Bell Atlantic Mobile Systems, Inc. v. Com.

• Decision Date: 28 May 2002
• Citation: 799 A.2d 902
• Parties: BELL ATLANTIC MOBILE SYSTEMS, INC., Petitioner, v. COMMONWEALTH of Pennsylvania, Respondent. AWACS, Inc., Petitioner, v. Commonwealth of Pennsylvania, Respondent.
• Court: Pennsylvania Commonwealth Court

799 A.2d 902

BELL ATLANTIC MOBILE SYSTEMS, INC., Petitioner, v. COMMONWEALTH of Pennsylvania, Respondent.

AWACS, Inc., Petitioner, v. Commonwealth of Pennsylvania, Respondent.

Commonwealth Court of Pennsylvania.

Argued March 13, 2002.

Decided May 28, 2002.

Joseph C. Bright, Philadelphia, for Bell Atlantic Mobile Systems.

James L. Fritz, Harrisburg, for AWACS, Inc.

Karen M. Gard, Harrisburg, for respondent.

Before COLINS, President Judge, and McGINLEY, Judge, SMITH-RIBNER, Judge, PELLEGRINI, Judge, FRIEDMAN, Judge, COHN, Judge, and LEAVITT, Judge.

OPINION BY Judge McGINLEY.

Bell Atlantic Mobile Systems, Inc. (Bell) and AWACS, Inc. (AWACS) (collectively, Taxpayer) petition for review¹ from an order of the Pennsylvania Board of Finance and Revenue (Board) that reassessed the sales and use tax and interest against Bell and sustained the decision of the Board of Appeals' assessment against AWACS.

Taxpayer and the Commonwealth of Pennsylvania (Commonwealth) stipulated to the following:

2. Taxpayer is a for-profit corporation engaged in the business of producing and selling mobile domestic cellular radio telecommunications service, sometimes referred to as cellular radiotelephone service. Such service is referred to herein as "Cellular Telecommunications Service" or "CTS."

3. CTS is a form of commercial mobile radio service. Taxpayer sells CTS to individual, commercial, industrial and institutional customers in Pennsylvania and elsewhere. Taxpayer also sells Cellular Telecommunications Service to other cellular system providers for their customers who engage in cellular communications while in Taxpayer's operational area. (A customer of CTS provider A, who is using cellular service in provider B's service area, is referred to as "roaming"). Taxpayer also provides services to a minor extent at wholesale to resellers for resale to retail customers. In describing Taxpayer's activity as "producing", or the "production" of, CTS or a part thereof, the parties make no stipulation whether the activity constitutes manufacturing, processing, or producing public utility service for Sales and Use Tax purposes. (emphasis added).

4. The Federal Communications Commission (`FCC') has granted Taxpayer licenses to provide Cellular Telecommunications Service over assigned frequencies, within each of Taxpayer's designated cellular service areas. The terms of the license require Taxpayer to construct and operate facilities and provide service throughout the designated service area within certain time deadlines.

...

10. In order to produce Cellular Telecommunications Service, Taxpayer purchases various items, including but not limited to the following, which are used in providing Cellular Telecommunications Service:

electricity for nonresidential use (sometimes referred to as "commercial electricity")

radio transmitting and receiving equipment

radio signal antennas

electronic signal filtering and processing equipment

electronic signal amplifiers

signal switching equipment

intrastate and interstate telephone service for nonresidential use

telecommunications services provided by entities other than Taxpayer

Each of these items constitutes tangible personal property for Sales and Use Tax purposes. (emphasis added).

....

37. Since about 1970, the Department of Revenue and the Board of Finance and Revenue have maintained and implemented a policy to treat producers of electricity as manufacturers for Sales and Use Tax purposes and have determined that the machinery, equipment and supplies used by a producer of electricity qualify for the manufacturing exclusion for Sales and use tax purposes....

....

48. The Commonwealth extends to a taxpayer the public utility exclusion for Sales and Use Tax purposes where the taxpayer provides services to the general public, without discrimination, which are subject to regulation by a governmental authority, such as the Pennsylvania Public Utility Commission or comparable federal agency, even though the agency's regulation does not extend to rates .... (emphasis added).

Joint Partial Stipulation of Facts, September 10, 2001, Paragraphs 2-4, 10, 37, and 48 at 2, 4, 25, and 28.

Bell was audited for the period from January 1, 1989, to April 30, 1991, (state) and October 1, 1991, to April 30, 1993, (local) and "[a]s a result of an audit, the Department of Revenue issued Assessment No. A-76980 ... for state sales tax of $773.51, use tax of $203,975.09, interest of $74,696.63, and penalties of $10,237.42 for a total state assessment in the amount of $289,682.65; and the Department issued Assessment No. A-76985 ... for local use tax of $11,627.88, interest of $3,757.42 and penalties of $636.25 for a total local assessment of $16,021.55." Partial Stipulation of Facts between Bell and the Commonwealth, Paragraph 3 at 1. Bell's assessed items included amplifiers, antennas, switching and testing equipment. Bell appealed the state and local assessments to the Board and contended that it was a manufacturer or alternatively, a processor, and was exempt from the sales and use tax. Bell sought relief of $177,604.04 from the sales and use tax and $10,937.97 from the local use tax. The Board abated the penalties imposed but sustained the tax and interest assessment.

AWACS sought a refund of the sales tax in the amount of $3,002,816.79 and, like Bell, contended that its services qualified for the manufacturing and/or processing exclusion. The Board sustained the decision of the Board of Appeals.

On appeal² Taxpayer contends that it manufactures CTS and is entitled to the "manufacturing" exclusion from the sales and use tax under Section 201 of the Tax Reform Code of 1971 (Tax Code)³, 72 P.S. § 7201 and that Taxpayer is also entitled to an exclusion because it is a public utility.

Is Taxpayer a Manufacturer?

Section 202 (imposition of tax) of the Tax Code, 72 P.S. § 7202 provides:

(a) There is hereby imposed upon each separate sale at retail of tangible personal property or services, defined herein, within this Commonwealth a tax of six per cent of the purchase price, which tax shall be collected by the vendor from the purchaser, and shall be paid over to the Commonwealth as herein provided. (emphasis added).

Section 201(m) of the Tax Code, 72 P.S. § 7201(m) defines the term "tangible personal property" as "[c]orporeal personal property including but not limited to ... interstate telecommunication service originating or terminating in the Commonwealth and charged to a service address in this Commonwealth, intrastate telecommunications services⁴ originating and terminating in the Commonwealth ...."

Section 201(c) of the Tax Code, 72 P.S. § 7201(c) defines the term "manufacture" 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 .... (emphasis added).

Therefore, in order to qualify for an exclusion from the sales and use tax, the manufacturer must change the tangible personal property from its original composition into a different form or product.⁵

Taxpayer asserts that the manufacture of CTS involves the application of labor and skill in order to transform the tangible personal property of electricity and various signals into different signals.⁶

The question whether a Taxpayer who provides these types of services is a manufacturer entitled to the exclusion under Section 201(c) of the Tax Code has not been addressed by our Pennsylvania courts. However, our prior decisions contain a rationale which is relevant and controlling.

In Suburban Cable TV Co., Inc. v. Commonwealth, 131 Pa.Cmwlth. 368, 570 A.2d 601 (1990), (Suburban Cable I), affirmed, 527 Pa. 364, 591 A.2d 1054 (1991), Warner Cable Corporation of Pittsburgh and Warner Amex Cable Communications, Inc. (Warner) sought an exclusion from the sales and use tax in addition to the capital stock tax.⁷ Warner contended that "the transformation of an electronic signal through the use of equipment and personnel, from a form that may not be viewed on a television set to one that may be viewed on a television set constitute[d] manufacturing under the ... sales and use tax laws ...." Id. at 603. This Court rejected Warner's argument:

At this stage of jurisprudence in Pennsylvania, this court perceives the concepts of the legislature and the Supreme Court as bestowing the manufacturing exemption⁸ only upon dealings with such tangible matter, not dealings with electrical or electronic impulses.

The courts have held that the production of electricity is not entitled to the manufacturing exemption.... This court recognized the reality of the tangible-versus-material distinction by stating:

The traditional legal concept assumes tangible `material' as a starting point, and a continuity of existence of the material into the final product.

....

Finally, controlling upon the manufacturing issue is Golden Triangle Broadcasting, Inc. v. City of Pittsburgh, 31 Pa.Cmwlth. 547, 377 A.2d 839 (1977), aff'd. 483 Pa. 525, 397 A.2d 1147 (1979), where this Court and the Supreme Court held that the broadcasting of radio and television signals by KDKA in Pittsburgh did not constitute manufacturing. This court concluded that electrical signals and microwaves did not constitute a product but rather only the means by which such broadcasting occurs, `more analogous to the provision of a service than the manufacture of a product.' 31 Pa.Cmwlth. at 560-62, 377 A.2d at 846-47. We also concluded that broadcasting essentially is the transmission of information rather than the manufacture of information. When the Supreme Court affirmed, the majority and dissenting opinions of that court indicate that the majority declined to accept the view of the dissenting justice, Mr. Justice Larsen, who would extend the manufacturing concept to a more technologically...