                IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Van Industries, Inc.,                               :
                             Petitioner             :
                                                    :
                      v.                            :
                                                    :
Commonwealth of Pennsylvania,                       :      No. 861 F.R. 2015
                     Respondent                     :      Argued: June 3, 2019

BEFORE:       HONORABLE ANNE E. COVEY, Judge
              HONORABLE CHRISTINE FIZZANO CANNON, Judge
              HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge

OPINION NOT REPORTED

MEMORANDUM OPINION BY
JUDGE COVEY                                         FILED: June 21, 2019

              Van Industries, Inc. (Taxpayer) petitions this Court for review of the
Board of Finance and Revenue’s (Board) December 2, 2015 order denying
Taxpayer’s Petition for Reassessment (Petition). The sole issue before this Court is
whether the Board properly denied Taxpayer’s exemption. After review, we affirm.


                                              Facts1
              Taxpayer is a Pennsylvania “S” corporation located at 2 Industrial Drive,
Birdsboro, Pennsylvania. Taxpayer is engaged in the business of: (i) metal and
ceramic fabrication; (ii) customized metal part machining and industrial metal repair;
(iii) powder coating customer parts and those Taxpayer fabricates; and (iv)
maintenance and cleaning of customer parts.                   The Department of Revenue
(Department) conducted a sales and use tax audit of Taxpayer’s business (Audit) for
the period January 1, 2011 through March 31, 2014 (Audit Period). During the Audit

       1
        The parties stipulated to the facts and filed the stipulation with this Court on December 6,
2018. See Joint Stipulation of Facts.
Period, Taxpayer used natural gas to heat its facility and to operate two ovens. The
ovens were used to: (i) cure powder-coated parts; and (ii) burn powder and
contaminants off of parts.
             The amount of natural gas associated with heating Taxpayer’s facility
fluctuates with the outside temperature. During the Audit, Taxpayer claimed that its
natural gas purchases were 100% exempt from sales or use tax for the Audit Period
and, thus, it paid no tax on those purchases.      In support of the claimed 100%
exemption, Taxpayer provided the Department with a document that Taxpayer
created, which purported to summarize Taxpayer’s exempt natural gas usage (Audit
Utility Documentation) over one unspecified month. Therein, Taxpayer averred that
its ovens consumed 97% of the natural gas it purchased in performing powder-
coating or burn-off services.
             The Department determined that the Audit Utility Documentation was
insufficient to establish the percentage of natural gas that was not subject to tax. On
or about August 25, 2014, the Department assessed Taxpayer $31,218.01 in taxes,
plus interest and penalties.    Of that $31,218.01 tax assessment, $2,548.58 was
assessed on Taxpayer’s natural gas purchases during November, December, January,
February, and March of each year of the Audit Period (Utility Assessment). See Joint
Stipulation of Facts (Stipulation), ¶14. The Department did not assess a tax for any
other natural gas purchases.
             On October 7, 2014, Taxpayer timely filed a petition for reassessment
with the Board of Appeals (BOA) seeking relief from the Utility Assessment,
claiming an exemption rate of 88.15% for natural gas purchases. On October 28,
2014, the BOA sent Taxpayer correspondence requesting that Taxpayer:

             Please provide a complete and detailed description of your
             business. Starting with when the part is received up to the
             completed product. The narrative must describe each piece
             of machinery, equipment, and other items claimed to be
                                          2
             directly related to the production process and the direct
             causal relationship between these items and the product.

Stipulation, ¶17.
             On January 9, 2015, the BOA sent additional correspondence to
Taxpayer requesting a breakdown of the type of work it performs during the winter
months because Taxpayer had averred:

             The nature of [Taxpayer’s] powder coating work is very
             busy in the months December through April, with burning
             off paint from various race[]car chassis[], lawn furniture,
             etc. and recoating them. The summer months work[]load
             consists of custom parts [Taxpayer] markets as an [original
             equipment manufacturer (]OEM[)] supplier and whatever
             work comes in as a job shop.

Stipulation, ¶18. On March 18, 2015, after notice and hearing, the BOA mailed
Taxpayer a decision denying its requested relief from the Utility Assessment.
             On June 15, 2015, Taxpayer filed the Petition with the Board requesting
relief from the Utility Assessment portion of the Audit assessment and claiming an
exemption rate of 88.15% for natural gas purchases.        In the Petition, Taxpayer
averred, inter alia:

             Since [Taxpayer’s] inception back in October[] 1991, [we
             were] and continue[] to be a business that experiences highs
             and lows in workload based on the seasons. Starting from
             our company’s beginning, we have been recognized as the
             best company to take chassis to for professional and expert
             powder coating. Our customers will attest to our reputation
             and the months in which we receive the majority of chassis
             frame[s] for powder coating.
             As expressed in this appeal, the winter months bring in
             chassis from the midget, sprint, dragster, go-cart and micro
             sprint car market[s].

Stipulation, ¶22. On December 2, 2015, the Board denied Taxpayer relief.




                                          3
               On December 29, 2015, Taxpayer appealed to this Court.2 On January 5,
2018, Taxpayer informed the Commonwealth of Pennsylvania (Commonwealth) that
it commissioned a professional utility study. By January 16, 2018 order, after four
status reports,3 this Court scheduled a status/conference for August 6, 2018. By
August 7, 2018 order,4 this Court directed the parties to file, inter alia, the
Stipulation. On December 7, 2018, the parties filed the Stipulation.5 As of December
5, 2018, Taxpayer had not provided the Commonwealth with a utility study or
detailed, supported information about Taxpayer’s business operations.6


                                           Background
               Section 202 of the Tax Reform Code of 1971 (Tax Code)7 imposes a tax
on “each separate sale at retail of tangible personal property . . . ,” 72 P.S. § 7202(a),
as well as a tax “upon the use . . . within this Commonwealth of tangible personal
property purchased at retail . . . .” 72 P.S. § 7202(b). Section 201 of the Tax Code
defines “tangible personal property” to include “natural . . . gas for non-residential
use[.]” 72 P.S. § 7201(m). However, the Tax Code’s definitions of “sale at retail”
and “use” exclude machinery, equipment, parts, and supplies consumed directly in

       2
          “In appeals from decisions of the [Board], our review is de novo because we function as a
trial court even though such cases are heard in our appellate jurisdiction.” DS Waters of Am., Inc. v.
Commonwealth, 150 A.3d 583, 588 n.7 (Pa. Cmwlth. 2016).
        3
          By November 17 and December 27, 2016, and May 8, June 1 and September 20, 2017
orders, this Court directed the parties/Taxpayer to file status reports. Taxpayer filed status reports
on December 19, 2016, May 29 and September 19, 2017, and the parties filed a Joint Status Report
on January 8, 2018.
        4
          This Court issued the August 7, 2018 order “with consent of the parties.” August 7, 2018
Order.
        5
          The Stipulation included four exhibits: (A) Department’s assessment notice; (B) BOA’s
decision; (C) Board’s decision; and (D) Taxpayer’s petition for review.
        6
          The parties have attempted to settle the matter, but the Commonwealth’s negotiations have
been relative to the Utility Assessment portion of the Audit assessment, not the entire outstanding
assessment amount of $31,218.01, plus interest. See Stipulation, ¶27.
        7
          Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§ 7101-10004.
                                                  4
the “manufacture of tangible personal property.” 72 P.S. § 7201(k)(8)(A), (o)(4)(B).
The issue in the instant case is whether Taxpayer is entitled to a tax exemption for
natural gas it consumed in the operation of machinery used directly in manufacturing
or processing during the Audit Period.


                                           Discussion
               The Board determined that Taxpayer is engaged in both taxable and tax-
exempt activities. To the extent that it is engaged in the fabrication for sale of
structural metal under Section 201(d)(5) of the Tax Code,8 Taxpayer is entitled to the
processing exemption. The Board ruled that the powder coating of chassis from
race car owners, however, is the taxable activity of repairing or altering tangible
personal property under Section 31.5 of the Department’s Regulations, 61 Pa.
Code § 31.5 (relating to persons rendering taxable services). The Board explained
that the submitted utility study did not separate the amount of the ovens’ usage for
taxable versus exempt activities, and Taxpayer did not respond to the Board’s
attempts at obtaining a usage breakdown.
               Taxpayer first argues that the Board erred in determining that
Taxpayer’s powder-coating service was taxable pursuant to Section 31.5 of the
Department’s Regulations because the services it renders in powder coating the
vehicles it repairs constitutes manufacturing, not alteration. See Section 201(c)(6) of
the Tax Code, 72 P.S. § 7201(c)(6). Specifically, Taxpayer contends that, because
the function of the vehicles is changed in the powder-coating process and they are
substantively transformed, the vehicles should be considered manufactured and,
therefore, tax exempt. The Commonwealth rejoins that Taxpayer’s powder coating


       8
          72 P.S. § 7201(d)(5) (defining “processing” as “[t]he fabrication for sale of ornamental or
structural metal or of metal stairs, staircases, gratings, fire escapes or railings (not including
fabrication work done at the construction site).”).
                                                 5
does not change the composition of its customers’ parts and, thus, it is not
manufacturing.
            Section 31.5(a) of the Department’s Regulations provides, in relevant
part:

            Imposition. The following services rendered upon
            tangible personal property are ‘taxable services’ whether
            or not tangible personal property is transferred in
            conjunction with the rendition of the services:
                 (1) Repairing, altering, mending, pressing, fitting,
                 dyeing, laundering, drycleaning or cleaning
                 tangible personal property other than clothing or
                 footwear. . . . For example, if a bookcase is taken to
                 a carpenter to have a defective shelf repaired, the
                 charge for the repair is subject to tax. However, if a
                 shoe is taken to a shoe repairperson to have a heel
                 fixed, the charge for the repair is not subject to tax.
                 ....
                 (4) Inspecting, altering, cleaning, lubricating,
                 polishing, repairing or waxing motor vehicles.

61 Pa. Code § 31.5(a) (emphasis added). Section 201(c)(6) of the Tax Code defines
“manufacture” as including:
            Remanufacture for wholesale distribution by a
            remanufacturer of motor vehicle parts from used parts
            acquired in bulk by the remanufacturer using an assembly
            line process which involves the complete disassembly of
            such parts and integration of the components of such
            parts with other used or new components of parts,
            including the salvaging, recycling or reclaiming of used
            parts by the remanufacturer.

72 P.S. § 7201(c)(6) (emphasis added).

            As our Supreme Court has noted, the definition of
            manufacture emphasizes two separate criteria—the type of
            activity at issue and the result of that activity:


                                           6
               To constitute ‘manufacture,’ first, the type of the
               activity must fall into one or more categories, i.e.
               ‘manufacturing, fabricating, compounding, processing
               or other operations[’] and second, as a result of one or
               more types of the prescribed activities, the personal
               property must be placed ‘in a form, composition or
               character different from that in which [such personal
               property]’ was acquired.
            Commonwealth v. Sitkin’s Junk Co., . . . 194 A.2d 199, 202
            ([Pa.] 1963) (emphasis and alteration in original). The
            burden is on the taxpayer to prove that the transaction
            sought to be taxed is either not within the Tax Code or is
            subject to an exemption.

DS Waters of Am., Inc. v. Commonwealth, 150 A.3d 583, 585 (Pa. Cmwlth. 2016)
(bold emphasis added).
            Here, pursuant to the Stipulation, which is the only record evidence
submitted to this Court for its de novo review, “[d]uring the Audit Period, Taxpayer
used natural gas to heat its facility and to operate two ovens. The ovens were used (i)
to cure powder[-]coated parts and (ii) to burn powder and contaminants off of
parts.” Stipulation, ¶5 (emphasis added). In Taxpayer’s self-created Audit Utility
Documentation, “Taxpayer averred 97% of the natural gas it purchased was
consumed by its ovens in performing powder[-]coating or burn[-]off services.”
Stipulation, ¶9 (emphasis added).
            The Stipulation further provides that Taxpayer asserted to the BOA:

            The nature of [Taxpayer’s] powder[-]coating work is
            very busy in the months December through April, with
            burning off paint from various race[]car chassis[], lawn
            furniture, etc. and recoating them. The summer months
            work[]load consists of custom parts [Taxpayer] markets as
            an OEM supplier and whatever work comes in as a job
            shop.

Stipulation, ¶18 (emphasis added). Taxpayer also averred to the Board:



                                          7
               Since [Taxpayer’s] inception back in October[] 1991, [we
               were] and continue[] to be a business that experiences highs
               and lows in workload based on the seasons. Starting from
               our company’s beginning, we have been recognized as the
               best company to take chassis to for professional and
               expert powder coating. Our customers will attest to our
               reputation and the months in which we receive the majority
               of chassis frame[s] for powder coating.
               As expressed in this appeal, the winter months bring in
               chassis from the midget, sprint, dragster, go-cart and
               micro sprint car market[s].

Stipulation, ¶22 (emphasis added).
               In its Summary of Argument to this Court, Taxpayer states that “it has
produced enough evidence and documentation, pursuant to [Section 201(d) of the Tax
Code] and [Section 31.5 of the Department’s Regulations] to reduce its taxable Sales
and Use Tax burden of Thirty-Nine Thousand One Hundred Nine and 05/100 Dollars
($39,109.05) by Eighty-Eight Percent (88%).”                 Taxpayer Br. at 8.          However,
Taxpayer has not submitted any evidence or documentation to this Court.9
               “Our review of a [Board] determination is governed by Rule 1571 of the
Pennsylvania Rules of Appellate Procedure, . . . which authorizes this Court to rule . .
. on the stipulation of facts made by the parties.” Strongstown B&K Enters., Inc. v.
Commonwealth, 152 A.3d 360, 362 n.2 (Pa. Cmwlth. 2016), aff’d, 171 A.3d 252 (Pa.
2017). “The [Stipulation] is binding and conclusive upon this Court, but we may
draw our own legal conclusions from those facts.” Id. This Court cannot conclude
based on the Stipulation10 that Taxpayer’s service of powder coating vehicles it

       9
          Taxpayer provided the Board a “utility [study], which included detailed explanations of its
business operations, photographs, and natural gas purchase invoices, to help the Board members
‘better understand what [Taxpayer] does to earn tax revenue and support the local economy.’”
Stipulation, Ex. C (Board’s Order) at 2. However, the Stipulation does not include the utility study
and, thus, is not before this Court for consideration. See Strongstown B&K Enters., Inc. v.
Commonwealth, 152 A.3d 360 (Pa. Cmwlth. 2016), aff’d, 171 A.3d 252 (Pa. 2017).
        10
           The above Stipulation references are the only mention of Taxpayer’s powder-coating
services therein.
                                                 8
repairs constitutes manufacturing, as opposed to alteration. See 72 P.S. § 7201(c)(6).
“Taxpayer’s bare assertions that its equipment was used in manufacturing . . . will not
sustain its burden of proving that the tax was improperly assessed.”          Fiore v.
Commonwealth, 668 A.2d 1210, 1217 (Pa. Cmwlth. 1995), aff’d, 690 A.2d 234 (Pa.
1997). Accordingly, this Court is constrained to hold that Taxpayer did not meet its
burden of proving that its powder-coating services are exempt.
            Taxpayer next argues that its natural gas usage should not be taxable
because the Commonwealth, as set forth in its Audit, determined that a portion of the
natural gas was used for heating Taxpayer’s building.            Specifically, Taxpayer
contends:

           This Honorable Court can, from the record already in
           existence, determine that [Taxpayer] is entitled to a
           reduction in taxes due to the nature of the gas usage. As
           such, Taxpayer believes it is appropriate to determine that
           [Taxpayer’s] Sales and Use Taxes should be reduced by
           Eighty-Eight Percent (88%).
Taxpayer Br. at 11 (emphasis added). The Commonwealth responds:
            Taxpayer appears to take the position that all natural gas not
            consumed to heat its facility is consumed by its ovens and
            directly used in manufacturing. Even if this were so,
            Taxpayer must establish how much natural gas is
            consumed to heat its facility. Taxpayer did not do so
            during the [A]udit and has not done so now.

Commonwealth Br. at 11 (emphasis added).
            The parties stipulated that the amount of natural gas associated with
heating Taxpayer’s facility fluctuates with the outside temperature. See Stipulation,
¶6. At the time of the Audit, Taxpayer produced the Audit Utility Documentation
based on gas usage for one month. However, the Audit Utility Documentation did
not specify to which month it applied. Based thereon, the Department determined



                                          9
that the Audit Utility Documentation was insufficient to establish the percent of
natural gas that was exempt from tax.
              Section 32.25(d)(4)(vi) of the Department’s Regulations provides:

              The purchase and use of . . . natural . . . gas, . . . by a person
              engaged in the business of manufacturing, [or] processing, .
              . . , may require apportionment between taxable and exempt
              use if a portion of the purchase is used directly in one or
              more of these business operations. To apportion the
              usage, an analysis of exempt usage shall be made. Any
              reasonable method of apportionment may be used. For
              example, the purchaser may estimate the exempt use of
              electricity through each meter by analyzing the electrical
              consumption of each item of equipment used directly by the
              purchaser in its manufacturing operation. This analysis
              should be annualized to reflect consumption during the
              entire calendar year. The resulting percentage of exempt
              use may be claimed by the purchaser upon the total monthly
              purchase of electricity through that meter . . . .

61 Pa. Code § 32.25(d)(4)(vi) (emphasis added).             Accordingly, the Department
properly determined that Taxpayer’s Audit Utility Documentation listing one
unidentified month was insufficient to establish a percentange of its exempt gas
usage.
              This Court acknowledges: “The record in this case was established by
[S]tipulation of [Taxpayer] and [the Commonwealth] . . . .               [W]hether or not
[Taxpayer] failed to provide the BOA or the Board certain [documentation] is of no
moment in this proceeding because the record here is de novo.” Golden Eagle
Constr. Co., Inc. v. Commonwealth, 813 A.2d 13, 16 n.6 (Pa. Cmwlth. 2002), aff’d,
834 A.2d 1103 (Pa. 2003). However, Taxpayer has not provided this Court with any
analysis of the exempt usage. Instead, without any support, Taxpayer requests an
88% exemption.11 See Taxpayer Br. at 11. Consequently, this Court cannot hold that

         11
         Taxpayer claimed a 100% exemption at the time of the Audit. See Stipulation, ¶7.
Taxpayer claimed a 97% exemption in its Audit Utility Documentation. Stipulation, ¶9. Taxpayer
                                             10
Taxpayer’s natural gas usage is exempt simply because the Commonwealth’s Audit
determined that a portion of the natural gas was used to heat Taxpayer’s facility.


                                          Conclusion
              Because this Court has determined that Taxpayer has not met its burden
of proving that its powder-coating services are tax exempt as manufacturing, and
Taxpayer has not produced any documentation as to the percentage of gas usage
apportioned between heating taxable activities and non-taxable activities,12
Taxpayer’s Petition was properly denied.
              For all of the above reasons, the Board’s order is affirmed.



                                            ___________________________
                                            ANNE E. COVEY, Judge




claimed an 88.15% exemption before the BOA and the Board. See Stipulation, ¶¶16, 21. None of
the above-stated percentages were supported by anything but Taxpayer’s assertions.
        12
           In its petition for review, Taxpayer asserts that the Board’s order “fails to take into
consideration the prior studies provided by [Taxpayer] indicating the percentage of exempt and non-
exempt natural gas usage.” Stipulation, Ex. D at 7-8. Because the prior studies were not included
in the Stipulation, this Court cannot consider them. See Strongstown B&K Enters., Inc.
                                                11
             IN THE COMMONWEALTH COURT OF PENNSYLVANIA



Van Industries, Inc.,                          :
                          Petitioner           :
                                               :
                    v.                         :
                                               :
Commonwealth of Pennsylvania,                  :   No. 861 F.R. 2015
                     Respondent                :


                                       ORDER

             AND NOW, this 21st day of June, 2019, the Board of Finance and
Revenue’s December 2, 2015 order is affirmed. The parties have 30 days from the
entry of this order in which to file exceptions.



                                        ___________________________
                                        ANNE E. COVEY, Judge
