repair into a capital improvement. If the job is really maintenance, charge the tax regardless of what the customer wants.
Keep it on file for at least three years (longer is safer) with the contract and invoice for that job, so the paper trail matches.
One certificate per project. Do not reuse a single ST-124 to cover unrelated future service calls.

How to complete Form ST-124

Who fills in which part matters, and so does the 90-day deadline for holding a completed copy. We walk through it line by line in how to fill out Form ST-124.

A worked example

Say a Long Island contractor does two jobs for the same commercial landlord in the same month.

Job A — new rooftop HVAC system, $80,000. This permanently improves the building and prolongs its life: a capital improvement. The landlord signs Form ST-124. The contractor bills $80,000 with no sales tax to the customer — but pays roughly 8.625% sales tax on the equipment and materials it purchased (about $3,000 on $35,000 of materials), which it builds into the price.

Job B — service call to fix two rooftop units, $4,000. This is a repair. The contractor must charge sales tax on the full $4,000 (labor included). At an 8.625% rate that is about $345 the contractor collects and remits. If the contractor mistakenly treats Job B as exempt and an auditor disagrees, the contractor owes that $345 plus penalty and interest — out of its own pocket.

Common New York sales tax mistakes that invite an audit

Billing a repair or service call as a capital improvement to avoid charging tax.
Accepting a Form ST-124 for work that clearly is not a capital improvement.
Having no signed ST-124 on file for a job billed without tax.
Trying to buy materials tax-free for a lump-sum capital improvement job.
Charging tax on labor for a genuine capital improvement (overcharging the customer).
Using the wrong local rate for the job site — New York rates vary by county and city.
Not keeping contracts, invoices, and certificates together for the six-year audit window.

How Precision helps New York contractors get sales tax right

At Precision Accounting & Consulting, we work with New York contractors every day to classify jobs correctly, set up clean ST-124 recordkeeping, apply the right local rates, and stay audit-ready. Sales tax should never quietly erode a job’s margin. Learn more about our construction accounting services for New York contractors, or see how disciplined construction job costing keeps every job profitable from bid to closeout.

Questions about a specific job or an audit notice? Contact our team and we will walk you through it.

The materials trap: why an ST-124 does not save you money

This is the part of New York sales tax that costs contractors real profit, and it is almost never explained on the forms themselves. Accepting an ST-124 does not make a job tax-free. It moves the tax from your customer onto you — permanently.

The instructions printed on Form ST-124 are blunt about it: a contractor performing a capital improvement “must pay tax on the purchase of building materials or other tangible personal property,” and “no credit or refund is allowed for the tax paid on the cost of materials by the contractor.” That last clause is the whole ballgame.

Capital improvement vs. repair: the credit asymmetry

Compare the same physical work billed two different ways:

Capital improvement job. You pay sales tax on materials to your supplier. You collect nothing from the customer. You get no credit and no refund for the tax you paid. It is a permanent cost of doing the job.
Repair or maintenance job. You charge the customer sales tax on the entire bill — labor included — and remit it. Because the customer is being taxed on the full charge, you may claim a credit for the sales tax you paid on materials transferred to that customer, so the tax does not hit you twice. (See the state’s guidance on repair, maintenance, and installation services.)

Read that again, because it is counterintuitive: the “exempt” job is the one where the tax sticks to you.

What this means for your books

If your accounting system posts material sales tax to a “taxes” expense account instead of to the job, three things happen at once: your estimates stay wrong because historical job costs understate materials, your gross margin by project is overstated, and you have no way to see the leak. The fix is structural, not clerical — sales tax on materials should be captured in the material cost code on the job, so it flows through your job costing and shows up in your chart of accounts where it can actually inform the next bid.

This is the same discipline that drives accurate work-in-process reporting. A margin that is overstated by three or four points at the job level becomes an overstated WIP schedule, which becomes a surprise at year end.

Frequently asked questions

Do I charge my customer sales tax on a capital improvement in New York?

No. When the work is a genuine capital improvement and the customer gives you a completed Form ST-124, you do not charge sales tax on that job. You still pay sales tax on the materials you purchased for it.

Can I buy materials tax-free for a capital improvement job?

Generally no. On a lump-sum capital improvement contract you are the final consumer of the materials, so you pay sales tax to your supplier when you buy them. The customer’s ST-124 exempts your bill to the customer, not your material purchases.

What happens if I do not have a Form ST-124 for an exempt job?

Without a properly completed ST-124 on file, New York can hold you liable for the sales tax you should have collected on that job, plus penalty and interest. Always collect the certificate up front and keep it with the contract and invoice.

Is a repair or service call taxable in New York?

Yes. Repairs, maintenance, and most installation services are taxable. You charge sales tax on the full amount you bill the customer, including your labor, at the rate in effect for the job location.

Can I get a refund of the sales tax I paid on materials for a capital improvement job?

No. Form ST-124’s instructions state plainly that no credit or refund is allowed for tax a contractor paid on the cost of materials used in a capital improvement. This is the single biggest difference between capital improvement work and taxable repair work, where a credit for tax on materials transferred to the customer is available. Price accordingly.

What if a capital improvement contract also includes appliances or other freestanding items?

Items that do not become part of the real property — a refrigerator, washer, or dryer, for example — are treated separately. You may purchase those items for resale using Form ST-120.1, but you must collect sales tax from the customer on the charge for them. Form ST-124 itself asks the customer to indicate whether the contract includes such items, so answer that question deliberately rather than leaving it blank.

What is New York State Form ST-124 for?

Form ST-124, the Certificate of Capital Improvement, is how a property owner tells a contractor that a job qualifies as a capital improvement. Once the contractor holds a properly completed certificate, no sales tax is charged on the contractor’s bill for that job. It does not exempt any materials purchase.

Are capital improvements exempt from sales tax in NYC?

Yes. The capital improvement rules are New York State rules and they apply in all five boroughs, so a qualifying job carries no sales tax on the contractor’s charge to the customer. The contractor still pays New York City’s combined rate on the materials it buys, and cannot recover it.

Are capital improvements taxable in NY?

The contractor’s charge to the customer is not taxable when the work is a genuine capital improvement and a completed Form ST-124 is on file. The materials are a different question: the contractor is treated as the final consumer of those materials and pays sales tax on them at purchase.

What is a ST-120.1 form?

Form ST-120.1 is the Contractor Exempt Purchase Certificate, and it is the purchasing counterpart to the ST-124. Where ST-124 governs what you bill the customer, ST-120.1 governs what you buy tax-free, and it only applies to specific project types. We cover it in detail in our guide to the exemption certificates a New York contractor can actually use.

If you buy materials on exempt-organization or public jobs, the certificate rules differ — see which New York exemption certificate applies.

Sales tax is one line in a contractor’s books, and rarely the most expensive one. Job costing, the WIP schedule and the over/under position decide whether a profitable-looking year survives closeout. If you would rather not carry that in-house, our outsourced accounting services run the bookkeeping, controller and CFO layers as one function, and our construction accounting services page sets out what that looks like for a contractor specifically.

Talk to an accountant who works in your industry

Precision Accounting & Consulting works with contractors, law firms, medical practices and property owners across the country. If something on this page raised a question about your own books, send it over and we will give you a straight answer.