Do Contractors Charge Sales Tax on Labor in NY?

In New York, contractors charge sales tax on labor when the job is a taxable repair, maintenance, or installation service, but not when the work qualifies as a capital improvement to real property. That single distinction drives almost every question about whether a contractor’s invoice should include tax on labor, and the state uses a specific test to decide which side of the line a project falls on.¹

When Labor Is Not Taxable: The Capital Improvement Test

If a project is a capital improvement, the contractor does not charge sales tax on labor or materials. To qualify, the work has to meet all three parts of the state’s test:¹

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

Installing a new central air conditioning system or building a new deck are examples the state treats as capital improvements. Fail any part of the test and the job is not a capital improvement, which puts the labor back into the taxable category.¹

When Labor Is Taxable: Repairs, Maintenance, and Installations

Repair and maintenance work is intended to keep property in good working order or restore it to its original condition. Fixing a broken window or replacing a faucet falls here. For these jobs, the contractor must collect sales tax on the total amount billed to the customer, which includes labor, materials, markups, and any other expenses included in the bill.²

Form ST-124: The Paperwork That Protects a Non-Taxable Bill

To justify not charging sales tax on a capital improvement, the contractor should get Form ST-124, the Certificate of Capital Improvement, from the customer. The customer fills it out and gives it to the contractor, and the properly completed form should be in the contractor’s hands within 90 days after the work is finished.³

When a contractor accepts a valid ST-124 in good faith, the burden of proving the work was not taxable shifts to the customer. If the state later determines the project was actually a taxable repair, the customer can be held responsible for the unpaid tax. Records tied to the certificate must be kept for at least three years, and misusing exemption certificates can bring heavy fines and loss of the business’s authority to operate in the state.⁴³

How Materials Are Taxed on Either Type of Job

New York treats the contractor as the final consumer of building materials. That means the contractor pays sales tax to the supplier at the time of purchase and generally cannot use a Resale Certificate (Form ST-120), because the materials are being used to perform a service rather than resold.¹

On a capital improvement job, the contractor may build the cost of that supplier-paid tax into the total price, but it must not appear as a separate sales tax line on the customer’s invoice. On a taxable repair or installation, the contractor pays tax to the supplier and also collects sales tax from the customer on the full bill, and may be eligible to claim a credit for the tax already paid on the materials.⁵

Registration and Filing for Contractors Who Do Taxable Work

Any contractor performing taxable services in New York must register with the Tax Department and obtain a Certificate of Authority, even if taxable jobs come up only occasionally. Operating without a valid certificate is illegal and can bring penalties of up to $10,000.⁶

Registered contractors have to file sales tax returns and remit collected tax on the schedule the state assigns based on their volume of taxable sales. Returns are required on time even if no tax was collected during the period, and contractors are personally liable for the tax they were required to collect.⁷⁸

1
New York State Department of Taxation and Finance. Tax Bulletin ST-104: Capital Improvements
2
New York State Department of Taxation and Finance. Tax Bulletin ST-770: Repair and Maintenance Services to Real Property
3
New York State Department of Taxation and Finance. Tax Bulletin ST-113: Certificate of Capital Improvement
4
New York State Senate. NY Tax Law § 1132
5
New York State Department of Taxation and Finance. Tax Bulletin ST-130: Sales and Use Tax Credits, Refunds, and Drawbacks for Contractors
6
New York State Department of Taxation and Finance. Tax Bulletin ST-175: Do I Need to Register for Sales Tax?
7
New York State Department of Taxation and Finance. Tax Bulletin ST-275: Filing Requirements for Sales and Use Tax Returns
8
New York State Senate. NY Tax Law § 1133