PA Supreme Court Rejects "Sheetz Test" for Sales Tax Purposes


In a consolidated decision issued on December 21, 2011, the Pennsylvania Supreme Court reversed the Commonwealth Court’s 2009 decisions in Northeastern Pennsylvania Imaging Center v. Commonwealth and Medical Associates of the Lehigh Valley, P.C. v. Commonwealth, which had held that MRIs and other medical scanning systems installed in the taxpayers’ imaging centers became part of the “real estate” under the Sheetz test discussed below, so that the taxpayers were entitled to a refund of sales tax paid on their purchase and lease of installed scanning systems.  The Supreme Court held that the scanning systems retained their identity as tangible personal property after installation, but remanded the cases to the Commonwealth Court for consideration of the taxpayers’ argument that the Department of Revenue’s denial of their refund claims violated the Uniformity Clause of the Pennsylvania Constitution because the Department had granted refunds to other similarly situated taxpayers.  The Commonwealth Court did not address the Uniformity Clause issue because it had ruled in favor of the taxpayers on the merits.

More significant than the particular ruling in this case was the Supreme Court’s holding that the “test” enunciated in Commonwealth v. Beck Electric Construction, Inc., 403 A.2d 553 (Pa. 1979), rather than the standard enunciated by the Commonwealth Court in In re Appeal of Sheetz, 657 A.2d 1011 (Pa. Cmwlth. 1995), appeal denied, 666 A.2d 1060 (Pa. 1995), applies for purposes of determining whether property that is attached to real estate becomes a permanent part of the real estate for sales and use tax purposes.  This “realty-personalty” analysis determines whether a contract with a non-exempt entity for the sale and installation of property constitutes a “construction contract” (in which case the installed property is “used” by, and taxable to, the installer) or a sale of tangible personal property (in which case the installer claims the resale exclusion when purchasing the property and collects any applicable sales tax from the purchaser).

While the sales tax consequences of contracts with non-exempt entities depend on whether the property being installed becomes part of the real estate, neither the Sales and Use Tax statute nor the Department of Revenue’s regulations define the term “real estate.”  The Department’s regulation at 61 Pa. Code § 31.11 lists items that are presumed to become a permanent part of the real estate upon installation and items that are presumed to remain “tangible personal property,” but that regulation contains no explicit test for determining whether an item becomes part of the real estate.  Since the term “real estate” is not defined by statute or regulation, the parties in Northeastern and Medical Associates took the position that the common law doctrine of fixtures, as delineated in the Sheetz case, represented the proper standard.

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