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Victory Bank v. Commonwealth

Commonwealth Court of Pennsylvania

October 16, 2019

Victory Bank, Petitioner
Commonwealth of Pennsylvania, Respondent

          Submitted: April 10, 2019



          PATRICIA A. McCULLOUGH, Judge

         Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i), [2] Victory Bank files exceptions to this Court's three-judge panel opinion and order in Victory Bank v. Commonwealth of Pennsylvania, 190 A.3d 782 (Pa. Cmwlth. 2018) (Victory Bank I), dated July 17, 2018, which affirmed an order of the Board of Finance and Revenue (Board), dated April 28, 2014. There, we concluded that the Board properly denied Victory Bank's petition for refund because it was required to pay sales tax on its purchase of computer hardware, canned computer software, and services related thereto, under Section 202(a) of the Tax Reform Code of 1971 (Tax Code).[3] Upon review, we overrule Victory Bank's exceptions.


         As set forth in our initial decision, Victory Bank, a commercial bank, filed a petition for refund of sales tax paid on purchases of computer hardware, canned computer software, and services. Victory Bank purchased the disputed items from three sellers and used all of the computer software and hardware "for its protection or convenience in conducting financial transactions." Victory Bank I, 190 A.3d at 783. For the contested transactions, Victory Bank paid state sales tax in the amount of 6% of the purchase price for each item purchased. Victory Bank did not tender an exemption certificate to any of the sellers.

         Victory Bank initially filed a petition with the Department of Revenue's (Department) Board of Appeals (BOA) seeking a refund of sales tax in the amount of $50, 000, plus applicable interest, paid during the period from November 26, 2009, until November 26, 2012. It later amended the requested amount to $17, 801.61. The BOA denied Victory Bank's request and the Board affirmed. In its petition for review to this Court, Victory Bank sought a refund for sales tax paid across 84 petitioned-transactions in the aggregate amount of $14, 775.35, plus interest. Id.

         On appeal to this Court in Victory Bank I, Victory Bank only raised the following issue: whether a bank's purchases of computer software components, as well as services related thereto, were excluded from sales tax pursuant to the Department's Financial Institution Security Equipment Regulation (FISE regulation), [4] because the sellers or their designees installed the computer hardware and the bank used the computer and software for its protection or convenience in conducting financial transactions. Id.

         We concluded that it was undisputed that Victory Bank met the definition of a "financial institution" and that its computer system met the definition of "security equipment" under the FISE regulation. Conversely, we determined that it was disputed whether plugging a computer system into an electrical outlet amounted to "installation" under the regulation, and whether the FISE regulation had been superseded by statute. We declined to address the first of these arguments because we concluded that statutory changes had superseded the definition of "construction contract" in the regulation. Id. at 784.

         We noted that when the Department first promulgated the FISE regulation there was no statutory definition of the term "construction contract," so that if equipment was installed within the definitions under the regulation it amounted to a "construction contract" and the obligation to pay sales tax fell on the contractor/installer rather than the purchasing institution. However, we observed that when the Tax Code was amended by the General Assembly in 2002, [5] the definition of "construction contract" in section 201 of the Tax Code was changed to the following: "A written or oral contract or agreement for the construction, reconstruction, remodeling, renovation or repair of real estate or a real estate structure." 72 P.S. §7201 (emphasis added). We concluded that the statutory definition of "construction contract" clearly "depart[ed] from the one found in the FISE regulation." Victory Bank I, 190 A.3d at 785.

         Also, we observed that "a statute is law and trumps an administrative agency's regulations" and that when "there is a conflict between a statute and regulation which purports to implement the statute's provisions the regulation must give way." Id. (citing Commonwealth v. Kerstetter, 62 A.3d 1065, 1069 (Pa. Cmwlth. 2013), aff'd, 94 A.3d 991 (Pa. 2014); Success Against All Odds v. Department of Public Welfare, 700 A.2d 1340, 1351 n.6 (Pa. Cmwlth. 1997)). This Court determined that section (c)(1) of the FISE regulation presented "such a conflict in that the statutory definition for 'construction contract' [was] inconsistent with the regulation's definition," and, that it was irrelevant that the FISE regulation had not been amended or repealed because the Commonwealth was merely interpreting a self-executing act of the General Assembly, which allowed it to dispense with the typical regulation publication requirements under section 204 of the Commonwealth Documents Law[6](CDL). Victory Bank I, 190 A.3d at 785. Accordingly, the Court held that Victory Bank could not rely upon section (c)(1) of the FISE regulation to argue that the seller of the computer system, instead of Victory Bank, owed the sales tax. Id.

         In the absence of an applicable statutory exclusion or exemption, the sales at issue, by default, warranted a 6% sales tax under section 202(a) of the Tax Code. Section 202(a) of the Tax Code imposes a 6% tax on the "sale at retail" of "tangible personal property or services." 72 P.S. §7202(a). Concluding that the items at issue were such property, we held Victory Bank's purchases were "sales at retail" to which sales tax must be applied and that the vendor of the items was required to collect sales tax from the purchaser, i.e., Victory Bank. Victory Bank I, 190 A.3d at 785. Therefore, since Victory Bank was required to pay sales tax on its computer systems under the Tax Code, the Board was found to have properly denied the petition for refund. Id. at 786. Victory Bank has now filed exceptions to our decision.[7]


         In its exceptions, Victory Bank argues that (1) the Commonwealth failed to comply with the CDL and, thus, is precluded from seeking the invalidation of the FISE regulation through a judicial decision; (2) pursuant to the FISE regulation, the sellers, rather than Victory Bank, were responsible for paying sales tax on the purchased items; and (3) Victory Bank met the elements of the FISE regulation and, therefore, is entitled to a sales tax refund.

         We first address whether the Commonwealth failed to comply with the CDL. Victory Bank maintains that the FISE regulation is presumptively valid and that, under the CDL, this Court is not the proper venue for the Commonwealth to amend or void the FISE regulation. Victory Bank contends that our panel decision overlooked our en banc decision in Muscarella v. Commonwealth, 87 A.3d 966 (Pa. Cmwlth. 2014), as applied to the CDL. As argued by Victory Bank, in Muscarella the Commonwealth maintained that certain tax regulations were invalid because they were inconsistent with the relevant statutory language; however, we held that because the regulations had been approved by the Office of Attorney General, under the CDL this Court was not the proper avenue to void or amend regulations. Victory Bank asserts that pursuant to the requirements of the CDL, the FISE regulation was published in the Pennsylvania Code and, thus, the Office of Attorney General presumptively approved its legality. Victory Bank alleges that under the CDL, the Commonwealth is precluded from seeking a judicial decision invalidating the FISE regulation and, accordingly, our panel decision erred in concluding that the definition of "construction contract" in the regulation is now superseded by statute.

         Conversely, the Commonwealth agrees with our decision in Victory Bank I that the amended statutory definition of "construction contract" in the Tax Code superseded the inconsistent definition in the FISE regulation. The Commonwealth contends that the CDL does not preclude the Commonwealth from seeking application of a recently enacted and implemented statutory definition in defense of a request for a tax refund. The Commonwealth maintains that while the CDL contains specific, mandatory procedures with regard to the legality, amendment, or repeal of administrative regulations, the CDL is only applicable to agency actions that actually constitute a regulation. Thus, the Commonwealth alleges that agency actions that do not constitute regulations, such as statements of policy and administrative adjudications of certain cases, are not subject to the constraints of the CDL. The ...

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