The Pennsylvania Board of Finance and Revenue (the “BF&R”) determined that Aero Aggregates of North America LLC (“Aero Aggregates”) was entitled to a partial refund of sales tax that it paid on natural gas, as such natural gas was used to power equipment directly used in its manufacturing operations. In Re: Aero Aggregates of North America LLC, Dkt. No. 2334167 (Bd. Fin. & Rev. Aug. 29, 2024).

The Facts: Aero Aggregates manufactures ultra-lightweight foamed glass aggregates from consumer recycled glass. Aggregates are used as building material in infrastructure construction projects, such as lightweight fill for highways, bridge abutments, and retaining walls. 

To turn the recycled glass into the foamed glass aggregates, the glass powder is mixed with a foaming agent that is sent through kilns to be softened. The foaming agent creates bubbles within the softened glass that ultimately form the foamed glass aggregates. In this process, Aero Aggregates uses certain equipment that is powered by natural gas. For the periods at issue, Aero Aggregates paid sales tax on its natural gas purchases but subsequently filed a petition for refund with the Board of Appeals (the “BOA”), claiming such purchases were exempt from sales tax because the natural gas was directly used in manufacturing operations.

The BOA granted partial relief because it determined certain equipment powered by natural gas was not directly used in exempt manufacturing activities. Aero Aggregates appealed the BOA’s decision to the BF&R, asserting the equipment the BOA denied relief on was all used as part of its manufacturing process.

The Law: Machinery, equipment, and supplies used directly in manufacturing are exempt from Pennsylvania’s sales and use tax. In determining whether certain property is exempt from tax, Pennsylvania’s administrative code provides examples of property that is directly used and property that is not directly used in manufacturing. Relevant here, transporting property before such property is used in the first production stage is considered a preproduction activity, and equipment used to transport such property is subject to tax. In addition, maintenance, service, and repair work—but not replacement parts—are subject to tax. 

The Decision: The BF&R ultimately granted Aero Aggregates additional relief and adjusted the percentage of exempt purchases as determined by the BOA. The BF&R held that equipment that removes and later reintroduces glass powder from the production line is part of the manufacturing process and is exempt from tax. 

The BF&R agreed with the BOA on certain operations, however. It found that equipment that removes metals out of the glass powder is part of preproduction operations and thus subject to tax. It also found that maintenance equipment for onsite repairs was subject to tax. 

Conclusion: Aero Aggregates did not appeal the BF&R’s decision to the Commonwealth Court. If this case had come before the BF&R only a few months later, the outcome may have been different, as the BF&R was recently granted additional authority regarding tax disputes. Under SB 1051, which was signed into law at the end of October, the BF&R has authority to initiate and oversee a formal settlement process. Under this process, the BF&R shall appoint a third party (who must be an attorney in good standing who has significant experience with Pennsylvania tax law) to preside over settlement conferences that can be requested by either party of the tax dispute or the BF&R itself. The new law was passed in hopes of permitting a faster resolution for tax disputes with the Department of Revenue and establishing a more equitable appeals process.