As discussed in prior blog posts, Ruling No. SUT-17-001 issued by the Pennsylvania Department of Revenue in February raised concerns that the Department’s interpretation of the term “support” in Act 89 of 2016 exceeded the scope of the statute.  Act 89 imposed tax on digital products, and on “maintenance, updates and support” for such products, as of August 1, 2016.  In Ruling No. SUT-17-001, the Department characterized certain “consulting” and “training” services as taxable “support” services.  The Department has since removed Ruling No. SUT-17-001 from its website – presumably because it is reconsidering the scope of taxable “support” services for computer software under current law.

Less than six months ago the Pennsylvania Supreme Court in Mount Airy #1, LLC v. Pennsylvania Dep’t of Revenue, 2016 Pa. Lexis 2174 (Pa. Sept. 28, 2016), held that the Pennsylvania Race Horse Development and Gaming Act’s “local share assessment” (a tax imposed upon slot machine revenue) violated the Uniformity Clause of the Pennsylvania Constitution. As a result of the Mount Airy decision, more than $140 million in tax payments to host municipalities are in limbo. The Court initially gave state lawmakers 120 days from its decision to find a proper solution. The legislators, however, failed to meet the 120 day deadline. Consequently, a group of state senators filed a petition for an extended stay on January 12, 2017 and on January 20, 2017, the Court gave lawmakers an additional four months -until May 26th- to fix the tax on casino slot revenue.

Now with the looming dark cloud deadline of May 26, 2017 as a backdrop, the Pennsylvania Supreme Court is going to hear oral arguments on two more tax cases involving Uniformity. On March 8 and April 5, 2017, the Pennsylvania Supreme Court will be hearing oral arguments in Valley Forge Towers Apts., et. al. v. Upper Merion Area School District, No. 49 MAP 2016 and Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Pa., No. 6 EAP 2016, respectively.

In Valley Forge Towers Apts. N, LP v. Upper Merion Area School District, 124 A.3d 363, 365 (Pa. Cmwlth. 2015), the Pennsylvania Commonwealth Court held that a school district does not violate the Uniformity Clause when it has reasonable financial considerations of increasing its revenue by appealing certain high-valued properties within its district. On April 26, 2016, the Pennsylvania Supreme Court granted allocator in Valley Forge Towers v. Upper Merion Area School District, 49 MAP 2016. The Supreme Court phrased the issue presented for review, as follows: “[i]s a school district’s decision to appeal property assessment insulated from review because, inter alia, the school district has a statutory right to file appeals and can identify an economic reason for its appeals?” The taxpayers claimed in their suit that the Upper Merion Area School District (“School District”) violated the Uniformity Clause by appealing only commercial properties and not appealing any of the thousands of under assessed single-family properties within the School District.

If the Supreme Court determines that the School District’s selection process in determining which properties to appeal in a given tax year violates the Uniformity Clause, it could take away school districts’ ability to file assessment appeals, drastically change the way school districts select properties to appeal, or it could give property owners a guide map on how to successfully fight school district-initiated assessment appeals. All of those outcomes could be financially devastating not only to the school districts that initiated the appeals, but also for the local municipality and county that piggy backed on any assessment increase. Unfortunately, many local taxing jurisdictions have grown accustomed to balancing their yearly budgets using real estate tax revenue generated from school district -initiated assessment appeals. If and when that ability to appeal is altered in any way, the local taxing jurisdictions are going to have to come up with more creative and hopefully constitutional ways to make up any lost revenue.

In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Cmwlth. 2015), the Commonwealth Court held that Pennsylvania’s cap on the use of net operating loss carryforwards to the greater of a fixed dollar amount of $3 million or a percentage of taxable income of 12.5 percent of taxable income for the 2007 tax year violated the Uniformity Clause. The Commonwealth Court reasoned that, while the Uniformity Clause does not require absolute equality and perfect uniformity in taxation, if no legitimate distinction exists between the classes subject to differing tax treatment, and a substantial unequal tax burden is imposed on similarly-situated taxpayers, the tax violates the Uniformity Clause. The court found that the only factor that distinguishes between those taxpayers who paid no corporate net income tax as a result of the 2007 net operating loss deduction limitation and those that paid some, was the amount of their taxable income – a classification that cannot withstand the scrutiny afforded under the Uniformity Clause.

Accordingly, the Commonwealth Court granted the taxpayer in Nextel full use of its net operating loss carryforwards, which resulted in a $3.94 million dollar refund. Although the Commonwealth Court decision specifically stated that it only applied to Nextel and the 2007 tax year, other similarly situated taxpayers filed refund appeals that could ultimately cost the Commonwealth hundreds of millions of dollars if the Pennsylvania Supreme Court upholds the Commonwealth Court’s analysis.

If you are subject to a school district initiated assessment appeal, or if you are not able to utilize your full net operating loss carryforwards, please contact Paul Morcom, or any member of McNees’ state and local tax group, to discuss.

Reproduced with permission from Daily Report for Executives, 35 DER (Feb. 23, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033)


Daily Report for Executives

February 23, 2017

Sales and Use Taxes

  • Pennsylvania Deems All Software Support Now Taxable

BNA Snapshot

  •  Had been tax-exempt since 1997
  •  Applies to all consulting, training, tech support of canned computer software
  •  Practitioners call it ‘significant overreach’

By Leslie A. Pappas

All support for canned computer software—even training and consulting from third-party vendors—is now subject to tax in Pennsylvania under recently issued guidance from the state Department of Revenue.

“My jaw just dropped,” Paul Graney, partner in the state and local tax group at Marcum LLP, told Bloomberg BNA. The ruling appears to say that “everything on an invoice from a software company is going to be taxable in Pennsylvania.”

The guidance applies sales and use tax to some computer-related services that have been nontaxable since 1997. Letter Ruling No. SUT-17-001, dated Feb. 9, lays out the department’s interpretation of Act 84 of 2016, which made digital downloads subject to the state’s 6 percent sales and use tax. The act amended the definition of tangible personal property to include digital versions of videos, books, music, applications and canned software, including “maintenance, updates and support.”

“The Department considers the Legislature’s express inclusion of ‘maintenance, updates and support’ language within the definition of tangible personal property to operate as rendering all such services to canned computer software as being subject to tax,” the letter ruling said.

According to the letter, support service could include:

  •  remote desktop support where a vendor accesses and alters canned software directly;
  •  telephone support where a vendor troubleshoots and helps fix an issue;
  •  upgrades, patches, or modules a vendor distributes to its customers;
  •  alterations or corrections to a copy of a software program sent to a vendor by a customer;
  •  call-in or help-desk support that provides direction about the use or manipulation of software; and
  •  training with response to the use, correction, or manipulation of software.

‘Significant Overreach.’

The letter “seems like a significant overreach of the statute,” Graney told Bloomberg BNA. The department seems to be taking standard language from software industry maintenance contracts “and stretching that out to items that were clearly not taxable in the past and pulling those in.”

The letter ruling “broadens the definition of tangible personal property” and makes all support services related to canned computer software subject to sales and use tax, Jonathan Liss, senior director for state and local tax for BDO USA LLP in Philadelphia, told Bloomberg BNA.

“Taxable support services include all types of technical support for canned software, canned software consulting services, and training that relates to canned software,” Liss emphasized in an e-mail to clients.

The guidance would apply as of Aug. 1, 2016, when Act 84 of 2016 took effect, he told Bloomberg BNA.

One Word

Pennsylvania appears to have taxed all computer services based on a single word in the statute, Jason C. Skrinak, practice leader for RKL LLP’s tax services group in Harrisburg, told Bloomberg BNA.

“They put so much credence into the one word: support,” he said.

The guidance goes beyond services that may be bundled into a maintenance contract as part of the price of computer software, Skrinak said. The letter ruling also seems to include third-party support services after the sale, which in the past would not have been subject to tax. The department “went pretty outside of the box on this,” he said.

Nontaxable Since 1997

The department’s interpretation appears to include some software-related services that were made nontaxable under a 1997 law.

“The Department took it upon themselves to interpret the definition of tangible personal property to include various computer-related services which are no longer taxable and were repealed from the tax code” on July 1, 1997, under 61 Pa. Code Section 60.13, Dennis Kolumber, principal in charge of Ryan LLC’s Philadelphia Offices, told Bloomberg BNA.

Some items in the letter ruling also seem to go beyond what is normally considered maintenance and support, said Sharon R. Paxton, vice chair of the state and local tax group at McNees Wallace & Nurick LLC in Harrisburg.

Training and Consulting

For example, the letter includes training and consulting services as taxable items, Paxton told Bloomberg BNA.

Yet the scope of consulting services that the department would view as taxable isn’t clear, she said. For example, companies often hire third-party consultants to modify canned software to meet a particular business need. In the past, the department agreed that charges for modifications made to canned software were non-taxable if they were reasonable and separately stated. It isn’t clear whether the department would now consider such services taxable.

“It’s not clear to me if they’re trying to pick that up,” she said, “but the letter specifically references consulting and modifications to canned software, so that could be a possibility.”

The department said that third-party support could be taxable. Training and consulting by third-party vendors “constitutes taxable support if the support involves access to, use of, or alteration of the software,” Department of Revenue spokesman Kevin Hensil told Bloomberg BNA in an e-mail.

The Department of Revenue issued the ruling in response to a taxpayer, he said.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Pennsylvania letter ruling No. SUT-17-001 is at

The Pennsylvania Department of Revenue has issued a letter ruling addressing the extent to which it considers support services to canned computer software to be subject to Pennsylvania sales and use tax. See Ruling No. SUT-17-001.

Effective August 1, 2016, Pennsylvania’s sales tax statute was amended to impose tax on an array of digital goods, as well as “maintenance, updates and support” for digital goods, including canned computer software. The term “support” is not defined in the taxing statute or in prior guidance issued by the Department. However, Ruling No. SUT-17-001 broadly defines “support” to include “consulting” and “training” related to canned computer software, in addition to various technical support services. While some questions remain, it appears that the Department’s interpretation of the term “support” may include some services not commonly viewed as computer “support” services.

Finally, the Department clarified that the provisions of its policy statement at 61 Pa. Code § 60.19 no longer apply to the extent they are inconsistent with the current statutory provisions.

As a result of guidance issued by the Pennsylvania Department of Revenue (“DOR”), solar generators may qualify for the sales and use tax manufacturing exclusion.  Accordingly, solar generators’ purchases of expensive machinery, equipment, parts and foundations, and supplies would be excluded from Pennsylvania’s sales and use tax.

The DOR issued guidance in Sales Tax Bulletin No. 2010-01 and Sales and Use Tax Ruling No. SUT-10-0001 on tax exclusions for Pennsylvania-based solar generators.  As a result of this guidance, taxpayers constructing solar generation facilities in Pennsylvania could qualify for the state sales and use tax manufacturing exclusion.

Eligibility for the Exclusion:

The guidance suggests that in order to qualify as being “engaged in the business of manufacturing electricity,” the following must apply:

  • The electricity production is conducted in an independent, separate and distinct location, utilizing independent, separate and distinct machinery and supplies devoted predominately to electricity producing activities.
  • The electricity production is the responsibility of employees assigned to the job of electricity production and whose duties are predominately related to electricity production.
  • Separate accounting or interdepartmental billing is provided to reflect the cost of operating electricity production activities and to charge these costs against any other business activities conducted by the electricity producer.
  • The electricity production activities are separate and distinct from any other business activities of the electrical producer.
  • Electrical production activities are of sufficient size, scope and character that they could be conducted on a commercially viable basis separate and distinct from any other business activities of the electricity producer.

Accordingly, if a Pennsylvania solar generator meets all of the criteria listed above, it could claim the manufacturing exclusion from sales and use tax on the purchase of equipment, machinery, parts and foundations therefore, and supplies claimed to be directly used in electricity manufacturing.  The particular generator in the ruling planned to sell the output to the public utility.  It seems generators selling to the wholesale market or entities could also qualify; however, the DOR has not issued a specific guidance on this situation.

Claiming the Exclusion:

A contractor building a Pennsylvania solar generation facility could also claim the manufacturing exclusion on the purchase of equipment, machinery, parts and foundations therefore, and supplies to be installed pursuant to a construction contract.  The contractor would have to execute and tender a properly completed Pennsylvania exemption certificate (Form REV-1220) to the Pennsylvania licensed vendor.  The contractor must also obtain a properly completed Pennsylvania exemption certificate (Form REV-1220) from the person/entity with whom he enters into such construction contract in order to protect himself in case of a Pennsylvania sales and use tax audit.

Recovering Pre-paid Sales and Use Tax on Exempt Purchases:

If a Pennsylvania solar generator or a construction contractor has already paid sales and use tax on purchases that could have been exempt from taxation, they may be able to claim a refund of the tax paid on purchases made in the last three years.

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If you have any questions on whether your facility qualifies for the manufacturing exclusion or whether you may be entitled to sales and use tax refunds, please contact Paul Morcom, or any member of McNees’s tax group, to discuss.