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Declaratory Ruling; Taylor Industries, Inc., Dkt. No. 94-30-6-0367

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Declaratory Ruling; Matter of Taylor Industries, Inc., Dept. Rev. & Fin. Dkt. No. 94-30-6-0367, . Machinery and equipment—when distinguished from fixtures.—

A seller of commercial food service equipment could purchase items for resale without paying sales tax to the extent that these items remained tangible personal property following installation in the customers' facilities. But it was liable for sales tax on its purchases of items that became fixtures after installation. Items are presumed fixtures unless proven otherwise. The most important test for determining whether an item remains personal property or becomes a fixture is whether it is put to the same use as the structure in which it is installed and whether the structure owner intends to make it a permanent part of the structure. The degree of physical attachment is less important, being mainly an indicator of the owner's intentions. The existence of a market for used items is also of secondary importance; in the case of items treated as fixtures, an active secondary market may simply be an outgrowth of a high rate of business failures. See also

Pursuant to a Petition for Declaratory Ruling submitted to the Iowa Department of Revenue and Finance (hereinafter referred to as “Department”) by Taylor Industries, Inc. (hereinafter referred to as “Petitioner”) and in accordance with Iowa Code § 17A.9 and Department rules 701-X.1(17A) “Petition for a Declaratory Ruling” and 701-X.5 “Refusal to Issue Ruling”, Iowa Admin. Code, the Department hereby issues this declaratory ruling.

The petition was filed with the Department on December 15, 1994. In the petition a meeting was requested between the Petitioner and the Department. The meeting was scheduled and held on January 13, 1995. Attending on behalf of the Department was Darwin Clupper, technical tax specialist. The Petitioner's representative, Mark Truesdale, Attorney at Law, was present as was its treasurer, John Bohnet, and Ned Jones a member of its sales staff. At the meeting, the Petitioner submitted additional factual material for the Department's consideration and that material now rests in the petition's public information file in the Department's Policy Section.

The facts of this matter are as follows: The Petitioner sells and installs a substantial amount of kitchen equipment. Many of its contracts for the sale and installation of kitchen equipment are with governmental units and private nonprofit educational institutions. The Petitioner has executed contracts for these sales in the past and plans to pursue more of these contracts in the future. These contracts repeatedly involve the sales and installation of predictable pieces of machinery and equipment. Some pieces of its machinery and equipment are attached more substantially to the underlying real estate; others less substantially, but all are attached to the real estate in some fashion. Each of these pieces of machinery and equipment, however, is always installed in the same manner.

In all cases, the Petitioner is not responsible for constructing any walls, floors, doors, windows, or ceilings. A party other than Petitioner is responsible for installation of plumbing materials including traps, grease traps, stops, and shutoffs. A party other than Petitioner is responsible for installation of electrical devices, including switches, current protection devices, circuit disconnects, motor starters and fittings. A party other than the Petitioner is responsible for roughing-in and connecting mechanical and electrical equipment to the kitchen equipment items to be furnished by Petitioner.

KITCHEN EQUIPMENT	INSTALLATION
1) Garbage Disposer. 208 volt; 2 hp electric motor	To Install: Connected to trap and drain by one collar-type plumbing fitting. One-half inch water line connected by one collar-type plumbing fitting. Wired into control panel at the wall (two wires). Disposer itself installs easily into the sink; secured at the top by a movable flange/collar. To Remove: Disconnect wires at the wall. Undo one plumbing fitting on 1/2" water pipe. Disconnect one plumbing fitting on drain line. Remove disposer's collar at sink and pull out the garbage disposer. Can easily be removed in fifteen minutes.
2) Dishwasher. Stainless steel, weight 4,000 lbs. Freestanding on floor, on its own stainless steel legs. Stainless steel splash shields are part of dishwasher, not connected to the wall. 208 volt, 2 hp wash motor.	To Install: One electrical connection; direct wire to junction box at wall. Connect one 3/4" water line. Convert one 16" by 16" exhaust duct above ceiling via metal screws. Indirect water drain (several inches between it and the drain on the floor). To Remove: Disconnect wires at wall; disconnect one 3/4" water line; disconnect one exhaust duct; remove. Easily disconnected and removed in one-half hour.
3) Walk-in Cooler and Freezer. 29.75 feet by 8.5 feet high by 12.5 feet deep. 115 volt refrigerator and freezer evaporator coils connected to compressor rack outside of building on concrete slab. Five lights inside cooler, pre-installed at factory. Drains are indirect; not connected.	To Install: Pre-manufactured sections of stainless steel and stucco aluminum, approximately 4X8 foot assembled on site. Connected via male/female camlocks using only one tool provided by the manufacturer. Walls and ceiling are not attached to walls of the structure. Galvanized steel floor assembled in 4X4 sections in identical fashion. Floor panels set on concrete slab covered with two inches of tile and grout. Condenser lines run from compressor outside of building, into cooler through the side. Wiring: Is part of condenser lines. Interior fixtures are all pre-wired at the factory. Takes one day to install. To Remove: Break out two inches of tile and grout with sledge hammer. This was actually done at West Liberty; took one laborer one hour to remove. Disconnect connect lines. Then disassemble the floor sections and wall sections one by one, piling them onto a forklift and hauling away. This cooler/freezer was actually removed at West Liberty; took less than one-half day to remove.
4) Stainless Steel Wall Cabinet. 15 inches deep, 28 inches high, 84 inches long.	To Install: Attached to wall via eight concrete anchors. Silicon adhesive bead around exterior has no structural function whatsoever, only for vermin barrier. To Remove: Can be removed in ten minutes. Simply unscrew eight screws.
5) Stainless Steel Natural Gas Stove. Two natural gas burners; cabinet base with hinged door. Stands on four legs. No electrical wiring. Natural gas connection: Quick disconnect.	To Install: Screw on regulator at back of stove. Has nipple at back. Then slip the natural gas "quick disconnect" connection six inch stainless steel onto the nipple; connect via hand at the wall. No tools required. To Remove: Simply pull the quick disconnect both at the regulator on the stove, and at the wall. Done with your hand. Takes about two seconds. Similar to unplugging a wall plug. Load on a cart and haul away.
6) Stainless Steel Natural Gas Convection Oven. Two natural gas burners. Freestanding on four stainless steel legs. No electrical wiring; just one cord and plug. Natural gas connection: Quick disconnect. Not connected to the hood. A picture submitted at the January 13, 1995 meeting shows that this particular item is mounted on wheels.	To Install: Connect by hand the natural gas quick disconnect. Plug in. Takes five seconds. To Remove: Unplug electric cord. Unplug the gas quick disconnect at both ends. Takes about five seconds. Load on a cart and haul away.
7) Combination Oven/Steamer with Stand. Capacity: Ten 18 inch by 26 inch pans. Contains five wire racks. 208 volt, 18.4 kW electric spray nozzle and hose. Free-standing on our stainless steel legs.	To Install: Wire to junction box in wall. Plumbing: One 3/4 inch water supply; quick disconnect; connect by hand. To Remove: Unhook the wire at the junction box. Grab water supply with hand; pull. Takes about one minute. Load on cart and haul away.
8) Stainless Steel Preparation Sink. 30" deep, 34" high, 150" long. Free-standing on four pair of stainless steel legs.	To Install: Six plumbing connections, 1/2%" water line. Each one with collar-type plumbing fitting. Wiring: Only one; to disposer. Drain: four drains: One for garbage disposer, one for each of three sinks. Three Z-clips are screwed to the wall. The lip of the backsplash then is lowered down over the Z-clips: sink is installed. To Remove: Lift sink straight up off Z-clips; pull forward. Disconnect the six water supplies, four drains; one wire; put onto cart and roll away. Can be removed in 1/2 hour.

The Petitioner also explains that the sinks, dishwashers, cabinets, stoves, ovens, and coolers are all manufactured of stainless steel. Stainless steel has a long useful life. Except for the electric motors, these items can have a useful life of thirty years or longer. For this reason, they are often removed from one building, resold, and reinstalled in another. One stainless steel oven may easily find three different homes during its useful life. The same is true of the stainless steel sinks, cabinets, and dishwasher assemblies. Even the walk-in cooler/freezers are frequently removed and resold. At any one time, the Petitioner has several of these cooler/freezers, in the form of piles of panels, at its facility available for sale. The Petitioner frequently sells and installs these used cooler/freezers into different locations. The national average life of a cooler/freezer of this type is 25 years. The national average life of a dishwasher of the type described in this petition is twelve years. Used coolers and freezers, used dishwashers and used equipment of this type are routinely sold by the Petitioners in the ordinary course of its business.

The function of a declaratory ruling is to provide “reliable advice from an agency as to the applicability of unclear law.” Bonfield, The Iowa Administrative Procedure Act: Background, Construction, Applicability, Public Access to Agency Law. The Rulingmaking Process, 60 Iowa Law Rev. 731.805 (1975). Iowa Code § 17A.9 (1995) contemplates declaratory rulings by administrative agencies on a disclosed set of facts. City of Des Moines v. P.E.R.B., 275 N.W.2d 753, 758 (Iowa 1979) A declaratory ruling enables the public to secure definitive binding advice as to the applicability of agency-enforced law to a particular set of facts. Bonfield, at 822-823.

It is not the function of a declaratory ruling to resolve issues involving factual analysis “too complicated to handle outside of an actual adjudication.” Bonfield, at 807. A declaratory ruling is not a “contested case” as defined in Iowa Code § 17A.2(2) (1995); namely, it is not an evidentiary hearing which is also an administrative remedy set forth in Iowa Code ch. 17A (1995) and in the Department's rules, see 701-7.23 Iowa Admin. Code. Consequently, for purposes of this declaratory ruling, the Director views the issues raised in the petition for declaratory ruling as questions of law applicable to the factual situation disclosed by the Petitioner in the petition. This view is consistent with department rule 701-7.25 Iowa Admin. Code concerning the issuance of declaratory rulings.

The Petitioner asks if items one though eight listed above are construction equipment or building materials which become a part of the real estate after installation (fixtures) or if these items are machinery and equipment which remain tangible personal property after installation in a contract sponsor's building or other structure. The differing tax consequences for the Petitioner are explained in department rules 701-19.9 and 19.12. The Petitioner must, ordinarily, pay tax on its purchases of construction materials or building equipment, but it can purchase machinery or equipment which remain tangible personal property after installation free of tax for subsequent resale to a sponsor.

If the Petitioner's construction contract is with a public school system, that public school system will purchase the machinery and equipment which remain tangible personal property exempt from tax. The institution is entitled to a refund of tax paid by the Petitioner on the Petitioner's purchase of construction material or building equipment. The Petitioner is obligated to timely provide an institution with the documents which will allow the refund to be properly computed.

Department rules 701-19.10 and 19.11 set out various examples of fixtures and tangible personal property and explain how to distinguish the one type of property from the other. The rules reads as follows:

701-19.10(422.423) Distinguishing machinery and equipment from real property. A construction contract may include many activities, but it does not include a contract for the sale and installation of machinery or equipment. Machinery and equipment includes property that is tangible personal property when it is purchased and remains tangible personal property after installation. Generally, tangible personal property can be moved without causing damage or injury to itself or to the structure, it does not bear the weight of the structure, and it does not in any other manner constitute an integral part of a structure. Manufactured [sic] machinery and equipment which does not become permanently annexed to the realty remains tangible personal property after installation.

19.10(1) The following is a list of property which, under normal conditions, remains tangible personal property after installation. The list non-exclusive and is offered for illustrative purposes only:

a. Furniture, radio and television sets and antennas, washers and dryers, portable lamps, home freezers, portable appliances and window air conditioning units.

b. Portable items such as casework, tables, counters, cabinets, lockers, athletic and gymnasium equipment and other related easily moveable property attached to the structure.

c. Machinery, equipment, tools, appliances, and materials used exclusively as such by manufacturers, industrial processors and others performing a processing function with the items.

d. Office, bank and savings and loan association furniture and equipment, including office machines.

e. Radio, television and cable television station equipment, but not broadcasting towers.

19.10(2) The following is a list of property which, under normal conditions, becomes a part of realty. The list is non-exclusive and is offered for illustrative purposes only.

a. Boilers and furnaces for space heating.

b. Built-in household items such as kitchen cabinets, dishwashers, sinks (including faucets), fans, garbage disposals and incinerators.

c. Buildings, and structural and other improvements to buildings, including awnings, canopies, foundations for machinery, floors (including computer room floors), walls, general wiring and lighting facilities, roofs, stairways, stair lifts, sprinkler systems, storm doors and windows, door controls, air curtains, loading platforms, central air conditioning units, building elevators, sanitation and plumbing systems, and heating, cooling and ventilation systems.

d. Fixed (year-around) wharves and docks.

e. Improvements to land including retaining walls, roads, walks, bridges, fencing, railway switch tracks, ponds, dams, ditches, wells, underground irrigation systems, drainage, storm and sanitary sewers, and water supply lines for drinking water, sanitary purposes and fire protection. See rule 18.35(422,423) relating to drainage tile.

f. Planted nursery stock.

g. Residential water heaters, water softeners, intercoms, garage door opening equipment, pneumatic tube systems and music and sound equipment (except portable equipment).

h. Safe deposit boxes, drive-up and walk-up windows, night depository equipment, remote T.V. auto teller systems, vault doors, and camera security equipment (except portable equipment).

i. Seating in auditoriums and theaters and theater stage lights (except portable seating and lighting).

j. Silos and grain storage bins.

k. Storage tanks constructed on the site.

l. Swimming pools (wholly or partially underground (except portable pools)).

m. Truck platform scale foundations.

n. Walk-in cold storage unit becoming a component part of a building.

701-19.11(422,423) Tangible personal property which becomes structures. Items which are manufactured as tangible personal property can, by their nature, become structures. However, the determination is factual and must be made on an item by item basis. The following is a listing of criteria which courts have used in making such a determination.

1. The degree of architectural and engineering skills necessary to design and construct the structure.

2. The overall scope of the business and the contractual obligations of the person designing and building the structure.

3. The amount and variety of materials needed to complete the structure, including the identity of materials prior to assembly and the complexity of assembly.

4. The size and weight of the structure.

5. The permanency or degree of annexation of the structure to other real property which would affect its mobility.

6. The cost of building, moving or dismantling the structure.

Example: A farm silo, which is a prefabricated glass lined structure, is intended to be permanently installed. The prefabricated glass lined structure is 70 feet high, 20 feet around, weights 30 tons, and is affixed to a concrete foundation weighing 60 tons which is set in the ground specifically for the purpose of supporting the silo. The assembly kit includes 105 steel sheets and 7000 bolts. The silo can be removed without material injury to the realty or to the unit itself at a cost of $7,000. In view of its massive size, the firm and permanent manner in which it is erected on a most substantial foundation, its purpose and function, the expense and size of the task and the difficulty of removing it, it is considered a structure and not machinery or equipment. Wisconsin Department of Revenue v. A.O. Smith Harvestore, 240 N.W.2d 357.

The above criteria is intended only to be summation of factors which the department will consider in determining whether or not a project involves construction. The following cases are used as reference material:

Wisconsin Department of Revenue v. A. O. Smith Harvestore Products, Inc. Wisc.) 240 N.W.2d 357 (1976); Prairie Tank or Construction Co. v. Department of Revenue, (Ill) 364 N.W.2d 963 (1977); Levine v. State Board of Equalization, (Calif), 299 PAC 2d 738 (1956); State of Alabama v. Air Conditioning Engineers, Inc. (Ala), 174 So 2d 315 (1965); A. S. Schulman Electric Company v. State Board of Equalization (Calif), 122 CAL Rptr 278 (1975); Western Pipeline Constructors, Inc. v. J. M. Dickinson (Tenn), 310 SW2d 455; and City of Pella Municipal Light Plant, Order of the Director of Revenue, June 16, 1975.

The Director reasons first: items 1 (the garbage disposal), 3 (the walk-in cooler and freezer), and 8 (the stainless steel preparation sink) become a part of the real estate after installation, and to state otherwise would contradict not only the applicable department rules but more than a century's worth of Iowa Supreme Court cases which have developed the laws which distinguish real from personal property in this state. Secondly, the Director reasons: the other items (2, 4, 5, 6 and 7) remain tangible personal property after installation, and this conclusion is amply supported by the rules and applicable case law.

By way of explanation for these two conclusions, the Director begins with the observation that under subrule 19.10(2) garbage disposals, sinks and walk-in cold storage units are stated to be “property, which under normal conditions, becomes a part of the realty”.

Subrule 19.10(2)“b”states that sinks and garbage disposals which are “built-in” become fixtures, and subrule 19.12(2)“n”states that walk-in “cold storage units” which become a “component part of a building” become the same. The Director concludes from the description contained in the petition that the garbage disposal and sink are as “built-in” as the usual appliances of that nature, and the walk-in cooler and freezer is clearly a “component part” of any building into which it is installed. Concerning this last item, the Petitioner's description of the activities necessary to remove the freezer pretty well indicate that the typical freezer is as much a component or integral part of a building as any number of other items (such as carpets, light fixtures and smaller central air conditioning units) which are ordinarily considered to be real property after installation. The Department rules which interpret the statutes it administers have the force of law and are presumptively valid. Richards v Iowa Department of Revenue, 360 N.W.2d 830 (Iowa 1985). By this reasoning the Director concludes that items 1, 3, and 8 become part of the realty when installed. Additionally, the common law which distinguishes a fixture from what remains tangible personal property after placement on real estate is well developed in the state of Iowa. The standards enunciated in that common law fully support the Director's conclusion that items 1, 3, and 8 are fixtures after installation. The general rule is stated in First Trust and Savings Bank of Moville, Iowa v Guthridge 445 N.W.2d 401, 402 (Iowa App. 1989):

Under common law personal property becomes a fixture when

(1)it is actually annexed to the realty, or to something appurtenant thereto;

(2)it is put to the same use as the realty with which it is connected; and

(3)the party making the annexation intends to make a permanent accession to the freehold.

Ford v. Venard, 340 N.W.2d 270, 271 (Iowa 1983); Cornell College v. Crain, 211 Iowa 1343, 1345, 235 N.W.731, 732 (1931); Speer v. Donald, 201 Iowa 569, 571, 207 N.W.581, 582 (1926); Rahm v. Domayer, 137 Iowa 18, 20, 114 N.W. 546, 546 (1908); Thomson v. Smith, 111 Iowa 718, 721, 83 N.W. 789, 790 (1900); Johnson v. Moser, 82 Iowa 29, 30-31, 47 N.W. 996, 996 (1891); Ottumwa Woolen Mill Company v. Hawley, 44 Iowa 57, 62 (1876), Teaff v. Hewitt, 1 O. St. 511.

The Petitioner attempts to stress the slight degree to which items 1, 3, and 8 are attached to the buildings in which they are placed, but the amount of attachment is not of great importance in determining whether or not an object is a fixture, and physical attachment to the soil or a building is not necessary to render property a fixture. An object can be annexed to real estate without being physically attached to that real estate. See Cornell College v. Crain and Ottumwa Woolen Mill Company v Hawley (supra). The use of physical attachment in determining whether an object is or is not a fixture is explained in the Rahm v Domaver case, supra, 137 Iowa at 19-20:

A leading case on the subject of fixtures is Teaff v. Hewitt, 1 Ohio St. 511 (59 Am. Dec. 634), where it is said: “The true criterion of a fixture is the united application of the following requisites: Actual annexation to the realty, or something appurtenant thereto. (2) Application to the use or purpose to which that part of the realty with which it is connected is appropriated. (3) The intention of the party making the annexation to make a permanent accession to the freehold.” The united application of the three requisites named was considered by this court in the case of The Ottumwa Woolen Mills Co. v. Hawley, 44 Iowa, 57, and it is there said, speaking of such requisites: “The first, being physical attachment all the cases hold is a very uncertain and unsatisfactory criterion, and in our opinion the only value to be attached to it is in determining the intention of the owner of the freehold in making the annexation.” The conclusion reached in that case was that “the intention of the party making the annexation to make a permanent accession to the freehold” was the controlling consideration in determining the whole question, and “the character of the physical attachment, whether slight or otherwise, and the use, are merely important in determining the intention of the party making the annexation.” (Emphasis added)

The rule which has emerged out of all of this is that if property is attached to the ground or a building, it is presumed that this property is a fixture and not tangible personal property. The presumption is rebuttable. The person who asserts that the attached property is not a fixture has the burden of proving his or her case. See Speer v Donald, Rahm v Domaver and Ottumwa Woolen Mill Company v Hawley, supra.

Applying First Trust and Savings Bank's three standards for determining when personal property becomes a fixture, the three items in question are annexed to the realty by way of physical attachment, and pretty clearly, all are “put to the same use” as the realty to which they are connected, if the real estate to which the equipment is attached is used as a cafeteria, the items are used as cafeteria equipment. Concerning the third standard, after substantial thought on the matter, the Director concludes that in the usual case the person attaching this equipment to a building would intend to make it a permanent part of the “freehold”. It is clear from a description of the equipment that the items are of a fairly large size and not light in weight. Once in place, there is no particular reason to move any of them until the person installing them ceases to use the building in which they are placed for food service or until an item wears out. By the Petitioner's account, there is a substantial market for coolers and sinks which are used and have been detached from real estate. That particular circumstance does not, however, provide a suitable quantum of proof to upset the usual presumption that property attached to the soil or a building is a fixture. The Director reasons that the usual motive for the detaching of such an item involves the vicissitudes of the food services business. A restaurant fails and its trade fixtures must be dismantled because the new owner or lessee of a building will use it for purposes other than the restaurant business. But this does not mean that the restaurant owner who installed the property in the building intended anything other than to operate the restaurant permanently if it were a success, or that the property installed was intended to be anything other than a permanent attachment to the real estate even though failure in the food service business is always a possibility.

In contrast to the above is the evidence which the Petitioner presents regarding items 2, 4, 5, 6 and 7. All are, when in use, attached to the buildings in which they are placed to some degree, but the facts presented by the Petitioner overcome the presumption that the items are fixtures by virtue of their attachment. The items remain tangible personal property after attachment.

As an explanation for this, the Director points first to subrule 19.10(1)“b” which mentions “easily movable property attached to the structure” which does not become part of the real estate. Sub section 19.10(1)“b” specifically mentions easily removed “cabinets”; clearly this is a reference to the type of cabinet labeled item 4 in the petition. Concerning items 5 and 6, these would seem to be movable and lightly attached to the point that they would remain personal property after installation as explained in subrule 19.10(1)“b”. It is also significant for item 6, that a fair-sized market exists for used ovens. Item 7 is connected to the building in much the same say as a clothes washer, that is, by way of an electric wire and a water hose. It remains tangible personal property after installation for the same reasons as a number of items described in subrule 19.10(1)“a”remain so. That is, its major attachment to the building is by way of an easily-removed electrical wire. Finally, concerning item 2, the issue is fairly close here. However, the greater weight of evidence indicates that a dishwasher remains tangible personal property after installation. Item 2 is not a built-in dishwasher, so subrule 19.10(2)“b”is not applicable. The dishwasher is very heavy, but it is lightly attached to the building by one electrical and one water hose connection. Again, a fairly sizable market for these large used dishwashers appears to exist. So item 2 remains tangible personal property after installation as explained generally in subrule 19.10(1).

WHEREFORE, based on the facts presented by the Petitioner, the foregoing reasoning and applicable provisions of law, it is the Director's ruling that items 1, 3 and 8 are fixtures after installation and items 2, 4, 5, 6 and 7 remain tangible personal property after installation.

This Declaratory Ruling is predicated upon information presented by the Petitioner and is applicable only to the factual situation presented.

Done at Des Moines, Iowa this 14th day of March, 1995.

IOWA DEPARTMENT OF REVENUE AND FINANCE

G. D. Bair, Director