                 IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Victory Bank,                                    :
                              Petitioner         :
                                                 :   236 F.R. 2014
                       v.                        :
                                                 :   Submitted: April 10, 2019
Commonwealth of Pennsylvania,                    :
                     Respondent                  :


BEFORE:        HONORABLE MARY HANNAH LEAVITT, President Judge
               HONORABLE ROBERT SIMPSON, Judge1
               HONORABLE P. KEVIN BROBSON, Judge
               HONORABLE PATRICIA A. McCULLOUGH, Judge
               HONORABLE ANNE E. COVEY, Judge
               HONORABLE CHRISTINE FIZZANO CANNON, Judge
               HONORABLE ELLEN CEISLER, Judge


OPINION BY
JUDGE McCULLOUGH                                                     FILED: October 16, 2019


               Pursuant to Pennsylvania Rule of Appellate Procedure 1571(i),2 Victory
Bank files exceptions to this Court’s three-judge panel opinion and order in Victory
Bank v. Commonwealth of Pennsylvania, 190 A.3d 782 (Pa. Cmwlth. 2018) (Victory
Bank I), dated July 17, 2018, which affirmed an order of the Board of Finance and
Revenue (Board), dated April 28, 2014. There, we concluded that the Board properly
denied Victory Bank’s petition for refund because it was required to pay sales tax on


       1
        This matter was assigned to this panel before September 1, 2019, when Judge Simpson
assumed the status of senior judge.

       2
         Pennsylvania Rule of Appellate Procedure 1571(i) provides, in pertinent part, as follows:
“(i) Exceptions. Any party may file exceptions to an initial determination by the court under this rule
within 30 days after the entry of the order to which exception is taken.” Pa.R.A.P. 1571.
its purchase of computer hardware, canned computer software, and services related
thereto, under Section 202(a) of the Tax Reform Code of 1971 (Tax Code).3 Upon
review, we overrule Victory Bank’s exceptions.


                                           Background
                As set forth in our initial decision, Victory Bank, a commercial bank, filed
a petition for refund of sales tax paid on purchases of computer hardware, canned
computer software, and services. Victory Bank purchased the disputed items from
three sellers and used all of the computer software and hardware “for its protection or
convenience in conducting financial transactions.” Victory Bank I, 190 A.3d at 783.
For the contested transactions, Victory Bank paid state sales tax in the amount of 6%
of the purchase price for each item purchased. Victory Bank did not tender an
exemption certificate to any of the sellers.
                Victory Bank initially filed a petition with the Department of Revenue’s
(Department) Board of Appeals (BOA) seeking a refund of sales tax in the amount of
$50,000, plus applicable interest, paid during the period from November 26, 2009, until
November 26, 2012. It later amended the requested amount to $17,801.61. The BOA
denied Victory Bank’s request and the Board affirmed. In its petition for review to this
Court, Victory Bank sought a refund for sales tax paid across 84 petitioned-transactions
in the aggregate amount of $14,775.35, plus interest. Id.
                On appeal to this Court in Victory Bank I, Victory Bank only raised the
following issue: whether a bank’s purchases of computer software components, as well
as services related thereto, were excluded from sales tax pursuant to the Department’s
Financial Institution Security Equipment Regulation (FISE regulation),4 because the

      3
          Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §7202(a).

      4
          61 Pa. Code §46.9. The regulation provides, in relevant part, as follows:


                                                  2
(a) General. This ruling pertains to the sale, installation and repair of
security equipment utilized by financial institutions. . . .

(b) Definitions. The following words and terms, when used in this
section, have the following meanings, unless the context clearly
indicates otherwise:

       Financial institution--A corporation or association, such as a
       bank, a bank and trust company, a trust company, a savings
       bank, a mutual banking association, a savings and loan
       association, a finance company, a credit union, or other similar
       institution, which maintains a place of business in this
       Commonwealth.

       Installation--An attachment or affixation of security equipment
       to real estate by means of one of the following:

               ....

               (iii) Wire which is integrated into an electrical system.

       Security equipment--Systems, devices and equipment, and their
       components, utilized by a financial institution for its protection
       or convenience in conducting financial transactions.

(c) Sales and installation. Sales and installation shall conform with the
following:

       (1) A sale of security equipment which is also installed, as
       defined in subsection (b), by the seller or or [sic] the seller’s
       designee is a construction contract. The seller-installer may not
       charge sales tax of the Commonwealth to his customer upon the
       contract price. Rather, the seller-installer, as a construction
       contractor, is considered to be the consumer of property
       transferred in connection with the construction contract. He
       shall pay the applicable sales or use tax upon his purchase price
       of the installed equipment, or upon his purchase price of
       material acquired and incorporated into the installed equipment
       ....

       ....

 (d) Straight sale. A straight sale is one in which security equipment of
a type which does not require installation, as defined in subsection (b)


                                   3
sellers or their designees installed the computer hardware and the bank used the
computer and software for its protection or convenience in conducting financial
transactions. Id.
               We concluded that it was undisputed that Victory Bank met the definition
of a “financial institution” and that its computer system met the definition of “security
equipment” under the FISE regulation. Conversely, we determined that it was disputed
whether plugging a computer system into an electrical outlet amounted to “installation”
under the regulation, and whether the FISE regulation had been superseded by statute.
We declined to address the first of these arguments because we concluded that statutory
changes had superseded the definition of “construction contract” in the regulation. Id.
at 784.
               We noted that when the Department first promulgated the FISE regulation
there was no statutory definition of the term “construction contract,” so that if
equipment was installed within the definitions under the regulation it amounted to a
“construction contract” and the obligation to pay sales tax fell on the
contractor/installer rather than the purchasing institution. However, we observed that
when the Tax Code was amended by the General Assembly in 2002,5 the definition of
“construction contract” in section 201 of the Tax Code was changed to the following:
“A written or oral contract or agreement for the construction, reconstruction,
remodeling, renovation or repair of real estate or a real estate structure.” 72 P.S.
§7201 (emphasis added). We concluded that the statutory definition of “construction

               is transferred, or one in which any type of security equipment is sold
               directly to a customer without installation by the seller or a designee.
               A straight sale is a taxable transfer of tangible personal property, and
               the seller shall register with the Department, to collect tax upon the total
               purchase price paid by a customer for security equipment, and to remit
               the tax collected to the Department.

Id.

      5
          Act of June 29, 2002, P.L. 559.

                                                    4
contract” clearly “depart[ed] from the one found in the FISE regulation.” Victory Bank
I, 190 A.3d at 785.
               Also, we observed that “a statute is law and trumps an administrative
agency’s regulations” and that when “there is a conflict between a statute and
regulation which purports to implement the statute’s provisions the regulation must
give way.” Id. (citing Commonwealth v. Kerstetter, 62 A.3d 1065, 1069 (Pa. Cmwlth.
2013), aff’d, 94 A.3d 991 (Pa. 2014); Success Against All Odds v. Department of Public
Welfare, 700 A.2d 1340, 1351 n.6 (Pa. Cmwlth. 1997)). This Court determined that
section (c)(1) of the FISE regulation presented “such a conflict in that the statutory
definition for ‘construction contract’ [was] inconsistent with the regulation’s
definition,” and, that it was irrelevant that the FISE regulation had not been amended
or repealed because the Commonwealth was merely interpreting a self-executing act
of the General Assembly, which allowed it to dispense with the typical regulation
publication requirements under section 204 of the Commonwealth Documents Law6
(CDL). Victory Bank I, 190 A.3d at 785. Accordingly, the Court held that Victory
Bank could not rely upon section (c)(1) of the FISE regulation to argue that the seller
of the computer system, instead of Victory Bank, owed the sales tax. Id.
               In the absence of an applicable statutory exclusion or exemption, the sales
at issue, by default, warranted a 6% sales tax under section 202(a) of the Tax Code.
Section 202(a) of the Tax Code imposes a 6% tax on the “sale at retail” of “tangible
personal property or services.” 72 P.S. §7202(a). Concluding that the items at issue
were such property, we held Victory Bank’s purchases were “sales at retail” to which
sales tax must be applied and that the vendor of the items was required to collect sales
tax from the purchaser, i.e., Victory Bank. Victory Bank I, 190 A.3d at 785. Therefore,


      6
          Act of July 31, 1968, P.L. 769, as amended, 45 P.S. §1204.



                                                 5
since Victory Bank was required to pay sales tax on its computer systems under the
Tax Code, the Board was found to have properly denied the petition for refund. Id. at
786. Victory Bank has now filed exceptions to our decision.7


                                            Discussion
               In its exceptions, Victory Bank argues that (1) the Commonwealth failed
to comply with the CDL and, thus, is precluded from seeking the invalidation of the
FISE regulation through a judicial decision; (2) pursuant to the FISE regulation, the
sellers, rather than Victory Bank, were responsible for paying sales tax on the
purchased items; and (3) Victory Bank met the elements of the FISE regulation and,
therefore, is entitled to a sales tax refund.
               We first address whether the Commonwealth failed to comply with the
CDL. Victory Bank maintains that the FISE regulation is presumptively valid and that,
under the CDL, this Court is not the proper venue for the Commonwealth to amend or
void the FISE regulation. Victory Bank contends that our panel decision overlooked
our en banc decision in Muscarella v. Commonwealth, 87 A.3d 966 (Pa. Cmwlth.
2014), as applied to the CDL.            As argued by Victory Bank, in Muscarella the
Commonwealth maintained that certain tax regulations were invalid because they were
inconsistent with the relevant statutory language; however, we held that because the
regulations had been approved by the Office of Attorney General, under the CDL this
Court was not the proper avenue to void or amend regulations. Victory Bank asserts
that pursuant to the requirements of the CDL, the FISE regulation was published in the
Pennsylvania Code and, thus, the Office of Attorney General presumptively approved


       7
         In tax appeals from the Board of Finance and Revenue, this Court functions as a trial court,
and exceptions filed to its final order have the effect of an order granting reconsideration. American
Electric Power Service Corp. v. Commonwealth, 184 A.3d 1031, 1034 n.7 (Pa. Cmwlth.), aff’d, 199
A.3d 880 (Pa. 2018).


                                                  6
its legality. Victory Bank alleges that under the CDL, the Commonwealth is precluded
from seeking a judicial decision invalidating the FISE regulation and, accordingly, our
panel decision erred in concluding that the definition of “construction contract” in the
regulation is now superseded by statute.
             Conversely, the Commonwealth agrees with our decision in Victory Bank
I that the amended statutory definition of “construction contract” in the Tax Code
superseded the inconsistent definition in the FISE regulation. The Commonwealth
contends that the CDL does not preclude the Commonwealth from seeking application
of a recently enacted and implemented statutory definition in defense of a request for
a tax refund. The Commonwealth maintains that while the CDL contains specific,
mandatory procedures with regard to the legality, amendment, or repeal of
administrative regulations, the CDL is only applicable to agency actions that actually
constitute a regulation. Thus, the Commonwealth alleges that agency actions that do
not constitute regulations, such as statements of policy and administrative adjudications
of certain cases, are not subject to the constraints of the CDL. The Commonwealth
contends that only agency actions that establish a binding norm constitute a regulation
and that, here, its filing of a brief in opposition to Victory Bank’s petition for review
does not establish such a binding norm.
             The Commonwealth also argues that Victory Bank misconstrues
Muscarella. According to the Commonwealth, Muscarella does not preclude the
Commonwealth from seeking application of a statutory provision over an inconsistent
regulation’s provisions or compel this Court to apply an inconsistent regulation in
derogation of the relevant statutory provision. The Commonwealth asserts that it was
not the “Commonwealth’s brief in opposition to [Victory Bank’s] request for refund,
or action (or inaction) of the [Department], that determined the taxability of its
purchases,” but instead, the General Assembly’s “adoption of a statutory definition for




                                           7
‘construction contract’ inconsistent with the Department’s earlier interpretations.”
(Commonwealth Br. at 18.)
              Initially, we note that in Muscarella, the estate of a claimant who paid her
property taxes for a tax claim year challenged the constitutionality of a tax regulation
that permitted a claimant’s estate to seek a tax rebate as long as the claimant survived
the entire claim year, but did not permit a rebate where the claimant did not survive the
entire claim year. 87 A.3d at 969-71. In that case, the relevant regulation had
essentially remained unchanged for four decades. Id. Although, pursuant to the
regulation, the Commonwealth’s long standing practice had been to provide property
tax rebates to estates when the claimant survived the entire calendar year, the
Commonwealth argued before this Court that all estates were prohibited from
receiving rebates. Id. at 974. The Commonwealth maintained that this Court should
“disregard the regulations permitting rebates to estates, in essence abandoning its prior
position that the regulations [were] reasonable and in furtherance of the intent of” the
relevant statute. Id. We noted that even though the underlying statutory framework
had been amended numerous times since the regulation was first adopted by the
General Assembly in the 1970s, the General Assembly “never amended it to deny
estates the right to file for rebate.” Id. at 976.
              After invalidating the regulation on constitutional grounds, this Court also
concluded that “to the extent the Commonwealth [sought] to void the Department’s
current regulations, such action [was] precluded” by the CDL. Id. at 977. We observed
that “[t]he CDL sets forth specific, mandatory procedures with regard to the legality,
amendment, or repeal of administrative regulations.” Id. We also noted that section
205 of the CDL specifically “provides that ‘[a]ll administrative regulations and changes
shall be approved as to legality by the Department of Justice’ and that ‘[t]he decision
of the Department of Justice shall be final and shall not be subject to judicial review at
the instance of the agency.’” Id. (quoting section 205 of the CDL, 45 P.S. §1205).


                                              8
Additionally, we found that “section 201 of the CDL requires an agency to provide
‘public notice of its intention to . . . amend or repeal any administrative regulation’ and
section 202 requires an agency to ‘review and consider any written comments’ before
‘taking action upon any administrative regulation or change therein.’” Muscarella, 87
A.3d at 977 (quoting sections 201-202 of the CDL, 45 P.S. §§1201-1202).
             This Court determined that the Commonwealth had approved the relevant
regulation because the Pennsylvania Bulletin, in which the regulation was first
published, stated the regulations were to be forwarded to the Department of Justice to
be approved for legality, and the regulations were then set forth in the Pennsylvania
Code, which created a rebuttable presumption that the regulations were approved.
Muscarella, 87 A.3d at 978. However, we noted that the Commonwealth sought to
“void the current regulations by circumventing the very same public notice and
comment requirements of the CDL which the Commonwealth complied with in
enacting them.” Id. Therefore, we held that this Court was “not the proper venue” for
the relief sought by the Commonwealth, i.e., “attempting to amend or void the current
regulations.” Id.
             Based on our review of the relevant administrative procedure, this case is
readily distinguishable from Muscarella. Unlike in Muscarella where the relevant
regulation was unaffected by subsequent statutory amendments, here, changes to the
Tax Code rendered the FISE regulation inconsistent with the underlying statute.
             It is axiomatic that all regulations “must be consistent with the statute
under which they were promulgated.”             Slippery Rock Area School District v.
Unemployment Compensation Board of Review, 983 A.2d 1231, 1241 (Pa. 2009). “A
statute is the law and trumps an administrative agency’s regulations.” Kerstetter, 62
A.3d at 1069. Similarly, “[w]here there is a conflict between the statute and a
regulation purporting to implement the provisions of that statute, the regulation must




                                            9
give way.” Commonwealth v. Colonial Nissan, Inc., 691 A.2d 1005, 1009 (Pa.
Cmwlth. 1997).
                “[W]hen an agency adopts a regulation pursuant to its legislative rule-
making power, as opposed to its interpretive rule-making power,[8] it is valid and
binding upon courts as a statute so long as it is (a) adopted within the agency’s granted
power, (b) issued pursuant to proper procedure, and (c) reasonable.” Tire Jockey
Service, Inc. v. Department of Environmental Protection, 915 A.2d 1165, 1186 (Pa.
2007). When analyzing whether a regulation is adopted within an agency’s granted
power, a court should consider, inter alia, whether the regulation is “consistent with
the enabling statute” because “clearly, the [General Assembly] would not authorize
agencies to adopt regulations inconsistent with the enabling statutes.” Marcellus Shale
Coalition v. Department of Environmental Protection,                   A.3d      (Pa. Cmwlth., No.
573 M.D. 2016, filed July 22, 2019), slip op. at 8 (internal quotation marks omitted).
Thus, when “a regulation presents ‘an actual conflict with the statute,’ we cannot
reasonably understand the regulation to be within the agency’s ambit of authority, and
the statute must prevail.” Id. (quoting AMP Inc. v. Commonwealth, 814 A.2d 782, 786
(Pa. Cmwlth. 2002), aff’d, 852 A.2d 1161 (Pa. 2004)).
               With respect to the second prong of Tire Jockey, a reviewing court should
assess “whether the agency promulgating the regulation followed the proper
procedures. Generally, in promulgating regulations an agency must comply with any
special procedures set forth in its enabling legislation as well as the procedures set forth
in the [CDL].” Marcellus Shale,            A.3d at     , slip op. at 8. However, as our Supreme
Court explained in Borough of Pottstown v. Pennsylvania Municipal Retirement Board,

       8
          Our Supreme Court has differentiated a legislative regulation from an interpretive regulation,
stating that “a legislative regulation is substantive and creates a new controlling standard of conduct
while the interpretive regulation does not.” Slippery Rock, 983 A.2d at 1238. Interpretive rules
“merely construe, without expanding, the terms of a statute.” Marcellus Shale Coalition v.
Department of Environmental Protection,           A.3d     ,     n.7 (Pa. Cmwlth., No. 573 M.D. 2016,
filed July 22, 2019), slip op. at 7 n.7.

                                                  10
712 A.2d 741 (Pa. 1998), so-called interpretive rules or regulations, which “do not in
themselves establish binding standards of conduct . . . need not be promulgated in
accordance with the [CDL] to the extent they merely construe a statute and do not
improperly expand upon its terms.” Id. at 743. In order “[t]o be viable, an interpretive
rule must genuinely track the meaning of the underlying statute, rather than establish
an extrinsic substantive standard.” Id.; see also Success Against All Odds, 700 A.2d at
1351 (holding that it is a well-established precept that an agency “may render
interpretive law so long as the interpretation is one that a reviewing court determines
is consistent with the meaning of the statute with respect to which it is rendered and
that interpretive rules consistent with these principles are not subject to the publication
requirements” of the CDL); Jay R. Reynolds, Inc. v. Department of Labor & Industry,
Prevailing Wage Appeals Board, 661 A.2d 494, 496-97 (Pa. Cmwlth. 1995) (same).
             Here, first and foremost, as the panel already determined, the amendment
of the Tax Code resulted in the language of the FISE regulation being inconsistent with
the statutory language. Under the FISE regulation, a “construction contract” includes
the installation of security equipment by a financial institution. 61 Pa. Code §46.9. As
found by the panel, when the FISE regulation was first promulgated, there was no
definition of construction contract. However, once the Tax Code was amended in 2002,
“construction contract” was defined in section 201 of the Tax Code as “[a] written or
oral contract or agreement for the construction, reconstruction, remodeling, renovation
or repair of real estate or a real estate structure.” 72 P.S. §7201. We reaffirm
Victory I on this issue that the statutory definition of “construction contract” clearly
“departs from the one found in the FISE regulation.” Victory Bank I, 190 A.3d at 785.
             Under Victory Bank’s reasoning, this Court would be required to follow
a regulation superseded by a subsequent amendment to the enabling statute, unless the
agency that adopted the regulation followed the requirements of the CDL to repeal the
regulation. However, Victory Bank’s logic reaches an absurd result. Because “[a]


                                            11
statute is the law and trumps an administrative agency’s regulations,” Kerstetter, 62
A.3d at 1069, where, as occurred here, the General Assembly amends a statute that is
inconsistent with a promulgated regulation, the regulation must yield to the statute.
Colonial Nissan, Inc., 691 A.2d at 1009.         Therefore, regardless of whether the
promulgation of a regulation follows the proper procedures, a regulation must be
consistent with the enabling statute. See Slippery Rock, 983 A.2d at 1241; Marcellus
Shale,    A.3d at        , slip op. at 8.
             The amendment of section 201 of the Tax Code resulted in the FISE
regulation being in conflict with the underlying statute; under our law the statute takes
precedence over the regulation without regard to whether the Department followed the
procedure mandated by the CDL. Unlike Muscarella, where there was no change in
the enabling statute but the Department suddenly decided not to follow its longstanding
regulation without seeking to repeal or amend the regulation pursuant to the dictates of
the CDL, here there was an intervening change to the statute. Accordingly, because
Muscarella did not involve an amendment to the underlying statute, that case differs
from the instant case. Because the 2002 statutory amendment to section 201 of the Tax
Code contains a definition of “construction contract” that is inconsistent with the FISE
regulation, the panel did not err in concluding that the FISE regulation did not apply to
Victory Bank’s purchases of the disputed items and, thus, that it was required to pay
sales tax on the same.
             Second, to the extent the Commonwealth’s position in this case constitutes
an actual “regulation,” it is interpretive rather than substantive.           Since the
Commonwealth is merely construing section 201 of the Tax Code, its interpretation is
consistent with the statutory language, and it is not expanding on the statutory
language, the Commonwealth is rendering an interpretive rule that is not subject to the




                                            12
requirements of the CDL.9 See, e.g., Borough of Pottstown, 712 A.2d at 743; Success
Against All Odds, 700 A.2d at 1351. Therefore, this case is unlike Muscarella in an
additional respect: whereas in Muscarella the Department impliedly sought to adopt a
substantive regulation by no longer following its longstanding regulation, here, the
Commonwealth is only interpreting an amended statutory provision. Accordingly,
Muscarella has negligible relevance to the disposition of this case.
               The remaining exceptions, noted herein, largely present the same issues
and arguments that were addressed by this Court in Victory Bank I. After careful
review of the record and briefs, we conclude that none of the arguments presented by
Victory Bank warrant sustaining its exceptions and vacating this Court’s prior decision.


                                            Conclusion
               After reviewing our previous opinion, we concur with both the result and
reasoning of this Court’s opinion in Victory Bank I, dated July 17, 2018. None of the
authority cited by Victory Bank changes our conclusion or the rationale of that opinion.
Accordingly, we overrule Victory Bank’s exceptions.



                                                  ________________________________
                                                  PATRICIA A. McCULLOUGH, Judge




       9
          Further, as we determined in Victory Bank I, under section 204 of the CDL, regulations
relating to the interpretation of “self-executing acts” of the General Assembly, such as section 201 of
the Tax Code, are not subject to the publication requirements of the CDL. Victory Bank I, 190 A.3d
at 785 (citing section 204 of the CDL, 45 P.S. §1204); see also, Success Against All Odds, 700 A.2d
at 1350-51 (noting that section 204 of the CDL “allows an administrative agency to ‘omit or modify’
the publication requirements [of the CDL] where the regulation relates to the interpretation of a self-
executing act of assembly”). “Self-executing statutes are those which are mandatory in nature and
require no further legislative action in order to become effective.” Success Against All Odds, 700
A.2d at 1351.

                                                 13
            IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Victory Bank,                          :
                        Petitioner     :
                                       :
                  v.                   :    236 F.R. 2014
                                       :
Commonwealth of Pennsylvania,          :
                     Respondent        :


                                     ORDER


            AND NOW, this 16th day of October, 2019, the exceptions filed by
Victory Bank to this Court’s July 17, 2018 opinion and order in Victory Bank v.
Commonwealth of Pennsylvania, 190 A.3d 782 (Pa. Cmwlth. 2018), are overruled.
Judgment shall be entered in favor of the Commonwealth.



                                           ________________________________
                                           PATRICIA A. McCULLOUGH, Judge
