SALT Blawg – State and Local Tax Blog
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Any Material Damage Enough to Avoid Sales Tax on Installation Costs for a Roller Coaster, But Likely Not in Texas
The New York Tax Appeals Tribunal has summarily affirmed a recent decision of the Division of Tax Appeals analyzing the applicability of sales and use tax to the $2,000,000 purchase and installation costs paid by Amusements of WNY, Inc. (“WNY”) for the Silver Comet roller coaster. The Tax Appeals Tribunal rejected the Division of Taxation’s appeal on the basis that the Silver Comet could be unbolted from its cement footings and re-erected elsewhere without material damage to the property or the improvements themselves.
New York Application on the Sales Taxation of Installation Services
N.Y. Tax Law § 1105(c)(3) generally imposes sales tax on the receipts from every sale, except for resale, of the service of installing tangible personal property (“TPP”), with an exception for services to install TPP where, once installed, will constitute a capital improvement to real property. Id.
(3) Installing tangible personal property, excluding a mobile home, or maintaining, servicing or repairing tangible personal property, including a mobile home, not held for sale in the regular course of business, whether or not the services are performed directly or by means of coin-operated equipment or by any other means, and whether or not any tangible personal property is transferred in conjunction therewith, except:
(iii) for installing property which, when installed, will constitute an addition or capital improvement to real property, property or land, as the terms real property, property or land are defined in the real property tax law as such term capital improvement is defined in paragraph nine of subdivision (b) of section eleven hundred one of this chapter; …
N.Y. Tax Law § 1101(b)(9)(i) defines a “capital improvement” as:
An addition or alteration to real property which:
(A) Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property; and
(B) Becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself; and
(C) Is intended to become a permanent installation.
The first prong was easily met, based on the approximate $2,000,000 expenditure by WNY for the installation of the Silver Comet.
As to the third prong, this is an objective test as to whether WNY desired the Silver Comet to be annexed to real property based on “all the circumstances at the time the property is annexed to the realty.” Voorhees v. McGinnis, 48 N.Y. 278 (1872). The Administrative Law Judge looked to various factors in WNY’s favor, including (i) the overall footprint of the roller coaster at 1.8 acres, (ii) the length of the track at 3,000 feet, (iii) the height of the roller coaster at 95 feet, and (iv) the inability to readily move the roller coaster. Additionally, the fact that concrete foundations had been poured for the Silver Comet, and a steel building that was permanently affixed to the ground was connected to it, evidenced an intent to annex the roller coaster to the real property. Finally, the Administrative Law Judge also noted perhaps two crucial factors: (i) the owner was the person who requisitioned the Silver Comet and generally owners desire permanency as opposed to tenants and (ii) there would be damage to the wood on which the rails rested if the Silver Comet were disassembled.
In addressing the second prong, the court pointed out that because the wood would not be able to be reused were the Silver Comet disassembled, and that without this wood the Silver Comet would not be functional, such factor constituted “material damage” to the Silver Comet. Further, as to the concrete footings and the steel building, such items would not be usable for any other purpose but for the connection of the roller coaster to such items, thus there is material damage to the real property as well.
Texas Application on the Sales Taxation of Installation Services
The analysis can be quite different in other states. In Texas, for example, one must first analyze whether the installation of the roller coaster constitutes “new construction” and if not then whether the installation services are part of the taxable sales price.
Unless specifically stated, services are not subject to Texas sales and use tax. Tex. Tax Code § 151.0101. Such taxable services include the “real property repair and remodeling” which is defined as the repair, restoration, remodeling, or modification of an improvement to real property. Id. § 151.0101(a)(13), .0047. The Texas Comptroller has exclusive jurisdiction to determine whether services fall into this category. Id. § 151.0101(b). Rule 3.357 of Chapter 34 of the Texas Administrative Code implements this jurisdiction, and clarifies that “new construction” is not subject to sales tax.
Whether the Services Deliver “New Construction”
Thus the first analysis would be whether the Silver Comet constitutes “new construction” under Rule 3.357(a)(4). New construction includes any “new improvements to real property.” However, Rule 3.357 seems to contemplate such “improvements” to be of the nature of buildings, with a focus on an improvement adding a wing to a building or a mezzanine area. Unsurprisingly, several hearing decisions focus on square footage as well, see Hearing Nos. 40,377, STAR 200808238H (Jan. 4, 2002), 48,736, STAR 200201816H (Aug. 11, 2008), 34,340, STAR (Feb. 18, 1997), 31,194, STAR 200009862H (Sept. 15, 2000). Thus Texas law does not clearly address whether a roller coaster would constitute “new construction” for state tax purposes. Taxpayers are thus at a disadvantage in attempting to couch the purchase of TPP as “new construction” under Texas law, as evidenced by Chevron’s unsuccessful attempt in Chevron Pipeline Co. v.Strayhorn, 212 SW3d 779, 783 (Tex. App.-Austin 2006, pet. denied) (rejecting the view that the purchase of remedial cathodic protection devices adds “square footage” to an existing pipeline).
Whether the Services Are Part of the Original Sales Transaction
Prior to October 1, 1987, the Texas Legislature specifically excluded a separately identified amount for services provided to install, apply, remodel or repair the TPP actually being sold. But this changed, with the sales price now defined to include both “a service that is a part of the sale and the amount of credit given to the purchaser by the seller” and “the transportation or installation of tangible personal property.” Tex. Tax Code § 151.007(b), .007(a)(3). As a result, the current policy is for sales tax to be imposed on installation services so long as the purchase of such services is related to the original sale of the TPP. Hearing No. 42,587, STAR 200504121H (Apr. 1, 2005); STAR 200108009L (Aug. 28, 2001).
In the given situation, the first question is whether the installation services themselves are related to the purchase of the Silver Comet. WNY contracted with Glynn Geotechnical Engineering to prepare a foundation design for a proposed roller coaster to be built on the premises. WNY later entered into a contract with Custom Coasters International (a new defunct entity) to design, engineer and construct a roller coaster on its premises, known as the “Silver Comet.” The contract allocated specific costs for design and engineering, rental cranes and forklifts, freight, labor to build the coaster, footings, a station building, housing, electrical subcontractors, a safety system, mechanics and the structure for the coaster.
Given this contract, the installation services for the Silver Comet would likely be subject to Texas sales tax. Clearly the charges for the services to install the roller coaster are “part of the sale,” being part of the same contact. Additionally, the services constitute the installation of TPP. Whether the TPP loses its character once installed would likely not change the result. However, a taxpayer may be able to push back against the Comptroller’s limited definition of “new construction” in Rule 3.357. In the only two cases in which “new construction” was challenged, the taxpayers failed to argue that the rule contravened or was otherwise inconsistent with legislative intent, thus the taxpayers perhaps painted themselves into a corner from which a favorable result was unlikely. Chevron Pipeline, 212 SW3d at 779; GATX Terminals Corp. v. Rylander, 78 SW3d 630, 633 (Tex.App.-Austin 2002, no pet.). Why? Because when a rule seems to cut against the taxpayer, unless that rule is attacked, it is highly unlikely that the taxpayer will see a favorable result:
"We construe administrative rules, which have the same force as statutes, in the same manner as statutes." Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex.1999). "Unless the rule is ambiguous, we follow the rule's clear language." Id. We defer to an agency's interpretation of its own rule when the rule is vague or ambiguous, unless the administrative interpretation is "plainly erroneous or inconsistent with the regulation." See id. at 254-55 (quoting Public Util. Comm'n v. Gulf States Util. Co., 809 S.W.2d 201, 207 (Tex.1991)).
7-Eleven, Inc. v. Combs, 311 S.W.3d 676 (Tex. App.-Austin 2010, pet. denied).