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Middlesex Water Co. v. Director

August 25, 1981

MIDDLESEX WATER COMPANY, PLAINTIFF,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT; ATLANTIC CITY ELECTRIC COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; COMMONWEALTH WATER COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; ELIZABETHTOWN GAS COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; ELIZABETHTOWN WATER COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; HACKENSACK WATER COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; JERSEY CENTRAL POWER AND LIGHT COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; MONMOUTH CONSOLIDATED WATER COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT; NEW JERSEY BELL TELEPHONE COMPANY, PLAINTIFF, V. DIRECTOR, DIVISION OF TAXATION, DEFENDANT.



Lasser

LASSER, P.J.T.C.

This is taxpayers' motion for summary judgment. Thirteen utility company cases have been consolidated for the purpose of this motion. Taxpayers are public utilities engaged in the business of selling electricity, gas, water or telephone services in New Jersey. The Director of the Division of Taxation has imposed an additional sales tax assessment on charges by outside contractors for installation of public utility production, generation, transmission and distribution machinery, apparatus or equipment, hereinafter referred to as "utility equipment." This assessment is made pursuant to N.J.S.A. 54:32B-3(b)(2) of the Sales and Use Tax Act.*fn1 Section 3 of the act defines the sale and service transactions which are subject to the tax. Section 3(b)(2) imposes sales tax on "[i]nstalling tangible personal property...."

The initial question to be decided is whether installation charges for additions or capital improvements to personal property are exempt under N.J.S.A. 54:32B-3(b)(2)(v) which exempts "services rendered in installing property which, when installed, will constitute an addition or capital improvement to real property, property or land."

I

Meaning of the Five Words "Real Property, Property and Land" in § 3(b)(2)(v)

Taxpayers contend that the exemption in subsection (v) of § 3(b)(2) for "services rendered in installing property which, when installed, will constitute an addition or capital improvement to real property, property or land" exempts from tax installation charges for utility equipment because such equipment, when installed, is an addition or capital improvement to real property, property or land. They contend that the word "property" includes personal property.

Taxpayers contend that the New Jersey Sales and Use Tax Act should be read to exempt installation charges for utility equipment because:

1. Such charges are exempt under the New York Sales and Use Tax Act, after which the New Jersey Act is patterned.

2. Assembly Bill 705 (1967), introduced on March 6, 1967, proposed to delete the words "property or land" from § 3(b)(2)(v). This proposed deletion was an apparent effort to make it clear that charges for installation of personal property to personal property (the cost of installing an engine in a portable crane, for instance) are not exempt. Shortly thereafter, the Legislature, at the insistence of the utility industry, amended the bill to delete this proposed change. This deletion in the bill is relied upon by taxpayers as an expression of intent by the Legislature to include installation charges for capital improvements to personal property within the category of exempt services.

3. The Sales and Use Tax Act should be read together with N.J.S.A. 54:30A-49 et seq. (hereinafter the Public Utilities Gross Receipts Tax Act) to conclude that sales and use tax exemptions granted to public utilities should be liberally construed.

4. Public policy indicates an intent to minimize the tax burden on utility companies.

The Director contends that the phrase "real property, property or land" in N.J.S.A. 54:32B-3(b)(2)(v) is limited to real property. He argues that the utility equipment installed is personal property and that, upon installation, it retains its original nature as personal property, never becoming real property or an addition or capital improvement to real property and, therefore, charges for its installation are not exempt.

The elements to be considered are the wording and legislative history of.

1. N.J.S.A. 54:32B-3(b)(2) and 3(b)(4) of the New Jersey Sales and Use Tax Act and the Director's Regulations, N.J.A.C. 18:24-5.2, 5.6 and 5.7(b);

2. The New York Sales and Use Tax Act from which the New Jersey Sales and Use Tax Act is derived, and

3. The relationship of the New Jersey Sales and Use Tax Act to the New Jersey Public Utilities Gross Receipts Tax Act.

Sales tax is imposed under the New Jersey act on every retail sale of tangible personal property not specifically exempted. N.J.S.A. 54:32B-3(a). "Sale" is broadly defined in the act as both the transfer of tangible personal property and the rendering of services. N.J.S.A. 54:32B-2(f). The act imposes the sales tax on a broad range of services. These services, defined in § 3(b), include producing, fabricating, processing, printing, installing, maintaining, servicing, repairing, storing and advertising.

There is a relationship between § 3(b)(2) and § 3(b)(4). The first deals with services to personal property and the second deals with services to real property. Section 3(b)(2) taxes the installation, maintenance, servicing and repairing of tangible personal property. Among the exemptions listed under this section is the exemption of "property which, when installed, will constitute an addition or capital improvement to real property, property or land." N.J.S.A. 54:32-3(b)(2)(v). It is clear that the installation (but not the sale) of property which becomes a capital improvement to real property is exempt. Thus, bricks used to build a house are subject to sales tax but services for incorporating them into the house are not.

We conclude that it is the legislative scheme of the Sales and Use Tax Act to tax the purchase of personal property under § 3(a) and to tax services for installing such property under § 3(b)(2) or § 3(b)(4) unless the installation constitutes an addition or capital improvement to real property. Section 3(b)(2)(v) must be read in conjunction with § 3(b)(4). The five words in § 3(b)(2)(v) are limited to real property, so that § 3(b)(2) and § 3(b)(4) are consistent.

If the five words mean both real and personal property, as taxpayers claim, § 3(b)(2) gives in the first line and takes away in the last. If the words "real property, property or land" mean real and personal property the only installation charges remaining taxable would be those relating to installation of noncapital items. Installation charges for this type of personal property would appear to be minimal. All installations of motors, gears, fans, pumps and all nature of mechanical, electrical, electronic and automotive equipment which are additions or capital improvements to personal property would be exempt. This would carry the exemption far beyond the public utility field and exempt a substantial number of services which are now being taxed. All additions which increase the capital value or the useful life of personal property would be exempt. It does not appear likely that the Legislature would have included installation charges as taxable, only to exempt substantially all such charges. If the Legislature had intended to tax only installation charges for noncapital improvements to personal property it could have done so by direct language.

The legislative scheme of the Sales and Use Tax Act is to exempt charges for installation of capital improvements to real property. There is no specific indication in this statute that the Legislature intended to extend this exemption to installation charges for capital improvements to personal property. Exemptions from tax are strictly construed and granted only when clear and unambiguous. Princeton Univ. Press v. Princeton, 35 N.J. 209, 214, 172 A.2d 420 (1961); Branch v. Monmouth Medical Center, 138 N.J. Super. 524, 531, 351 A.2d 756 (App. Div. 1976), aff'd 73 N.J. 179, 373 A.2d 651 (1977); Container Ring Co., Inc. v. Taxation Div. Director, 1 N.J. Tax. 203, 208 (Tax Ct. 1980).

The New Jersey Sales and Use Tax Act is patterned after the New York Sales and Use Tax Act. N.Y. Tax Law, § 1105 (McKinney) of the New York Act exempts installation charges "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...."

The New York Real Property Tax Law, § 102(12) (McKinney), defines the five words and leads to two conclusions, first, that the five words "real property, property or land" as used in the New York Sales and Use Tax Act do not include personal property and, second, that these words as defined in New York do include utility equipment. The scheme for the taxation of public utilities is not the same in New York as it is in New Jersey.

We conclude from the foregoing that the intent of the New Jersey Legislature cannot be ascertained from the wording and ...


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