United States

Pennsylvania: Purifying and Distilling Water is Not Manufacturing

Dec 12, 2016
From KPMG TaxWatch

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Recently, the Commonwealth Court of Pennsylvania ruled that purifying and distilling water did not constitute manufacturing. Under Pennsylvania law, the purchase or use of tangible personal property by a person engaged in the business of manufacturing tangible personal property is exempt from the measure of sales and use tax.  The taxpayer at issue took water from municipal systems and converted it to purified water and distilled water. The taxpayer’s predecessor had received rulings from the Board of Finance and Revenue and Board of Appeals holding that the activity of purifying water constituted manufacturing. Nevertheless, several years later, the Department of Revenue took the position that the taxpayer was not engaged in manufacturing and that it owed sales and use tax on various purchases of supplies and equipment used to produce its purified and distilled water. After the Board upheld the assessment, the taxpayer appealed.

Before the court, the taxpayer argued that it qualified for the exclusion because the processing and manufacturing of its purified and distilled water products caused a permanent change in the composition and character of the source water. After reviewing a line of cases holding that filtering and pasteurizing various products did not change the products sufficiently to constitute manufacturing, the court ruled in favor of the Commonwealth. Several cases relied on by the court addressed taxes other than sales and use taxes; however, the court noted that they all addressed whether the processes in question created a new and different product. Notably, the Pennsylvania Supreme Court, in a case from 1925, held that a capital stock tax exemption for manufacturing did not apply to a taxpayer engaged in the production of distilled water.

The taxpayer also argued that because the various entities had previously determined that its predecessor was engaged in manufacturing, the Department was collaterally estopped from determining otherwise. The court was not persuaded. In its view, the Commonwealth could not be estopped from assessing a tax due to the failure of officials to impose taxes under a mistaken impression of the applicable law. For more information on DS Waters of America, Inc. v. Pennsylvania, please contact Joe Duch at 412-232-1578.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.