Sales Tax Exemption for Construction Items

A Pennsylvania medical center recently sued the state to recover sales taxes and won. The medical center purchased and installed MRI and PET/CT scan equipment in connection with the reconstruction of a building. An MRI device is imaging equipment used to identify disease and damage to soft tissue; a PET/CT scan device is equipment that uses radioactive substances to make images of cross‑sections of the human body. Both systems are large and expensive, and the construction contractor added over $362,000 in sales tax to the invoice for the equipment. The medical center paid the invoice, including the sales tax, and then challenged the sales tax.

Personal Property or Fixture?

The medical center argued that the two devices were not personal property or merchandise but were fixtures in the building and should be exempt from sales tax. The structural changes needed to accommodate the equipment included specialized flooring, heating, plumbing, and ventilation. The medical center had to strengthen its floors and ceilings to support the equipment. The installation took more than three weeks, and the devices were connected to various cooling, electrical, heating, and plumbing systems and were bolted to the floors.

The Pennsylvania Commonwealth Court agreed with the medical center, finding that the Pennsylvania Department of Revenue should have excused the sales tax. The court noted that construction contracts are specifically exempted from sales tax. The court also observed that whether an item is part of the construction contract is not always clear:

• Furniture is never part of the construction;
• Permanently affixed items, such as roof shingles and skylights, are always part of the construction; and
• Other, removable fixed features may or may not be part of the construction.

The court found that the two pieces of imaging equipment were removable equipment that had become part of the construction because they were thoroughly physically attached to the building, they were essential to the use of the building, and they were intended to be permanent. According to the court, the size and weight of the items do not define whether they are part of the construction; instead, the focus must be on the function and use of the items.

Pennsylvania residents and businesses are not obliged to pay sales tax on items that are part of a construction contract if those items qualify as permanent fixtures essential to the real estate.