                  IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Downs Racing, LP,                               :
                                 Petitioner     :
                                                :
                       v.                       :
                                                :
Commonwealth of Pennsylvania,                   :    No. 201 F.R. 2013
                     Respondent                 :

Downs Racing, LP,                               :
                                 Petitioner     :
                                                :
                       v.                       :
                                                :
Commonwealth of Pennsylvania,                   :    No. 202 F.R. 2013
                     Respondent                 :    Submitted: June 7, 2017



BEFORE:         HONORABLE MARY HANNAH LEAVITT, President Judge
                HONORABLE RENÉE COHN JUBELIRER, Judge
                HONORABLE ROBERT SIMPSON, Judge
                HONORABLE P. KEVIN BROBSON, Judge
                HONORABLE ANNE E. COVEY, Judge
                HONORABLE MICHAEL H. WOJCIK, Judge
                HONORABLE JOSEPH M. COSGROVE, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION BY
JUDGE COVEY                                          FILED: October 12, 2017

                Downs       Racing,     LP    (Taxpayer)     filed   exceptions,     pursuant   to
Pennsylvania Rule of Appellate Procedure (Rule) 1571(i),1 to the portions of this


      1
          Rule 1571(i) states:

                Any party may file exceptions to an initial determination by [this
                C]ourt under this rule within 30 days after the entry of the order to
                which exception is taken. Such timely exceptions shall have the
                effect, for the purposes of Rule 1701(b)(3) (authority of lower court
                or agency after appeal) of an order expressly granting reconsideration
Court’s July 11, 2016 order affirming the Board of Finance and Revenue’s (Board)
January 30, 2013 orders denying its Petition for Review and Petition for Refund
(Petitions) (Exceptions). There are two issues before this Court: (1) whether the
Court erred by holding that Taxpayer’s payments to Teleview Racing Patrol, Inc.
(Teleview) for closed circuit television services were subject to sales and use taxes;
and, (2) whether the Court erred by holding that Taxpayer’s payments to IGT
(formerly known as International Gaming Technology) for the intellectual property
necessary to operate its multi-player gaming system were subject to sales and use
taxes. After review, we overrule Taxpayer’s Exceptions.
              Taxpayer is a Pennsylvania limited partnership that operated a harness
racing track, off-track betting locations and a casino resort under the fictitious name,
Mohegan Sun at Pocono Downs between January 1, 2005 and December 31, 2008
(Audit Period). The Department of Revenue (Department) determined that, pursuant
to Section 202 of the Tax Reform Code of 1971 (Tax Code),2 Taxpayer owed
$1,208,796.86 in sales and use taxes for the Audit Period, but had reported only
$869,240.54. Accordingly, in March 2011, the Department issued a Notice of Audit
Assessment (Assessment) requiring Taxpayer to pay $440,076.38.3
              Taxpayer filed a petition with the Department’s Board of Appeals
(BOA) seeking a reassessment and a refund of self-assessed taxes related to IGT’s
royalty/licensing fees.       The BOA bifurcated the matters, issued one decision
sustaining the assessed tax and interest but abating the penalties, and issued another


              of the determination previously entered by the court. Issues not raised
              on exceptions are waived and cannot be raised on appeal.
Pa.R.A.P. 1571(i).
       2
         Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7202.
       3
         The $440,076.38 assessment included: (1) $339,556.32 in additional sales and use taxes;
(2) $75,181.47 in interest; (3) $16,977.82 in understatement penalties; and, (4) $8,360.77 in major
understatement penalties.


                                                2
decision denying Taxpayer’s refund request. Taxpayer filed the Petitions with the
Board, which denied them. Taxpayer appealed to this Court, which consolidated the
matters. On July 11, 2016, this Court affirmed the Board’s orders.4 Taxpayer timely
filed the Exceptions which are now before this Court en banc.5


                                     Teleview Equipment
              In its Exceptions, Taxpayer contends that the Court erred by holding that
where a transaction’s “true object” is a service not defined as tangible personal
property (i.e., simulcasted closed-circuit horse races), and the tangible personal
property (i.e., Teleview’s audio and visual feed equipment) is only the medium by
which to transmit the service, that tangible personal property remains taxable. In
addition, Taxpayer declares that it is not required to separately value tangible
personal property necessary to produce non-taxable services, and that substantial
evidence did not support this Court’s determination that Teleview’s invoices did not
sufficiently separate those costs.        See Exceptions at 3-7.         Taxpayer made these
identical arguments in its initial appeal to this Court.
              The Court, however, rejected these arguments and held that since
persons liable for sales and use taxes must keep sales tax records pursuant to the
Department’s regulations which, at a minimum, require that invoices specify taxable


       4
          In addition, this Court reversed and remanded a portion of the Board’s order for the Board
to recalculate taxes Taxpayer owed under its contract with MRI Contract Staffing. That portion of
the Board’s order is not at issue here. See Downs Racing, LP v. Commonwealth, 143 A.3d 511 (Pa.
Cmwlth. 2016).
        “Our scope of review in tax appeals is . . . limited to the construction, interpretation and
application of a State tax statute to [the] given set of facts.” United Servs. Auto. Ass’n v.
Commonwealth, 618 A.2d 1155, 1156 (Pa. Cmwlth. 1992) (quoting Escofil v. Commonwealth, 406
A.2d 850, 852 (Pa. Cmwlth. 1979), aff’d per curiam, 452 A.2d 1012 (Pa. 1982)).
        5
           “[E]xceptions filed pursuant to [Rule] 1571(i) have the effect of an order granting
reconsideration.” Kalodner v. Commonwealth, 636 A.2d 1230, 1231 (Pa. Cmwlth. 1994), aff’d, 675
A.2d 710 (Pa. 1995).
                                                 3
versus non-taxable services6 and, since “neither the auditor nor this Court can
determine from the submitted invoices what was billed for taxable services versus
non-taxable services because they were billed together as one item on the invoice[,]”
Teleview’s services were presumed taxable. Downs Racing, LP v. Commonwealth,
143 A.3d 511, 517 (Pa. Cmwlth. 2016). The Court alternatively concluded that, since
“Teleview was obligated to ‘provide, install and maintain’ the equipment at issue on
Taxpayer’s various properties[, and] Teleview provided its own personnel, whom it
supervised and controlled,” as it would “[i]f Teleview had performed these services
for Taxpayer at its own facilities,” the services were taxable. Id. at 519. In addition,
the Court declared, based upon the “true object” test set forth in Graham Packaging
Co., L.P. v. Commonwealth, 882 A.2d 1076 (Pa. Cmwlth. 2005), that “[e]ven if the
‘true object’ of the transfer was for intangible personal property, it does not make
taxable items non-taxable.” Downs Racing, LP, 143 A.3d at 515 n.7. We find no
error in this Court’s July 11, 2016 conclusions relative to this issue.


                           IGT Intellectual Property License
             Taxpayer also contends in its Exceptions that the Court misapplied the
true object test in holding that the royalty fees it paid IGT to license IGT’s
intellectual property were subject to taxation as tangible personal property because
the object of the transaction was the intellectual property rather than the license. See
Exceptions at 7-8. This argument is the same that Taxpayer made in its appeal to this
Court.
             In concluding that IGT’s software license was taxable tangible personal
property, this Court observed:



         6
        See Section 271 of the Tax Code, 72 P.S. § 7271, and Section 34.2(a)(2) of the
Department’s Regulations, 61 Pa. Code § 34.2(a)(2).
                                            4
             Without the intellectual property, Taxpayer could not use or
             operate its poker machines. Thus, the object of the
             transaction is the intellectual property and not the license.
             Further, just because the [Tax] Code does not expressly
             mention ‘intellectual property’ in its definition of ‘tangible
             personal property’ does not mean that it does not constitute
             tangible personal property.         See Dechert[, LLP v.
             Commonwealth], 942 A.2d [210,] 212 [(Pa. Cmwlth. 2008)]
             (‘we conclude that the [Tax] Code’s definition of ‘tangible
             personal property’ is not rendered ambiguous merely
             because the statute fails to expressly state that software
             licenses constitute tangible personal property. . . .’).

Downs Racing, LP, 143 A.3d at 519-20. We find no error in this Court’s July 11,
2016 conclusions relative to this issue.


                                      Conclusion
             Clearly,

             Taxpayer[’s] [E]xceptions . . . raise precisely the same
             issues that [it] raised in [its] initial appeal.
             ....
             After reviewing our previous opinion and revisiting the
             arguments Taxpayer[] presented in [its] briefs and at [the
             June 9, 2016] oral argument, we concur with both the result
             and the reasoning of this Court’s opinion of [July 11, 2016].
             None of the authority cited by Taxpayer[] changes our
             conclusion or the rationale of that opinion.
             Accordingly, we [overrule] Taxpayer[’s] [E]xceptions.

Kalodner v. Commonwealth, 636 A.2d 1230, 1231-32 (Pa. Cmwlth. 1994) (citation
omitted; emphasis added), aff’d, 675 A.2d 710 (Pa. 1995).


                                       ___________________________
                                       ANNE E. COVEY, Judge

Judge McCullough did not participate in the decision in this case.


                                           5
            IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Downs Racing, LP,                      :
                        Petitioner     :
                                       :
                  v.                   :
                                       :
Commonwealth of Pennsylvania,          :   No. 201 F.R. 2013
                     Respondent        :

Downs Racing, LP,                      :
                        Petitioner     :
                                       :
                  v.                   :
                                       :
Commonwealth of Pennsylvania,          :   No. 202 F.R. 2013
                     Respondent        :


                                     ORDER

            AND NOW, this 12th day of October, 2017, Downs Racing, LP’s
exceptions to this Court’s July 11, 2016 opinion and order are OVERRULED, and
the Chief Clerk is directed to enter judgment in the Commonwealth of Pennsylvania’s
favor.


                                     ___________________________
                                     ANNE E. COVEY, Judge
