Appeal from the Order of the Commonwealth Court at No.
The opinion of the court was delivered by: Mr. Justice Eakin
CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ.
SUBMITTED: December 1, 2010
In these consolidated appeals, the Commonwealth of Pennsylvania, Department of Revenue seeks review of the Commonwealth Court's decisions holding appellees' MRI*fn1 and PET/CT*fn2 Scan systems were not tangible personal property subject to sales tax under § 7202(a) of the Tax Reform Code of 1971, 72 P.S. § 7101 et seq., because they were part of real estate structures. We reverse.
The facts relevant to both appeals, as established by joint stipulation, are set forth individually below, along with the procedural history of each case.
In December, 2003, Northeastern Pennsylvania Imaging Center purchased an MRI and PET/CT Scan system from Philips Medical Systems North America Company. Northeastern paid Philips $2,172,375 for the MRI system, and paid $129,774.02 in sales tax. For the PET/CT Scan system, it paid Philips $1,815,000, and paid $98,010 in sales tax. To prepare for installation of both systems in its facility, Northeastern made extensive structural changes to the building, which it owns. The changes included: revising the electrical, heating, ventilation, air conditioning, and plumbing systems; installing floor and ceiling supports; enlarging rooms; installing troughs in the walls and conduit above the ceilings to accommodate power cables and wire; installing radio frequency shielding in the walls, floor, and ceiling to prevent MRI radio signals from interfering with other devices; installing a vent for safe removal of cryogenic helium vapor the MRI magnet generated; installing lead panels for radiation shielding; enlarging doors in order to move the PET/CT Scan system into the building; and removing an outside wall in order to move the MRI system into the building.
The MRI system weighed 15,201 pounds and could only be moved by a crane. It took approximately five days to install. The system's magnet and patient table were bolted to the building, using anchors installed in concrete beneath the floor. Removal of the system would require several days of interior construction work and would necessitate removing an exterior wall to give a crane access to the system. The PET/CT Scan system weighed 12,375 pounds and took approximately two weeks to install. The system's gantry*fn3 and patient table were bolted to the building by anchors installed in concrete beneath the floor, and the system was hardwired to Northeastern's electrical system. Removal of the PET/CT Scan system would require several days. The MRI system remains in place in Northeastern's facility; however, the PET/CT Scan system became obsolete, and was removed and replaced with a new system in 2006. The new system was not at issue in this matter.
On July 20, 2004, the Department issued a letter ruling which stated, "[P]rospectively the sale and installation of an MRI to [a] taxable entity is considered a construction contract. The MRI is considered to be a permanent part of the real estate upon installation." Pennsylvania Sales and Use Tax Letter Ruling No. SUT-04-021, 7/20/04, at 1. Thus, the sale and installation of MRI and PET/CT Scan systems like the ones Northeastern purchased was no longer subject to sales tax, which only applies to the sale of tangible personal property and services. See 72 P.S. § 7202(a) (imposing six percent sales tax on sale at retail of tangible personal property or services). Instead, as part of a construction contract,*fn4 the sale and installation of MRI and PET/CT Scan systems would be subject to a use*fn5 tax under 72 P.S. § 7202(b), which imposes a six percent tax on the use of tangible personal property, paid by the seller or contractor. Ten months later, the Department rescinded its first letter ruling; it issued a second letter ruling which stated an installed MRI system would be subject to sales tax as tangible personal property. See Pennsylvania Sales and Use Tax Letter Ruling No. SUT-05-008, 5/20/05.
Northeastern had paid sales tax on its imaging systems in installments during a large portion of the period when the first letter ruling was in effect. It filed a claim with the Department December 7, 2006, seeking a refund of $362,811.88 for the sales tax paid on the systems and their service agreements. The Department denied Northeastern's refund claim, and Northeastern filed a petition for review with the Board of Finance and Review, which affirmed.
Northeastern petitioned the Commonwealth Court for review, seeking reversal of the Board's decision on the grounds that the Department's first letter ruling was correct, and the acquisition of the imaging systems did not trigger a sales tax event; rather, the systems were installed as part of a construction contract and thus were subject to use tax payable by the seller or contractor.*fn6 The Department countered that Northeastern, not Philips (who sold the imaging systems), was responsible for the construction necessary to prepare the building for installation of the systems. It also argued the systems were items of tangible personal property, which were not so annexed to Northeastern's building that they became part of the realty.
In a published opinion, the Commonwealth Court reversed the Board's decision; it concluded the imaging systems, once installed, constituted realty, and thus were not subject to sales tax. Acknowledging that the Tax Reform Code's definition of "real estate structure" does not apply to for-profit corporations like Northeastern, the court relied on In re Appeal of Sheetz, 657 A.2d 1011 (Pa. Cmwlth. 1995), which the parties contended set forth the appropriate test for determining whether the imaging systems were tangible personal property or part of the realty. The court noted, in a footnote, that the parties agreed Commonwealth v. Beck Electric Construction, Inc., 403 A.2d 553 (Pa. 1979), did not apply; although the case concerned the applicability of sales tax, it was partially superseded by statute insofar as it pertained to sales and use tax for tax-exempt entities. See Northeastern Pennsylvania Imaging Center v. Commonwealth of Pennsylvania, 978 A.2d 1055, 1061-62 n.13 (Pa. Cmwlth. 2009). The court further noted Beck's analysis, which focused on an item's ease of portability in determining whether it was realty, was based on a regulation that had since been superseded; thus, the court did not apply Beck. Id.
Instead, the court relied on Sheetz, which was a real estate assessment case. At issue in Sheetz was whether canopies covering gasoline pumps at a service station became part of the real estate for purposes of assessing the real property's value. Sheetz 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. Sheetz, at 1012-13. Because the gas pump canopies fell into the third category, the Commonwealth Court considered, in assessing the circumstances: (1) the manner by which the canopies were affixed to the land; (2) the canopies were essential to the property's use as a gas station; and (3) the canopies were intended to be permanent. Id., at 1013. Based on these factors, the Sheetz court concluded the canopies were realty and thus were to be included in the real estate assessment.
Applying the Sheetz analysis, the Commonwealth Court concluded the imaging systems fell within the third category, chattel which could be either realty or personalty, and proceeded to consider the three factors set forth in Sheetz. Regarding the first factor, i.e., the manner of physical attachment of the systems, the court concluded the systems possessed the requisite degree of attachment to the building, based on the extensive, complex level at which their components were wired, bolted, and connected to the building. Regarding the second factor, i.e., whether the systems were essential to the use of the building, the court held the owner's chosen use of the property determines whether the chattel is essential. The court concluded the systems were essential to the ongoing use of the building as an imaging center, noting the "numerous and specialized structural, electrical, and mechanical improvements to [Northeastern's building] would serve no function without the systems themselves." Northeastern, at 1065. Finally, the court found the third factor - whether the systems were intended to be permanent - was met, as they were installed with the intention that they remain in the building as long as Northeastern continues to use it as an imaging center or until the systems become obsolete and must be replaced.
Accordingly, the Commonwealth Court held the systems were realty under the Sheetz test, and thus "real estate structures" within the meaning of § 7201(nn) of the Tax Reform Code. Therefore, the court concluded the systems were not subject to sales tax, and Northeastern was entitled to a refund; the court reversed the Board's order.
Senior Judge McCloskey dissented, disagreeing with the majority's conclusion that Northeastern intended the imaging systems to be a permanent part of the building. The dissent commented, "[T]he rapid advancement in medical technology fights against the majority's conclusion. In fact, leasing of this type of equipment is becoming the norm because of the need to remain current with the technology." Northeastern, at 1066-67 (McCloskey, S.J., dissenting).
Medical Associates of the Lehigh Valley, P.C. v. Commonwealth of Pennsylvania
In June, 2000, Medical Associates entered into an agreement to purchase an MRI system from GE Medical Systems for $1,155,360; it subsequently assigned its rights under the agreement to First Union Commercial Credit Corporation, permitting First Union to take title to the system. In August, 2000, Medical Associates agreed to lease the system from First Union for 60 months, beginning December 31, 2000. The lease provided Medical Associates the option to purchase the system from First Union at the end of 60 months, and it exercised that option in 2005, paying $97,050.24. Medical Associates also purchased a CT Scan system from GE for $675,018 in 2002. Medical Associates paid sales tax on both transactions, totaling $100,976.40.
To prepare for installation of the imaging systems in its facility, Medical Associates made extensive structural changes to the building, which it leases. The changes included: revising the electrical, heating, ventilation, air conditioning, and plumbing systems; installing floor and ceiling supports; enlarging rooms; installing troughs in the walls and conduit above the ceilings to accommodate power cables and wire; installing radio frequency shielding in the walls, floor, and ceiling to prevent MRI radio signals from interfering with other devices; installing a vent for safe removal of cryogenic helium vapor the MRI magnet generated; installing lead panels for radiation shielding; and removing an outside wall in order to move the MRI system into the building.
The MRI system weighed 20,599 pounds and could only be moved by a crane. It took approximately three days to install. The system's magnet and patient table were bolted to the building, using anchors installed in concrete beneath the floor. Removal of the system would require several days of interior construction work and would necessitate removing an exterior wall to give a crane access to the system. The CT Scan system also took several days to install. The system's gantry and patient table were bolted to the building by anchors installed in concrete beneath the floor, and the system was hardwired to Medical Associates' electrical system. The CT Scan system was replaced in 2006 with an updated system. It took approximately one week to remove the old system; the floor had to be reconstructed prior to installing the new system, which is not currently at issue.
Medical Associates filed a claim with the Department July 7, 2005, seeking a refund of $100,976.40 for the sales tax paid on the systems and their service agreements. The Department denied the refund claim, and Medical Associates filed a petition ...