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decided: October 15, 1987.


Appeal from the Order of May 1, 1986 of the Commonwealth Court of Pennsylvania at Nos. 2365 C.D. of 1979; 2195 C.D. of 1982; 3732 C.D. of 1984. 94 Pa. Commw.Ct. 608, Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ.

Author: Flaherty

[ 516 Pa. Page 328]


This is an appeal from an order of the Commonwealth Court, 94 Pa. Commw. 608, 504 A.2d 1349, which affirmed orders of the Board of Finance and Revenue affirming use tax assessments made by the Department of Revenue for three audit periods in which tax liabilities of the appellant, Ernest Renda Contracting Co., Inc. (hereinafter Taxpayer), were examined. The audit periods covered March 31, 1971 through November 30, 1974 (first audit period), January 1, 1975 through December 31, 1977 (second audit period), and January 1, 1978 through December 31, 1980 (third audit period). Inasmuch as the facts and legal issues pertaining to the three audit periods are substantially the same, there is no need for the audit periods to be addressed separately.

Appeals taken to the Commonwealth Court from the Board of Finance and Revenue are de novo in nature, with

[ 516 Pa. Page 329]

    no record being certified from the Board. Pa.R.A.P. 1571(f). Based upon stipulations of the parties, and upon an evidentiary hearing, the Commonwealth Court made the following findings of fact.

Taxpayer, a multi-state construction contractor, is a corporation organized under the laws of New Jersey, and has its principal office in that state. Taxpayer's primary business activity consists of constructing sewage and water systems throughout New Jersey, New York, and Pennsylvania. During the three audit periods in question, this type of construction work was performed in Pennsylvania under contracts with a number of municipalities and municipal authorities, whereby Taxpayer installed approximately fifteen sanitary sewer systems, one water system, and one or two storm sewer systems. The work consisted of excavating trenches, placing beds of crushed stone therein, laying pipe, refilling the trenches, and restoring ground surfaces to their original condition by either repaving, planting grass seed, or restoring sidewalks and curbs. Some of the work also involved installation of metering or pumping stations as integral parts of the systems. Equipment that was used, but not installed, in these construction activities was stored at a vehicle park/repair facility in Lehigh County, Pennsylvania, and such equipment included cranes, excavators, an office trailer, etc.

A use tax is imposed in Pennsylvania under provisions of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, No. 2, art. I, § 101, et seq., 72 P.S. § 7101, et seq. Taxpayer did not file use tax returns for the first audit period. Returns were filed for the second and third audit periods, however, but no tax was paid. The Department of Revenue determined, based upon the audits conducted, that taxes and penalties were owed in the amount of approximately $356,000.00, plus interest. As of April, 1985, the interest due on this balance amounted to more than $244,000.00. Taxpayer contests nearly the entire use tax assessment, but concedes that a small portion of the tax, under $10,000.00, is due, though this amount has not been paid.

[ 516 Pa. Page 330]

The basis for assessment of this tax was Taxpayer's use in Pennsylvania of construction materials, equipment, and repair parts and services upon which no sales tax had been paid to the Commonwealth. Some of these items had been purchased in Pennsylvania, and others had not, but to the extent that sales taxes were shown by the Taxpayer to have been paid to other states for the items, credit was accorded in computing the tax due. It is the contention of Taxpayer that, because all of the contracts which it performed in Pennsylvania involved installation of municipal utility facilities and equipment, the items assessed were exempt from the use tax by reason of the public utility exclusion set forth in 72 P.S. § 7201(o)(4), which, during the audit periods in question, provided in pertinent part as follows:

[A taxable] "use" shall not include --

(B) The use or consumption of tangible personal property, including but not limited to machinery and equipment and parts therefor, and supplies . . . directly in any of the operations of --

(iii) The producing, delivering or rendering of a public utility service, or in constructing, reconstructing, remodeling, repairing or maintaining the facilities which are directly used in such service, whether or not such facilities constitute real estate: Provided, however, "real estate" shall not include buildings, roads, or similar facilities;

The [exclusion] provided in [subparagraph iii] 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, parts or foundations therefor that may be affixed to such real estate . . . .

The exclusion provided in subparagraph (iii) shall not apply to (A) construction materials used to construct,

[ 516 Pa. Page 331]

    reconstruct, remodel, repair or maintain facilities not used directly in the production, delivering or rendition of public utility service, or (B) tools and equipment used but not installed in the maintenance of facilities used directly in the production, delivering or rendition of a public utility service.

(Emphasis added).

Applying this provision to the case sub judice, and noting that the burden of proof is upon Taxpayer to establish that the use tax has been improperly assessed, 72 P.S. § 7236, the Commonwealth Court held that Taxpayer failed to prove that the entities for which the utility pipelines were installed ...

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