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Pounding Square Pegs Into Round Holes - Pennsylvania Supreme Court Rules That MRI Machines are Tangible Personal Property Upon Installation

State and Local Tax

By Jack Stewart

In December 2011, the Pennsylvania Supreme Court (“the Court”) issued an opinion in the case of North East Imaging Center v. Commonwealth of Pennsylvania, reversing a ruling of the Commonwealth Court. The Court ruled that MRI and PET/CT Scan systems keep their identity as tangible personal property upon installation, thereby making them subject to sales tax.

In the Court’s ruling the Justices indicated that the lower court should not have used the case of Sheetz, Inc., a property tax case, as a basis to determine whether or not an item of tangible personal property becomes part of the realty or retains its identity as tangible personal property upon installation for sales and use tax purposes. The Court believed that the case of Beck Electrical (“Beck”), a sales tax case involving an exempt entity, was more appropriate, even though sales tax rules for exempt entities differ from those applicable to for-profit entities, such as North East Pennsylvania Imaging Center.

In applying Beck, the Court referenced Regulation 150, currently known as 61 Pa Code § 31.11 (“Reg. 31.11”), and commented that in Beck, the focus was on the character of the object, its ability to be installed and removed, its degree of portability, and whether it maintained is functional integrity after installation. The Court concluded what really mattered under Regulation 150 was “the ease with which the property is disassociated from the realty.”

The Court, in its decision, acknowledged the extensive renovations that had to be done to the realty to accommodate the systems, such as “revising the electrical, heating, ventilation, air conditioning, and plumbing systems; installing floor and ceiling supports; enlarging rooms; installing troughs in the walls and conduit above the ceilings to accommodate power cables and wire; installing radio frequency shielding in the walls, floor and ceiling to prevent MRI radio signals from interfering with other devices; installing a vent for safe removal of cryogenic helium vapor that the MRI magnet generated; installing lead panels for radiation shielding; enlarging doors in order to move the PET/CT Scan system into the building; and removing an outside wall in order to move the MRI system into the building.” The PET/CT Scan systems took approximately two weeks to install.

In support of its conclusion the Court stated: “The construction contract here did not use the big piece of medical equipment that would eventually be housed in the building. The construction in fact was just that – a means of housing the imaging equipment, not a means of becoming one with it. The real estate does not take the pictures.” The Court went on to say, “In the end, these machines are nothing more than cameras – they may be big, bulky and complex, but they are just devices that take pictures, the evolution, if you will, of the x-ray machine.”

In spite of all the evidence to the contrary, the Court came to the conclusion that the MRI and PET/CT Scan systems are like a large x-ray machine, which according to Reg. 31.11, is a sales activity and thus, it keeps its identity as tangible personal property upon installation.

In applying the Court’s reasoning, does it make sense for us to believe that, while the real estate does not take the pictures, there are instances when the real estate can wash our car, wash and dry our dishes, or cook our food? After all, car wash equipment, dishwashers (built-in) and ovens (built-in) are all listed under construction activities in Reg. 31.11 and are assumed to become part of the real estate structure upon installation.

One cannot help but to be confused by the Court’s conclusion. While applying the Beck case instead of Sheetz Inc. case and looking to Reg. 31.11 may make sense, one would think that the extensive revisions to the realty, the length of time required to install the systems, and the lack of disassociation of the systems from the realty would provide enough evidence to support an alternative conclusion: that these systems do not keep their identity as tangible personal property and become part of the realty upon installation. The Justices, by classifying these systems as nothing more than cameras and choosing to ignore the method of installation, give one the impression that they were just trying to pound a square peg into a round hole to achieve a desired result.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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