This past summer, Cohen Seglias attorneys Roy Cohen, Ashling Ehrhardt, and Sydney Pierce obtained a victory for their client Kuharchik Construction against the Commonwealth of Pennsylvania in Kuharchik Construction, Inc. v. Commonwealth. In Kuharchik, the Commonwealth Court ruled in Kuharchik’s favor on its appeal from the Pennsylvania Board of Finance and Revenue, finding that the poles, mast arms, and pedestals used in constructing traffic signals on roads and highways are included in the Pennsylvania Tax Reform Code’s definition of “Building Machinery and Equipment” and are therefore exempt from Pennsylvania’s use tax. This decision marks a major update for heavy highway electrical projects and subcontractors operating in Pennsylvania.

To put the Kuharchik decision in context, in the Pennsylvania Tax Reform Code, any contractor that works on a construction project for a tax-exempt entity, such as the Commonwealth or a municipality, is exempt from paying sales and use tax on building machinery and equipment used for the project. Use tax in Pennsylvania is a 6% tax on the use of tangible personal property purchased at retail, including supplies and materials used in construction projects, which ordinarily must be paid by the contractor unless sales tax was paid at the time of purchase or there is a tax exemption set out in Pennsylvania’s Tax Reform Code. The Tax Reform Code generally provides for a “Building Machinery and Equipment” use tax exemption for contractors working on certain public or tax-exempt projects.

However, the exemption’s definition of “Building Machinery and Equipment,” as listed in Section 201(pp), is very delineated within the Tax Reform Code, and the few times the courts have examined it, they have further interpreted it narrowly. Basically, unless the Tax Reform Code’s Section 201(pp) specifically lists out the piece of equipment that is exempt, construction contractors must pay use taxes on that item, even if working for a tax-exempt, public entity. While much of this subsection is highly detailed, there are some areas that are ambiguous, specifically where traffic equipment is concerned. Section 201(pp) only mentions traffic equipment as a “control system limited to…traffic” and “traffic signals.” “Traffic signals” itself is not defined within the Code. Any heavy highway electrical contractor knows that those terms are very broad and do not provide much in the way of guidance as to specific traffic signal equipment pieces that may or may not be taxed.

Kuharchik’s dispute began when it was audited by the Pennsylvania Department of Revenue, which determined that Kuharchik owed use taxes for traffic control items it used for a public project, specifically traffic signal poles with mast arms and pedestal bases. Rather than accept the Commonwealth’s position, Kuharchik spearheaded the effort to challenge that position, appealing the Department’s audit all the way to the Commonwealth Court. Kuharchik argued that the broad inclusion of “traffic signals,” the idea of the “traffic control system,” and the lack of specific exclusions related to traffic signal-related equipment meant that the poles and mast arms that the Department sought to tax should actually be tax-exempt under the Building Machinery and Equipment definition. The Commonwealth Court agreed with Kuharchik, specifically ruling that common usage of the term “traffic signal” included the poles, mast arms, and pedestal bases because those items are required to support and integrate a traffic signal head for purposes of controlling traffic. The Court also ruled that any conduit, receptacle, or junction boxes are, however, subject to the tax because the Code’s definition of Building Machinery and Equipment specifically excludes those items.

Following the decision, Robert Bresnahan, Jr., CEO of Kuharchik praised the team, stating that “Attorney Cohen and the entire team truly displayed the required expertise in navigating this controversial interpretation. This victory is monumental for our industry, municipalities, and taxpayers that were never intended to be subjected to this hidden fee.”

Kuharchik is a substantial win for heavy highway electrical contractors, as it specifically allows them to calculate more competitive bids for public projects knowing that they will not have to pay use tax on poles, mast arms, and pedestal bases for traffic signals, allowing for substantial savings. Moreover, for other contractors, the Court’s ruling directly provided legal precedent regarding how other ambiguous, undefined terms listed within the Building Machinery and Equipment definition may be interpreted by Pennsylvania courts. While the Commonwealth is currently attempting to appeal the Court’s decision, this glimpse into the decision-making process on this issue suggests that it may be an uphill battle for the Commonwealth. No matter what, the lawyers at Cohen Seglias will keep its clients and the public updated and are available for all your construction questions.