In Sales & Use Tax Bulletin 2017-01 (April 10, 2017), the Pennsylvania Department of Revenue announced major changes in its procedures for the handling of sales and use tax refund petitions. The Bulletin provides that “large” refund requests may be addressed through the field audit process. This will be accomplished by allowing the Board of Appeals to “dispose of” a refund petition by issuing a decision and order requiring a field audit. The Department will have discretion as to whether to conduct a field audit in a particular case, but noted that “in general, refund petitions requesting in excess of $100,000, or multiple petitions in one year exceeding that threshold in the aggregate, are more likely to be referred for a field audit.”

The Board of Appeals also has introduced two new appeal schedules for Sales and Use Tax refund petitions, as well as detailed “supporting documentation” requirements for Sales and Use Tax appeals, which are available on the Board’s website. First, the existing REV-39 Appeal Schedule form has been revised to require more information, and the Board has stated a preference that the schedule be submitted in an electronic format for ease of processing. In addition to detailed transaction information for each contested transaction, the instructions for the updated REV-39 form purport to require submission of proof of tax payment “for every transaction in which the refund of tax is requested.” Historically, the Board had required the submission of detailed proof of payment information only for a sample of the transactions included in a refund claim, unless the taxpayer was unable to provide satisfactory proof of payment for the selected sample transactions. The instructions further state that the “[f]ailure to provide any of the information requested . . . may result in the dismissal of [a] petition.”

Second, the Board has introduced a new Summary Appeal Schedule, which must be submitted with petitions seeking a refund of $100,000 or more, other than refund requests for sales tax attributed to bad debts. For purposes of determining whether a petitioner has requested a refund of $100,000 or more, the Board may consider all petitions filed within one year as a single refund request. The Summary Appeal Schedule “may be filed to determine if the Department intends to refer the refund request for a field audit review prior to submission of all of the evidence supporting the claim.” The Schedule requires a list of the substantive issues (e.g., resale exclusion, computer services, direct use in manufacturing, etc.), the estimated number of transactions per issue, the estimated dollar amount per issue, and the calendar year in which the disputed transactions occurred. The total dollar amount in the Summary Appeal Schedule must match the total refund amount requested in the petition. Otherwise, a complete appeal schedule will be requested by the Board.

If a taxpayer is referred for a field audit, the Department will consider both underpayments and overpayments of tax through the audit process. The audit conducted by the Department “will encompass at least the same periods within the 3-year refund window, and may extend to additional periods if the taxpayer agrees to a waiver of the statute of limitations on assessments.” The Bulletin lists the use of a “stratified random sample of liabilities and overpayments . . . to limit the number of transactions required to be reviewed at all appellate levels” as one of the advantages of addressing refund requests through a field audit. Other stated advantages include potential reductions in the amount of interest and penalty due on audited underpayments and the fact that “[c]onsolidating the liability and overpayment issues into a field audit would allow the appellate process to handle both issues simultaneously.”

The Bulletin clarifies that a taxpayer may file a subsequent refund petition pursuant to 72 P.S. § 10003.1(b) after completion of the field audit to contest any “refunds not granted in the audit.” The Bulletin appears to contemplate that such a petition would cover only the specific refund transactions that were reviewed in the audit, as opposed to all refund transactions originally identified by the taxpayer. That is, in the case of a test audit for expense purchases, only tax overpayments on transactions that were selected as part of the test sample would be included in the subsequent refund claim.

Various issues will need to be addressed as the Department moves forward with the new procedures. For example, does the Board of Appeals have statutory authority to “dispose of” a refund petition without considering the merits of the claim? And, can a taxpayer seek refunds or credits for tax paid on transactions that were not included in a test sample, but were included in the sampled population, when a refund claim is filed after a field audit, on the basis that the test audit did not adequately capture tax overpayments made by the taxpayer?