STATE OF NEW YORK
DIVISION OF TAX APPEALS
In the Matter of the Petition
L & L PAINTING CO., INC.
for Revision of a Determination or for Refund of
Sales and Use Taxes under Articles 28 and 29 of the
Tax Law for the Period December 1, 1998 through
November 30, 2005.
DTA NOS. 822266
In the Matter of the Petition AND 822227
ESTATE OF ALVIN LEVINE
for Revision of a Determination or for Refund of
Sales and Use Taxes under Articles 28 and 29 of the
Tax Law for the Period September 1, 2003 through
November 30, 2005.
Petitioners, L & L Painting Co., Inc., and Estate of Alvin Levine, filed petitions for revision of determinations or for refund of sales and use taxes under Articles 28 and 29 of the Tax Law for the periods December 1, 1998 through November 30, 2005 and September 1, 2003 through November 30, 2005, respectively.
A consolidated hearing was held before Timothy Alston, Administrative Law Judge, at the offices of the Division of Tax Appeals, 641 Lexington Avenue, New York, New York, on May 6, 2009 at 10:30 A.M., with all briefs to be submitted by September 23, 2009, which date commenced the six-month period for the issuance of this determination. Petitioners appeared by Timothy P. Noonan, Esq., and Mark S. Klein, Esq. The Division of Taxation appeared by Daniel Smirlock, Esq. (Robert A. Maslyn, Esq., of counsel).
I. Whether the installation of a platform to contain debris and pollutants at a job site was a "temporary facility" at a construction site, which was "a necessary prerequisite to the construction of a capital improvement" and therefore not subject to sales tax pursuant to 20 NYCRR 541.8(a).
II. Whether certain other purchases were also not subject to sales tax pursuant to 20 NYCRR 541.8(a).
FINDINGS OF FACT
1. On November 13, 2006, following an audit, the Division of Taxation (Division) issued to petitioner, L & L Painting Co., Inc., a Notice of Determination which asserted $1,047,474.98 in additional sales and use tax due, plus interest, for the period December 1, 1998 through November 30, 2005.
2. Also on November 13, 2006, the Division issued a Notice of Determination to Alvin Levine which asserted additional sales and use tax due of $286,874.32, plus interest, for the period September 1, 2003 through November 30, 2005. Mr. Levine, who died in 2006, was assessed as a responsible officer of L & L Painting Co., Inc. His status as a responsible officer during the relevant period is not in dispute. Accordingly, unless otherwise indicated, all references to petitioner refer to L & L Painting Co., Inc.
3. Petitioner, a family-run New York corporation, has been in the commercial painting business for more than 60 years. Petitioner's vice-president, Ross Levine, testified at hearing and explained that petitioner has two lines of business. Its "commercial division" handles the painting of commercial buildings, including hospitals, apartment buildings, schools and hotels. Its "steel bridge division" handles the painting of bridges. Petitioner's bridge painting projects have included the George Washington Bridge, the 59th Street Bridge, the Williamsburg Bridge, the Manhattan Bridge, the Broadway Bridge and the Tappan Zee Bridge. Since the majority of petitioner's bridge projects were performed within New York City, its chief client on such projects has been the New York City Department of Transportation.
4. In November 2001, the Division commenced a sales and use tax audit of petitioner for the period December 1, 1998 through August 31, 2001. The audit was later expanded to cover tax periods through November 30, 2005. Over the course of the audit period, petitioner reported more than $423 million in sales and accrued use taxes for taxable purchases on its sales tax returns. As a result of the audit, the Division determined that petitioner's taxable sales were correctly reported and that no additional tax was due on petitioner's purchase of capital assets.
5. With respect to expense purchases, petitioner did not provide sufficient books and records for a detailed review of such purchases for the entire audit period. The Division was provided with complete expense purchase records for the month of March 2001. On audit, petitioner agreed that this month was representative of its expense purchases, and in June 2006, near the close of this unusually protracted audit, petitioner's comptroller signed a test period election agreeing to the use of a test period audit of petitioner's expense purchases.
6. Upon examination of petitioner's expense purchases in detail for March 2001, the Division determined additional tax due on purchases totaling $205,622.76. An error rate was computed based on this detailed review and projected over the entire audit period, resulting in a determination of $1,047,474.98 in additional tax due as indicated in the November 13, 2006 Notice of Determination.
7. Most of the additional tax due as determined on audit resulted from the Division's conclusion that a $148,843.00 payment from petitioner to Safespan Platform Systems, Inc. (Safespan) during the test period was properly subject to tax. This was a progress payment for the installation of a 40,000 square foot platform as part of a "containment system" in connection with petitioner's contract to paint the Pulaski Bridge, which connects Greenpoint in Brooklyn to Long Island City in Queens, New York. The invoice in respect of this payment is dated March 15, 2001 and describes the work performed as "installation platform."
8. In addition to the Safespan invoice, petitioner protested the Division's determination of tax due on the following test period purchases: Cow Bay Contracting ($10,000.00), Massaro Electric ($4,550.00), Stan Chem ($262.00), Chester's Towing ($4,317.00) and Bridge Construction Services ($1,000.00).
9. In its brief, the Division conceded that no additional tax was due on the purchases from Stan Chem, Chester's Towing and Bridge Construction Services.
10. Petitioner's bridge-coating (or painting) contracts with the New York City Department of Transportation fall into three distinct categories of work, the choice of which depends on the condition of the bridge and its existing paint or coating. The smallest-scale project is a "spot touch-up" job. On a "spot touch-up" job, the bridge is inspected to identify spots where the existing coating has failed and left the structural steel exposed and susceptible to corrosion. Workers then address each trouble spot, using a hand-scraper to scrape off any loose material, followed by the application of a primer, then an intermediate coating, and finally a topcoat of urethane-based or other paint to match the bridge's existing paint.
11. The second type of bridge project generally combines a spot touch-up on specific areas, followed by a new topcoat of paint applied over the entire bridge, designed primarily to enhance the aesthetic appearance of the bridge. In this type of "overcoating" project, any areas of failed paint are still addressed through a spot touch-up. But in overcoating, the matching topcoat also is applied over the entire bridge. On portions where the existing topcoat has not failed, the new topcoat is applied directly onto the existing topcoat, without any surface preparation. Industry publications in evidence describe touch-up and overcoating projects as forms of "maintenance painting" that serve as an "alternative to a full removal and replacement of a failed existing paint system." Painting directly over lead paint or the alkyd paints that were used at the time the Pulaski Bridge was erected poses problems relating to the condition of these paints, which become brittle and lose their adhesive abilities with age. Aside from the potential for paint failure from lack of proper surface preparation, repeated overcoating over existing layers can add an unsustainable amount of weight to the bridge.
12. The third type of bridge contract performed by petitioner, and that specified for the Pulaski Bridge, generally addresses bridges where at least 20 to 25 percent of the bridge's existing paint or protective coating system has failed, leaving the bridge's structural steel particularly susceptible to corrosion. This type of project calls for the complete removal of the bridge's existing coating and its replacement using a new protective coating system. This is accomplished by way of abrasive blasting of the entire steel structure, which removes any rust, dirt, grease, oil, soluble salts, and foreign materials on the structural steel. Once the bridge is blast-cleaned down to bare steel, the failed coating (typically including layers of ineffective and hazardous lead paint) is replaced with a high-durability three-to-four layer protective coating system.
13. This type of total removal and replacement is recognized by the painting industry as a more permanent and effective corrosion control solution for steel bridges than either spot touch-up jobs or overcoating jobs. Moreover, multi-layer zinc- and epoxy-based coating systems, such as that utilized on the Pulaski Bridge (discussed below) cannot be applied over existing paint, but rather must be applied onto bare steel whose surface has been prepared to a state as clean or cleaner than it had been in the factory. When properly applied, a multi-layer zinc- and epoxy-based coating system is designed to last at least 20 years, and can last up to 40 years, depending upon the location of the bridge and the weather and traffic conditions surrounding it. Because of the extensive amount of surface preparation involved and a limited painting "season" in a year providing the right temperature conditions, a full removal and recoating project on a large bridge can take as much as five years to complete.
14. The New York City Comptroller's Office has instituted published financing rules for determining whether a public works project qualifies as a "Capital Project" that must be funded through the issuance of bonds, or a maintenance expense that can be funded through current City funds. Although "painting" is generally considered a "preventative maintenance program" and not eligible for funding as a Capital Project, the Comptroller's Office, in its "Internal Control and Accountability Directive 10: Charges to the Capital Projects Fund," specifically deems bridge painting to be a "betterment" to a "Capital Asset" and therefore an eligible Capital Project "when it involves a treatment process that incorporates extensive surface preparation and application of a protective coating that has a life expectancy of at least 10 years, and the coating is applied to a bridge that has a useful life of at least 10 years and an original or replacement cost of at least $10 million." The City also considers any comprehensive lead-paint abatement projects that "render an otherwise hazardous or potentially hazardous Capital Asset suitable for use or otherwise increase an asset's utility" to be eligible betterments to Capital Assets.
15. As noted previously, the Pulaski Bridge connects Greenpoint in Brooklyn to Long Island City in Queens. First opened to traffic in 1954, it is a bascule-type drawbridge that carries six lanes of traffic and a pedestrian walkway over Newton Creek, with city streets on either side of the creek. The bridge also sits above a set of Long Island Railroad tracks.
16. On or about January 19, 2000, petitioner and the New York City Department of Transportation entered into a contract entitled "Protective Coating of the Pulaski Bridge in the Boroughs of Brooklyn and Queens." This nearly 600-page contract called for the complete removal of all lead paint and coatings on the Pulaski Bridge; the installation of a temporary containment system to contain pollutants and debris during the blasting; and finally, the application of a completely new four-layer, zinc- and epoxy-based protective coating system. In addition to the structural steel on the bridge, the contract also required petitioner to address portions of the bridge's structural concrete, including its piers. The contract's concrete specifications called for the application of two types of epoxy coatings to the concrete, following extensive surface preparation (including sandblasting) to ensure proper bonding of the coatings to the concrete.
17. The total bid for the Pulaski Bridge project came to about $5.4 million, with $3 million of that cost allocated to the actual paint removal, surface preparation work, and the installation of the protective coating system over the bridge's structural steel. An additional $1.5 million of the bid was attributable to the installation of a required temporary "Class 1A" containment system, mandated by the New York City Department of Transportation under the contract, to fully contain debris and pollutants at the site during the abrasive blasting and removal of the bridge's hazardous lead paint.
18. The abrasive-blast cleaning required on the Pulaski Bridge was extensive. Petitioner was required to use a dry-abrasive blast (similar to sandblasting, but using larger, sharp-edged particles for maximum cutting effect) to remove all existing paint from the entirety of the bridge, as well as any rust, grease, oil, soluble salts, or other foreign materials that had accumulated on the steel. The contract required petitioner, through the abrasive blasting, to achieve a final surface cleanliness on the structural steel known in the industry as an "SSPC-SP10 Near-White Blast."
19. "SSPC-SP10 Near-White Blast" is an industry specification developed by the Society for Protective Coatings, a nonprofit association of engineers and others devoted to researching and developing new coatings and application methods to protect industrial steel structures. The primary function of the SP-10 preparation is two-fold: to remove any and all traces of substances from the surface of the steel that can lead to early failure of the protective coating system, and to obtain an optimal surface "profile" or roughness to optimize adhesion of a new coating system. In an SP-10 preparation, the steel is blasted to a point where only five percent of any material other than bare steel is present - mostly in the form of isolated stains. This preparation includes even the removal of "mill scale," a thin layer of oxidation found on steel in its factory state, which has been shown to limit the adhesion of coatings placed over it and to cause premature failure of coatings.
20. Stephen Pinney, an engineer and consultant with more than 30 years of experience working in the protective coatings field, appeared on behalf of petitioner and was qualified as an expert witness in the field of corrosion control and protective coatings. Among other qualifications from his long career, Mr. Pinney has held positions with the National Association of Corrosion Engineers and the SSPC itself.
21. Mr. Pinney testified that the SP-10 preparation is the minimum surface preparation for steel that allows for the use of the zinc-rich primer specified in the Pulaski contract.
22. Mr. Levine, meanwhile, explained that the combination of surface preparation and the coating system used on the Pulaski Bridge were "categorically different" from anything petitioner would use on a commercial building. Petitioner has never sandblasted, much less been required to perform an SP-10 "near-white blast" on a commercial building. This is primarily because commercial buildings do not require the corrosion-control measures or extremely expensive protective coating systems, such as those using zinc-rich primers, that are required on steel bridges.
23. According to Mr. Pinney, steel bridges over water in a marine environment like the Pulaski Bridge are particularly prone to corrosion from a combination of moisture in the atmosphere, marine salts, salts used to treat the bridge's roadways in the winter, and normal wear brought on by traffic usage. Exposure to water causes steel to corrode, and salts in the water accelerate corrosion, Mr. Pinney explained. Left unchecked, corrosion can deteriorate portions of a bridge's structural steel where stress is greatest, such as around the bolts and gusset plates that fasten larger steel members of the bridge together. Mr. Pinney noted that corrosion at such points can lead to collapse. Multi-layer protective coating systems such as that employed on the Pulaski Bridge are designed to prevent corrosion and collapse of steel structures.
24. Mr. Pinney testified at length as to the effectiveness of using a zinc-rich primer within a protective coating system as the leading method of preventing corrosion and prolonging the life of a bridge. Zinc, unlike steel, is extremely resistant to chlorides (i.e., salts). Mr. Pinney explained that any newly constructed steel bridge today would likely use a coating system built upon a zinc primer.
25. The Pulaski contract specifications required the use of an organic zinc primer consisting of no less than 80 percent actual zinc. A zinc primer consists of two components that are mixed together at the job site: a pure zinc powder, and a liquid binding agent that allows for the even application of the zinc. As both of petitioner's witnesses explained, the effectiveness of zinc is its ability, when combined with the binding agent and applied to bare, blasted steel, to bond both mechanically and atomically to the steel and to act as an anode, sacrificing itself in preference to the steel. The zinc primer is metal with liquid (the bonding agent) around it, and that liquid ultimately hardens because of the chemical reaction. Extensive abrasive blasting is required for a zinc primer not only to allow a pure bond and electron flow between the zinc and the steel, but also because, as noted previously, blasting increases the surface area of the steel by creating a "profile" or "anchor pattern" of peaks and valleys on the steel surface. This creates an optimum bond and the opportunity for more zinc to bond to the steel, essentially filling in the peaks and valleys with zinc particles.
26. This surface preparation, and the chemical reaction between zinc and steel, also makes the zinc layer impossible to remove without re-blasting the surface and, inevitably, removing some of the steel itself. Although the zinc primer, like other layers in the Pulaski Bridge coating system, could be applied using sprayers, the Pulaski contract also required a "stripe coat" of the primer to be applied via brushes over sharp-edged areas, including nuts and bolts, to ensure adequate application.
27. The second layer of the coating system specified in the Pulaski contract was a "high-build" epoxy intermediate coat. This was applied after the application of a "penetrating sealer" over the zinc, designed to prevent gasses or bubbles from welling up between the primer and epoxy coat. Like the zinc primer, the epoxy intermediate layer consisted of two components mixed at the job site: an epoxy resin and a hardening agent which causes the coating to harden by chemical reaction. While the zinc primer's primary effect is its chemical resistance to chlorides, the epoxy layer functions as a hardened, nonporous, chemically-resistant physical barrier between the steel and the atmosphere. Along with the evaporation of a solvent, the hardening of the epoxy occurs through chemical reaction caused by mixing the two separate components. This is different from a typical waterborne latex paint used on houses, which cures through the water evaporating and leaving a latex film behind. The chief benefits of epoxy as a bridge coating are its toughness, resilience, and adhesion.
28. The final layer called for in the Pulaski Bridge protective coating system consisted of a topcoat of "acrylic aliphatic urethane." As opposed to the zinc primer and epoxy coating, this urethane layer is applied predominantly for aesthetic purposes. Even though epoxy coatings are available in colors, they react adversely to ultraviolet rays, and exposure to sunlight causes them to "chalk" and lose aesthetic appeal. Thus, the primary purpose of the urethane topcoat on a bridge is to maintain aesthetic appeal.
29. Both of petitioner's witnesses testified that the purpose of a complete replacement job like that at the Pulaski Bridge is to enhance and protect the structural integrity of the bridge by creating a new chemically and physically resistant barrier to block the deleterious effects of corrosion. According to Mr. Pinney, the primary function of such a steel protective coating system is to ward off corrosion, which can cause structural instability and even collapse of steel structures.
30. While the substantive work on the Pulaski Bridge involved stripping the bridge down to bare steel and applying a durable new protective coating system, nearly a third of the project's cost related to the installation of the Class 1A containment system. This extensive system was mandated by the New York City Department of Transportation in the contract, within the specifications for lead paint removal. Since the Pulaski project involved dry abrasive blasting, the specifications called specifically for a Class 1A system in order to prevent lead paint, dust, and other debris from falling onto pedestrians, traffic, train tracks, Newton Creek below, or being released into the air. The containment system was also required in order to contain the large amounts of abrasive itself released during the blasting process. Because of this, the Class 1A containment system required a substantial flooring system able to bear at least four times its maximum intended weight without failure. Additionally, all Class 1A systems require vertical screening extending from the flooring to create a fully airtight work area.
31. Of the five classes of containment systems generally employed on paint-removal projects on steel structures, a Class 1A system has the most stringent requirements for emissions control. Because of the degree of lead paint on New York City bridges and the City's population density, the City would always mandate a Class 1A system on a complete removal project like the Pulaski Bridge, according to Mr. Pinney. Environmental Protection Agency and Occupational Safety and Health Administration standards also dictate the degree of containment necessary for paint removal jobs, as do New York City's own occupational safety and environmental remediation rules and regulations.
32. Without a temporary containment system meeting all of the contracted-for specifications, petitioner would have been contractually precluded from performing a protective coating project at the Pulaski Bridge.
33. In order to provide the flooring system necessary for the required Class 1A containment system, petitioner contracted with Safespan on or about February 7, 2000 for the installation and eventual removal of a Safespan "shielding system" at the Pulaski site. The total contract cost to "supply, install, move and remove" this platform system was $650,000.00.
34. The purpose of the Safespan platform was not to provide petitioner's workers access to the bridge for painting, and petitioner's workers, in fact, did not utilize the platform as a means of access.
35. As noted previously, in addition to the Safespan payment, petitioner disputed the taxability of certain other test period purchases deemed taxable on audit (see Finding of Fact 8). As also noted, the Division has conceded that certain of these purchases were nontaxable (see Finding of Fact 9). The following purchases remain in dispute:
a) Cow Bay Contracting. The bill in respect of this $10,000.00 expense describes the work performed as the "Complete removal of temporary lights and re-install existing lights" at the Williamsburg Bridge. Mr. Levine testified that petitioner's work at the Williamsburg Bridge in 2001 was a complete removal of the bridge's protective coatings, abrasive blasting, installation of a Class 1A containment system, and application of a new protective coating system, in a contract with the New York City Department of Transportation, the same category of project as the Pulaski Bridge project.
b) Massaro Electric. Three invoices totaling $4,550.00 were determined taxable on audit. The invoices themselves and the comments in the auditor's workpapers describe the work as the installation and disconnecting of wiring for trailers at the Williamsburg and Broadway Bridges. Mr. Levine testified that, like the Williamsburg Bridge, the Broadway Bridge job also involved the complete blasting, removal, and replacement of that bridge's protective coating system.
36. No certificate of capital improvement in respect of the Pulaski Bridge contract was provided by petitioner to the Division on audit. After the audit, however, petitioner provided such a certificate dated October 16, 2003.
37. Petitioner submitted proposed findings of fact numbered 1 through 35. With the following exceptions, proposed findings of fact 1 through 33 are accepted and have been incorporated herein: Proposed findings of fact 8, 10, 12, 14, 18 and 20 have been modified to better reflect the record and two sentences in proposed finding of fact 20 are rejected as unsupported by the record. Proposed finding of fact 35 is rejected as both inconsistent with the record and irrelevant. Proposed finding of fact 36 is rejected as irrelevant.
SUMMARY OF THE PARTIES POSITIONS
38. Petitioner contends that the installation of the platform pursuant to the Safespan contract was a "necessary prerequisite to the construction of a capital improvement" and therefore not subject to sales tax pursuant to 20 NYCRR 541.8(a). Accordingly, petitioner contends that the Division improperly assessed tax on its $148,843.00 payment to Safespan during the test period. On the "necessary prerequisite" requirement of the regulation petitioner notes the contractual requirement that the platform be installed and further notes EPA and OSHA requirements that such a platform be installed in connection with a project such as the Pulaski Bridge contract. On the capital improvement requirement, petitioner asserts that the Pulaski Bridge job met the definition of a capital improvement under Tax Law § 1101(b)(9).
39. The Division contends that the platform was not a "temporary facility" within the meaning of the regulation because such a platform is not referenced in the regulation. The Division further asserts that the platform was not required within the meaning of the regulation because it would have been physically possible to perform the abrasive blast and paint job without the platform. According to the Division, the contractual requirement does not require a finding that the platform was "essential" to the work. The Division also contends that failure of the City of New York to timely provide a certificate of capital improvement to petitioner disqualifies the installation from being considered part of a capital improvement under the regulation. Finally, the Division argues that if the platform were rented it would be taxable and if the platform were considered to be scaffolding it would be taxable.
40. On the capital improvement question, the Division asserts that the painting of existing structures is repair and maintenance under the Division's regulations 20 NYCRR 527.7(a)(1); 541.2(l); 541.5(d)(3)(Example 3). The Division asserts that the work done on the Pulaski Bridge was functionally the same as traditional painting and that therefore the regulations regarding painting are applicable.
41. With respect to the other purchases remaining at issue, petitioner contends that, like the Safespan platform, these purchases constitute necessary temporary facilities at the site of capital improvement work. In response, the Division contends that these were not expenditures for temporary facilities under the regulation and that the work performed was not capital improvement work.
CONCLUSIONS OF LAW
A. The focus of the hearing and the briefs was whether petitioner's payment of $148,843.00 to Safespan for the installation of the platform at the Pulaski Bridge site was properly subject to sales tax. While generally the installation of such tangible personal property is taxable pursuant to Tax Law § 1105(c)(3), the Division's regulations provide that charges for the installation of temporary facilities at construction sites are not subject to tax where such facilities are "a necessary prerequisite to the construction of a capital improvement to real property" (20 NYCRR 541.8[a]). Pursuant to the regulation, such installation is considered part of the capital improvement. Accordingly, the specific questions presented in the instant matter are, first, whether the installation of the platform was a necessary prerequisite to the work performed under the Pulaski Bridge contract and, if so, whether such work constituted a capital improvement.
B. 20 NYCRR 541.8(a) provides as follows:
Subcontracts to provide temporary facilities at construction sites, which are a necessary prerequisite to the construction of a capital improvement to real property, are considered a part of the capital improvement to real property. Charges for the installation of materials and the labor to provide temporary heat, temporary electric service, temporary protective pedestrian walkways, and temporary plumbing by a subcontractor are therefore not subject to tax provided the subcontractor receives a copy of the properly completed certificate of capital improvement issued by the customer to the contractor.
C. While the Division does not contest that the platform was a "facility" within the ordinary meaning of that term,(1) it asserts that the platform was not a "temporary facility" within the meaning of the regulation because it was not among the temporary facilities listed in the second sentence of the regulation. As petitioner correctly notes, this assertion misreads the regulation. The second sentence of section 541.8 merely lists examples of facilities covered by the regulation. If this list was intended to be exclusive, there would be no need for the first sentence of the regulation, which states the general rule with respect to "temporary facilities at construction sites." There would also be no need for the word "therefore" in the second sentence which refers back to the general rule as the authority for the exclusion of the listed examples from sales tax. The Division's interpretation thus runs contrary to the established rule of construction that meaning and effect should be given to all words of a statute or regulation (see Matter of Direen Operating Corp. v. State Tax Commn., 46 AD2d 191, 361 NYS2d 736 [3rd Dept 1974]) and is therefore properly rejected.
D. The platform was also a "necessary prerequisite" to petitioner's Pulaski Bridge work within the meaning of the regulation. The platform and the Class 1A containment system of which it was a part were required under petitioner's contract with the New York City Department of Transportation. Furthermore, the containment of pollutants and debris from the work on the bridge was necessary for reasons of public health and safety (see Finding of Fact 30 and 31). This satisfies the "necessary prerequisite" standard. The Division's contention that the contractual requirement of such a containment system does not necessitate a finding that the platform was "essential to the construction of a capital improvement" is without merit. First, as petitioner notes, the relevant standard under the regulation is "necessary prerequisite" and not "essential." Second, Matter of MGK Constructors (Tax Appeals Tribunal, March 5, 1992), cited by the Division in support of its position, is inapposite to the present matter. Unlike the present matter, that case involved the resale exclusion. Specifically, whether the purchase of guard services by a construction contractor pursuant to a contract with an agency of the City of New York was excluded from sales tax as a purchase for resale. In contrast to the present matter, the applicability of 20 NYCRR 541.8 was not at issue in Matter of MGK Constructors (presumably because guard services are clearly not "temporary facilities"). Further, as petitioner correctly notes, the Division's suggestion of a "physical possibility" standard with respect to this requirement, i.e., that it would have been physically possible to blast and paint the bridge without the platform, is contradicted by reference to the examples in the regulation itself. Specifically, it would certainly be physically possible (although unfeasible and possibly illegal) to complete construction projects without temporary heat, electricity, plumbing or protective pedestrian walkways, yet such facilities are specifically listed as examples of temporary facilities under the regulation.
E. The Division also contends that the installation of the platform fails to qualify under the regulation because the subcontractor (Safespan) did not receive a copy of a capital improvement certificate issued by the customer (City of New York DOT) to the contractor (petitioner). The Division notes that no certificate of capital improvement was provided by petitioner on audit, but that a certificate dated October 16, 2003 was provided post-audit (see Finding of Fact 36). It is noted that the Safespan invoice at issue is dated March 15, 2001.
The failure to provide a certificate of capital improvement is not determinative of capital improvement status. The receipt of a capital improvement certificate under the terms set forth in the Division's regulations relieves a vendor of liability for failure to collect tax (see Tax Law § 1132[c]; 20 NYCRR 532.4[b]). In this case, the issue is whether petitioner, as a customer, should have paid sales tax to Safespan on the installation of the platform. Capital improvement certificates do not alter the liability of customers who must prove the nontaxability of the transaction irrespective of the issuance of a certificate (see Matter of Saf-Tee Plumbing Corp. v. Tully, 77 AD2d 1, 432 NYS2d 409 [3rd Dept 1980]; 20 NYCRR 532.4 [b]). Hence the failure to issue a timely certificate does not disqualify the Safespan transaction from capital improvement status any more than the timely issuance of such a certificate would conclusively establish that the bridge job was a capital improvement. Accordingly, the Division's contention is rejected.
F. As to the Division's contention that if the platform were rented it would be taxable, it is observed that the Division has not expressly asserted that the platform was rented and even if it had made such an assertion, the record shows that the payment at issue was for the installation of the platform (see Finding of Fact 7). As to the Division's claim regarding treating the platform as scaffolding, it is noted that, despite references to the platform as "scaffolding" in the audit report, the platform and the containment system of which it was a part, were not scaffolding; nor did the platform perform the same or a similar function as scaffolding (see Finding of Fact 34). Accordingly, there is no basis upon which to treat the platform as scaffolding.
G. Turning to the question of whether the work performed by petitioner on the Pulaski Bridge was a capital improvement, Tax Law § 1105(c)(5) imposes tax on the receipts from the following services:
Maintaining, servicing or repairing real property, property or land, as such terms are defined in the real property tax law, whether the services are performed in or outside of a building, as distinguished from adding to or improving such real property, property or land, by a capital improvement as such term capital improvement is defined in paragraph nine of subdivision (b) of section eleven hundred one of this chapter . . . . (Emphasis added.)
H. In contrast to Tax Law § 1105(a) which imposes sales tax on all retail sales of tangible personal property, except as otherwise provided, Tax Law § 1105(c) imposes tax on specific enumerated services. Accordingly, the capital improvement provision in Tax Law § 1105(c)(5) is properly construed pursuant to the rule applicable when determining whether a transaction is subject to taxation at all (see Matter of Grace v. New York State Tax Commn., 37 NY2d 193, 371 NYS2d 715 , lv denied 37 NY2d 708, 375 NYS2d 1027 ). That is, most strongly against the government and in favor of the citizen (see Matter of Building Contractors Association v. Tully, 87 AD2d 909, 449 NYS2d 547 [3rd Dept 1982]). This rule of construction stands in contrast to the rule with respect to exemptions from tax, i.e., strictly and narrowly against the taxpayer (see Matter of International Bar Assn. v. Tax Appeals Tribunal, 210 AD2d 819, 620 NYS2d 582 [3rd Dept 1994], lv denied 85 NY2d 806, 627 NYS2d 323 ).
I. Tax Law § 1101(b)(9)(i) defines 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.
J. The terms "maintaining, servicing and repairing" real property, as distinguished from a capital improvement are defined in the Division's regulations as follows:
Maintaining, servicing and repairing are terms which are used to cover all activities that relate to keeping real property in a condition of fitness, efficiency, readiness or safety or restoring it to such condition. Among the services included are services on a building itself, such as painting; services to the grounds, such as lawn services, tree removal and spraying; trash and garbage removal and sewerage service and snow removal. (20 NYCRR 527.7[a] [emphasis added]; see also 20 NYCRR 541.2[l].)
K. Where services are performed on real property, the taxability of such services depends on their end result. If the end result of the services is the repair or maintenance of real property, then the services are subject to tax pursuant to Tax Law § 1105(c)(5). If the end result of the services is a capital improvement to real property, then the services are excluded from sales tax. (See 20 NYCRR 527.7[b].) There is no authority in the Tax Law or regulations to classify such services as taxable maintenance or repair services; nor is any additional proof required to remain excluded from tax where a service has been found to meet the definition of capital improvement (see Matter of Nu-Look Specialists, Tax Appeals Tribunal, November 3, 1988).
L. Whether particular services result in a capital improvement to real property must be decided on a case by case basis (Matter of Gem Stores, Tax Appeals Tribunal, October 14, 1988).
M. Pursuant to the foregoing it is necessary to determine whether petitioner's work on the Pulaski Bridge met the three-part definition of capital improvement under Tax Law § 1101(b)(9)(i).
N. As noted, the first part of the definition requires that the addition or alteration to real property must either substantially add to the value of the real property or appreciably prolong its useful life.
The record establishes protective coating systems such as that applied on the Pulaski Bridge prevent corrosion that can result in the collapse of the structure (see Finding of Fact 23). Indeed the purpose of the blast and coating treatment described herein is to prevent corrosion and thereby protect the structural integrity of the bridge (see Finding of Fact 29). Considering that such protection is expected to last for 20 to 40 years (see Finding of Fact 13), it is clear that the work performed appreciably prolonged the useful life of the bridge within the meaning of Tax Law § 1101(b)(9)(i)(A).
The record also shows that the work in question substantially added to the value of the bridge. As petitioner correctly notes on brief, the Tribunal's analysis in determining whether improvements meet this part of the statutory definition focuses on the cost of the improvements. For example, in Matter of Dairy Barn Stores (Tax Appeals Tribunal, October 5, 1989) the Tribunal reasoned that "[w]ith purchase costs in excess of ten thousand dollars petitioner's freezers did substantially add to the value of each of petitioner's retail properties." In Matter of Gem Stores, Inc., the Tribunal found that "[w]ith an installation and purchase expense in excess of several thousand dollars [approximately $21,000] petitioner's electronic surveillance equipment would substantially add to the value of each of petitioner's leased buildings." Here, the City of New York paid petitioner about $3 million for the abrasive blasting and application of the protective coating system as described herein. In addition, the City paid about $1.5 million for the Class 1A containment system. Consistent with the Tribunal's analysis in Dairy Barn and Gem Stores, the work performed by petitioner under the contract substantially added to the value of the Pulaski Bridge.
O. The second part of the statutory definition requires that the addition or alteration to the real property become part of or permanently affixed to the real property such that its removal would cause material damage to the properly or to the article itself (Tax Law § 1101[b][i][B]). Here, as petitioner notes, permanent affixation or adhesion of the various protective coatings is the whole point of the job and the work is performed in such a manner as to make the affixation or adhesion as effective as possible. Specifically, the abrasive blasting allows for a pure bond between the zinc primer and the steel and also creates an anchor pattern of peaks and valleys on the surface of the steel to create an optimum mechanical and atomic bond between the zinc primer and the steel (see Finding of Fact 25). The zinc layer is impossible to remove without re-blasting the surface of the bridge (see Finding of Fact 26). The epoxy layer is later applied, which chemically hardens over the zinc (see Finding of Fact 27). The record thus shows that removal of the paint could only be accomplished by abrasive blasting, which would, of course, destroy the paint. Accordingly, the Pulaski Bridge job meets the second part of the definition.
P. The third part of the definition requires a showing that the addition or alteration be intended to become a permanent installation.
The controlling intent is not petitioner's subjective intent when installing the units, but rather the intention the law objectively will deduce from all the circumstances at the time the property is annexed to the realty to test whether, everything considered, it may fairly be found that the purpose of the annexation was to make the chattel a permanent part of the freehold (citations omitted). Factors to weigh in deciding whether the annexation was intended to be permanent include: the nature of the article annexed, the mode of annexation, the relation to the property of the person making the attachment, and the applicability and application of the chattel to the use to which the property is being put (citations omitted). (Matter of Dairy Barn Stores, Tax Appeals Tribunal, October 5, 1989.)
Analyzing these factors against the record shows that the protective coating system applied to the Pulaski Bridge was intended to be permanent within the meaning of Tax Law § 1101(b)(9)(i)(C). As noted previously, permanent affixation is the whole point of the job. The abrasive blasting prepares the surface of the steel to maximize the effectiveness of the bonding of the zinc primer to the steel. The various coatings of paint, including the zinc primer and the epoxy layer, are designed for steel bridges such as the Pulaski (see Findings of Fact 22, 24 and 27). As also noted previously, the protective coating system can only be removed by destroying it. As to "the relation of the property to the person making the attachment," petitioner applied the protective coating system at the request of and for the benefit of the owner of the bridge, the City of New York. An owner will more likely intend permanency than a tenant (Matter of Dairy Barn Stores). Finally, as to applicability of the paint to the use it is being put, the paint or protective coating system was designed for application on steel bridges to prevent corrosion and thereby enhance and protect their structural integrity. This is precisely the use to which the paint is question has been put. Finally, it is noted that "permanent" for purposes of the capital improvement provision does not mean perpetual, "it being sufficient that it was contemplated that the article remain where fastened until worn out or superseded by another article more suitable to the purpose" (Matter of Gem Stores citing Troncillito v. Farm Family Mutual Insurance Company, 89 Misc 2d 844, 846, 393 NYS2d 159, 160 , affd 63 AD 2d 1042, 406 NYS2d 143 [3rd Dept 1978], affd 47 NY2d 736, 417 NYS2d 253 ) The 20 to 40 year expected life of the coating system meets this standard.
Q. Pursuant to the foregoing discussion, petitioner has established that the Pulaski Bridge work resulted in a capital improvement to real property under the three-part definition of Tax Law § 1101(b)(9)(i). Having previously established that the installation of the platform was a necessary prerequisite to that job, such installation is properly treated as a part of the capital improvement pursuant to 20 NYCRR 541.8(a). Accordingly, petitioner's payment of $148,843.00 to Safespan for the installation of the platform was not subject to sales tax and the Division's assessment of tax on that payment was improper.
R. The Division did not address the question of whether the Pulaski Bridge job met the three-part definition of capital improvement, but rather contends that the services are taxable as maintenance services under Tax Law § 1105(c)(5). This is unfortunate for the Division because where, as in the present matter, an activity meets the statutory definition of capital improvement, then the activity must receive capital improvement treatment:
If, as here, the determination based on the facts presented is that the activities meet the statutory definition of capital improvement, then, under the "test" it is a capital improvement. The regulation does not suggest that an activity whose end result satisfied the definition of a capital improvement could nonetheless be a taxable maintenance or repair service.
We find nothing in Tax Law or regulations of the Commissioner to indicate that a service which has been found to meet the definition of a capital improvement requires additional proof to remain excluded from tax (Matter of Nu-Look Specialists).
Accordingly, having concluded that the Pulaski Bridge job met the statutory definition of capital improvement it cannot, as a matter of law, also be a taxable maintenance service.
S. Rather, the Division contended that painting is specifically included within the definition of maintaining, servicing and repairing as set forth in the regulations. The Division focuses on the second sentence of the regulation which, as noted, lists as examples of maintenance work as follows:
Among the services included are services on a building itself, such as painting; services to the grounds, such as lawn services, tree removal and spraying; trash and garbage removal and sewerage service and snow removal. (20 NYCRR 527.7[a] [emphasis added]; see also 20 NYCRR 541.2[l].)
Contrary to the Division's argument, this sentence does not define all painting to be maintenance services. First, as petitioner correctly notes, the example references the painting of a building, it does not refer to the abrasive blasting and coating of a steel bridge. The record shows that the processes and materials used in steel bridge painting are distinct from that employed in the painting of a building (see Findings of Fact 22 and 27). Furthermore, this sentence lists several routine services which clearly fall within the general definition of repair and maintenance service provided in the first sentence of the regulation (see Conclusion of Law J). As the record in this matter demonstrates, however, the $5.4 million Pulaski Bridge contract, which involved the installation of a Class 1A containment system, the abrasive blasting of the steel to the SP-10 specifications and the application of zinc primer and epoxy coatings as part of a multi-layer protective coating system and which was expected to last for 20 to 40 years, was not routine maintenance. The "extremely expensive" zinc primer, which is 80 percent zinc mixed with a liquid bonding agent, and which bonds atomically and chemically with the steel, is "categorically different" from conventional paint products (see Finding of Fact 22). With respect to the epoxy coating, it is observed that the application of an epoxy glaze used to protect terra cotta tiles on a building has been considered capital improvement work (see Matter of F. W. Woolworth Co., Tax Appeals Tribunal December 2, 1993). Furthermore, the Division itself has distinguished epoxy coatings from conventional paints in an advisory opinion (see Centimark Corp., Advisory Opinion, January 27, 2003, TSB-A-03S). Accordingly, the scope of the project, along with the use of the zinc and epoxy coating materials distinguish the Pulaski Bridge work from the sort of routine maintenance painting contemplated by the regulation.
T. Petitioner has failed to meet its burden of proof to show that the other purchases remaining at issue were also entitled to capital improvement treatment (see Finding of Fact 35). While the invoices show that these purchases were for the removal of temporary lights, the reinstallation of existing lights and the installation and disconnecting of wiring for trailers, there is no evidence in the record showing the specific manner in which the lights and the trailers were used. It cannot be concluded, therefore, that these expenditures were "necessary prerequisites" to capital improvement work as required under 20 NYCRR 541.8(a).
U. The petitions of L & L Painting Co., Inc., and the Estate of Alvin Levine are granted to the extent indicated in Conclusion of Law Q and in accordance with Finding of Fact 9. The petitions are denied to the extent indicated in Conclusion of Law T. The Division of Taxation is directed to modify the notices of determination dated November 13, 2006 in accordance therewith and as so modified the notices are sustained.
DATED: Troy, New York
March 18, 2010
1. Where a word in a statute is not defined in the statute or regulations, it is appropriate to use a dictionary definition to ascertain the word's ordinary, everyday meaning (see Matter of Publishers Clearing House, Tax Appeals Tribunal, July 22, 1997). A "facility" is defined as "something (as a hospital) that is built, installed or established to serve a particular purpose" (Merriam-Webster Online Dictionary ). The platform and the Class 1A containment system fall within this definition.
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