Q&A with the Pennsylvania Department of Revenue

Are leasehold improvements a “real estate structure”?

Sep 25, 2014
Scenario:

ABC purchased leased space for part of its tax-exempt operations. ABC hired a construction contractor to install a significant amount of leasehold improvements to the space. Most of the improvements are in the nature of cabinetry and furniture which can be detached from the real estate structure. ABC may and has the option of removing any portion of the improvements upon vacating the leased space. ABC paid for the improvements and capitalized them for financial reporting and tax purposes.

Q:

Is the DOR’s position that leasehold improvements are a “real estate structure” under §7201(qq) and ABC and / or the contractor can purchase tax free any related materials qualifying as building, machinery & equipment under §7201(pp)?

A:

If the contract for the improvements is with ABC then the contactor may purchase tax free any property qualifying as building machinery and equipment.

Q:

Since ABC can remove the improvements upon vacating the premises, can the improvements all be treated as exempt purchases of tangible personal property using ABC’s sales tax exemption?

A:

If the contract is for the installation of “real estate” as defined in Section 7201(qq), then the contract is a construction contract and only property qualifying as building machinery and equipment is exempt from tax.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.