Opinion ID: 2188488
Heading Depth: 1
Heading Rank: 2

Heading: did the three construction contracts constitute realty improvement contracts under sdcl 10-46a-1?

Text: Contractors' excise tax is imposed on the gross receipts from realty improvement contracts. Brink argues that the electrical equipment it installed as part of its contracts was not a realty improvement, because the equipment did not become fixtures. The equipment was designed and installed so that it could be removed, replaced or reinstalled at another location as needs changed. Transformers rested on concrete pads, but were not fastened down. Circuit breakers were held to the pads with nuts and bolts. All the installed equipment could be removed within hours. We held in Matter of Diagnostic Medical Systems, 415 N.W.2d 816 (S.D.1987) that certain diagnostic medical equipment was not subject to contractors' excise tax as a realty improvement because such equipment was not a fixture when installed in a hospital or diagnostic medical facility. In deciding whether an article is a fixture, we consider the following: (1) annexation to the realty; either actual or constructive; (2) its adaptability to the use and purpose for which the realty is used; and (3) the intention of the party making the annexation ... The intention of the party with regard to making the article a permanent accession to the realty is the controlling criterion.... The other tests derive their chief value as evidence of such intention .... Intention is deduced from the relation of the parties and the circumstances of a particular case.... Matter of Tax Appeal of Logan and Associates, 331 N.W.2d 281, 282-283 (S.D.1983). Brink contends that Diagnostic Medical Systems is controlling here, thus items it installed were not realty improvements because these components: (1) could be moved if changes were required at the substation and removal would not injure the equipment or the real estate; (2) could be replaced during their useful life; (3) had a recognized secondary market; (4) were not contained in a specially constructed building; (5) were affixed to the ground by bolts mounted in concrete slabs (except the large transformer) and could easily be removed with a wrench; and (6) were treated as depreciable personal property under the Internal Revenue Code. The equipment in question was designed for electrical substations and most of it was bolted to concrete slabs specially designed for each piece of equipment. Brink constructed the slabs as part of its contracts. The automatic transformer, although not attached to a slab upon which it rested, weighed approximately two hundred tons. Brink argues that the transformers it installed were merely larger versions of that commonly seen on power poles on streets and alleys, and the circuit breakers likewise were larger versions of those installed in residential homes. The trial court reasoned that whether installed in homes, on power poles or at a substation site, this equipment is `placed upon [the land] to promote the use for which the realty has been put.' See Dakota Harvestore Systems v. S.D. Dept. of Revenue, 331 N.W.2d 828, 830 (S.D.1983). Brink also relies on the case of Southwestern Public Service Co. v. Chaves County, 85 N.M. 313, 512 P.2d 73 (1973). There the New Mexico Supreme Court found that certain distribution and transmission substation equipment and items located on easements were not fixtures subject to real estate tax. After applying the traditional tests for deciding whether an item is a fixture, the New Mexico Supreme Court stated We fail to see how it can reasonably be said that the transmission and distribution substation equipment was real estate. The equipment was readily portable and was frequently moved about for one reason or another. The annexation ranged from slight to none, the adaptation was non-existent. From these considerations and the totality of the surrounding circumstances, we can infer no objective intention on the part of Southwestern that this equipment should be real estate. Southwestern, 85 N.M. at 318, 512 P.2d at 78. The equipment the court referred to was comprised of a transformer, together with associated switches to control voltage in and out of the transformers. The transformers are set upon a pad built to support them but are not bolted down. Transformers vary in size. Located with the transformers are oil circuit breakers, which are actually switches filled with oil. The oil circuit breakers are secured by anchor bolts, not to hold them to the pad, but rather to prevent them from moving about as they operate. The transformers were changed quite frequently, sent to the factory for rewinding, transferred as the need arose, or moved to other locations. Id. 85 N.M. at 318, 512 P.2d at 78. We see a clear distinction between that case and the present one. In Southwestern the issue was whether individual components were subject to real estate tax. Here we are dealing with taxing gross receipts of realty improvement contracts, which are not broken into constituent parts for tax purposes. Brink's installation of electrical equipment was only a part of the three projects. Cf. In Matter of Diagnostic Medical Systems, supra . Besides supplying and installing equipment, the contracts included grading, embankment construction, trenching, creation of reinforced concrete foundations, demolition and foundation removal, repairs, removal of old equipment and materials, erection of steel structures, construction of transmission lines and reroofing a service building and building modifications. Under all three contracts the overall work improved the realty for electrical transmission purposes. Furthermore, the equipment in Southwestern was readily portable and frequently moved about for one reason or another. Here the equipment could be moved, but frequent movement was not contemplated unless replacement was necessary. In this sense, the installations were permanent. The permanence required is not equated with perpetuity. It is sufficient if the item is intended to remain where affixed until worn out, until the purpose to which the realty is devoted is accomplished or until the item is superseded by another item more suitable for the purpose. Matter of Tax Appeal of Logan and Associates, supra at 283. Considering the contracts in their entirety, each was a realty improvement contract subject to contractors' excise tax.