Nov 26

Watch Out For Sales Tax

The Pennsylvania Sales Tax is imposed upon each sale at retail of tangible personal property and a few selected services.  The Use Tax is imposed upon the use within the Commonwealth of Pennsylvania of tangible personal property purchased at retail and a few selected services where the purchaser has not paid sales tax.

The Pennsylvania Sales and Use Tax does not apply to most services.

72.P.S. § 7201(g)(4) states that where the vendor or lessor supplies or provides an employee to operate tangible personal property, the value of the labor may be excluded and shall not be considered part of the purchase price if separately stated.  Pennsylvania Sales Tax Regulation § 31.4(a)(1) provides that if equipment is furnished with the services of an operator, it is presumed that the payments are for the equipment, and thus, taxable.  This presumption can be rebutted by establishing that the work to be accomplished is exclusively under the control of the person who furnished the equipment and the operator.

A recent Supreme Court case addresses this issue.  In Downs Racing LP v. Commonwealth of Pennsylvania where the taxpayer purchased equipment and services together, the Pennsylvania Supreme Court determined that the taxpayer had not demonstrated that the cost of labor to operate the equipment was separately stated, and hence, Downs Racing LP needed to pay sales tax on the full amount paid.  It is important that the purchase agreement or lease specifically state how much is being paid for the equipment which is subject to sales and use tax, and how much is being paid for labor which is not subject to sales and use tax.  Otherwise, the entire amount is subject to sales tax or use tax.

Generally, intellectual property such as trademarks, copyrights and patents are not tangible personal property and therefore, generally licensing fees for intellectual property are not subject to sales or use tax.  As the Downs Racing LP case points out, it is important to separately document how much is being paid for intellectual property vs. tangible personal property.  See Downs Racing LP v. Commonwealth of Pennsylvania, Supreme Court of Pennsylvania, Middle District (October 25, 2018).

Leave a Reply