Strongstown B&K Enterprises, Inc. v. Commonwealth
152 A.3d 360
| Pa. Commw. Ct. | 2016Background
- Strongstown B&K Enterprises, a construction contractor, purchased and installed fabricated aluminum road signs, posts, and hardware under contracts with PennDOT and municipalities during 2008–2011.
- Strongstown did not pay sales tax to its vendors for the road signs; the Department audited Strongstown and assessed $1.734M in unpaid use tax (part of a larger assessment), prompting Strongstown to seek reassessment of $625,809.21 of use tax on road signs.
- The parties stipulated the sole issue for the Court: whether Pennsylvania use tax was properly assessed on the road signs Strongstown installed.
- Strongstown argued the signs are (1) building machinery and equipment (BME) as a “control system” for traffic under Section 201(pp)(6), (2) tangible personal property sold for resale or otherwise exempt, and (3) that policy favors exempting highway items sold to the Commonwealth.
- The Commonwealth/Department argued the signs are not BME because they are not a “system” (no evidence they network or operate together) and that prior precedent requires contractors to pay tax on materials unless they qualify as BME transferred to an exempt entity.
- The Commonwealth Court (en banc) affirmed BF&R that the use tax was properly assessed, finding no record evidence that the signs functioned as a traffic control “system” and rejecting the resale/tangible-property and policy arguments; Strongstown’s exceptions were later denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether road signs qualify as BME under §201(pp)(6) as a “control system” for traffic | Signs operate together to control traffic and thus are a traffic control system (BME) | No evidence signs form a network/system or are electrically/networked; statute lists traffic signals specifically, not signs | Court: Not BME; no record proof of a system; taxed under use tax |
| Whether the signs are tangible personal property/resale and thus not taxable | Signs are personal property often removed/replaced; purchased for resale to Commonwealth, so not taxable | Precedent holds contractors are liable for tax on materials used in performance unless items qualify as BME transferred to exempt entity | Court: Precedent (Plum Borough/Kinsley) controls; not exempt as BME, so taxable |
| Whether §204(57) is an exclusion (construed against Commonwealth) or an exemption (construed against taxpayer) | §204(57) is an exclusion and should be strictly construed against the Commonwealth | Court and precedent: functionally an exemption for items normally taxable unless they meet §204(57) conditions; construed against taxpayer | Court: Treats §204(57) as an exemption; strictly construed against taxpayer; Strongstown loses |
| Whether public policy favors relief (exempt highway items sold to Commonwealth) | Tax increases contract costs paid by taxpayers; policy favors exemption for highway items | Court bound by statutory text and precedent; policy change is for Legislature | Court: Policy argument insufficient; direct claim to Legislature; exception denied |
Key Cases Cited
- Commonwealth v. Beck Elec. Constr., Inc., 403 A.2d 553 (Pa. 1979) (distinguishing tangible personal property and tax treatment)
- Plum Borough Sch. Dist. v. Commonwealth, 860 A.2d 1155 (Pa. Cmwlth. 2004) (construction contractors liable for tax on property used unless it qualifies as BME transferred to exempt entity)
- Kinsley Constr., Inc. v. Commonwealth, 894 A.2d 832 (Pa. Cmwlth. 2006) (limits construction-contractor exclusions to BME as defined in the Code)
- Adelphia House P’ship v. Commonwealth, 709 A.2d 967 (Pa. Cmwlth. 1998) (statutory labeling of provisions as exclusions vs. exemptions does not control; interpret by language and effect)