Paul S. Roeder, Deputy Atty. Gen., Harrisburg, for appellant.
Samuel C. Harry, Morgan, Lewis & Bockius, Harrisburg, for appellee.
Eagen, C. J., and O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Roberts, J., filed a dissenting opinion in which Eagen, C. J., joins.
The question in this appeal is whether the "manufacturing exclusion" to the use tax imposed by the Tax Act of 1963 for Education*fn1 (Tax Act of 1963, or Tax Act) is here applicable to shield from taxation the use of certain equipment by taxpayer-appellee, Air Products and Chemicals, Inc. Answering that question in the affirmative, the Commonwealth Court reversed a decision of the Board of Finance and Review which had sustained a denial of Air Products' claim for a refund of use taxes paid by it between 1967 and 1970. This appeal filed by the Commonwealth of Pennsylvania is from the Commonwealth Court's final order entering judgment
in favor of Air Products in the sum of $65,733.03, representing the amount of the refund found due and owing appellant for the years in question. We affirm the judgment.
A summary of the relevant factual background is necessary as a preface to our discussion of the law.*fn2 Air Products is principally engaged in the making and selling of industrial and medical gases such as oxygen, nitrogen and argon. The manufacturing process is one of compressing and purifying atmospheric air, cooling the air to a temperature sufficiently low so that it will pass to a liquid state, then distilling the liquid air into its constituent liquid elements; as a final step, the liquid oxygen and other elements are conducted through a heat exchanger where they are vaporized into gases.
Marketing the finished gaseous product*fn3 is accomplished in one of three ways, depending on the usage requirements of the consumer. For customers having the greatest demand, such as steel manufacturers, an entire air separation plant is furnished on-site. To serve customers at the other end of the spectrum, the small or sporadic users, Air Products provides returnable gas cylinders filled at one of its own plants. For sales of intermediate quantities, appellee installs at the buyer's location a complex of equipment termed a "customer station".*fn4 This appeal relates to Air Products' use of the equipment comprising these customer stations.
A customer station consists of a large insulated vessel designed to hold and maintain the product in its liquid form prior to conversion to gas, and the valves, piping, vaporization apparatus and controls attached to the vessel and involved
in transforming the liquid element into its usable gaseous state at the temperature and pressure required for the customer's needs. The liquid conversion system feeds gas directly into the customer's plant and operates automatically whenever the customer draws upon it; it works by a process which is essentially the application of heat to the liquid, the heating medium being either steam, electricity or the ambient air, for at standard temperatures the product will vaporize. Supplied by tank truck deliveries of the liquid, the customer station thus furnishes the buyer a convenient point-of-use source of supply of the finished product, all prior steps in the production process having been accomplished at Air Products' plant.
The Tax Act of 1963 imposes a tax on the use of tangible personal property "purchased at retail",*fn5 but excludes from its definition of "use" the "use . . . of . . . property . . . directly in any of the operations of -- (i) The manufacture of personal property."*fn6 Whether or not appellee's use of its customer stations constitutes a ...