Ernest Renda Contracting Co., Inc. v. Com.
| Decision Date | 15 October 1987 |
| Docket Number | No. 25,25 |
| Citation | 516 Pa. 325,532 A.2d 416 |
| Parties | ERNEST RENDA CONTRACTING CO., INC., Appellant, v. COMMONWEALTH of Pennsylvania, Appellee. M.D. Appeal 1986. |
| Court | Pennsylvania Supreme Court |
Robert P. Coyne, Harrisburg, for appellee.
Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, HUTCHINSON, ZAPPALA and PAPADAKOS, JJ.
This is an appeal from an order of the Commonwealth Court, 94 Pa.Cmwlth. 608, 504 A.2d 1349, which affirmed orders of the Board of Finance and Revenue affirming use tax assessments made by the Department of Revenue for three audit periods in which tax liabilities of the appellant, Ernest Renda Contracting Co., Inc. (hereinafter Taxpayer), were examined. The audit periods covered March 31, 1971 through November 30, 1974 (first audit period), January 1, 1975 through December 31, 1977 (second audit period), and January 1, 1978 through December 31, 1980 (third audit period). Inasmuch as the facts and legal issues pertaining to the three audit periods are substantially the same, there is no need for the audit periods to be addressed separately.
Appeals taken to the Commonwealth Court from the Board of Finance and Revenue are de novo in nature, with no record being certified from the Board. Pa.R.A.P. 1571(f). Based upon stipulations of the parties, and upon an evidentiary hearing, the Commonwealth Court made the following findings of fact.
Taxpayer, a multi-state construction contractor, is a corporation organized under the laws of New Jersey, and has its principal office in that state. Taxpayer's primary business activity consists of constructing sewage and water systems throughout New Jersey, New York, and Pennsylvania. During the three audit periods in question, this type of construction work was performed in Pennsylvania under contracts with a number of municipalities and municipal authorities, whereby Taxpayer installed approximately fifteen sanitary sewer systems, one water system, and one or two storm sewer systems. The work consisted of excavating trenches, placing beds of crushed stone therein, laying pipe, refilling the trenches, and restoring ground surfaces to their original condition by either repaving, planting grass seed, or restoring sidewalks and curbs. Some of the work also involved installation of metering or pumping stations as integral parts of the systems. Equipment that was used, but not installed, in these construction activities was stored at a vehicle park/repair facility in Lehigh County, Pennsylvania, and such equipment included cranes, excavators, an office trailer, etc.
A use tax is imposed in Pennsylvania under provisions of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, No. 2, art. I, § 101, et seq., 72 P.S. § 7101, et seq. Taxpayer did not file use tax returns for the first audit period. Returns were filed for the second and third audit periods, however, but no tax was paid. The Department of Revenue determined, based upon the audits conducted, that taxes and penalties were owed in the amount of approximately $356,000.00, plus interest. As of April, 1985, the interest due on this balance amounted to more than $244,000.00. Taxpayer contests nearly the entire use tax assessment, but concedes that a small portion of the tax, under $10,000.00, is due, though this amount has not been paid.
The basis for assessment of this tax was Taxpayer's use in Pennsylvania of construction materials, equipment, and repair parts and services upon which no sales tax had been paid to the Commonwealth. Some of these items had been purchased in Pennsylvania, and others had not, but to the extent that sales taxes were shown by the Taxpayer to have been paid to other states for the items, credit was accorded in computing the tax due. It is the contention of Taxpayer that, because all of the contracts which it performed in Pennsylvania involved installation of municipal utility facilities and equipment, the items assessed were exempt from the use tax by reason of the public utility exclusion set forth in 72 P.S. § 7201(o )(4), which, during the audit periods in question, provided in pertinent part as follows:
[A taxable] "use" shall not include--
....
(B) The use or consumption of tangible personal property, including but not limited to machinery and equipment and parts therefor, and supplies ... directly in any of the operations of--
....
(iii) The producing, delivering or rendering of a public utility service, or in constructing, reconstructing, remodeling, repairing or maintaining the facilities which are directly used in such service, whether or not such facilities constitute real estate: Provided, however, "real estate" shall not include buildings, roads, or similar facilities;
The [exclusion] provided in [subparagraph iii] shall not apply ... to materials or supplies to be used or consumed in any construction, reconstruction, remodeling, repair or maintenance of real estate other than machinery, equipment, parts or foundations therefor that may be affixed to such real estate....
....
The exclusion provided in subparagraph (iii) shall not apply to (A) construction materials used to construct, reconstruct, remodel, repair or maintain facilities not used directly in the production, delivering or rendition of public utility service, or (B) tools and equipment used but not installed in the maintenance of facilities used directly in the production, delivering or rendition of a public utility service.
(Emphasis added).
Applying this provision to the case sub judice, and noting that the burden of proof is upon Taxpayer to establish that the use tax has been improperly assessed, 72 P.S. § 7236, the Commonwealth Court held that Taxpayer failed to prove that the entities for which the utility pipelines were installed constituted public utilities for purposes of the statutory exclusion. We do not agree.
The Commonwealth concedes in its brief (p. 18) in the instant appeal that the use tax was not assessed by the Department of Revenue against certain of the items used by Taxpayer in the subject utility installations, and the Commonwealth asserts that the only items assessed were those not directly used in providing public utility service. Implicit in this view, perhaps, is the notion that items not assessed were in fact directly used in public utility service. It is curious, therefore, for the Commonwealth to argue as it does elsewhere in its brief that the municipal entities for which the utility systems were installed did not constitute public utilities, for if such were the case then none of the materials would have been subject to the public utility exclusion, and the Commonwealth has not taken the position that materials were improperly excluded from taxation by the Department of Revenue.
An examination of the record, including the audit reports which formed the basis for assessment of the instant tax deficiencies, confirms that the Department of Revenue regarded as public utilities the entities for which the utility facilities were constructed. Accordingly, use taxes were not assessed against items such as the pipe used in the installations, as these were regarded as being directly used in providing public utility service. The items assessed were those deemed not directly used in public utility service, to wit, primarily materials used to embed and cover the pipelines and to restore surface conditions, including crushed stone, sand, gravel, asphalt paving, concrete sidewalks, grass seed, etc.
Further, the record of the evidentiary hearing before the Commonwealth Court contains statements by counsel for the Commonwealth expressly admitting that stipulations had been entered that Taxpayer had contracted with entities that were "public utilities." One such statement occurred when counsel believed the contracts were about to be offered into evidence, whereupon counsel moved to exclude them, stating, "If they're merely being introduced to show that there was a contract with a public utility, we have stipulated to that fact." Stipulations appear in the record indicating that Taxpayer installed the aforementioned utility pipeline systems under contracts with municipalities and municipal authorities in Pennsylvania during the three audit periods in question. Further, at the evidentiary hearing below, Taxpayer presented unrebutted testimony that it installed facilities for public utilities, as well as unrebutted testimony that it performed no other construction work in Pennsylvania during the relevant time periods.
Regulations promulgated by the Department of Revenue also plainly recognize that sanitary sewer systems and water systems, but not storm sewer systems since the latter have not been regarded as public utility facilities, are utilized in providing municipal "public utility services" for purposes of the statutory exemption. For example, 61 Pa.Code § 31.13(b)(2) provides that the "exemption which a contractor has with respect to contracts with public utilities ..." applies to, inter alia, "Sanitary sewer, not storm sewers, or water mains, manholes and covers, sewage treatment equipment, pumping equipment installed for public utilities, municipalities, or municipal authorities." See also 66 Pa.C.S.A. § 102 ().
Sanitary sewer systems and water systems are prime examples of utilities offered to the public, and municipalities and municipal authorities have traditionally been providers of these facilities. Granted, municipal corporations are not, under definitions set forth in the Public Utility Code, considered to be "public utilities" for purposes of the Code. Commonwealth v. Merritt-Chapman & Scott Corp., 432 Pa. 584, 586 n. 3, 588 n. 5, 248 A.2d 194, 195 n. 3, 196 n. 5 (1968); Public Utility Code, Act of July 1, 1978, P.L. 598, No. 116, § 1, 66 Pa.C.S.A. § 102....
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