July 1, 1999
FOR IMMEDIATE RELEASE

Ryan & Company Wins Suit to Exempt Real Property Modifications from Texas Sales Tax. Ryan & Company, through its legal counsel, Scott, Douglass & McConnico of Austin, Texas, recently won a substantial victory in the taxation of real property construction in Turnkey Construction, Inc. v. John Sharp, et al.; In the 98th Judicial District Court of Travis County, Texas; Cause No. 98-12767.

This is the first case to go to trial challenging the Comptroller’s interpretation of new construction vs. remodeling. The judge ruled from the bench in the taxpayer’s favor. The case deals with whether the underground installation of Stage II vapor recovery systems at convenience store gasoline stations is nontaxable new construction or taxable repair and remodeling.

Turnkey Construction, Inc. ("Turnkey") is a Dallas-based construction company that builds gasoline service stations, installs and removes gasoline storage tanks, and installs vapor recovery systems for service stations. Vapor recovery systems collect fuel vapors from tanks as they are being filled. Stage I vapor recovery systems collect vapors from underground storage tanks as they are being filled by tanker truck. Stage II vapor recovery systems collect vapors from automobile fuel tanks as they are being filled.

When the air quality in the Dallas area reached "non-attainment" status, service stations were required to install Stage II vapor recovery systems in addition to the Stage I systems that were already in place. In each of the transactions at issue, Turnkey dug trenches and installed underground pipes to return fuel vapors from the pump nozzle to the underground storage tanks. Turnkey did not connect the systems to the pumps because it was not licensed to do so.

Turnkey contended that the installation of the Stage II vapor recovery systems was nontaxable new construction. "New construction" is defined as:

"All new improvements to real property including initial finish out work to the interior or exterior of the improvement. An example would be a multiple story building which has only had its first floor finished and occupied. The initial finishing out of each additional floor prior to initial occupancy will be considered new construction. New construction also includes the addition of new footage to an existing structure." Tex. Admin. Code § 3.357(a)(5) (emphasis added).

Turnkey argued that the installation of the Stage II vapor recovery systems was nontaxable new construction because the systems were new improvements involving "new footage." The new equipment and new piping was installed in new trenches, located outside the existing structure, to perform a new function that the existing structure was incapable of performing, and clearly involved the addition of new footage.

The Comptroller contended that the installation was taxable as an "upgrade" under the Comptroller’s rule for remodeling, which is defined as:

"Remodeling or modification - to make over, rebuild, replace, or upgrade existing real property. However, the replacement of an item within an operating and functioning unit in accordance with paragraph (4) of this subsection [maintenance] is not taxable remodeling or modification. Finish out work performed after initial finish out has been done is remodeling even though the improvement has not been occupied. An example would be a shopping complex completely finished by the developer prior to renting to tenants. A prospective tenant wants a different color scheme before taking possession. The repainting by the developer is remodeling." Rule 3.357(1)(8)(emphasis added).

Turnkey argued, however, that the installation of the Stage II vapor recovery systems was not "remodeling or modification" because the installation did not "makeover, rebuild, replace, or upgrade existing real property." Instead, the Stage II vapor recovery systems were new systems, with new piping, located in new trenches, designed to perform new functions that the existing systems were incapable of performing. Moreover, although Turnkey constructed the new Stage II vapor recovery systems, it did not connect them to the existing fuel dispensing pumps because it was not licensed to do so. Therefore, the Stage II vapor recovery systems, as installed by Turnkey, could not be considered to be a remodeling or modification of the existing facilities. Please contact a Ryan & Company professional for more information.

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