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Providing quality representation for over 10 years. |
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The GALVIN LAW FIRM |
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The Nuts and Bolts of Determining When Personalty is Realty for the Purpose of Real Estate |
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Dennis M. Galvin |
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In light of our current economic malaise the New Jersey State Legislature has introduced A5046 and S-3595, known as "The Business Retention and Equitable Taxation Act", which would alter the concept of what constitutes real property for purposes of assessing local property taxes. The debate on this issue has raged on for years. Such items as; oil refineries or radio transmission towers are real property for taxation purposes today. In 1985 they were personalty and in 1992, if the proposed legislation passed, they it will be personalty once again. The current law, NJSA 54:4-1, also known as Chapter 117, as interpreted by the Tax Court, allows the taxation of special uses such as oil refineries, breweries, public utility transformer stations, radio transmission tower’s etc., as real property. Chapter 117 was enacted in 1986 in response to City of Bayonne vs. Port Jersey 79NJ367 (1979) and its progeny. In City of Bayonne vs. Port Jersey 79 NJ 367 (1979) the New Jersey Supreme Court held that if machinery or equipment can be removed without "material injury" to the freehold, it was not taxable as real property. Armed with this definition all sorts of taxpayers filed appeals and were successful at removing entire plants such as refineries from the tax rolls. A perfect example is the case of Sta-Seal, Inc v. Taxation Div. Director, 5 NJ Tax 272, (Tax Ct. 1983), aff’d 6 NJ Tax 345 (App.Div. 1984), certif.den..97 NJ 644,483A.2d 169 (1984), in which the Tax Court exempted an entire asphalt plant in South River. The court held that since it was bolted to the ground and was capable of being removed and transported, it was not realty. In response to these kinds of opinions the Legislature revised NJSA 54:4-1 as follows: Real property taxable under this chapter means all land improvements thereon includes personal property affixed to the real property or an appurtenance thereto unless: a. (1) The personal property. So affixed can be removed or severed without material injury to the real property. (2) The personal property can be removed or severed without material injury to the personal property itself; or (3) The personal property so affixed is not ordinarily intended to be affixed permanently to real property; or b. The personal property so affixed is the machinery, apparatus equipment which is neither functionally essential to a structure the personal property is within or to which the personal property is fixed nor constitutes a structure itself. As Governor Kean pointed out, in his Reconsideration and Recommendation Statement, "This bill is a response to certain recent court decision that may result in the exemption from local property taxation of certain industrial property that has long been taxed locally." Since the passage of this revision there have been challenges and interpretations. Judge Andrews in Chevron USA v. Perth Amboy, 9 NJ Tax 205, (1987) found these revisions to be constitutional. The court went on to interpret the meaning of "material injury" and ordinary intent, these two terms being the key to understanding this amended legislation. First, the Court found that the term "material injury" should be defined in accordance with the pre-enactment definition established in City of Bayonne, supra. Specifically, material injury means "irreparable or serious physical injury of damage to the freehold." The second issue considered by the Tax Court in the Cheveron case was the term "ordinarily intended to be affixed." The Court found that outward appearances are relevant when determining ordinary intent. Finally the court held: "Even though Chevron’s refinery could be removed without material injury to itself or the real property, this court finds that the machinery, equipment and process units implicated in Chevron’s refinery are ordinarily intended to be affixed permanently to real property pursuant to c. 117. This finding applies to the entire refinery to include the process units, machinery, instrumentation, piping, storage tanks and related equipment." Id at 244 The Statute commonly referred to as Chapter 117 boils down to a two-prong test. First, the plaintiff must prove that there is no material injury occasioned upon the personalty to be removed or the freehold where it was attached. Then having cleared this hurdle, the plaintiff must prove by a preponderance of the evidence that the machinery and equipment are not ordinarily intended to remain permanently affixed to real property. See American Hydro-Partner v. Cliften, 9 NJ TAX 259 (1987). In that case the Tax Court found that the machinery and equipment utilized in the production of hydroelectric power was taxable as real property. Although the focus of most decisions has been on the issue of ordinarily intended to remain affixed to the realty; some taxpayers have failed to pass either prong. In NYT Cable TV v. Audobon Borough 9 NJ Tax 359 (1987) the Tax Court having found that a 250-foot cable antenna tower with a sophisticated 3-tier 6-component underground concrete foundation was of a type ordinarily intended to be permanently affixed to the realty. The Court secured its decision by adding that there would be material injury to the freehold if this super structure was removed as "there would remain imbedded in the ground a 13-foot-deep reinforced concrete foundation backfilled with crush stone with six inches of the concrete protruding from the ground level and six one-inch anchor bolts projecting five-and-one-half inches." Id at 372 Despite these difficulties, taxpayers may still prevail if they can show that in accordance with NJSA 54:4-1 (b) the equipment under consideration for taxation is not "functionally essential" as defined by the Director in NJAC 18:12-10.01. In Badische v.Town of Kearny 11 NJ Tax 385 (1990), the Tax Court cited Texas Eastern Transmission Corporation v. Division of Taxation, 11 NJ Tax 198 (1990), for the proposition that the directors definition of functionally essential was invalid when applied to special uses property. The Tax Court reaffirmed that case stating that: "If the property is special purpose property, as in the subject case, the operation of the structure and the operation of the business conducted Therein merge. That which would be regarded as machinery, apparatus Or equipment and not taxed as real property if contained in a general purpose property is taxed as real property when affixed to special purpose property. Because it is functionally essential to the "special purpose"...11 NJ Tax at 401 The Tax Court went on to find that: "the batch ester plant is a special purpose property, so its operation and the operation of the business conducted therein, e.e., the manufacture of plasticizer, are merged. The property employed in the process of esterification carried on in the structure is functionally essential to the special purpose". 11 NJ Tax at 401 It is unquestionable that Chapter 117 achieved its goal, which was to require special uses such as oil refineries, breweries, public utility transformer stations, radio transmission towers, etc. to be taxed as real property. If Chapter 117 is amended by the Legislature, it is a certainty that the legal grist mill will regain a high level of activity in the analysis of this new law as to what constitutes real property for the purposes of real estate taxation. In the meantime, operations which are removable without material injury to the freehold but which are ordinarily intended to be permanently affixed may be ripe for omitted assessments. Thus, even if a subject property is not "too attached" to a community it may very well be taxable as real property. |
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