In two recent decisions, Northeastern Pennsylvania Imaging Center1 and Medical Associates of the Lehigh Valley2, the Pennsylvania Commonwealth Court applied a new test to determine whether, for sales tax purposes, tangible personal property becomes a part of a real-estate structure upon installation. These decisions may create refund opportunities for purchasers of certain equipment that is permanently affixed to real property as part of the installation process. However, at the same time, these decisions may create unexpected use tax liabilities for vendors of such equipment.
In Northeastern and Medical Associates, the Court applied a three-pronged test derived from a property tax case (Sheetz3), to determine whether MRI, CT and PET/CT scan machines were real property or tangible personal property after installation in a building. Under the Sheetz test, tangible personal property is part of a real-estate structure upon installation, if the following three factors are present:
- The property has been attached. In Northeastern the court focused on the "degree of attachment," such as how the property was connected to the building's many systems, including plumbing, cooling, and electrical, and how the property was physically connected to the structure.
- Installation of the property is essential to the use of the building. For purposes of this factor, the court noted in Northeastern that "it is the owner's chosen use of the property that determines whether it is essential." In Sheetz, the court was satisfied that canopies were necessary for the use of the property as a modern gas station, and in Northeastern, the court was satisfied that the MRI, CT and PET/CT machines were essential to the use of the property as an imaging center.
- The property was intended to be permanently affixed. For purposes of this factor, the court noted in Northeastern that "it is sufficient if the item is intended to remain where affixed until worn out." In Northeastern, the court was satisfied that the taxpayer had shown that the machines were intended to remain installed as long as the building continued to be used as an imaging center, or until the machines must be replaced because they have become obsolete.
Prior to the recent Commonwealth Court decisions, property was classified as real property or personal property for Pennsylvania sales tax purposes, based on the standard set forth in Beck Electric4. Beck provided that property was classified as real property or personal property based on its ease of portability. However, the court in Northeastern found that Beck "[did] not provide meaningful guidance here even though [Beck] is a sales tax case ... [because it] was partially superseded..."5
In the case of the MRI, CT and PET/CT scan machines that were the subject of the Northeastern and Medical Associates cases, the court determined that the three prongs of the Sheetz test were satisfied and, therefore, the MRI, CT and PET/CT scan machines were real-estate structures. Because the machines were real-estate structures, the purchasers were not responsible for sales tax; but instead, the installers of the MRI, CT and PET/CT machines were responsible for use-tax on the machines.
Since the Sheetz test is fact-driven, many items of personal property, in addition to MRI, CT and PET/CT scan machines, may become real property upon installation. For example, ventilation systems, awnings, canopies, conveyors, and custom shelving and cabinetry all could become realty upon installation under the Sheetz test. Consumers purchasing these or similar items on an installed basis should consider filing refund claims. However, consumers purchasing such items should consider the potential negative property tax implications before refund claims are filed. Since the same test now appears to apply for sales tax and property tax, purchasers should take care not to unwittingly lay the groundwork for the inclusion of the value of any installed personal property in their real property tax assessment (or, if the personal property is installed in leased premises, in the real property tax assessment of the lessor).
Meanwhile, vendors who sell personal property on an installed basis should review their standard contractual provisions to make certain that those provisions require purchasers to indemnify the vendor for any use tax imposed on the vendor as a result of the vendor's deemed use of the property during the installation process.