The New York State Tax Appeals Tribunal recently held for the taxpayer in two cases on the issue of whether or not construction projects constituted capital improvements. Although the facts of each case were different—one involved a roller coaster and the other a temporary facility constructed as part of a bridgepainting project—the Tribunal held each was a capital improvement.

Matter of Amusements of WNY, Inc.

In Matter of Amusements of WNY, Inc., DTA No. 822534 (N.Y.S. Tax App. Trib., May 26, 2011), the Tribunal ruled that the purchase and installation of a wooden roller coaster constituted a capital improvement, and therefore was not subject to sales tax. The taxpayer, an operator of an amusement park, owned real property on which it contracted to have a roller coaster built. The operator treated the entire cost of the roller coaster as a capital improvement and did not pay sales tax on its purchase and installation.

Upon audit, the Department determined that only certain parts of the roller coaster were properly treated as capital improvement—specifically, the concrete footings, station house, and electrical and labor costs associated with those parts. However, the Department assessed sales tax on the steel superstructure and wooden track (and the related labor costs) on the grounds that they were not capital improvements because the steel superstructure could be unbolted from the cement footings and re-erected elsewhere without causing material damage to the real property or to the roller coaster itself. An Administrative Law Judge disagreed, holding that the entire purchase and installation of the roller coaster was not subject to sales and use tax. The Department filed an exception.

Sales tax is imposed on the receipts from every sale (except for resale) of the service of installing tangible personal property, except for installing property which, when installed, will constitute a capital improvement to real property. The term “capital improvement” is defined in Tax Law § 1101(b)(9)(i) as:

An addition or alteration to real property which:

  1. Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property; and
  2. 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
  3. Is intended to become a permanent installation.

The Tribunal affirmed the decision of the ALJ, adopting the ALJ’s reasoning in concluding that the entire roller coaster installation was an exempt capital improvement. The ALJ had found that the installation of the roller coaster met each of the requirements in Section 1101(b)(9)(i).

First, the ALJ held that, at a cost of nearly $2 million, the roller coaster substantially added to the value of the property. Next, the ALJ determined that it was intended to be permanent, noting, among other things, that the roller coaster had a 1.8- acre footprint and could not be easily removed, as its foundation included concrete slabs and piers to attach the structure to the ground. The ALJ also noted that it is the intention of the person requesting the installation that determines intent, and in this case, it appeared that the amusement park operator requesting the installation intended for the roller coaster to be permanent because, among other things, it owned the real property on which the improvement was being made.

Finally, the ALJ examined whether the roller coaster was permanently affixed to the real property so that its removal would cause material damage to the property or to the roller coaster itself. The ALJ found that, although the steel superstructure of the roller coaster could be moved and re-erected, doing so would cause material damage to the roller coaster itself because it would damage the wooden boards and wooden supports, without which the steel track was unusable. The Tribunal affirmed the ALJ’s decision in full and held that the entire cost of the purchase and installation of the roller coaster was exempt from sales tax as a capital improvement.

Matter of L & L Painting Co., Inc.

A week later, the Tribunal again held for the taxpayer in a capital improvement case. In Matter of L & L Painting Co., DTA Nos. 822266 & 822227 (N.Y.S. Tax App. Trib., June 2, 2011), the Tribunal held that, since applying a protective coating of paint to a bridge was a capital improvement, the installation of a temporary platform to contain pollutants and debris during that project was a necessary prerequisite to the construction of a capital improvement, and was not subject to sales tax under Regulation 541.8.

The taxpayer was a commercial painter with a “steel bridge division” whose painting projects included bridges such as the George Washington Bridge, the Williamsburg Bridge, and the 59th Street Bridge. The taxpayer contracted with the New York City Department of Transportation to paint the Pulaski Bridge linking Brooklyn and Queens. The contract called for the taxpayer to completely remove the bridge’s existing painting by abrasive blasting down to the steel, and to then cover the bridge with a new protective coating of paint. The taxpayer was required by contract to install a temporary containment system to contain pollutants and debris during the blasting. The painting job was designed to protect the bridge from corrosion and would, if done properly, last at least 20 years and possibly as long as 40 years.

Upon an audit of the taxpayer’s purchases, the Department determined that the taxpayer’s payment to a thirdparty contractor to install the temporary pollution containment system at the Pulaski Bridge was not exempt from sales tax. The Department argued that the painting of the Pulaski Bridge was not a capital improvement, but rather was taxable as repair and maintenance work under Regulation 527.7(a). Accordingly, it argued that the pollutant containment system was not exempt from sales tax because the painting of the bridge was not itself a capital improvement.

In determining whether certain services are properly classified as capital improvements or as repair or maintenance, Regulation 527.7(a)(1) provides:

The imposition of tax on service performed on real property depends on the end result of such service. If the end result of the services is the repair or maintenance of real property, such services are taxable. If the end result of the same service is a capital improvement to the real property, such services are not taxable.

(Emphasis added.)

Regulation 541.8(a) provides that temporary facilities that are a “necessary prerequisite to the construction of a capital improvement” are also exempt from sales tax. Thus, in order for the containment system to be exempt, the painting of the bridge had to be exempt as a capital improvement.

The ALJ held that the painting of the bridge was a capital improvement and that therefore the construction of the pollution containment system was a necessary prerequisite to a capital improvement and exempt from sales tax under Regulation 541.8(a). The Tribunal found that the “end result” test under the regulation supported the ALJ’s determination because the end result of painting the bridge met the definition of a capital improvement under Section § 1101(b)(9)(i). The application of paint prolonged the life of the bridge by protecting it from corrosion. The paint was permanently affixed to the bridge and could not be removed without materially damaging the paint and the bridge itself, since the only way to remove the paint was to do another abrasive blasting, and the painting was clearly intended to be permanent. Accordingly, the Tribunal held that the pollution containment system was also exempt from sales tax.

Additional Insights. The Tribunal’s holding in Amusements of WNY suggests that, in certain circumstances, the Tribunal will not allow the Department to, in effect, break a single, integrated project into multiple parts, asserting that some parts are capital improvements and other are not, particularly when each part is useless without the other, and the items may be damaged by separating them. The decision, while involving a highly specific set of facts, reveals that the Tribunal may be willing to look to the overall nature of an improvement in determining whether it is a capital improvement, rather than analyzing each of the component parts.

The Tribunal’s ruling in L & L Painting is a reminder that even services specifically listed as potentially taxable maintenance, service, and repair items in the regulations, such as painting, sewerage service, and tree removal, can still qualify as capital improvements if the end result of the performance of the services is a capital improvement.