In December 2011, the Pennsylvania Supreme Court resolved an outstanding issue of whether the purchase of large MRI and PET/CT scan systems was subject to the commonwealth’s sales tax. In an opinion authored by Justice J. Michael Eakin, the court determined that such large systems were in fact subject to the state sales tax.
The case, which was composed of two consolidated appeals, is styled as Northeastern Pennsylvania Imaging Center v. Commonwealth of Pennsylvania . By its holding, the Supreme Court reversed the decision of the Commonwealth Court. The appellees were both entities that had previously purchased the large-scale scanning machines. All of the facts presented to the Supreme Court were stipulated by the parties.
Procedural Posture and Underlying Facts
Pursuant to 72 P.S. §7202(a), the commonwealth levies a 6 percent sales tax on the sale at retail of tangible personal property or services. On July 20, 2004, the Pennsylvania Department of Revenue issued a letter ruling (No. SUT-04-021) stating essentially that the sale and installation of an MRI is considered a construction contract whereby the MRI scanner is considered to become a permanent part of the real estate upon installation. Therefore, the purchase of a large scanning system such as an MRI or PET/CT would be exempt from the sales tax. Rather, the sale and installation would be subject to a use tax, paid for by the seller. Ten months after issuing ruling 04-021, the department rescinded the ruling, and issued a second stating such a scanning system would be subject to commonwealth sales tax (No. SUT-05-008).
In the first underlying case, Northeastern Pennsylvania Imaging Center (NPIC) purchased an MRI and PET/CT scan system in 2003 for a combined cost of roughly $4 million. Furthermore, it paid close to $230,000 in sales tax for the purchase. According to the court, it had paid the tax in installments “during a large portion of the period when the first letter ruling was in effect.”
The installation of the systems was no small task. NPIC made extensive structural changes — including revising electrical, heating and plumbing systems, enlarging rooms and doors, and installing other related changes — to its building in anticipation of installing the scanners. The MRI system weighed 15,201 pounds, had to be moved by crane, and took five days to install. The PET/CT system weighed 12,375 pounds and took two weeks to install. While NPIC retains the MRI center in its facility, the PET/CT system was later replaced by an upgraded model, which was not at issue in the appeal.
NPIC filed a claim with the Revenue Department seeking a refund in excess of $350,000 for the sales tax it had paid. The claim was denied by the department and was again upheld by the Board of Finance and Review. NPIC then petitioned the Commonwealth Court for review.
The Commonwealth Court reversed the board’s decision. The Commonwealth Court relied upon the case of In re Appeal of Sheetz as having the appropriate test for determining whether the scanning systems were tangible personal property or part of the real estate. Sheetz was a real estate assessment case and, according to the court, it identified three classes of chattel: “(1) furniture and similar items, which are always personalty; (2) items annexed to the building or land to the extent they could not be removed without causing injury to the realty or themselves, which are always realty; and (3) items affixed to the realty that can be removed without damaging the item or the realty, which items can be either realty or personalty, depending on the circumstances.”
The items at issue in Sheetz were determined to be part of the third category. Therefore, the Sheetz court considered the following factors: the manner by which the items were affixed to the land; how essential the items were to the property’s use; and whether the items were considered to be permanent.
The Commonwealth Court applied the Sheetz analysis to NPIC’s claims and determined the imaging systems fell into the third category of chattel. Therefore it assessed the three factors. It found that the imaging systems were sufficiently attached to the building under the circumstances, that the systems were essential to the ongoing use of the building as an imaging center and that the systems were intended to be permanent. Based on its assessment, the Commonwealth Court concluded the imaging systems were part of the realty and therefore not subject to sales tax.
The second case had a similar factual background. It involved the purchase of an MRI system by Medical Associates of the Lehigh Valley (MALV) in June of 2000 and a CT system in 2002. MALV leased the MRI system for 60 months and then purchased it for roughly $100,000. It purchased the CT system for roughly $675,000. Between the two systems, it paid approximately $100,000 in sales tax.
Similar to the installation of equipment at NPIC, both machines required extensive structural changes to the MALV building to prepare for their installation. Both systems took several days to install.
MALV filed a claim seeking a refund of the sales tax it paid. This claim was denied by both the Revenue Department and the Board of Finance and Review. MALV petitioned the Commonwealth Court for review, which held that the imaging systems were real estate structures and not subject to sales tax.
The department appealed both decisions to the Pennsylvania Supreme Court.
Supreme Court Analysis
The Supreme Court first stated that its standard of review was de novo and the scope plenary, as the matter was a pure question of statutory interpretation of Pennsylvania tax law. The court noted that the tax statute must be strictly construed and any doubts be resolved in the taxpayer’s favor. The court noted that neither party had issue with the statute’s wording. The question was the correct test to apply to determine whether the systems had been converted to a real estate structure such that they were subject to the use, and not the sales, tax.
The court noted that both parties agreed that the Sheetz test applied, but disagreed on the application. It further stated that the parties had agreed that a test from a different case, Commonwealth v. Beck Electric Construction Inc. , did not apply. The court then stated it was not bound by the parties’ position that Sheetz controls.
The court, in fact, determined that Sheetz did not present the correct test under which to analyze this case. The court explained that in Sheetz , the question was whether an extension of a building’s roof was part of the real estate for purposes of assessing the property for real estate tax purposes. In contrast, Beck was in fact a sales tax case. The court explained, “The concepts of Sheetz seek to determine if a tax is due — the concepts of Beck deal with which tax is due.”
The court stated that in Beck , Beck purchased electrical machinery and equipment and then sold it to the General Services Administration of Pennsylvania. The court explained its Beck analysis, stating it determined in Beck that the Pennsylvania use tax was properly imposed under the Pennsylvania Department of Revenue Regulation 150 on the sale and installation of certain items that were integral to the building’s electrical system. The use tax was not properly imposed on items that were not intended to become a permanent part of the real estate. These were items for which the sales tax was appropriately imposed.
The court then turned to the principles of Regulation 150, which now exist in 61 Pa. Code §31.11-16. Section 31.11, according to the court, stated that “absent proof to the contrary, certain items will be presumed not to become a permanent part of the real estate.” The regulation also provides examples. The court stated that of medical equipment, only nurses’ stations were listed as examples presumed to be affixed to the property. Examples cited for items subject to sales tax include X-ray machines.
The court here stated that the imaging machines here are more like an X-ray machine than a nurse’s station. The court ultimately concluded: “In the end these machines are nothing more than cameras — they may be big, bulky, and complex, but they are just devices that take pictures.” The court stated that this technology will ultimately become outdated (as some of it already had) and it will be removed and replaced with newer technology, demonstrating the lack of permanence. Therefore, it reversed the decision of the Commonwealth Court.
Karilynn Bayus is an associate at the firm. Her practice involves both litigation of health care related matters, including representation of licensees before the professional boards, and representing clients in health care transactions. Bayus graduated from Temple University’s Beasley School of Law in 2006. She may be reached at KBayus@KSDBhealthlaw.com .