Pennsylvania’s broad mining exemption from sales and use tax also includes an exemption for pollution-control devices that is less well known than the general exemption for mining equipment. The pollution-control exemption covers all purchases or use of equipment, machinery, and supplies used to control, abate or prevent air, water, or noise pollution generated in mining operations.1 In fact, in an often-cited decision, the Pennsylvania Commonwealth Court held that the sales and use tax exemption for pollution-control devices is very broad.2 In Kelly Run, for example, the court held that bulldozers, cranes, containers, and a "Trashmaster," were exempt from tax under the pollution-control exemption.3 The court stated that the "items are used only to dispose of industrial wastes, two-thirds of which are hazardous. Since these pieces of equipment are used as pollution control devices more than half of the time, [they are] exempt from the sales tax."4 Thus, under the case law in Pennsylvania, many purchases that you would not normally consider exempt under the manufacturing exemption5 are still exempt under the pollution-control exemption.
Perhaps even less well known than the sales tax exemption is the Pennsylvania capital stock/ franchise tax exemption for pollution-control devices. Like the sales tax exemption, the capital stock/franchise tax exemption applies to equipment, machinery, facilities and other property used in the commonwealth for water and air pollution control or abatement for the benefit of the general public.6 The exemption allows taxpayers to remove the costs of the exempt devices from the numerator of the assets fraction, if using single-factor apportionment, or from the numerator of the property factor, if using three-factor apportionment.7 While the capital stock/franchise tax is scheduled to be eliminated for tax years ending after December 31, 2013, the pollution-control exemption is still relevant for taxpayers who have been assessed additional capital stock/franchise tax for years ending on or prior to December 31, 2013. Of course, the exemption is also relevant for taxpayers that overpaid capital stock/franchise tax and want to seek refunds for open periods.
Taking advantage of the capital stock/franchise exemption for pollution-control equipment can be a bit more difficult than taking advantage of the sales tax exemption because, before claiming the capital stock/franchise tax exemption, a taxpayer must first obtain a qualifying certificate for each device from the Pennsylvania Department of Environmental Protection ("DEP"). Permits can be obtained from the DEP after the equipment is placed into service, and can be used to claim the capital stock/franchise tax exemption retroactively.8 (In order to obtain a DEP permit for equipment, the taxpayer simply has to prove that the equipment was in operation during the open tax year in question.) In certain cases, Reed Smith has been successful in claiming the capital stock/franchise tax exemption for pollution-control devices without obtaining a DEP Permit.
In light of the large amount of air and water pollution-control equipment required for fracking, together with the ongoing push to recycle and reuse "frack water," Pennsylvania’s franchise and sales tax exemptions for pollution-control devices should be resulting in a material amount of tax benefit for most companies currently operating in the Marcellus Shale region of Pennsylvania. In our view, all equipment used to recycle or reuse frack water should be exempt from sales tax and excluded from the franchise tax property or assets factor as pollution control devices.
Unfortunately, we have experienced some push-back from the Pennsylvania Department of Revenue (the "Department") with respect to allowing companies to claim the exemptions for all of their purchases connected with controlling air and water pollution. For example, on occasion, we have seen the Department question whether certain pollution-control equipment is for "the benefit of the general public," or attempt to limit the scope of the exemption to some portion of an entire pollution-control facility or installation.9 In addition, some companies that have properly claimed one or both exemptions have been receiving assessments. However, because of the breadth of the exemptions, our experience has been that such assessments rarely hold up on appeal. So, if your company has received an assessment, or has paid tax on exempt pollution-control devices, or needs assistance in navigating the DEP approval process, you should contact one of our Reed Smith State Tax attorneys to discuss your appeal and/or refund rights.10
For more information on Reed Smith’s Marcellus Shale tax and state tax practice, including information on the scope of Pennsylvania’s exemptions for pollution-control devices, contact the authors of this Alert.
1. 61 Pa. Code § 32.35(a)(2)(ii).
2. See Kelly Run Sanitation, Inc. v. Commonwealth, 487 A.2d 58 (Pa. Cmwlth., 1985).
5. In Pennsylvania, the "mining" exemption is found under the "manufacturing exemption." 72 P.S. § 7201(c); 61 Pa. Code § 32.1
6. 72 P.S. § 7602.1. See also, 61 Pa. Code § 155.11.
7. 61 Pa. Code § 155.11(a).
8. See Cambria CoGen Company v. Commonwealth, Dep’t. of Envtl. Resources, 1995 WL 75063 (Pa. Env. Hrg. Bd. 1995).
9. See id.; The York Water Co. v. Commonwealth, Dep’t. of Envtl. Resources, 1995 WL 347899 (Pa. Env. Hrg. Bd. 1995).
10. Thanks to Brent Beissel, Esq., an associate in the State Tax Group in Reed Smith’s Philadelphia office, for his contributions to this Alert.
Client Alert 2013-138