The Pennsylvania Board of Finance and Revenue (BF&R) recently decided on an IT business’s petition to appeal a denial of its sales tax refund claim. The appeal involved several aspects of the taxpayer’s operations, including the use of software and construction repair services, that often provide great refund opportunities. However, the BF&R only granted partial refunds for the taxpayer in this case because of issues with the evidence and documentation to support the claim. We review the details of the case below and discuss some of the lessons you can take away from the BF&R’s decision.
How Sales and Use Tax Appeals Work in Pennsylvania
For brief context, the BF&R is an independent state agency that reviews taxpayer disputes with the Pennsylvania Department of Revenue and acts as an administrative court for these matters. Appeals are generally filed with the BF&R after exhausting your appeal options with the Department of Revenue’s Board of Appeals following an unfavorable sales and use tax audit or assessment. Appeals are generally due to the BF&R within 60 days of receiving a mailed notice of the decision from the Board of Appeals.
The Basis for the Taxpayer’s Refund Claims on Software, Construction, and Out-of-State Purchases
The taxpayer in the BF&R’s decision, In Re: Trustflow Digital Services Inc, sought refunds for the following payments—some of which involved payments for business locations that were outside of Pennsylvania:
The taxpayer had two types of computer-related sales tax payments as part of its refund claim. The first was for computer programming and consulting services. The second was for software subscription fees the taxpayer claimed to use exclusively in the out-of-state locations of India and Texas.
In general, Pennsylvania sales tax applies to canned software, whether delivered electronically or not, but does not apply to custom software or computer-related services. See 61 Pa. Code § 60.19. The BF&R accepted the refund claim related to the computer programming and consulting services because those were exempt charges. However, the taxpayer could not obtain a full refund for the software subscription charges because it provided no information to connect the software use to India or Texas. For example, identifying the number of users in these places and their locations, such as a valid address.
The taxpayer also claimed purchases were exempt from use tax as the repair of real property under 61 Pa. Code § 31.11. The payment of Pennsylvania sales tax on construction-related activities can be difficult to evaluate because of the challenges in determining what is a taxable repair of personal property versus an exempt improvement or repair of real property. The services in question for the taxpayer were for repairs to a fire suppression system which were specifically for inspections in connection with maintenance services. The BF&R denied this refund because general building maintenance services, including inspections, are clearly stated as taxable under 61 Pa. Code § 60.1(d)(4).
The final part of the taxpayer’s refund claim was for the purchase of network infrastructure services. The BF&R agreed that 50% of the taxpayer’s purchases were not subject to Pennsylvania sales tax because they were for services at the taxpayer’s business location in New Jersey. Supporting its claim were the taxpayer’s submission of a master services agreement, invoices, and a letter from an executive of the vendor confirming that half of the invoiced charges were for services outside of Pennsylvania.
Getting Help with a Pennsylvania Sales & Use Tax Refund Claim or Appeal
This BF&R case is an excellent example of the value in appealing unfavorable tax decisions from the Pennsylvania Department of Revenue. This could be especially true when seeking relief from assessments over difficult sales tax issues that come with the use of software, construction services, and out-of-state activity. These industries don’t always have the clearest rules on taxability, which can benefit taxpayers who have strong documentation to support their nontaxable position. When buying or selling a particular item or service in Pennsylvania, it’s important to consider how your invoicing and agreements align to support that exempt status.Meet with one of our sales tax professionals today to discuss your refund claim, appeal options, or compliance strategy in Pennsylvania.