Paris Manufacturing Co. v. Commonwealth

ZAPPALA, Justice,

dissenting.

I dissent from the opinion of the majority. Resettlement Orders of the Board of Finance and Revenue are proper under the Tax Reform Code, Act of March 4, 1971, P.L. 6, No. 2, Art. IV, § 401(3)2(a)(18), as amended, 72 P.S. § 7401(3)2(a)(18), which provides as follows:

If the allocation and apportionment provisions of this definition do not fairly represent the extent of the taxpayer’s business activity in this State, the taxpayer may petition the Secretary of Revenue or the Secretary of Revenue may require, in respect to all or any part of the taxpayer’s business activity:

(A) Separate accounting;

(B) The exclusion of any one or more of the factors;

*24 (C) The inclusion of one or more additional factors which will fairly represent the taxpayer’s business activity in this State; or

(D) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income.

This provision allows variation from the usual apportionment formula, as was done here.

The Board acted in accordance with what is known as the “throw out” rule, which implements the above-cited Tax Reform Code provision and is set forth at 61 Pa.Code § 153.43. The regulation provides for a case by case review to determine whether departure from the usual formula is required for equitable apportionment. It states that “an exclusion of sales from the sales factor may be effected in those cases where the statutory sales factor percentage is deemed by the Department (of Revenue) to be disproportionate to the property factor or payroll factor percentages or both and the excluded sales of tangible personal property delivered or supplied to a purchaser in a state or states wherein the taxpayer conducts no business activity which is taxable in such state or states____ (The rule is applied) by the exclusion from the denominator of the sales factor of those sales of tangible personal property delivered or supplied to a purchaser in a state:

(1) Wherein the taxpayer is not subject to a net income tax, a franchise tax measured by net income, a franchise tax for the purpose of doing business, or a corporate stock tax, or

(2) Which does not have jurisdiction to subject the property to a net income tax.”

We approved of the “throw out” rule in Hellertown Manufacturing Co. v. Commonwealth, 480 Pa. 340 , 390 A.2d 732 (1978). That case involved a corporation that conducted all of its manufacturing activities and had all of its personnel and tangible property, but less than one percent of its sales in Pennsylvania. It was not jurisdiction-ally subject to taxation in any other state except Ohio, *25 where it paid a fifty dollar a year franchise tax. The exclusion of sales in states where the taxpayer was not jurisdictionally subject to taxation resulted in a sales factor of 96%. The “throw out” rule as applied in Hellertown was consistent with the Tax Reform Code and took reasonable account of the fact that the taxpayer’s operations were within the Commonwealth. I would reaffirm the validity of Hellertown and find it controlling in the instant case. The stipulated facts and the high apportionment factors for property and payroll as cited in the majority show that the bulk of Appellant’s operations are within the Commonwealth. The sales factor is disproportionately low as not to fairly represent the concentration of activities here. This is the type of situation that the tax code covers in § 401(3)2(a)(18). It should be dealt with by means of the “throw out” rule.

I would affirm the Order of the Superior Court.

NIX, C.J., and McDERMOTT, J., join in this dissenting opinion.