Pennsylvania State and Local Tax Update—Fourth Quarter 2022

It was a relatively quiet fourth quarter in Pennsylvania, but the Commonwealth Court issued an interesting decision in the sales and use tax and inheritance tax issues. There also was some welcome news for Philadelphia business taxpayers and helpful guidance about realty transfer tax refunds.

In Quality Driven Copack, Inc., v. Commonwealth, the Commonwealth Court overruled the taxpayer’s exceptions and affirmed its decision that the taxpayer was not engaged in manufacturing. The taxpayer purchases food components and packaging materials, blends the components into meals, packages the finished meals into various types of containers, and freezes them to complete the process. The meals then are sold to the taxpayer’s customers.

The taxpayer argued that it was engaged in manufacturing because it uses its skill and technical expertise to blend ingredients for sauces and gravies; sprays ingredients, such as corn, with water and margarine to add to potato mixes; shreds cheeses and adds those cheeses to various products; and adds proteins to various meals before sealing and packaging the meals for the end consumer.

The court reaffirmed its earlier decision holding that the taxpayer didn’t make the requisite substantive change to tangible personal property to be considered a manufacturer of the final products.

In the same decision, the court also reaffirmed its ruling in favor of the taxpayer that certain workers were not providing taxable help supply services to the taxpayer. It reasoned that the taxpayer demonstrated (and the commonwealth couldn’t rebut) that the taxpayer didn’t directly supervise or control the workers of its third-party vendor.

In some good news for Philadelphia taxpayers, the carryforward period for business income and receipts tax net operating loss carryforwards was increased to 20 years. The BIRT net operating loss carryforward has long been capped at three years. In 2018, the city council passed an ordinance extending the carryforward period to 20 years, but that change couldn’t take effect without the commonwealth authorizing legislation. In October 2022, the General Assembly finally amended the enabling legislation, allowing taxpayers to immediately take advantage of the change with respect to losses incurred in 2022 and later years.

Also of note in Philadelphia, because the city conducted a countywide reassessment of property for the 2023 tax year, the common level ratio factor used for realty transfer tax purposes was reduced to 1.00 from 1.08, effective Jan. 1. The 1.00 common level ratio factor should be in place for 18 months—until June 30, 2024.

In other realty transfer tax news, the Commonwealth Department of Revenue published updated guidance on procedures for claiming refunds of overpaid tax. In Realty Transfer Tax Bulletin 2022-01, the department makes clear that refunds of local tax must be claimed directly from the municipality and/or school district, while the department will hand claims for refunds of the state tax.

Taxpayers may request a refund arising from simple issues (such as duplicate payments and mathematical errors) through an administrative process by filing Form REV-1651. However, to claim a refund arising from more complicated scenarios, taxpayers must file a petition for refund with the Board of Appeals. Filing a claim using Form REV-1651 doesn’t toll the statute of limitations for filing a more formal claim—that is, three years from the date the tax was paid.

The bulletin also answers some frequently raised questions regarding the payment of refunds. The department states that any party that was liable for and paid the tax can claim a refund and that agents (such as attorneys or title companies) can file on behalf of a party that paid. Because of the joint and several nature of the tax, the department suggests in the bulletin that, when multiple parties are involved, each file a claim for the portion of the refund to which they are entitled. This will allow the department to mail a refund check to each party.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Christopher A. Jones co-leads Ballard Spahr’s tax-real estate team. He advises clients on a wide range of federal, state, and local tax matters, as well as the tax consequences of complex transactions and associated planning opportunities.

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