This article was originally published on March 25th, 2004
With one dissent by Justice Thomas Saylor, the Pennsylvania Supreme Court affirmed per curiam a decision of the Commonwealth Court that a provider of cellular service is not entitled to the manufacturing or public utility exclusions for Pennsylvania Sales and Use Tax purposes. Bell Atlantic Mobile Systems, Inc. v. Commonwealth, No. 103 MAP 2002 (Pa. Mar. 23, 2004), aff'g 799 A.2d 902 (Pa. Commw. 2002).
The Commonwealth Court had held that a provider of cellular service is not entitled to the manufacturing exclusion for Pennsylvania Sales and Use Tax purposes. Retail sales of cellular service are taxable in Pennsylvania. Cellular service, indeed almost all telecommunications as well as electricity, are defined by statute as tangible personal property. Manufacturing is defined as putting tangib le personal property in a form, composition or character different from that in which it was received. The parties stipulated that the taxpayers started with items of tangible personal property and produced different tangible personal property. The taxpayers therefore claimed they were entitled to the manufacturing exclusion. The taxpayers argued that since their retail product, cellular service, was defined and taxable as tangible personal property, the machinery, equipment and supplies used to produce the service should be excluded from tax. Otherwise, double taxation would result.
The Commonwealth Court disagreed, stating that when the legislature included telecommunications in the definition of tangible personal property, it did nothing more than subject telecommunications to tax. The court then stated that to extend the manufacturing exclusion to telecommunications service solely because such service is defined as tangible personal property would ignore the statutory definition of manufacturing and would create an absurd result. In his dissenting opinion, Justice Saylor stated that since the General Assembly defined the term tangible personal property to include cellular service, and defined manufacture as the production of tangible personal property, he agreed with the taxpayers that cellular carriers were entitled to the exclusion. Justice Saylor further agreed that the Commonwealth Court's reliance on Suburban Cable TV Co. v. Commonwealth, 570 A.2d 601 (Pa. Commw. 1991), aff'd, 591 A.2d 1054, and Suburban Cable TV Co. v. City of Chester, 685 A.2d 616 (Pa. Commw. 1996), was misplaced since the first case dealt with a superseded taxing scheme and the second involved a local business privilege tax that did not define the term manufacturing.
The Commonwealth Court had also rejected the argument that the taxpayers were entitled to the public utility exclusion. The court stated under prior decisions only entities subject to regulation by the Pennsylvania Public Utility Commission were entitled to the exclusion. The court stated that to extend the exclusion to cellular providers simply because they were subject to FCC regulation would require the court to ignore Pennsylvania statute and case law and allow any public service organization regulated by a government agency to qualify as a public utility.
On this issue, Justice Saylor stated that the Commonwealth should have considered the taxpayer's constitutional concerns, including those raised under the Supremacy and Commerce Clauses of the United States Constitution, and the principle of statutory construction that requires courts to presume that the General Assembly did not intend to violate constitutional principles.
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