State Makes Tough Tax Decision on Cap Improvements

By:
RICHARD J. KORETO
Published Date:
Jan 21, 2014

The New York State Department of Taxation and Finance moves seamlessly from the sublime to the ridiculous. Last week, we described how the tax department applied the U.S. Constitution to a seemingly simple tax nexus case. This week, we show how the department turns its attention to the taxation of amusement park water slides. But as odd and trivial as this may seem—most NYSSCPA members will go their entire careers without accounting for a water slide—the ruling actually has important implications for any CPA who works with real estate and has concerns about capital improvements.

The petitioner in Advisory Opinion TSB-A-13(38)S operates an amusement park. Several years ago it signed a contract with a manufacturer for the design of a water slide and purchase of components for the slide—the cost was nearly half a million dollars. The manufacturer did not break down the costs but the petitioner noted the slide was specifically designed for the terrain and soil conditions at the amusement park. Subsequently, the petitioner signed an agreement with a contractor to install slide for $349,000. The petitioner noted this was a substantial engineering product: the slide, at completion, was four-stories tall, about 300-feet long and built to accommodate 5,000 gallons of water rushing through it each minute.

The question was whether the installation of such a structure constituted a capital improvement and thus was exempt from sales tax.

Wisely, the petitioner shared full construction details with the tax department to prove its point. For example, it noted that the slide's steel support columns were bolted to concrete piers in the ground. The splash pier at the end consisted of a poured concrete floor covered with a fiberglass wall. Powering the slide is a dedicated pump house, housed in a cement block building with a concrete foundation. The petitioner said that although it was theoretically possible to move the slide, disassembling it would lead to damage to the slide itself and to the underlying real property.

Petitioner Did Its Homework

Deputy Counsel Deborah R. Liebman was able to apply the petitioner's detailed description of the slide and its installation in rendering a decision that was favorable to the amusement park. She turned to the state tax law section 1101(b)(9), which defined a capital improvement as an addition or alteration to real property that fulfills all of the following conditions:

  • Substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property.
  • 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.
  • Is intended to become a permanent installation.

The petitioner did not specifically state that its management, CPAs or attorneys had read section 1101 before submitting the petition, but it seems obvious from the detailed way it explained the slide that it was trying to match all three points, above. Liebman agreed. In her decision, Liebman cited the $1 million price tag as adding value, and the concrete and steel structure as permanent, and noted that removal would cause damage. Indeed, Liebman even found case law on the subject (Matter of Amusements of WNY, Inc.), in which the Tax Appeals Tribunal said that a roller coaster was a capital improvement. Liebman ruled that water slides and roller coasters are analogous.

One More Twist

Just as rides—roller coasters or water slides—may come with a final scary turn, this case almost had one for the petitioner. It turned out that the petitioner doesn't own the amusement park land, but rents it on a long-term lease. How can it claim a tax break on real property it doesn't even own?

Whether by design or luck, the petitioner still wins: Liebman said that the petitioner's underlying lease with its landlord "provides that improvements on the property vest in the landlord at the expiration or termination of the lease." So the actual owner is seeing an improvement in value, and the cap improvement exemption is granted.

As noted above, the usual rule about advisory opinions being limited in precedent is irrelevant—water slides don't come up too often. But this opinion is yet another lesson in the positive benefits of giving the tax department full details, and of considering the tax implications of major decisions well in advance.     

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