Appeal from the Decision of the Board of Finance and Revenue in case of Appeal of Tyger & Karl Complete Water Systems Co., Inc., No. R-22362. Transferred September 1, 1970, from the Court of Common Pleas of Dauphin County to the Commonwealth Court of Pennsylvania.
Harry J. Rubin, with him Krekstein and Rubin, for appellant.
Edward T. Baker, Deputy Attorney General, for appellee.
President Judge Bowman and Judges Crumlish, Jr., Kramer, Wilkinson, Jr., Mencer and Rogers. Opinion by President Judge Bowman.
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Tyger and Karl Complete Water Systems Co., Inc., is a Pennsylvania corporation in the business of drilling water wells and installing pumping equipment for a variety of customers ranging from individual home owners and farmers to larger industrial and commercial enterprises. For the period from June 1, 1962 to March 31, 1965, the Bureau of Taxes for Education assessed against the appellant a use tax liability totaling $4,138.78 pursuant to the "Tax Act of 1963 for Education," Act of March 6, 1956, P.L. (1955) 1228, as amended, 72 P.S. § 3403-1, et seq.*fn1
Appellant's timely petition for refund was refused after hearing before the Sales Tax Board. A petition for review was then filed with the Board of Finance and Revenue which sustained the Board's ruling. This appeal followed.
The appeal was initially taken to the Court of Common Pleas of Dauphin County and was transferred to this Court pursuant to the Appellate Court Jurisdiction Act of July 31, 1970, P.L. 673 (Act No. 223), 17 P.S. § 211.101, et seq. The parties then filed a stipulation of
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facts following the taking of two depositions which were incorporated in the stipulation as part of the record along with other exhibits relating to the Bureau's method of assessing the tax liability. The parties further agreed to waive a trial by jury pursuant to the Act of April 22, 1874, P.L. 109, 12 P.S. § 688.
The essential dispute between the Commonwealth and appellant concerns the legal characterization which each places upon the appellant's business activities. The Commonwealth contends that the business of drilling water wells is properly subject to the use levy whereas the appellant argues that its operations come within the purview of the so-called "mining exemption" excluding certain mining, extracting, exploring and refining activities from the burden of such taxes.
The "Tax Act of 1963 for Education" generally imposes a tax as follows: "There is hereby imposed upon the use, on or after the effective date of this act, within this Commonwealth of tangible personal property purchased at retail on or after March 7, 1956 . . . a tax of [currently six (6) per cent but four (4) per cent until the Act of May 29, 1963, P.L. 49, and five (5) per cent until the Act of January 1, 1968, P.L. (1967) 918]. . . ." 72 P.S. § 3403-201.
The definitional section of the Act contains a detailed description of the term, "use," which includes a variety of activities and services specifically subject to the tax. The section further contains a lengthy exclusionary proviso that reads in relevant part:
". . . And Provided further, That the term 'use' shall not include --
"(c) The use or consumption of tangible personal property including, but not limited to machinery and equipment and parts and foundations therefor, and supplies or the obtaining of the services described in subclauses
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(2), (3) and (4) of this clause directly in any of the operations of --
"(i) The manufacture of personal property;
"The exclusions . . . shall not apply . . . to materials or supplies to be used or consumed in any construction, reconstruction, remodeling, repair or maintenance of real estate other than machinery, equipment or parts or foundations therefor, that may be affixed to such real estate. The exclusions . . . shall not apply to tangible personal property or services to be used or consumed in managerial sales or other nonoperational activities." 72 P.S. § 3403-2(n). The term, "manufacture," is similarly defined in specific detail.
"(c) 'Manufacture.' The performance of manufacturing, fabricating, compounding, processing or other operations, engaged in as a business, which place any personal property in a form, composition or character different from that in which it is acquired whether for sale or use by the manufacturer, and shall include, but not be limited to --
"(3) Refining, exploring, mining and quarrying for, or otherwise extracting from the earth or from waste or stock piles or from pits or banks, any natural resources, minerals and mineral aggregates, including blast furnace slag." 72 P.S. § 3403-2(c). [Emphasis ours.]
Pursuant to these statutory directives, the Bureau of Taxes for Education has promulgated regulations as to what activities and services it deems to be subject to use tax. Two portions of such regulations are relevant because the parties take diametrically opposed positions as to which set of regulations applies to appellant's drilling operations. Further, the appellant asserts that the regulations fail to accurately reflect and to embody
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the intent of the legislature in providing for the various manufacturing exclusions under the use tax provisions.
The Commonwealth contends that the water well drilling activities of the taxpayer involve ". . . materials or supplies to be used or consumed in any construction, reconstruction, remodeling, repair or maintenance of real estate . . . ," 72 P.S. § 3403-2(n)(4)(c), and therefore, by definition, constitute "construction." Construction contractors, as contemplated by the definition above, must pay use tax on their purchases of materials and supplies. The terms ...