Confusion has continued since the Sales and Use Statute was substantially revised in 1998. Most of the confusion arises when the owner is a public or charitable entity. The old method of receiving the owner’s tax-exempt number has, for the most part, gone by the wayside.
This article outlines the general rule. But as you will see, the code’s complexities and exceptions make every situation unique, and you should consult a qualified professional to determine the full tax liability.
Generally, the first step for tax analysis is to consider any transaction of goods or services a taxable event. This conclusion is reinforced by the tax code’s use of the words “any”, “all”, “every” and “each.” Taxable transactions are of two types:
Sale at Retail to – any transfer of tangible personal property for consideration
Use of – the exercise of any right or power incidental to ownership, custody or possession of tangible personal property, including transportation, storage or consumption
The next step is to determine whether the transaction is exempt or excluded. Exclusions are items that are not intended to be taxed. Exemptions are items within the general scope of the statute imposing the tax but, for certain reasons, are exempt.
No more use of owner’s certificate
Whether a transaction is taxed usually (though not always) is based on the type of entity receiving the property or how the property will be used. Exempt entities include governments, charities, volunteer fireman’s organizations, nonprofit educational institutions or religious organizations for religious purposes, provided that the materials are not used in any unrelated business. Under the old Code, a contractor could enjoy the benefits of the tax-exempt entity’s certificate. This method is no longer appropriate.
A paving contractor bought bituminous asphalt for use in paving streets for a township. Can this contractor claim sales and use tax exemption?
The statute provides tax exemption for sales of property or services to the federal government and the Commonwealth of Pennsylvania, its instrumentalities or political subdivisions, which include counties, cities, boroughs, incorporated towns, townships and school districts. A township may claim an exemption from sales tax. However, sales to a township are exempt only when invoiced directly to the township. The paving contractor is liable for Pennsylvania sales tax on the purchase of bituminous asphalt.
Direct exemption is restricted
The 1998 Code now grants exemption directly to a construction contractor, but only for the sale at retail to or use of building machinery and equipment and services thereto when transferred to a tax-exempt entity.
Building machinery and equipment is that which is used for generation, storage, conditioning, distribution and termination. However, the statute and code provide a long list of examples of what is included – and what isn’t. For example, while electrical is listed as exempt from sales and use tax, it does not include wire, conduit, receptacles and junction boxes.
How does a contractor appropriately claim the exemption when purchasing building machinery or equipment? Because a vendor of tangible personal property is required to collect sales tax unless the customer provides a valid exemption certificate, the contractor must provide the supplier with an exemption certificate to obtain the exemption for those items that meet the definition of building machinery and equipment. The construction contractor should complete a Pennsylvania Exemption Certificate (Form REV-1220) by including on Line 7 this statement:
Property or services qualify as building machinery and equipment and will be transferred pursuant to a construction contract to [name of exempt entity].
The Department of Revenue interprets Regulation §31.13 to include situations in which the contractor enters into a contract with a developer that will dedicate the sanitary sewer installation, upon completion of the subdivision, to a public utility, municipality or municipal authority. In order for the contractor to claim the sales tax exemption, the contractor must present to its supplier:
1. A copy of a properly executed Form REV-1220. That form or an attached sheet should list the developer, description of the job, the exempt entity to which the property will be dedicated and a list of items purchased to which the exemption applies, and
2. A copy of the applicable letter ruling from the Department of Revenue.
Example: water and sewer lines
The contractor is performing site development work, including installing water and sanitary sewer lines. Upon completion of the work, the sewer lines will be dedicated to a municipal township authority, and the water lines will become the property of a regulated water company. Is the transaction tax exempt?
The contractor may purchase certain property exempt from sales tax, if the purchases are made pursuant to a contract with a public utility. Exemption is limited to equipment, machinery and parts that the contractor, in conjunction with the contract, will transfer to the public utility or a municipal authority engaged in a sanitary sewer operation. The property purchased pursuant to the exemption must be directly used in a sanitary sewer installation, not a storm sewer. The exemption does not apply to any items used beyond the curb of what will be commercial or privately owned property of a residential subdivision. Water mains, sewer treatment equipment, pipes, fittings, manholes and covers, stone bedding and covering, cement and pumping equipment are examples of exempt property.
Appropriate application of the Sales and Use tax is complicated and, in some instances, convoluted. To save money at the time of purchase, completing the appropriate forms is necessary. However, if the tax is inadvertently paid, a contractor may be entitled to submit a refund of the tax in the form of a credit on future tax liability.