Opinion
Docket No. 4067-2009 Docket No. 3574-2010 Docket No. 8131-2011 Docket No. 5423-2012
09-22-2014
Re: Costco Wholesale v. Township of Monroe Block 79, Lot 20 (10 Costco Drive)
BY ELECTRONIC MAIL Henry Lacap, Esq. Janat, Lacap & Assoc., L.L.P. Crossroads Corporate Center One International Blvd., Suite 40C Mahwah, New Jersey 07495 Richard A. Rafanello, Esq. Gregory B. Pasquale, Esq. Shain, Schaffer & Rafanello, P.C. 50 Morristown Road, Suite 105 Bernardsville, New Jersey 07924
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
BY ELECTRONIC MAIL
Henry Lacap, Esq.
Janat, Lacap & Assoc., L.L.P.
Crossroads Corporate Center
One International Blvd., Suite 40C
Mahwah, New Jersey 07495
Richard A. Rafanello, Esq.
Gregory B. Pasquale, Esq.
Shain, Schaffer & Rafanello, P.C.
50 Morristown Road, Suite 105
Bernardsville, New Jersey 07924
Copy delivered to:
Plaintiff v Defendant v Other ___
By: Mali_Fax. ___ In Person ___ Email v
on 9.22.14 Initials vE
Dear Counsel:
This is the court's opinion in connection with plaintiff's ("Costco") in limine motion to strike portions of defendant's ("Township") appraisal report relating to the cost conclusion of the refrigeration equipment located in the refrigerated warehouse which constitutes a portion of the above captioned property ("Subject"). Costco argues that other than the piping and the wiring, the items comprising the refrigeration equipment are exempt business personal property under N.J.S.A. 54:4-1(b) because each one's sole purpose is to keep and maintain cool temperatures in the warehouse where perishable food is received, stored, and dispatched. The Township maintains that the entire refrigeration equipment is either a structure or is primarily used to enable a structure to support, shelter, or house property, i.e., the perishable goods, thus, is to be treated as taxable real property under the same statute.
For the reasons stated below the court finds the paneled electric cabinets inside the warehouse and the concrete pads on the floor and roof which hold the compressors, electric cabinet and condensers are not exempt. The remaining three items comprising the refrigeration equipment, namely, the compressors, the blowers (including the coil-fans within) and the evaporative condensers on the roof are exempt. PROCEDURAL HISTORY
For tax years 2009 and 2010, the Township assessed the Subject as follows:
| Land | $16,800,000 |
| Improvements | $31,225,800 |
| TOTAL | $48,025,800 |
For tax years 2011 and 2012, the assessment was as follows:
| Land | $16,800,000 |
| Improvements | $32,063,500 |
| TOTAL | $48,863,500 |
The matters were scheduled for trial February 3, 2014. Parties exchanged appraisal reports in this connection.
The Township's expert's appraisal report used the market and cost approach but relied only upon the value conclusion under the cost approach. Included under the cost approach were cost estimates for "refrigeration equipment" comprising of a "Cooler 32 to 45 degrees" and a "Freezer -15 to -5 degrees" in an amount of $4,734,576 and $1,120,802 respectively and totaling $5,855,378 (for tax year 2009). The estimates were prepared by an independent cost estimator, and were adopted by the Township's valuation expert for each tax year.
The amounts varied for each tax year but not significantly, and were about $6 million in total each year.
The Township's expert did an "in-place" appraisal rather than per-item cost analysis using Marshall & Swift's cost data on a per square foot basis for an entire refrigerated building. Thus, his report did not contain a breakdown or itemization of the costs. Nor was there a breakdown or itemization of what comprised the "refrigeration equipment" in the cooler or freezer sections. The pictures of the refrigeration equipment included in the Township's expert's report were labeled thus: (1) "Refrigerated Cross Dock - Typical Ceiling Mounted Cooler Units;" (2) "Refrigerated Cross Dock - Compressor Room;" (3) "Refrigerated Cross Dock -Battery Charger Room; (4) "Refrigerated Cross Dock - Center Aisles."
On or about December 20, 2013, Costco filed an in limine motion to strike portions of the Township's expert's appraisal report relating to the cost conclusions of the refrigeration equipment. Costco argued all the components of any of the items of the refrigeration equipment which the Township's valuation expert had included in his cost estimates, except for the piping and electrical wiring throughout the building which connect the refrigeration's system to each other, were exempt as business personal property under N.J.S.A. 54:4-1 (b).
A plenary hearing was then held. Costco's witness was its real estate appraiser whose expertise in real estate appraisal was stipulated to by the Township. He had over 20 years of experience in appraising refrigerated warehouses or properties which involved aspects of refrigeration. The Township's witness was its Chief Administrative Officer in charge of construction, and licensed in building sub-code, electric and fire, prior to which he was the Township's building inspector. FACTS
The Subject consists of two warehouse buildings on one lot. One building is a distribution warehouse for dry products. It measures about 876,422 square feet ("SF"). The other is a refrigerated distribution center measuring about 262,920 SF. There is also a guard shack and a building that houses a pump for a fire suppression system.
The refrigerated warehouse area is a food storage facility designed to maintain or extend both produce and meat product life through a cold storage refrigeration system. The building is a specially constructed insulated structure that includes design features to minimize heat loss, fe., insulated walls and ceiling, and insulated loading dock doors designed to isolate the building interior from the exterior by mechanical seals that attach to tractor trailer trucks during loading and unloading. The walls and floors are concrete.. While the exterior walls are masonry some portions are metal for additional insulation. Meat products are stored in the freezer portion of the cold storage building. All other perishable goods are kept in the cooler portion of the warehouse. The only function in this warehouse is to receive, store, and ship the refrigerated products out.
Operationally, the warehouse is like a giant refrigerator. Its refrigeration system operates in a closed loop recirculation system converting liquid to gas and back with ammonia as the active refrigerant, and works to keep the entire warehouse at a stable cool temperature. Ammonia is chilled (using electric power), converted, and circulated through the system to lower the air temperature in the storage area. The chilled ammonia is returned through the same system to compressors and condensers and the warmed air is again cooled and recirculated.
The basic components of the system includes compressors and their associated electrical motors and control circuits, roof mounted evaporative condensers, dock evaporators, and the electrical control panels containing wiring, valves, levers, and switches. Each equipment is described below.
The compressors are made of solid metal (or steel) and are located in the "engine room" which is on the outside of building, thus, outside the cold storage room (there is a wall separating the engine room and the cold storage area). They are very heavy, thus, are stationed on individual concrete blocks or pads (called "machine pads") and are bolted into them with metal/steel bolts. The machine pads themselves are attached to the concrete floors as part of the construction of the floors. The compressors have attached electrical lines and insulated piping both of which are used to convert/distribute the refrigerant to the evaporative condensers (located outside the building on the root), and to draw the ammonia gas from the dock evaporators.
Both witnesses testified that removing the compressors and the attached piping would leave the warehouse's ceilings and walls in place and would not impact either. They agreed that the compressors do not assist in holding up the ceiling or the walls. Costco's witness stated that the compressors could wear out and may need to be replaced over time. He also stated that they could be removed to another Costco facility without any damage to them, however, the concrete machine pads on which they each lie may or may not be susceptible to reconfiguration for other equipment, and if not, retrofitting may cause some damage to the pads itself or to the floor area on which the pads sit. However, he noted that given the heaviness of the compressors, thus, the weight to be borne by the pads, and consequently by the floor on which the pads are affixed, the floor foundation would be deeper than a typical floor. This factor would allow for little to no damage to the actual floor if there was any retrofitting or reconfiguration to the machine pads.
The evaporative condenser unit is located on the roof of the warehouse and is enclosed by walls to shelter it from the elements of nature. It is mounted on elevated steel pads which are attached to the roof. They are heat exchangers which transfer heat from the ammonia refrigerant to the ambient air. Inside the condenser the ammonia refrigerant changes from a vapor to a liquid.
The schematic drawing provided during the construction phase showed three such units. The photographic exhibit showed one unit on the roof. The inset shows the unit to be large, square, and enclosed with steel or metal sides.
The dock evaporators (which contain fan-coil assemblies and also called "blowers") distribute the cold air throughout the warehouse. They function as heat exchangers by blowing air over the cold coils containing refrigerant similar to radiators in cars. The fans are enclosed in containers, which according to the Township's witness were three-quarter inch rolled steel (and per Costco's witness, sheet metal). A dock evaporator unit could contain two-to-four such fans. Some units have metal sheet vents above the fans. Some also have attached an electrical gear or switch box. The fan blades are visible through a grill area on the face cover. The blowers have attached insulated piping which pumps the cold vapor through to the blowers. Also attached are condensate drain pipes which traps the liquid moisture from the cold air (when it starts to get warm) and discharges the liquid outside the building.
The blowers are located near the upper walls (and closer to ceiling/roof areas) throughout the warehouse and hang from the roof support fe., the structural bar joists which hold up the roof. While the structural joist is anchored at both ends of the exterior walls and its columns are anchored to the interior walls, the blowers are bolted to and suspend from the structural bar joists. The Township's witness explained that the blowers are hung off a "trapeze" like equipment (made of U-channels, threaded rods, nuts and bolts, held together with steel rods and angle iron sandwiching) which "trapeze" is attached to the bar joists. He also stated that a blower unit with the motors, fans, controls, piping, would weigh about 300 pounds and a forklift would be needed to move them. He agreed that the ceilings and the walls of the cold storage warehouse would remain in intact if the blowers were removed from the facility.
The electrical equipment located in the "engine room" comprises of controls, galvanized piping, and cabinets with distribution panels. The pictures showed the exterior of some of the panels as having switches and levers. The electrical control panels are made of metal but are not as heavy as the compressors. They are bolted onto a concrete pad so as to have elevation and avoid moisture, but was also supported off the wall with bolts and nuts. An entire panel (with all the built in electrical equipment) weighs about 700-800 pounds and typically are moved by forklifts. The electrical equipment provides the power for the entire closed loop refrigeration system. Costco's witness stated that it also provides power for other purposes.
The photographic exhibits showed the interior of the warehouse as well-lit with several light fixtures.
The Township's witness agreed that all these pieces of equipment, which comprised the entire refrigeration system, could be removed without damaging the walls or ceilings of the warehouse. He added that the only damage would be to one of the masonry walls because the pipes and electric wiring penetrated through them, however, this would not cause the ceilings and walls to fall down. He agreed that the purpose of the entire refrigeration equipment was "strictly" so Costco could "keep [its] stuff cold," i.e., to "shelter and contain perishable goods" and did not support the structure of the warehouse's ceiling or walls. ANALYSIS
N.J.S.A. 54:4-1 taxes all real property, which includes any "personal property affixed to the real property or an appurtenance thereto." There are two exceptions. The first test (the 'a' test since it is contained in subsection (a) of the statute) applies to a "general class of" personal property which is affixed to real property. General Motors Corp. v. City of Linden, 150 N.J. 522, 536-37 (1997). Such property is exempt if (i) it can be removed or severed without material injury to the real property; (ii) it can be removed or severed without material injury to the personal property; and (iii) it is not ordinarily intended to be affixed permanently to real property. N.J.S.A. 54:4-1(a).
The second test for exempting affixed personal property (the 'b' test) applies to a "more specific class of" personal property that is either machinery or apparatus or equipment used in business. General Motors, supra, 150 N.J. at 537. The 'b' test, enacted by "Business Retention Act" ("BRA") was included "to specify that items of machinery, apparatus or equipment used in the conduct of a business" are tax exempt business personal property unless such machinery, apparatus or equipment is (i) a "structure" or (ii) their "primary purpose" is to "enable a structure to support, shelter, contain, enclose or house persons or property." General Motors, supra, 150 N.J. at 537; N.J.S.A. 54:4-1(b). See also Senate Budget and Appropriations Committee, Statement to Senate No. 332 (the 'b' test is intended to exclude "items of machinery, apparatus or equipment used in the conduct of a business" unless "they constitute a structure, as defined . . . or are primarily used to enable a structure to support, shelter, contain, enclose, or house persons or property").
Costco concedes that the refrigeration equipment is affixed to real property. It therefore does not seek exemption under the 'a' test.
For purposes of the 'b' test, Costco agrees that all of the four items of the refrigeration system (including the connective piping and electrical wiring) are equipment and that they are affixed to real property. Both parties agree that the refrigeration equipment is used and held for use in Costco's business operations. Costco concedes that the piping and wiring is not exempt by virtue of the statute's specific language deeming the same taxable. See N.J.S.A. 54:4-1(b) (for purposes of the 'b' test "real property shall include pipe racks, and piping and electrical wiring up to the point of connections with the machinery apparatus, or equipment of a production process . . . .").
Both parties agree that the only issue for the court is whether the refrigeration equipment is exempt as a structure, or as property whose primary purpose is to enable a structure to accomplish the structure's purpose. The Township contends that by keeping the food in a cold state (temperature-wise), the equipment is either sheltering or containing the perishable goods or is enabling the walls and the ceilings of the warehouse to do so, therefore, it is not exempt.
(A) Is the refrigeration equipment a "structure"?
The term "structure" is defined as "any assemblage of building or construction materials fixed in place for the primary purpose of supporting, sheltering, containing, enclosing or housing persons or property." N.J.S.A. 54:4-1.15. The regulation defines the term similarly except omits the word "housing" and adds that the term "does not include machinery, apparatus or equipment which the structure is designed to hold in place, shelter, contain or enclose." See N.J.A.C. 18:12-10.1.
Under the above definition and interpretation, the court finds that the refrigeration equipment, except for the steel-paneled electric cabinet, is not a "structure." From the evidence, it does not appear that each piece was an "assemblage" of "building or construction materials" (the latter being an undefined term, but conceivably includes concrete, sheet rock, masonry, stone, wood and/or steel) but were specialized heavy-duty material suited for the purpose of the particular equipment. See Township of Howell v. Monmouth Cty. Bd. of Taxation, 18 N.J. Tax 149, 158 (Tax 1999) ("[t]he term "structure" must be limited to property similar in nature to a "building.""). These items are not "fixed in place" to support the Subject's walls, floors or ceilings, which clearly are the "structure" of the Subject. It is undisputed that the refrigeration equipment does not support the structure of the warehouse's ceiling or walls.
Even if the three items of the refrigeration equipment (compressors, evaporative condensers and blowers) were made of some building or construction material, they do not support or contain or enclose or house property. The term "support" in this connection means something which physically holds or carries the weight of an item, or maintains the item in position to prevent the same from falling, sinking or slipping. Id. at 159-60 (noting the various courts which applied the term "support" in a physical rather than a "metaphysical" sense). Other than the cabinet holding the electric panels/distribution channels, none of three pieces of the refrigeration equipment physically holds property (other than their internal mechanisms, which clearly are not meant to qualify those items as structures). However, the concrete pads which lie on the floor and which physically support and hold the compressors and the paneled electric cabinet, as well as the concrete pads on the roof which physically support and bear the evaporative condensers, are taxable as "structures," thus, as real property.
The Township relies on the holding in General Motors Corp. v. City of Linden, 20 N.J. Tax 242, 308-09 (Tax 2002) that if "stackers" there were deemed as taxable "structures," so too should the refrigeration equipment. The reliance is misplaced. Those stackers were "multi-level steel racking system" and were used to physically support and store the "completed" cars. Id. at 306. Thus, they functioned more like the racks or shelves where the manufactured items were physically placed for storage. The compressors, blowers, or evaporative condensers simply do not function in the same or similar manner and do not physically hold any of the personal property (perishable food).
However, the interior electrical paneled cabinets are used to contain, house and shelter the various electrical equipment which support the refrigeration system and its distribution channels. The court thus finds the same taxable as real property. Although they appear similar to the "control rooms" which were deemed exempt because the electrical connections therein were "ancillary, integral and integrated parts of the [exempt painting] booths and [exempt] ovens," id. at 277, 279, they are distinguishable in that the electrical connections cabinets contain the control system for the warehouse's other electrical purposes as well. The court therefore finds that the metal-paneled electric cabinets to be a structure, thus, taxable as realty.
In sum, only the concrete pads holding the refrigeration equipment, and the paneled electric cabinets which contain or enclose the switch-gear equipment, are taxable as structures.
(B) Is the "primary purpose" of the refrigeration equipment to enable a structure accomplish its purpose?
Based on the evidence, the court finds that the sole purpose of each item of the entire refrigeration equipment is to keep the warehouse at a stable cool temperature so that the perishable goods can be stored. While the refrigeration equipment helps maintain the cold temperature inside the warehouse (in addition to the insulated walls and ceilings), and thus, the life/longevity of the perishable goods, such function does not convert the entire refrigeration equipment to taxable real property.
In Township of Freehold v. Javin Partnership, 15 N.J. Tax 88 (Tax 1995), this court was faced with the identical issue, and while the refrigerated warehouse was used to store and maintain beer, the refrigeration system worked in an similar closed loop system as here involving blowers and compressors, and insulated ceilings/wall panels. Id. at 92-93, 104. The court concluded that the blowers and compressors were tax exempt because their primary purpose was "to actually cool" the beer, and that the "warehouse structure, including the interior areas created by the insulated panels, would be perfectly capable of containing and housing the beer without the compressors and blowers." Id. at 92-93. The reasoning applies here as well since the warehouse with its insulated walls and ceilings, and sealed loading bays, could also hold the perishable goods.
The warehouse also contained unrefrigerated areas which were used "for repacking, storing empty beer containers, and recharging electric vehicles" and for "beer that does not need refrigeration." 15 N.J. Tax at 92-93.
The conclusion does not change because unlike bottled beer in Javin, the property being stored here is perishable food, or because the perishable food arrives in refrigerated trucks. The focus in that case, and here, is primary purpose of the business personal property. The court has found the sole purpose of the refrigeration equipment is to produce and maintain the mechanical process of refrigeration to sustain the viability of the products so they can be sold for and in furtherance of Coscto's business. See also Javin, supra, 15 N.J. Tax at 105-06 ("the compressors and blowers used in a refrigerated warehouse have as their primary purpose the operation [and furtherance] of . . . plaintiff's business, specifically the sale of cold beer," without which business, plaintiff would not need such equipment).
The Township's argument that without the refrigeration equipment the perishable goods would perish, thus, the equipment's primary purpose is to enable the warehouse to contain or shelter the perishable goods, is asserting the legislatively rejected "functionally essential" test. As explained in Javin, supra, the Legislature deleted the "functionally essential" standard under prior case law from the 'b' test and replaced it with a "primary purpose" standard or test. Under the former test, the compressor and blowers would have been taxable since they would be "'functionally essential' to the operation of the refrigerated warehouse." Id. at 105. Under the current "primary purpose" test, the "compressors and blowers whose primary purpose is to make operational the refrigerated portions of a warehouse are not taxable as real property." Ibid.
The court cited to Texas Eastern Transmission Corp. v. Division of Taxation, 11 N.J. Tax 198, 207, 209-10 (Tax 1990) where under the statue's prior "functionally essential" test, compressors used in moving gas through the taxpayer's pipeline were deemed realty, as were their components which were necessary for the operation of the pipeline.
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Further, the intent of the BRA should not be lost in analyzing the 'b' test. As noted by the Supreme Court in this connection:
With the BRA, the Legislature continued to clarify its intent to distinguish between property integrated with the business, and property integrated with the realty upon which the business is located. The Governor's Statement to the Senate concerning the BRA confirms this understanding. The Statement declares that the BRA was intended to restore Chapter 117's distinction between business machinery that participates in the business, and business machinery that accommodates the business. The former was business personal property, the latter taxable as real property. An example given of the distinction was of an air-conditioning unit that dries the paint of new cars as they leave the assembly area and one that cools an office suite.Clearly, the air conditioning used as part of the business process is not contemplated as being taxable.
[General Motors, supra, 150 NJ. at 532]
This recognition of BRA's intent and purpose is also reflected in Javin, supra. The court acknowledged that it was drawing "a fine line between the blowers and compressors at issue here and central heating and air conditioning systems that are viewed as taxable real property under the" BRA because the Legislature had indicated as examples of taxable business personal property "which enable a structure to house persons or property, and which are therefore locally taxable, [to] include central heating or air conditioning systems. . . ." 15 N.J. Tax at 104-06. The court nonetheless distinguished the same because the "primary purpose of central heating and air conditioning is to enable a structure to cany out its basic function of housing persons and property." Id. at 105. Whereas the refrigeration equipment in the warehouse was primarily being used in and for the "the operation [and furtherance] of the . . . plaintiff's business" of selling "cold beer." Ibid. Thus, and although the warehouse framework could hold the beer without the blowers and compressors, due to the insulated walls and ceilings, it also found that this equipment was used only because of plaintiff's business needs, and it served a "unique business purpose" thus was "distinguishable from a heating or air conditioning system that makes a modern building habitable for general use." Id. at 105-06. This reasoning equally applies to the instant matter.
In sum, the court finds that the primary purpose of the refrigeration equipment (here, the compressors, blowers and the evaporative condensers, with their respective internal components) is to create and maintain the refrigeration process. This function is solely in the course of Costco's business of providing refrigerated food to its consumers. The facts herein, combined with the reasoning in Javin, supra, and the intent of the BRA, suffice to exempt these three items under the 'b' test. CONCLUSION
For the aforementioned reasons, the paneled electric cabinets are not exempt. The machine pads on the floor physically holding the compressors and electric cabinet, and the concrete pads on the roof physically supporting/holding the evaporative condensers are not exempt. The remaining three items, namely, the compressors, the blowers (including the coil-fans within) and the evaporative condensers on the roof are exempt.
An Order reflecting the above findings will be entered.
Very truly yours,
/s/
Mala Sundar. J.T.C.