Commonwealth v. Weldon Pajamas, Inc.

Dissenting Opinion by

Mr. Justice Jones:

Unfortunately I am unable to join the majority opinion.

To me, even a cursory reading of the applicable statute reveals that Weldon, N.Y., is entitled to the exemption. The franchise tax in question [Act of June 1, 1889, P. L. 420, §21, as amended, 72 P.S. §1871 (b)] includes in a foreign corporation’s taxable property “the value of the taxpayer’s tangible property not actually and exclusively used in manufacturing, situated within the Commonwealth. . . .” Weldon, N. Y., is seeking to exclude from its taxable property the average value of the raw material, work in process and finished inventory located at its subsidiary’s plant in Pennsylvania. There is no question that these items are (1) tangible property (2) actually and exclusively used in manufacturing and (3) located in Pennsylvania. While it is true that Weldon, N.Y., does not manufacture anything in Pennsylvania, there is nothing in the statute *489 requiring a corporation to be engaged in manufacturing in Pennsylvania to qualify for the exemption. The only requirement is that the corporation own property in Pennsylvania which is used in manufacturing. Weldon, N.Y., meets this requirement.

The majority has read an exception into the statute which the language itself does not contain. Can the majority justify their exception as being an indication of the true legislative intent? “The purpose of granting the exemption in the Act of 1889 seems to be to encourage the investment and use of capital in manufacturing enterprises so that Pennsylvania’s resources might be developed, its people given employment and the public welfare advanced.” Commonwealth v. Jeca Corp., 31 Pa. D. & C. 2d 759, 766 (1963). “Obviously, the purpose of the manufacturing exemption is to provide incentives to business enterprise to establish and maintain manufacturing facilities in this Commonwealth.” Commonwealth v. Twitchell, 31 Pa. D. & C. 2d 226, 240 (1963). The Commonwealth argues that these policy reasons do not favor the exemption because Weldon, N.Y., does not create employment in Pennsylvania. This contention ignores the simple facts. The number of people the Pennsylvania subsidiary will employ at a given time depends on the amount of raw material which it receives from Weldon, N.Y. If the subsidiary receives nothing from Weldon, N.Y. (perhaps because of unfavorable tax incentives), Pennsylvania citizens who now work for the subsidiary will be laid off. All parties agree that if Weldon, N.Y., actually owned and operated the plant in Pennsylvania, it would receive the exemption. I cannot understand how this difference in result squares with the legislative intent. Certainly, the language of the statute does not say that if a corporation actually manufactures in Pennsylvania it will receive the exemption, whereas if it does the same work through a wholly- *490 owned subsidiary, it will not receive tbe exemption. Whether Weldon, N.Y., or Weldon, Pa., actually operates the plant should have no effect on the employment created, for the same number of shirts will be manufactured regardless of who runs the plant. If the purpose of the statute is to increase manufacturing in Pennsylvania, that purpose is realized if Weldon, N.Y., sends, raw material to its wholly-owned subsidiary in Pennsylvania to be manufactured.

The majority seems to reach its result solely on the strength of Commonwealth v. Williamsport Rail Co., 18 Dauphin 189, aff'd per curiam, 250 Pa. 596 , 95 A. 795 (1915). On the surface the facts of both cases appear identical. What the majority does not mention, however, is that there is a significant difference in the applicable statutes. The Act of June 8, 1893, P. L. 353 states: “But every manufacturing corporation, limited partnership or joint stock association shall pay the State tax of five mills herein provided upon such proportion of its capital stock as may be invested in any property or business not strictly incident or appurtenant to its manufacturing business . . .” (emphasis added). The taxpayer in Williamsport Rail was not involved in manufacturing in Pennsylvania; it did not have a manufacturing business in Pennsylvania. Therefore, the property it was attempting to exempt could not possibly be “incident or appurtenant to its manufacturing business” in Pennsylvania. The statute taxing foreign corporations today has been amended to remove the requirement that the property be actually used in the manufacturing business of the taxpayer. The statute merely says “actually and exclusively used in manufacturing” in Pennsylvania. Under this statute Williamsport Bail Company would be entitled to the exemption, but not under the statute controlling when Williamsport Rail was decided in 1915. In short, Williamsport Rail is *491 no longer cogent authority because of a significant change in the applicable statute.

There is a well-recognized rule that a taxpayer will not lose the manufacturing exemption if he leases a plant to a lessee who does engage in manufacturing. This rule has been codified in the Act of July 11, 1901, P. L. 668, §1, 72 P.S. §1893. Both the court below and the Commonwealth claim that this rule is completely statutory in nature. -In a case decided the year this statute became law, the Dauphin County Court of Common Pleas held that this rule should be read into the Act of 1889 itself and that, in reality, the Act of 1901 was unnecessary. See: Commonwealth v. Cambria Iron Co., 5 Dauphin 101 (1902). In effect, then, this leasing rule is derived from the same language which controls our case.

The majority, apparently realizing that the court below had misunderstood the derivation of this rule, attempts instead to distinguish the lease situation from our case: “But the ownership of raw materials which are converted by another into a manufactured product is far different from the ownership of a manufacturing plant used by another to produce a manufactured product. In the latter instance, the owner of the plant has invested its capital in such a dedicated and permanent way for the furtherance of manufacturing that the Legislature, in its sole discretion, could conclude that such is the equivalent of ‘manufacturing.’ ” First, there is nothing in the Act of 1893 or its successors which indicates that the legislature made the distinction which the majority now urges. As indicated above, the leasing rule is derived from the Act of 1893, which also controls our case, and not from the Act of 1901. Second, the majority has failed to convince me that there is a policy distinction between the two situations which would dictate a different result. The majority is willing to give the manufacturing exemp *492 tion to an investor who builds a plant and leases it. The only connection this individual has with manufacturing is that he built a plant for investment purposes rather than an apartment house or office building and he is not particularly concerned if he leases his plant to a company which employs 50 or 500 employees in their manufacturing work. The impact such an individual has on manufacturing is indirect, at best. The majority is not willing, on the other hand, to give the exemption to a parent company which has a very direct influence on the amount of manufacturing which is carried on by its subsidiary which operates a plant in Pennsylvania. To me it seems, clear that Weldon, N.Y., has at least as great, if not greater, an effect on manufacturing in Pennsylvania as the investor-leasor.

The majority has chosen to ignore the most recent case construing this particular area of the franchise tax. Commonwealth v. Jeca Corp., 31 Pa. D. & C. 2d 759 (1963) also involved a leasing situation. Jeca bought a factory for the purpose of leasing it to a manufacturing corporation. It leased the factory to a company engaged solely in manufacturing. Jeca did not manufacture anything itself, but it did own 60% of the company which did do the manufacturing. In opposing Jeca’s claim for the manufacturing exemption, the Commonwealth argued (1) that Jeca never manufactured anything and (2) that the Act of 1901 only applies if the company now leasing the factory had at some time engaged in manufacturing in the plant. As to the first argument, the court held, “The statute does not require that the taxpayer be engaged in manufacturing. ... It is the use to which the property is put which is determinative of whether or not the property is to be relieved from the capital stock tax.” (31 Pa. D. & C. 2d at 764). This language is broad enough to cover the Weldon, N.Y., situation also. As to the second argument, the court held that Cambria Iron was con *493 trolling and that that case did not hold that the taxpayer must have used the plant for manufacturing purposes at some time in the past in order to qualify for the exemption when it leased the plant.

The court in Jeca further said: “The General Assembly has relieved from tax neither more nor less than is necessary to encourage manufacturing by relieving from the tax the property employed in manufacturing rather than the corporation engaged in manufacturing.” (31 Pa. D. & C. 2d at 766). The court in Jeca, in my opinion, correctly observes that the emphasis should be placed on the property and not on the corporate structure of the manufacturing unit. There is no disagreement in our case that the property in question is used in manufacturing. “By Act of June 8, 1893, P. L. 355, the relieving proviso was changed to its present form so that it now no longer relieves the corporation actually carrying on manufacturing, but it relieves the property actually employed in manufacturing. The history of this legislative change clearly indicates that it was the legislative intent not to have the relieving proviso related to what the owner of the property was doing in the year of taxation. . . .” (31 Pa. D. & C. 2d at 766-67).

In conclusion, I submit that neither the statutory language, legislative intent, nor controlling case law supports the majority’s position.

Mr. Justice Eageist joins in this dissent.