In our last issue of PA Tax Law News, we published the first part of a list of Sales and Use Tax issues recently raised in tax appeals filed with the Commonwealth Court. This list is intended to help readers identify issues for which there may be an opportunity to obtain additional relief through a court appeal when they have not been successfully resolved at the administrative appeal levels. Many issues raised before the Commonwealth Court are ultimately resolved through negotiated settlement.
Part 1 of this article addressed, among other things, computer software and services, miscellaneous nontaxable services, construction contract issues, out-of-state transactions, the resale exclusion, wrapping supplies, direct mail advertising materials and various production exclusions. Additional issues under appeal are set forth below. You should keep in mind that, in addition to the merits of a particular legal position, the ultimate outcome of an individual appeal may depend on the specific facts involved and the adequacy of the supporting documentation submitted in support of the taxpayer’s position.
Sales Tax Bad Debts
Vendors and utility companies that have remitted sales tax to the Department of Revenue may claim a refund of the tax when their customer receivables have been written off as uncollectible. Finance companies also may file such claims under certain circumstances when the bad debts relate to sales made by affiliates or pursuant to a private label credit card arrangement. Court appeals may involve documentation requirements for sales tax bad debt refund claims.
Medical Supplies and Therapeutic Medical Equipment
Issues on appeal include whether a supply is “disposable” and whether equipment is used for therapeutic versus diagnostic purposes.
Medical Scanning Systems as Nontaxable Manufacturing Equipment
The issue of whether medical scanning systems, such as MRIs and CT scanners, qualify for the manufacturing exclusion is currently on appeal to the Pennsylvania Supreme Court.
Keystone Opportunity Zones
Issues on appeal include whether certain items (e.g., laptop computers) satisfy the requirement that property be used “exclusively” in a KOZ to qualify for exemption.
Purchase of Fractional Aircraft Interests
At least one taxpayer has challenged the imposition of tax on fractional aircraft interests on the basis that the purchases occurred outside PA, the aircraft were hangared outside PA and the disputed “services” do not constitute a taxable “use” of tangible personal property. The Department imposed tax because flights regularly flew into and out of PA.
Bulk Sale Liabilities
There are appeal(s) pending in court contesting the applicability of the bulk sale statute to sales or transfers made by assignees for the benefit of creditors.
Responsible Party Assessments
Individuals can appeal responsible party assessments on the basis that they were not an “active and controlling” officer or agent of the business with the underlying tax liability. Such assessments become final and binding unless they are appealed.
Isolated Sales Transactions
With certain exceptions, items purchased in an isolated sales transaction are not subject to sales and use tax
Taxation of Finance Amounts
Taxpayers have filed appeals contesting the imposition of tax on charges that are not part of the taxable purchase price of the property or services being financed.
Previous Determinations by BF&R or Department of Revenue
When the BF&R has ruled in favor of a taxpayer on a particular issue, the taxpayer may be able to rely on that determination to avoid an assessment (or denial of a refund) for a later period on a similar transaction under the Taxpayers’ Bill of Rights. Equitable arguments are also raised by taxpayers in situations where the Taxpayers’ Bill of Rights technically does not apply.
Taxpayer(s) have contested the taxability of royalty fees relating to the use of leased property, when the royalty fees were imposed under a separate contract, arguing that the fees were not part of the purchase price of the property.
Taxpayers assert that tax was improperly assessed or paid on tax-exempt wearing apparel, footwear or clothing, such as work uniforms, “fancy” dresses and items that are not used only when engaged in sports.
Additional Issues for Audited Taxpayers
Penalties are appealable on the basis that the taxpayer acted in good faith and without negligence or intent to defraud the Commonwealth. In most cases, at least some level of penalty relief can be obtained at some point in the appeals process.
Taxpayers appeal issues relating to the Department of Revenue’s sample selection, sample size, representativeness of a sample, the inclusion of statistical outliers in error rate calculations, de minimis error rates (less than .005), and the precision or reliability of sampled audit results.
Projection of Tax Overpayments
Taxpayers commonly seek to include tax overpayments within a test sample in the error rate calculations for an audit deficiency. The projection of such overpayments is often requested even if the overpayments relate to items which the Department of Revenue may view as taxable (when the taxpayer has a reasonable argument that the items are not subject to tax).
Computation of Interest
The Department often processes requests for credits for tax overpayments as separate refund petition(s). Taxpayers have filed appeals requesting that credits for tax overpayments be applied to reduce an audit assessment as of the date of each overpayment, which will reduce the interest due on the audit assessment.
Additional Issues for Vendors Audited for Sales Tax Compliance
Disallowed Exemption Certificates
Disallowed exemption certificates are often contested on the basis that the vendor accepted the certificates in good faith.
Alternative Proof for Untaxed Sales
When a vendor cannot locate exemption certificates for sales that were treated as exempt, the vendor may submit alternative documentation to support the exemption, either at the audit level or on appeal.
Customer Audited for Same Period
If a vendor made an exempt sale without obtaining an exemption certificate and cannot obtain alternative documentation, the vendor may pursue relief on the basis that its customer was also audited (to avoid the collection of tax by the Department twice on the same transaction).
Customer Remitted Use Tax
Similarly, a vendor may be able to obtain relief if it can provide evidence that the purchaser paid tax directly to the Commonwealth.
Failure to Pay Sales Tax on Uncollected Receivables
Taxpayer(s) have contested the assessment of sales tax on receivables that were not collected by the vendor.