What Is the ST124 Form and How Is It Used in Capital Improvements?

Sales tax exemptions can significantly impact the cost of capital improvement projects, making it essential to understand the necessary documentation. The ST-124 form determines whether certain transactions are exempt from sales tax.

Proper use of this form ensures compliance with tax regulations and prevents unnecessary expenses. Understanding its application helps businesses and property owners avoid mistakes that could lead to penalties.

Its Role in Capital Improvement Transactions

The ST-124 form certifies that a project qualifies as a capital improvement, determining whether sales tax applies to labor and materials. In New York, a capital improvement is work that substantially increases a property’s value, extends its useful life, or adapts it for a new use. When a contractor receives a properly completed ST-124 from a property owner, they do not have to collect sales tax on labor.

For a project to qualify, the work must be permanent and not easily removed without damaging the property. Installing a new roof qualifies, while replacing a broken windowpane does not. If a project does not meet the definition, the contractor must charge sales tax on labor, increasing costs.

Contractors must keep the ST-124 for at least three years in case of an audit. If the form is missing or incomplete, tax authorities may determine that sales tax should have been collected, leading to penalties and interest charges. Ensuring the form is correctly filled out and retained protects both contractors and property owners from unexpected liabilities.

Who Can Use the Form

Property owners and contractors involved in qualifying improvement projects use the ST-124. Property owners must provide this form to contractors when work qualifies for a sales tax exemption. Without it, contractors must collect tax.

Contractors, including general contractors and subcontractors, rely on the ST-124 to document why they are not charging sales tax on labor. If a subcontractor is involved, the general contractor can issue the form to maintain tax-exempt status throughout the project. If any contractor in the chain fails to obtain the form, they may be responsible for uncollected tax.

Businesses that own commercial properties also benefit from using the ST-124 when hiring contractors for qualifying projects. For example, a retail company renovating its storefront can provide the form to ensure labor costs remain exempt. If a business leases space, responsibility for issuing the form depends on lease terms and whether the tenant or landlord is considered the property owner for tax purposes.

Items Covered by ST-124

The ST-124 applies to labor costs and certain materials and services directly tied to qualifying improvement projects. However, the exemption does not automatically apply when a contractor purchases materials. Contractors must pay sales tax on materials upfront unless they hold a resale certificate. They are not required to pass that cost to the property owner if the project qualifies.

Certain services associated with capital improvements also qualify for exemption when properly documented. Architectural and engineering services directly related to an exempt project are not subject to sales tax. If a contractor hires a third-party service provider for site preparation, demolition, or structural reinforcement, those costs may also qualify, provided they are integral to the improvement and not routine maintenance or repair work.

Leased equipment used exclusively for an exempt project may also qualify. If a contractor rents machinery, such as cranes or excavators, and the rental is billed as part of the capital improvement contract, it may not be subject to sales tax. However, if the equipment is used for both exempt and non-exempt work, tax must be allocated accordingly. Without proper documentation, tax authorities may challenge the exemption.

Completing the Documentation

Accuracy when completing the ST-124 is essential. The property owner must provide a detailed project description, specifying the nature of the work and how it qualifies as a capital improvement. Vague descriptions like “general renovations” or “repairs” may raise red flags during an audit. Instead, specifying “installation of a new HVAC system” or “construction of an additional building wing” provides clarity.

The contractor’s legal business name and sales tax identification number must be entered correctly. Errors in these fields can lead to disputes with tax authorities. Both parties must ensure the form is signed and dated, as omissions could render it invalid. Contractors should not rely on verbal assurances from clients that a project qualifies for an exemption. Without a properly executed ST-124, they could be held liable for uncollected sales tax.

Tax Implications in Certain Projects

While the ST-124 exempts labor costs from sales tax, property owners and contractors must consider broader tax consequences, including property tax assessments and federal depreciation rules.

For commercial property owners, capital improvements can increase a property’s assessed value, potentially leading to higher property taxes. Local tax assessors may review significant renovations or additions and adjust valuations accordingly.

From a federal tax perspective, capital improvements are generally not deductible as an immediate expense but must be capitalized and depreciated over time under IRS guidelines. The Modified Accelerated Cost Recovery System (MACRS) determines depreciation schedules, with structural improvements typically depreciated over 39 years for commercial properties and 27.5 years for residential rental properties. Some improvements may qualify for bonus depreciation or Section 179 expensing, allowing for accelerated deductions in the year of completion.

For contractors, misclassifying a project as a capital improvement when it does not meet the legal criteria can result in tax liabilities. If the exemption is later disallowed during an audit, the contractor may be responsible for back taxes, penalties, and interest. Businesses that frequently engage in capital improvements must correctly distinguish between capital expenditures and routine maintenance, as the latter remains subject to sales tax. Proper documentation and consultation with tax professionals can help mitigate risks.

Recordkeeping Requirements for Compliance

Maintaining thorough records related to the ST-124 is necessary for both contractors and property owners. Since tax authorities can audit transactions years later, having organized documentation prevents costly disputes and penalties.

Contractors must keep copies of all ST-124 forms for at least three years, as required by the New York State Department of Taxation and Finance. These records should be stored alongside contracts, invoices, and project descriptions to substantiate the exemption claim. If an audit occurs, tax authorities will scrutinize whether the project met the legal definition of a capital improvement. Missing or incomplete documentation could result in the contractor being held liable for uncollected sales tax, along with interest and penalties. Digital recordkeeping systems can help streamline compliance by ensuring that all necessary forms are properly archived.

Property owners should also keep copies of the ST-124 and related project records, particularly if they plan to sell the property. Capital improvements can affect the property’s tax basis, which determines capital gains tax liability upon sale. Proper documentation of improvement costs can support a higher adjusted basis, reducing taxable gains. If a dispute arises over whether a project qualified for sales tax exemption, having detailed records can help resolve the issue.