November 26, 2013
BURLINGTON COAT FACTORY WAREHOUSE, Plaintiff-Appellant,
DIRECTOR, DIVISION OF TAXATION, Defendant-Respondent.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted October 1, 2013
On appeal from the Tax Court of New Jersey, Docket No. 007820-2008.
Stravitsky & Associates, L.L.C., attorneys for appellant (Bruce J. Stravitsky, on the brief).
John J. Hoffman, Acting Attorney General, attorney for respondent (Lewis A. Scheindlin, Assistant Attorney General, of counsel; Jill C. McNally, Deputy Attorney General, on the brief).
Before Judges Messano and Hayden.
Plaintiff Burlington Coat Factory Warehouse installed an inventory material handling system (the system) and new restrooms in its warehouse facility. After paying a sales tax on services associated with the two projects pursuant to N.J.S.A. 54:32B-3, plaintiff filed a refund claim, asserting that, because the system and restrooms were capital improvements to real property, the services provided were exempt.
In a letter dated March 7, 2008 (denial letter), defendant, the State of New Jersey Division of Taxation (Division), granted plaintiff a partial refund in the amount of $31, 156.20, finding that services performed in conjunction with demolishing the existing restrooms and installing new ones were exempt from sales tax. However, the Division declined to issue a refund for the balance of the taxes paid, $396, 568.56. In the denial letter, the Division explained:
[The] labor charges associated with the inventory material handling system are taxable services as installing personal property, or maintaining, servicing, repairing tangible personal property . . . [because the] taxpayer [. . .] 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.
Further, the Division found that plaintiff's accounting treatment of the system, i.e., it had depreciated the system using six- or ten-year useful lives, suggested the system was tangible personal property, not real property. Alternatively, the Division concluded that, if the system was real property, the labor charges would be "taxable services as maintenance, servicing, or repair of real property . . . ."
Plaintiff filed its complaint in the Tax Court, and the matter proceeded to trial. Following the close of plaintiff's case, the judge granted the Division's motion to dismiss, concluding that plaintiff failed to present sufficient evidence to establish it was entitled to a refund.
Plaintiff now appeals, positing several procedural and substantive arguments. We have considered the arguments raised in light of the record and applicable legal standards. We affirm.
We set forth some general standards that inform our review in this case.
"A taxpayer challenging the [Division]'s determination bears the burden of proof." UPSCO v. Director, Div. of Taxation, 430 N.J.Super. 1, 8 (App. Div.) (citing Atl. City Transpo. Co. v. Dir., Div. of Taxation, 12 N.J. 130, 146 (1953), certif. Granted, __ N.J. __ (2013)). Those transactions enumerated by the Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -55, are "presumed" to be "subject to tax until the contrary is established, and the burden of proving that any such receipt, charge or rent is not taxable . . . shall be upon the person required to collect tax or the customer." N.J.S.A. 54:32B-12(b).
An appellate court may reverse the trial court's findings in a non-jury case only if "they are so manifestly unsupported by or inconsistent with the competent, relevant, and reasonably credible evidence as to offend the interests of justice." Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011). Moreover, we "apply a highly deferential standard of review when considering the factual findings and decisions of Tax Court Judges[, ]" because of "[their] special qualifications, knowledge, and experience in matters of taxation . . . ." Presbyterian Home at Pennington, Inc. v. Borough of Pennington, 409 N.J.Super. 166, 180 (App. Div. 2009) (citations omitted). Accordingly, the findings of the Tax Court should not to be reversed "'unless they are plainly arbitrary or there is a lack of substantial evidence to support them.'" Ibid. (citing G&S Co. v. Borough of Eatontown, 6
N.J.Tax. 218, 220 (App. Div. 1992)). However, we review "[a] tax court's interpretation of a statute . . . de novo." Presbyterian Home, supra, 409 N.J.Super. at 180 (citing Twp. of Holmdel v. N.J. Highway Auth., 190 N.J. 74, 86 (2007)).
N.J.S.A. 54:32B-3(b) imposes a tax on the "receipts from every sale . . . of" certain services. These include services connected with "[i]nstalling tangible personal property, " or "[m]aintaining, servicing or repairing real property." N.J.S.A. 54:32B-3(b)(2) and (4). However, with certain exceptions not applicable here, services connected with the installation of 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 . . . ." N.J.S.A. 54:32B-3(b)(2)(v). This exemption from taxation, like others, must "be strictly construed against the claimant." Quest Diagnostics, Inc. v. Director, Div. Of Taxation, 387 N.J.Super. 104, 109 (App. Div.) (quotation marks and citations omitted), certif. denied, 188 N.J. 577 (2006).
At trial, plaintiff called its employee, John Hooven, a millwright trained in "the use . . . and install[ation of] . . . conveyor systems, " as an expert witness. Hooven explained that the inventory material handling system was comprised of eighteen miles of "conveyor" capable of sorting 10, 000 items of inventory for distribution to 500 stores per hour. The system was specifically designed to meet plaintiff's needs and required installation of electrical wiring, metal support beams, a sprinkler system and a series of staircases and mezzanines. These mezzanines were constructed of poured concrete, and each consisted of workspace for between 250 and 300 people, offices, and bathrooms. The system was secured to the building floor by hundreds of bolts and supported by a series of "hangers" attached to the ceiling of the building. Removal of the system would cause "damage to the system and . . . the building itself." Hooven believed the system was a capital improvement.
After plaintiff rested, the Division moved to dismiss, arguing that plaintiff failed to prove it was entitled to the capital improvement exemption. Plaintiff's counsel argued, "[T]here's a very low threshold as to what constitutes a capital improvement . . . ." Quoting from one of the Division's tax bulletins, counsel stated, "Capital improvement means an installation of tangible personal property which increases the capital value or useful life of the real property. The items installed must be permanently attached to the real property."
The judge, however, clearly indicated that plaintiff's proofs up to that point were insufficient. He permitted plaintiff to "re-open, " and plaintiff called Jeffrey Schwab as a witness.
Schwab was the Division's conferee who considered plaintiff's administrative request for a refund. Schwab essentially reiterated the points contained in the denial letter, which he authored. However, Schwab was not qualified as an expert, and he lacked any expertise as to whether the system had increased the value or the useful life of plaintiff's real property.
Plaintiff also proffered invoices from World Source Integration (WSI), the company that built the system, to demonstrate "the magnitude of this project [and plaintiff's] investment in the asset[, ]" which, plaintiff contended, clearly "increased the value of the [real] property." The judge, however, ruled the invoices were inadmissible because the foundation requirements for the business records exception to the hearsay rule, N.J.R.E. 803(c)(6), were not satisfied.
Plaintiff then argued that the denial letter itself proved the installation increased the capital value of the real estate or useful life of the property. In the letter, Schwab indicated that "the building was valued at $26, 744, 400 in 2001 and the . . . market value [in 2008] . . . will be $54, 860, 300." However, the judge noted that the denial letter stated "the Edgewater Park Township Tax Assessor did not classify or assess the inventory material handling system" in the valuation. Accordingly, the judge found that the denial letter was insufficient to prove installation of the system increased the value of the real property.
The Division again moved to dismiss the complaint. The judge concluded that plaintiff failed to prove "the . . . system increase[d] the capital value of the real property, " or that its installation resulted in a "significant increase to the useful life of the property." Therefore, plaintiff was not entitled to the capital improvement exemption provided by N.J.S.A. 54:32B-3(b)(2)(v).
In determining whether an "installation of tangible personal property results in a capital improvement to real property, " the Division "should . . . consider [w]hether the improvement results in an increase in the capital value of the real property . . . [w]hether the improvement results in a significant increase in the useful life of the real property and . . . the treatment, for accounting purposes, of such improvements for Federal Internal Revenue purposes." N.J.A.C. 18:24-4.6(a)(2)(i)-(iii). We accord significant deference to the Division's interpretation of its own regulations and the enabling legislation from which they are derived. Quest Diagnostics, supra, 387 N.J.Super. at 109 (citations omitted).
Initially, we consider plaintiff's contention that the judge improperly excluded the WSI invoices that would have demonstrated installation of the system increased the value of the real property. We agree that the judge properly exercised his discretion and excluded the invoices from evidence. See, e.g., State v. Rose, 206 N.J. 141, 157 (2011) ("A trial court's ruling on the admissibility of evidence is reviewed on appeal for abuse of discretion.") (citing Brenman v. Demello, 191 N.J. 18, 31 (2007)).
N.J.R.E. 803(c)(6) excepts from the hearsay rule:
A statement contained in a writing or other record of acts, events, conditions, and, subject to Rule 808, opinions or diagnoses, made at or near the time of observation by a person with actual knowledge or from information supplied by such a person, if the writing or other record was made in the regular course of business and it was the regular practice of that business to make it, unless the sources of information or the method, purpose or circumstances of preparation indicate that it is not trustworthy.
The proponent of the evidence must satisfy a three-prong test:
First, the writing must be made in the regular course of business. Second, it must be prepared within a short time of the act, condition or event being described. Finally, the source of the information and the method and circumstances of the preparation of the writing must justify allowing it into evidence.
[State v. Sweet, 195 N.J. 357, 370 (2008) (quoting State v. Matulewicz, 101 N.J. 27, 29 (1985) (internal quotation marks omitted), cert. denied, 557 U.S. 934, 129 S.Ct. 2858, 174 L.Ed.2d 601 (2009).]
In this case, plaintiff argued that Hooven's testimony was sufficient to authenticate the invoices as business records. However, the judge noted that the invoices were not "Hooven's bills, " Hooven did not "supervise the construction" of the system and he was not employed by WSI. In short, we agree with the judge's analysis. 
Turning to the merits of plaintiff's substantive arguments, we first note that plaintiff never contested the Division's assertion that the tax treatment of the system was "inconsistent" with plaintiff's claim for a refund. Accordingly, one of the regulatory factors that the Division considered, specifically, N.J.A.C. 18:24-4.6(a)(2)(iii) (how plaintiff treated the system for accounting purposes with respect to Internal Revenue filings), weighs against any finding that the system was a capital improvement.
Nevertheless, plaintiff argues that the testimony of Hooven and Schwab proved the installation of the system "result[ed] in an increase in the capital value of the real property" and "a significant increase in the useful life of the real property." N.J.A.C. 18:24-4.6(a)(2)(i) and (ii). We disagree.
Hooven was unqualified to express any opinion regarding either of these two regulatory considerations. It is true that Hooven described in detail the installation of the system, and the manner by which it was affixed to the floor of the building, concluding its removal would be laborious and damage the floor. Plaintiff, relying on General Motors Corp v. City of Linden, 20
N.J.Tax. 242 (Tax 2002), and H.J. Bradley, Inc. v. Taxation Division Director, 4
N.J.Tax. 213 (Tax 1982), seemingly argues that, because the system was a fixture, it was a capital improvement, and its installation was not subject to sales tax.
However, plaintiff's reliance on General Motors is misplaced. There, the court was called upon to decide only whether the conveyor system at issue was subject to real property tax pursuant to N.J.S.A. 54:4-1. General Motors, supra, 20
N.J.Tax. at 265. As such, the court never considered the regulations regarding exemption from the sales tax for capital improvements.
In H.J. Bradley, supra, 4
N.J.Tax. at 215, the court considered whether installation of a pool was "the mere installation of tangible personal property, which is taxable, or rather constituted the construction of a capital improvement . . . ." The court found the "intent to permanently affix [was] the dominant factor" in determining whether the pool "bec[ame] a capital improvement . . . subject to be assessed as real property and thereby taxed annually." Id. at 225. However, because the plaintiff "introduced no evidence whatsoever as to the manner in which any specific pool installed by it was in fact installed or affixed to the realty, " the court granted the Division summary judgment. Id. at 227. Importantly for our purposes, the court also noted:
In addition, no evidence was presented to indicate whether any installation resulted in an increase in the capital value of the real property or resulted in a significant increase in the useful life of the real property, two factors to be 'considered' in determining whether an installation of tangible personal property becomes a capital improvement, as required by [regulation].
[Id. at 228.]
As the judge in this case recognized, proving affixation alone is insufficient to demonstrate that any particular installation of personal property is necessarily a capital improvement. The taxpayer must present evidence that the installation increased the value of, or extended the useful life of, the real property. See e.g., Newman v. Director, Div. of Taxation, 14
N.J.Tax. 313, 330 (1994) (noting that the plaintiff failed to demonstrate that its "services result[ed] in capital improvements as defined by the Director; namely, he [had] not shown that hardwood floor refinishing either increase[d] the value of the underlying property or extend[ed] its useful life"), aff'd, 15
N.J.Tax. 228 (App. Div. 1995).
Plaintiff contends the denial letter, which included the increased assessed value of the real estate from $26, 744, 400 in 2001, to $54, 860, 300 in 2008, proved that installation of the system "increase[d] . . . the capital value of the real property." N.J.A.C. 18:24-4.6(a)(2)(i). However, Schwab made clear in his testimony that the assessment made by the municipality did not include "the material handling equipment." Plaintiff produced no evidence to contradict this testimony.
Nor did plaintiff prove that installation of the system "result[ed] in a significant increase in the useful life of the property." N.J.A.C. 18:24-4.6(a)(2)(ii). Schwab testified that he was not qualified to express an opinion on the issue, and the denial letter only included plaintiff's estimate of the useful life of the system as exhibited by its tax accounting treatment. In sum, plaintiff failed to produce any evidence that demonstrated the system was a capital improvement as defined by regulation and case law, and, thus, exempt from sales tax.
Lastly, plaintiff appears to contest the Division's alternative conclusion that, if the system was determined to be real property, the labor charges associated with its installation would be "taxable services as maintenance, servicing, or repair of real property." See N.J.S.A. 54:32B-3(b)(4) (requiring sales tax to be paid for such services "as distinguished from adding to or improving such real property by a capital improvement"). Plaintiff argues that its installation of the inventory material handling system was not maintenance, servicing or repair of its real property.
While we agree with plaintiff's proposition that installation of the system was not subject to sales tax pursuant to N.J.S.A. 54:32B-3(b)(4), the point is immaterial. Plaintiff's entire focus before the Tax Court was that the system was a capital improvement exempt from sales tax pursuant to N.J.S.A. 54:32B-3(a)(2)(v). Plaintiff never advanced any other position.
We recognize that N.J.S.A. 54:32B-3(b)(2)(v) exempts "services rendered in installing property which, when installed, will constitute an addition or capital improvement to real property, property or land . . . ." (Emphasis added). The term "addition" is not defined in the definitional section of the Use and Sales Tax Act, N.J.S.A. 54:32B-2, nor in the Administrative Code.
However, as we noted, plaintiff never claimed it was entitled to an exemption because the inventory system was "an addition" to real property. Indeed, when informed by the judge that proving affixation was insufficient to prove the installation was a capital improvement, plaintiff did not argue that it was entitled to an exemption simply because the system constituted an "addition." We express no opinion on the issue. Plaintiff did not present such an argument to the trial court. To the extent it is now made, we refuse to consider it for the first time on appeal. Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973).