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Recent PA Sales Tax Case Shows Importance in Documenting Sales Tax Exemptions


When seeking a refund or claiming an exemption, it is critical to have a state and local tax professional on your side. Unlike taxability issues, which the state must show how it arrived at the assessment, the burden is on you, the taxpayer when claiming a refund or exemption of sales and use tax. A recent case out of Pennsylvania shows how important it can be to properly document to show the number of your exemptions.

In Van Industries, the company engaged in several activities such as metal and ceramic fabrication, customized metal part machining and industrial metal repair, powder coating customer parts and own fabrications, and maintenance and cleaning of customer parts. In order to cure its powder coating and to burn powder and contaminants off of parts, the business had two gas-powered ovens. The ovens were also used to heat its facilities.

In Pennsylvania, like many states, the sale of gas is considered the taxable sale of tangible personal property under § 202 of the Tax Reform Code of 1971 (“Tax Code”).  Likewise, like most states, Pennsylvania also has an exemption for excludes machinery and parts as well as supplies consumed to manufacture tangible personal property.  During a Sales and Use Audit by the Pennsylvania Department of Revenue (“Department”), the taxpayer claimed that its natural gas purchases were 100% exempt from sales or use tax for the Audit Period and paid no tax on those purchases.

As is often the case, there was an issue as to the amount of gas used in the so-called manufacturing process. The taxpayer claimed that for one unspecified month, the ovens consumed 97% of the natural gas purchased in performing powder-coating or burn-off services. Contrarily, the Department said the documentation was insufficient to substantiate the exemption and assessed over $30,000 in unpaid sales and use tax.

The taxpayer disagreed and filed a petition for reassessment with the Pennsylvania Board of Appeals (“BOA”).  The PA BOA requested additional documentation such as the process of powder coating and detail to show the percentage of gas used for that purpose. Ultimately, the BOA deemed the documentation insufficient and denied the appeal.

The case found its way to the judicial court, which is the Commonwealth Court of Pennsylvania. The taxpayer claimed it had sought a utility study but failed to file the study with the court. The taxpayer contended that as the powder-coating changed the function of and substantially transformed the vehicles they worked on, the vehicles should be considered manufactured. The Department argued that the powder-coating did not change the composition of the items worked on and as such the activity was not manufacturing within the meaning of § 31.5 PA Code nor was it “remanufacture” within the meaning of § 31.5(a).

Ultimately, The Court noted that the State Supreme Court had ruled that “manufacturing” required:

  1. The activity must fall into one or more categories, i.e., manufacturing, fabrication, compounding, processing or other operations;
  2. As a result of one or more of the prescribed categories, the personal property must be placed ‘in a form, composition or character from that in which [such property] was acquired.

The court also observed the BOA had determined that the taxpayer engaged in both taxable and non-taxable activities and had ruled powder-coating was the taxable activity of repairing or altering of tangible property under § 31.5  Pa. Code of the Department’s regulations. Further, the taxpayer’s evidence did not provide a  breakdown of the use of the ovens between taxable and exempt activities and VII had failed to respond to the Department’s attempts to secure such a breakdown.  Additionally, the burden was on the taxpayer to prove that the transaction did not fall within the Tax Code and/or that it was the subject of an exemption (Commonwealth v Sitkin’s Junk Co 194 A.2d 199, 202 ([Pa.]  1963).

In its last-ditch effort, the taxpayer also claimed that its use of the natural gas was not taxable because the Department’s audit determined that a portion was used for heating VII’s building and the relevant tax should be reduced by 88%. The Court noted that § 32.25(d)(4)(vi) of the Department’s Regulations requires an apportionment to be made between exempt and taxable usage of the natural gas and that any reasonable method could be used and the result had to be annualized to give an annual rate. As such, the Department had properly determined that the taxpayer’s provision of one month’s usage evidence was insufficient to establish a percentage of its exempt gas usage. The Court further noted that VII had failed to furnish the Court with any analysis of the exempt usage and its request for 88% exemption is without support.

This case showcases the importance of factual development to obtain an exemption or sales tax exemption from the state.  While it can be easy to focus on the law and whether certain activities are taxable, it is at least as important to have a sales tax professional to properly support the taxpayer’s assertion with documentation backup. Without it, the court cannot just take your word for it.


  • 202 of the Tax Reform Code of 1971
  • 201 of the Tax Reform Code of 1971
  • 31.5 Pa. Code of the Department of Revenue’s regulations
  • 31.5(a) Pa. Code of the Department of Revenue’s regulations

Commonwealth v Sitkin’s Junk Co 194 A.2d 199, 202 ([Pa.]  1963

Fiore  v. Commonwealth, 668 A.2d 1210, 1217 (Pa. Cmwlth. 1995), aff’d, 690 A.2d 234 (Pa. 1997