The opinion of the court was delivered by: Judge Leavitt
BEFORE: HONORABLE BERNARD L. McGINLEY, Judge, HONORABLE MARY HANNAH LEAVITT, Judge, HONORABLE JOSEPH F. McCLOSKEY, Senior Judge.
Northeastern Pennsylvania Imaging Center (Northeastern) petitions for review of an adjudication of the Board of Finance and Revenue denying Northeastern's petition for a refund of Pennsylvania sales tax it paid for the acquisition and installation of an MRI system and a PET/CT Scan system.*fn1
Northeastern argues that the equipment was installed in connection with a construction contract and thereafter became a part of the real estate. Given these circumstances, Northeastern asserts that it was the obligation of its vendor to pay a use tax on the wholesale price of the equipment, and it was not Northeastern's obligation to pay a sales tax on the retail price of this equipment, as found by the Board. Concluding that Northeastern's position has merit, we reverse the Board.
For the most part, the facts relevant to this appeal were established by a joint stipulation of facts.*fn2 Northeastern paid sales tax on two separate acquisitions: the purchase of an MRI system and the purchase of a PET/CT Scan system from Philips Medical Systems North American Company (Philips). In addition, Northeastern entered into agreements with Philips for the maintenance and servicing of the MRI and PET/CT Scan systems on which Northeastern also paid sales tax.*fn3 Northeastern seeks a refund of $362,811.88 plus interest.
With respect to the MRI system it purchased from Philips, Northeastern paid sales tax in the amount of $129,774.02. The sales agreement between Philips and Northeastern fixed the purchase price of $2,172,375, which covered the acquisition, transportation, installation, training, and one-year warranty on the MRI system. The MRI was installed in Northeastern's Imaging Center in December of 2003.
To prepare for the installation of the MRI system, in accordance with Philips' specifications, Northeastern made extensive structural changes to its building. These structural changes included revisions to the building's electrical, heating, ventilation and air conditioning, and plumbing systems.*fn4 Northeastern strengthened the floors and ceiling supports, removing excess ferrous material; changed room sizes; and removed an outside wall in order to be able to move the MRI equipment into the building. The MRI magnet weighs 15,201 pounds and can only be moved by a crane. Troughs were installed in the walls and conduit above the ceilings of the MRI Rooms to accommodate the cables and wire needed to power and operate the MRI. Radio frequency shielding, consisting of zinc panels, had to be installed in the walls, floor and ceiling to prevent the radio signals of the MRI equipment from interfering with other devices. Finally, Northeastern installed a vent to allow for the safe removal of cryogenic helium vapor generated by the magnet.
After delivery of the MRI system to the Imaging Center, Philips personnel assembled, installed and connected the MRI system to the building's plumbing, cooling, and electrical systems. The installation of the MRI took approximately five days. The magnet and patient table were bolted to the building, using anchors installed in concrete beneath the floor of the Magnet Room.
The MRI remains in place at the Imaging Center. To remove the MRI magnet from the Imaging Center would require several days of construction work on the interior of the building. It would also require the removal of an exterior wall of the building to give a crane access to the magnet.
With respect to the PET/CT Scan system purchased from Philips, Northeastern paid sales tax in the amount of $98,010. The agreement between Philips and Northeastern fixed the total purchase price at $1,815,000. The agreement included acquisition of the PET/CT Scan system, together with its transportation, installation, training, and a one-year warranty. The PET/CT Scan system was installed in the Imaging Center on or about December 29, 2003.
Again, extensive preparations were undertaken to install the PET/CT Scan system at the Imaging Center. These included the installation of new electrical power; new heating, ventilation, and air conditioning systems; and installation of troughs and conduits in the walls and above the ceiling of the scanning and control rooms to accommodate the cables and wires needed to power and operate the PET/CT Scan system. Northeastern also enlarged rooms; installed lead panels to provide radiation shielding; enlarged doors to allow entry of the system into the building; and installed additional floor supports. The total weight of the PET/CT Scan system is 12,375 pounds, including the power equipment.
Philips spent approximately two weeks on the installation of the PET/CT Scan system. Two Philips engineers worked on the system each day. The gantries and patient table were bolted to the building using masonry anchors installed in concrete beneath the floor of the room. Various wires and cables were installed to connect the various components to the building's systems and to each other. The PET/CT Scan system is hardwired to the Imaging Center's electrical system.
The PET/CT Scan system remains in place at the Imaging Center. To remove the system would require several days of construction to dismantle and remove the PET/CT Scan components from the Imaging Center.
On December 7, 2006, Northeastern filed a claim with the Department of Revenue (Department), seeking a refund in the amount of $362,811.88 for the sales tax paid on the MRI and PET/CT Scan systems, as well as the sales tax paid on the service agreements for these systems. It filed this request during a period of transition at the Department about how to tax such systems.
On July 20, 2004, the Department issued a letter ruling which stated that prospectively the sale and installation of an MRI to [a] taxable entity is considered a construction contract. The MRI is considered to become a permanent part of the real estate upon installation.
Pennsylvania Sales and Use Tax Letter Ruling No. SUT-04-021, 7/20/2004, at 1. On May 20, 2005, the Department issued Letter Ruling No. SUT-05-008, rescinding Ruling No. SUT-04-021 and stating an installed MRI would be taxed as tangible personal property. Northeastern paid the sales tax on its systems in various installments between December 2003 and January 2005, while Letter Ruling No. ...