Sales Tax Slice: An Expensive Inventory Material Handling System Apparently Did Not Increase Property Value - Thus Installation Is Not Exempt


Burlington Coat Factory Warehouse (Burlington) missed out on a sales tax refund of $396,568.56 in New Jersey because it was unable to provide sufficient evidence to prove that the installation of a pricey inventory material handling system in its warehouse was a capital improvement, and thereby did not qualify for an exemption.  Burlington Coat Factory Warehouse v. New Jersey Dir. of Taxn., N.J. Super. Ct. App. Div., No. A-0535-11T3, 11/26/13.

In New Jersey, services connected with installing tangible personal property are exempt from sales tax if the "property, when installed, will constitute an addition or capital improvement to real property, property, or land."  Affirming the trial court, the appellate court found that Burlington failed to substantiate that the labor charges associated with the inventory material handling system increased the capital value of the real property and significantly increased the useful life of the real property---the standard required to prove that the installation system was a capital improvement.

At trial in the lower court, Burlington's expert witness had explained that the inventory material handling system was comprised of 18 miles of "conveyor," capable of sorting 10,000 items of inventory for distribution to 500 stores per hour, and was secured to the building floor by hundreds of bolts and supported by a series of "hangers" attached to the ceiling of the building. The system required installation of electrical wiring, metal support beams, a sprinkler system, and a series of staircases and mezzanines. The expert witness believed the system was a capital improvement, and using the expert's testimony, Burlington argued that because the system was permanently affixed to real property, it was a capital improvement.

The court disagreed with Burlington stating that 1) Burlington's expert witness was not qualified to make the determination, and 2) proving affixation alone is insufficient to demonstrate that any particular installation of personal property is necessarily a capital improvement.

Alternatively, Burlington argued that the letter it received from the New Jersey Dept. of Taxation, denying its request for a refund, proved that the inventory material handling system increased the capital value of the real estate or useful life of the property, because the letter indicated that the "building was valued at $26,744,400 in 2001 and the market value [in 2008] will be $54,860,300" for property tax purposes. But at trial, the department's witness said that the inventory handling system was not classified or assessed in the valuation that was stated in the letter.

Because Burlington did not produce any evidence to contradict this claim, the court found that the denial letter was insufficient to prove that installation of the inventory material handling system increased the value of the real property. Thus, the system did not qualify as a capital improvement, and the installation charges do not qualify for the exemption.  Therefore the $396,568.56 paid in sales tax for the services will, unless successfully appealed, remain in New Jersey's coffers.

 

By Ean Hamilton

 

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