196 A.3d 603
Pa.2018Background
- Downs Racing, LP (Taxpayer) operated a racetrack, off‑track wagering locations, and a casino with video poker machines; it contracted with Teleview for closed‑circuit simulcasting equipment and services and bought poker machines and software from IGT.
- Teleview invoices bundled charges for equipment rentals (TVs, satellite dishes, screens), labor, maintenance, and simulcasting services without itemizing taxable vs. nontaxable components.
- The Department audited Taxpayer for 2005–2008, assessed ≈$340,000 in unpaid sales/use taxes (chiefly Teleview charges); Taxpayer paid under protest and appealed administratively and to Commonwealth Court.
- Taxpayer also paid ≈$13,000 in self‑assessed tax on royalty/licensing fees paid to IGT for intellectual property (themes/trademarks/patents) and sought a refund when denied.
- Commonwealth Court largely affirmed the assessment as to Teleview charges (finding Taxpayer failed to segregate taxable items) and denied the refund for IGT royalties, reasoning intellectual property payments were taxable; Taxpayer appealed to the Pennsylvania Supreme Court.
- Pennsylvania Supreme Court affirmed taxation of Teleview charges (insufficient records, presumption of taxable transfer not rebutted) but reversed as to IGT royalties, holding royalties for trademarks/copyrights/patents are not tangible personal property and thus taxable only if they are part of the transfer of tangible property (which they were not here).
Issues
| Issue | Plaintiff's Argument (Downs) | Defendant's Argument (Commonwealth) | Held |
|---|---|---|---|
| Whether Teleview charges for equipment + services are subject to sales/use tax | True‑object test: primary object was nontaxable simulcasting service; rentals were operated by Teleview so not taxable | Invoices failed to segregate taxable and nontaxable charges; presumption of taxable transfer not rebutted | Taxable: Taxpayer failed to carry burden; records insufficient to separate nontaxable labor/equipment charges; presumption not rebutted |
| Whether separately billed labor for equipment operation may be excluded from purchase price | Labor for operation is nontaxable if separately stated | Labor invoices did not identify operation vs. service/repair; thus cannot be excluded | Taxpayer failed to show labor was separately stated for nontaxable operation; tax stands |
| Whether the "true object/essence" test exempts transfers of tangible property when service is primary | True object was intangible service, so taxable character should not attach to tangible medium | Statute/regulations, not judicially fashioned essence test, govern taxability; Taxpayer must meet statutory record requirements | Court declined to apply/endorse the essence test; statutory rules control; no relief |
| Whether royalty/licensing fees for intellectual property used in poker machines are taxable as tangible personal property or part of purchase price | Royalties are intangible rights (trademarks, copyrights, patents) and not tangible personal property; fees were separately billed and not ancillary to machine/software purchase, so refundable | Dechert II: canned software taxable; Section 7201(g)(4) treats "full consideration" as part of purchase price | Refund granted: royalties are intangible and here not ancillarily part of a tangible transfer; taxes on IGT royalties must be refunded |
Key Cases Cited
- Dechert, LLP v. Commonwealth, 942 A.2d 210 (Pa. Cmwlth. 2008) (Commonwealth Court decision analyzing software license taxation)
- Dechert, LLP v. Commonwealth, 998 A.2d 575 (Pa. 2010) (Pa. Supreme Court decision addressing taxation of canned computer software)
- Graham Packaging Co., L.P. v. Commonwealth, 882 A.2d 1076 (Pa. Cmwlth. 2005) (discussing the "true object/essence" test for tax character)
- Downs Racing, LP v. Commonwealth, 143 A.3d 511 (Pa. Cmwlth. 2016) (Commonwealth Court opinion below affirming most of Department's assessment)