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Pennsylvania Supreme Court Determines that Credit for Tax Erroneously Paid to Vendors Should Be Allowed in Audit

Tax Development Nov 03, 2003

The Pennsylvania Supreme Court in McNeil-PPC, Inc. v. Commonwealth of Pennsylvania, No. 99 MAP 2002, October 22, 2002, ruled that auditors are required to issue determinations for the correct amount of tax, including credits for overpayments of tax paid to vendors.

The Pennsylvania Department of Revenue ("Department") performed a sales and use tax audit on McNeil-PPC ("McNeil") for the period October 1, 1991 through December 31, 1994. The Department performed a detail examination of approximately 780,000 purchases that were made during the audit period. The auditor told McNeil that overpayments of tax on non-taxable purchases would reduce any underpaid amounts. McNeil agreed to two extensions of the three-year limitations period so that the Department could complete the audit.

McNeil relied on the auditor's statement about including overpayments of tax paid to vendors, so they did not present the auditor with a schedule or file a refund claim on these items. The Department assessed a deficiency, and did not include credits for tax that McNeil paid directly to vendors. McNeil filed a timely petition for reassessment with the Board of Appeals, which reduced the assessment for exempt items included, but did not provide adjustments for the overpayment of tax paid to vendors.

McNeil filed a petition with the Board of Finance & Review ("Board") requesting an adjustment for the overpayment of tax and included a detail schedule of these items. The Board denied the petition stating that the request for refund was not made within the three-year period prescribed by Pennsylvania Statue Annotated § 253(a). McNeil filed exceptions with the Commonwealth Court, which was denied on the grounds that McNeil should have been aware of the provisions that they were responsible for filing refund claims within the appropriate time period.

McNeil ultimately appealed to the Pennsylvania Supreme Court contending that the Department is responsible for determining the "proper amount" of tax during the course of an audit and should include credits for overpayments of tax. The Court agreed with McNeil and ruled that once an audit is in progress it is not necessary to file a refund claim for the overpayment of tax. It is the duty of the auditor to determine the correct amount of tax, which would, include any overpayment of tax paid.

If you have any questions regarding this case, please call James Trester, Principal at Ryan & Company, at 972.934.0022. Mr. Trester can also be reached by e-mail.