Argued: June 19, 2013
BEFORE: HONORABLE DAN PELLEGRINI, President Judge HONORABLE BERNARD L. McGINLEY, Judge HONORABLE BONNIE BRIGANCE LEADBETTER, Judge HONORABLE RENÉE COHN JUBELIRER, Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE ANNE E. COVEY, Judge
BONNIE BRIGANCE LEADBETTER, Judge
Taxpayer, Tristan Radiology Specialists, P.C.,  petitions for review of the order of the Board of Finance and Revenue (Board) denying Taxpayer's petition for refund of sales and use taxes ($61, 845.44) paid on magnetic resonance imaging (MRI) and computed tomography (CT) machines, canned software associated therewith, and electricity to power such equipment during the period October 2006 through December 2008. The issue on appeal is whether these items are excluded from tax under the manufacturing exclusion set forth in the Tax Reform Code of 1971 (Tax Code).
According to the parties' Stipulation of Facts, Taxpayer is engaged in the practice of medicine in the Susquehanna Valley and specializes in radiology. It provides diagnostic imaging, particularly MRIs and CTs (described as "services") to patients referred to it by other physicians. Either the patient or his/her health insurer pays Taxpayer for its services; Taxpayer does not charge or collect sales tax from the patient or insurer for the medical report ultimately provided by its radiologists or on the resulting images provided on film or compact disc when a copy of the image is provided to the patient or referring physician. The patient is considered the owner of the medical report and the film or compact disc.
Both the MRI and CT equipment image patients through a multi-step process fully described in the stipulations. Suffice it to say, the scanning/imaging process includes sending raw data to the hard drive on the equipment's computer; canned software on the hard drive is then used to read the data and allow a technician to manipulate the data to produce an image(s) on the computer monitor; when satisfied with the images, the technician uses canned software to transfer the images to a film printer or a compact disc printer to produce either a film or compact disc if the referring physician requires the captured images; the images are also transferred to a hard drive in Taxpayer's electronic archive. The images transferred to film or compact disc are produced with a laser using a dry view process instead of the chemical developing process historically used to develop films and photographs. Taxpayer's radiologists access the images on the hard drive in the electronic archive, display them on the computer monitor, read them and prepare a written report analyzing the images. Two-thirds of the referring physicians using Taxpayer's services require film or a compact disc with the written report; the remainder of the physicians require only the report. Taxpayer can also produce scanned images on film or compact disc at a later date from the electronic archive if requested.
According to the Board, Taxpayer sought a refund contending that the purchase and installation of the imaging equipment constituted a permanent addition to the realty and, therefore, was a nontaxable construction activity. In the alternative, Taxpayer asserted that the equipment constituted photographic equipment, rendering the equipment, supplies and electricity nontaxable under the manufacturing exclusion. See Board's Opinion and Order attached to Taxpayer's appellate brief as Appendix I. The Board disagreed, concluding: (1) the equipment remained tangible personal property upon installation, rendering the provisions applicable to construction activity inapplicable; and (2) the equipment constituted medical diagnostic equipment, not photographic equipment, such that the manufacturing provisions were inapplicable. Accordingly, the Board denied the petition for refund. This appeal followed.
In determining whether Taxpayer's imaging machines, software and electricity consumption is excluded from tax, we begin with the applicable statutory and regulatory provisions. Section 202(a) of the Tax Code imposes a six percent tax on the "sale at retail" of "tangible personal property or services . . . which tax shall be collected by the vendor from the purchaser, and shall be paid over to the Commonwealth . . . ." 72 P.S. § 7202(a). "Sale at retail" includes any transfer, for a consideration, of the ownership, custody or possession of tangible personal property, which is defined in part as "[c]orporeal personal property including, but not limited to, goods, wares [and] merchandise . . . ." Section 201(k)(1), (m), 72 P.S. § 7201(k)(1), (m).
Notably, a "sale at retail" does not include the "rendition of services or the transfer of tangible personal property including, but not limited to, machinery and equipment and parts therefor and supplies to be used or consumed by the purchaser directly in the operations of . . . [t]he manufacture of tangible personal property." Section 201(k)(8)(ii)(A), 72 P.S. § 7201(k)(8)(ii)(A). "Manufacture" is defined by the Tax Code in part as:
The performance of manufacturing, fabricating, compounding, processing or other operations, engaged in as a business, which place any tangible 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-(1) Every operation commencing with the first production stage and ending with the completion of tangible personal property having the physical qualities (including packaging, if any, passing to the ultimate consumer) which it has when transferred by the manufacturer to another. . . . (2) The publishing of books, newspapers, magazines and other periodicals and printing.
Section 201(c)(1), 72 P.S. § 7201(c). The applicable administrative regulations define "manufacturing" as:
The performance as a business of an integrated series of operations which places personal property in a form, composition or character different from that in which it was acquired whether for sale or use by the manufacturer. The change in form, composition or character shall result in a different product having a distinctive name, character and use. Operations such as compounding, fabricating or processing are illustrative of the types of operation which may result in a change although any operation which has that result may be manufacturing. Mere changes in chemical composition or slight changes in physical properties are not sufficient….
61 Pa. Code § 32.1. In addition, the regulatory exclusion for manufacturing specifically states:
Equipment, machinery, parts and foundations therefor and supplies used directly in manufacturing or processing. The purchase or use of tangible personal property or services performed thereon by a person engaged in the business of manufacturing or processing is exempt from tax if the property is predominantly used directly by him in manufacturing or processing operations. . . .
. . . .
[Propertydirectlyused;General]. Machinery, equipment, parts and foundations therefor, and supplies which are used in the actual production or to transport, convey, handle or store the product from the first production operation to the time the product is packaged for the ultimate consumer are ...