Opposition Brief — Erieview Cartage, Inc. v. Pennsylvania Board of Finance & Revenue

FILED

NO. 98-494 OCI 26 1998

IN THE OFFICE OF THE CLERK

SUPREME COURT OF THE UNITEDSTATESURT Us

October Term, 19938

ERIEVIEW CARTAGE, INC.

Petitioner

Ve

COMMONWEALTH OF PENNSYLY ANIA,

BOARD OF FINANCE AND REVENUE,

Respondent

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

D. MICHAEL FISHER

Attorney General

BY: J. BART DeLONE

Deputy Attorney General

Counsel of Record

CALVIN R. KOONS

Senior Deputy Attorney General

JOHN G. KNORR, III

Chief Deputy Attorney General

Chief, Appellate Litigation Section

Office of Attorney General

15th Fl., Strawberry Square

Harrisburg, PA 17120

(717) 783-3226

QUESTION PRESENTED

I. Whether a state taxing statute violates the Commerce

Clause where it complies with every factor outlined by this Court

in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

TABLE OF CONTENTS

PAGE:

TABLE.GE AU TRAAMs a5 6 din CRA ns Vee ii

STATEMENT OF THE CASE. 6.5.5.5 2.52005 en |

REASONS FOR DENYING THE WRIT .......... .4

I. THERE IS NO CONFLICT OR CONFUSION

CONCERNING WHAT FACTORS DETERMINE

WHEN A STATE TAXING STATUTE COMPLIES

WITH THE COMMERCE CLAUSE ............ 4

COINCEAIIES i 5 5. ccna BC Uhh eae ee 10

APPENDIX

OPINION OF THE COMMONWEALTH

COURT OF PENNSYLVANIA

(Aer 0s aa Dany te wk Sib bey BO la

OPINION OF THE COMMONWEALTH

COURT OF PENNSYLVANIA

(REPORTED AT 654 A.2d 276 (1995)) ...... 8a

Sue RET FIGED 6 Se Eee eee 16a

TABLE OF AUTHORITIES

Commonwealth of Virginia, Department of

Taxation v. B.J. McAdams,

227 Va. 548, 317 S.E.2d 788 (1984) ...... 6,7,8

Complete Auto Transit, Inc. v. Brady,

per e CROFT Pe eich Sic ea, passim

Container Corp. of America v. Franchise Tax Board,

cent A SA RS 3

Erieview Cartage, Inc. v. Comm. of Pa.,

___ Pa. Cmwith. Ct. _—, 654. A.2d 276 (1995) .. 2

Erieview Cartage, Inc. v. Department of Revenue

of Jllinois,

No. 1-93-2565, (Ill. App. Ct., April 24, 1996) .. . 6

Quill Corporation v. North Dakota,

ee 5

Spector Motor Services, Inc. v. O’Connor,

ce ES RE eer 6

Tyler Pipe Industries, Inc. v. Washington State

Department of Revenue,

ee WMMCEERO MEO OAS Sb dae. ee a 5

RULES:

Supreme Court of the United States Rule 14.1(I(i) ..... 2

Supreme Court of the United States Rule 14.1(I)(ii) .... . 2

STATUTES:

i |) a 2

|

STATEMENT OF THE CASE

Petitioner, Erieview Cartage, Inc., asks the Court to grant

certiorari to review an order of the Pennsylvania Supreme Court that

affirmed without opinion an opinion of an intermediate appellate

court which rejected petitioner’s challenge to the assessment of its

corporate net income and franchise taxes. Petitioner is a commonly

controlled contract motor freight carrier. During the tax years on

appeal, (1986 through 1988) Petitioner provided transportation

services by hauling property into, through, and from Pennsylvania.

Petitioner served numerous customers with locations throughout

Pennsylvania; Pennsylvania mileage represented 17.6% of

Petitioner’s total mileage in 1986, 15.4% in 1987, and 12.9% in

1988. Petitioner operated within Pennsylvania, and everywhere else,

through the use of drivers and equipment leased from independent

contractors. Respondent’s Appendix pp. 18a-20a.'

'The parties to this action entered into a stipulation of facts, which was

not included in Petitioner’s Appendix. Respondent has attached that stipulation of

facts as part of an appendix to this brief. Reference to that appendix will be cited

by “Respondent’s Appendix p. =

Due to its regular substantial presence, and continuous

conduct of business within Pennsylvania, Petitioner was assessed a

corporate net income tax as well as a franchise tax (hereinafter

collectively the “Taxes”) by the Pennsylvania Department of

Revenue. Petitioner filed a Petition of Review with Respondent, The

Commonwealth of Pennsylvania Board of Finance and Revenue.

That petition was denied and Petitioner appealed to the

Commonwealth Court. The Commonwealth Court, in its opinion ”,

reviewed each of the factors outlined by this Court in Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274 (1977), and determined that the

Taxes comply with the Commerce Clause. The Commonwealth

Court held that Petitioner’s activities have a substantial nexus with

Pennsylvania, that the Taxes: are fairly apportioned®: do not

*Rule 14.1(I)(i) and (ii) of the Rules of the Supreme Court of the United

States requires that Petitioner’s Appendix include all opinions entered in

conjunction with the judgment sought to be review.d. The Commonwealth

parties, Erieview Cartage, Inc. v. Comm. of Pa., __ Pa. Cmwith. Ct. un - 5 Ags

A.2d 276 (1995), incorporated by reference in that opinion, are not included in

Petitioner’s Appendix and are included in Respondent’s Appendix at pp. la-15a.

*The corporate net income tax and franchise tax are both apportioned

using the same revenue miles fraction. (See 72 P.S. §7401(3)(2)(b)(1).) The

numerator of that fraction is the revenue miles within Pennsylvania and the

denominator is the total revenue miles. This fraction is applied to a taxpayers

apportionable income and its franchise tax value to determine what portion of that

<2.

discriminate against interstate commerce‘, and are fairly related to

the services provided by Pennsylvania.* Respondent’s Appendix,

1la-13a. Petitioner appealed to the Pennsylvania Supreme Court.

The Pennsylvania Supreme Court affirmed the Commonwealth Court

without opinion.

income in value is attributable to Pennsylvania. Since the use of this

apportionment formula by all jurisdictions would not result in more than 100% of

a taxpayer’s income being taxed and accurately reflects how trucking income is

earned by apportioning to miles traveled within each state, it satisfies this Court's

two-pronged test to determine what constitutes fair apportionment. See Container

Corp. of America v. Franchise Tax Board, 463 U.S. 159, 169-170 (1983).

*All carriers conducting activities within Pennsylvania are subject to the

Taxes without regard to whether business is conducted wholly within

Pennsylvania or in a nurnber of states. Interstate carriers are not treated any

differently than intrastate carriers.

‘In addition to Petitioner’s use of Pennsylvania’s roadways, bridges, and

the benefits of its roadway maintenance and safety services, Petitioner also availed

itself of Pennsylvania’s economic market and enjoyed the benefits and protection

of its courts, laws, and law enforcement allowing Petitioner to pursue its income

generating activities in Pennsylvania.

3.

REASONS FOR DENYING THE WRIT

I. THERE IS NO CONFLICT OR CONFUSION

CONCERNING - WHAT FACTORS

DETERMINE WHEN A STATE TAXING

STATUTE COMPLIES’ WITH THE

COMMERCE CLAUSE. _

Petitioner attempts to characterize this case as one in which

the Court’s guidance is necessary to resolve a conflict among state

courts concerning the proper factors to determine when a state tax on

interstate carriers violates the Commerce Clause and to explain the

“economic underpinnings” of Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977), the decision which defines those factors. In

fact, Petitioner has cited outdated caselaw that is no longer valid and

misstated modern decisions to create the illusion of conflict where

there is none. There is no evidence that the state courts have refused

to follow Complete Auto or they have had difficulty in interpreting it.

The Commonwealth Court did so, correctly we believe, and so did

the cases cited by Petitioner which postdate Complete Auto. The test

Complete Auto announces is fact specific, therefore the result of that

test varies from case-to-case. These variations present no reason for

the Court to grant certiorari.

Whether or not a state tax complies with the Commerce

Clause® is determined by the application of a number of factors

outlined by this Court in Complete Auto Transit, Inc. v. Brady,

supra. In that case, the Court held that what must be considered is

not the formal language of a tax statute but rather its practical effect;

that such a statute will be sustained against a commerce clause

challenge where it:

[1] is applied to an activity with a substantial nexus

with the taxing State, [2] is fairly apportioned, [3]

does not discriminate against interstate commerce,

and [4] is fairly related to the services provided by

the state.

Id. at 279.’

*Petitioner, in its petition, also suggests that the Taxes violate the Due

Process Clause. However, Petitioner does not present any factual basis or legal

authority to support this assertion. This Court has specifically held that where a

commercial enterprise purposefully avails itself of the benefits of a state’s

economic market, the Due Process Clause does not bar enforcement of that state’s

tax against the commercial enterprise even if it has no physical presence in the

state. Quill Corporation v. North Dakota, 504 U.S. 298, 306-308 (1992).

*Petitioner, in its petition, perfunctorily mentions three of the four

factors outlined in Complete Auto. (Petitioner’s independent contractors travel

more than one and a half million miles on the highways of Pennsylvania on its

behalf each year; representing 12% to 18% of Petitioner’s business activities.

The Court has held that the fact that Petitioner's leased motor transportation

equipment is operated by independent contractors is not constitutionally

significant; that a taxpayers nexus with a state cannot be defeated by the fact that

the activity of the taxpayer is performed by independent contractors instead of

agents or employees. See Tyler Pipe Industries, Inc. v. Washington State

Department of Revenue, 483 U.S. 232, 250 (1987). Accordingly, Petitioner does

-5-

Prior to Complete Auto Transit, Inc. v. Brady, supra, this

Court held that a tax on the privilege of doing business if applied to

what is exclusively interstate commerce violated the Commerce

Clause. Spector Motor Services, Inc. v. O’Connor, 340 U.S. 602,

610 (1951). Complete Auto Transit overruled Spector Motor Services

and held that interstate commerce could be taxed. Complete Auto

Transit, Inc. v. Brady, supra at 288-289. Despite this Petitioner

cites a number of cases that predate Complete Auto, specifically rely

on Spector Motor Services per se rule against taxing interstate

commerce, and are no longer valid law.

The modern cases which Petitioner asserts conflict with the

Commonwealth Court’s decision are Commonwealth of Virginia,

Department of Taxation v. B.J. McAdams, 227 Va. 548, 317 S.E.2d

788 (1984), (a Virginia Supreme Court case) and Erieview Cartage,

Inc. v. Department of Revenue of Illincis, No. 1-93-2565, (Ill. App.

not mention its substantial nexus with Pennsylvania.) Petitioner appears to

suggest that the Taxes do not meet these three factors. Petitioner, in its petition,

misstates the extent of the services provided to it by Pennsylvania and incorrectly

suggests that the Taxes apply differently to interstate commerce but cites

absolutely no legal authority to challenge the conclusion reached by the

Commonweaith Court that the Taxes meet all of the factors outlined in Complete

Auto.

-

Ct., April 24, 1996) (an Illinois appellate court decision).* Review

of these cases establish that all three courts used the factors outlined

in Complete Auto to determine that the Commerce Clause had not

been violated.

Petitioner asserts that the Illinois courts’ conclusions

conflicted with the Commonwealth Court’s decisions and reached a

contrary result concerning the constitutionality of the specific state

taxes. Petitioner's Brief at pp. 8, 15. This assertion is simply

wrong. The Illinois court’s decision reached the same conclusion as

the Commonwealth Court in this action; finding, after review of

Complete Auto, that the Illinois state tax satisfied the requirements of

both the Commerce and Due Process Clauses. Appendix at p. A4.°

Similarly, Petitioner’s suggestion that the Virginia Supreme

court’s decision in McAdams conflicts with the Commonwealth

*This decision was not reported. The petition for leave to appeal to the

Illinois Supreme Court was denied. 168 Ill. 2d 587, 671 N.2d 729, 219 Ill.Dec.

562 (1996).

°The Illinois court did grant partial tax relief finding that pass through

miles were not taxable under the language of the specific Illinois income tax statue

in question. The Commonwealth Court in its decision made clear that in this

action, unlike the Illinois tax, “the Commonwealth’s CNI and franchise taxes

clearly apply to all of the taxpayers activities conducted within the

Commonwealth.” Respondents’ Appendix at pp. 3a and 4a.

<7

\

Court’s decision here because it failed to consider one of the factors

in Complete Auto (whether the tax was fairly related to the services

provided by Virginia), Petitioner’s Brief at p.9, is also incorrect. In

McAdams, the Virginia Supreme Court held:

the present Virginia income tax laws as applied to

interstate commerce are not only constitutional but

are also fair and reasonable recompense for services

and benefits provided to interstate carriers by the

taxpayers of Virginia. The burden of proving that

the statutory scheme of taxation fails to make the

prerequisite requirements of Complete Auto, supra,

rest upon the taxpayer. See Moorman Mfg. Co. v.

Bair, [437 U.S. 267, 275] (1978). McAdams has

carried no such burden here.

Commonwealth of Virginia, Department of Taxation v. McAdams,

supra, 317 S.E.2d at 792 (emphasis added).

The Virginia Supreme Court, the Illinois appellate court, and

the Commonwealth Court, considered the factors referenced in

Complete Auto and held that the taxing statutes in question did not

violate the Commerce Clause. Petitioner may disagree with how

these factors were actually applied in each instance. However,

application of these factors is fact specific, dependent upon the

varying language of the individual state statutes involved and,

therefore, differs from case to case. These differences do not

constitute a conflict between state courts of last resort concerning

what the proper rule of law is. All of these courts used the proper

rule and reached the same conclusions. Petitioner’s attempts to

create the impression of conflict and confusion does not change that

fact.

-9-

CONCLUSION

For these reasons, respondent respectfully requests that the

Court deny the writ of certiorari.

Respectfully submitted,

D. MICHAEL FISHER

Attorney General

J. BART DeLONE*

Deputy Attorney General

CALVIN R. KOONS

Senior Deputy Attorney General

JOHN G. KNORR, III

Chief Deputy Attorney General

Chief, Appellate Litigation Section

Office of Attorney General

Appellate Litigation Section

15th Floor, Strawberry Square

Harrisburg, PA 17120

(717) 783-3226

DATED: October 26, 1998

*Counsel of Record for Respondent

-10-

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent : No. 437 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

¥

COMMONWEALTH OF

PENNSYLVANIA,

Respondent =: No. 438 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent : No. 439 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

Wa

COMMONWEALTH OF

PENNSYLVANIA, :

Respondent =: No. 440 F.R. 1992

la

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent

ERIEVIEW CARTAGE, INC.,

Petitioner

v.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent

: No. 441 F.R. 1992

: No. 442 F.R. 1992

: Submitted: May 9, 1997

BEFORE: HONORABLE JAMES GARDNER COLINS,

President Judge

HONORABLE JIM FLAHERTY, Judge

HONORABLE EMIL E. NARICK, Senior Judge

OPINION NOT REPORTED

MEMORANDUM OPINION

BY PRESIDENT JUDGE COLINS FILED: June 10, 1997

Erieview Cartage, Inc. (Erieview) petitions for review of an

order of the Board of Finance and Revenue (Board) sustaining the

Department of Revenue’s (Revenue) assessment of corporate net

income’® (CNI) and corporate franchise'’ taxes for the years 1986

through 1988.

The stipulated facts of the case and the issues raised by the

parties are identical to those we confronted in our 1995 en banc

decision, Erieview Cartage, Inc. v. Commonwealth, 654 A.2d 276

(Pa. Cmwith.), appeal quashed, 542 Pa. 677, 668 A.2d 1138 (1995)

(Erieview I), involving the tax years 1983 through 1985. In that

opinion we concluded that the Taxpayer was subject to the CNI and

franchise taxes based on the total number of miles it logs in the

Commonwealth, both pass-through miles and miles travelled in

connection with a pick up or delivery in the Commonwealth.

In support of its argument that insufficient nexus exists

between the Taxpayer and the Commonwealth to support taxation,

the Taxpayer cites an unpublished decision in which an Illinois court

found that Erieview was not subject to Illinois income tax with

respect to pass-through miles. Erieview Cartage, Inc. v. Department

Sections 401-412 of the Tax Reform Code of 1971, Act of March 4,

1971, P.L. 6, as amended, 72 P.S. §§7401-7412.

"Sections 601-606 of the Tax Reform Code of 1971, Act of March 4,

1971, P.L. 6, as amended, 72 P.S. §§7601-7606.

3a

of Revenue of the State of Illinois, No. 1-93-2565 (Ill. App. Ct.,

April 24, 1996). (Petitioner’s Brief at Appendix B.) We note that

the Illinois court’s decision reached the same conclusions as this

Court in finding that the Taxpayer’s activities constituted sufficient

nexus with the taxing state to satisfy commerce clause and due

process considerations. The Illinois court found that pass-through

miles were not taxable under the language of the Illinois income tax

Statute in question. Id. (Slip op. at pp. 5-6.) In the instant matter,

the Commonwealth’s CNI and franchise taxes clearly apply to all of

the Taxpayer’s activities conducted within the Commonwealth.

For the reasons set forth in Erieview I, judgment is entered

in favor of the Commonwealth.

/S/_

JAMES GARDNER COLINS, President Judge

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

ERIEVIEW CARTAGE, INC.,

Petitioner

Wa

COMMONWEALTH OF

PENNSYLVANIA, ; ;

Respondent : No. 437 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

1

Respondent : No. 438 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent =: No. 439 F.R. 1992

ERIEVIEW CARTAGE, INC.,

Petitioner

v.

COMMONWEALTH OF

PENNSYLVANIA, ;

Respondent _: No. 440 F.R. 1992

Sa

ERIEVIEW CARTAGE, INC.,

Petitioner

Vv.

COMMONWEALTH OF

PENNSYLVANIA,

Respondent

ERIEVIEW CARTAGE, INC.,

Petitioner

Wi

COMMONWEALTH OF

PENNSYLVANIA,

Respondent

: No. 441 F.R. 1992

: No. 442 F.R. 1992

i

AND NOW, this 10th day of June, 1997, judgment in the

above-captioned matter is entered in favor of the Commonwealth in

the amount of $40,233:

Franchise Tax Corporate Net Income Tax

1986 $4,691 $ 9,121

285 penalty 988 penalty

1987 $4,193 8,330

260 penalty 940 penalty

1988 $3,719 7,149

236 penalty 321 penalty

Judgment becomes final unless exceptions are filed within thirty (30)

days of the entry of this order pursuant to Pa. R.A.P. 1571(i).

/s/

JAMES GARDNER COLINS, President Judge

7a

!

ERIEVIEW CARTAGE, INC., Petitioner,

v.

COMMONWEALTH of Pennsylvania,

Respondent. (Six Cases.)

Commonwealth Court of Pennsylvania.

Decided Feb. 1, 1995.

Before COLINS, President Judge, and McGINLEY, SMITH,

PELLEGRINI, FRIEDMAN, KELLEY and NEWMAN, JJ.

OPINION

COLINS, President Judge.

Erieview Cartage, Inc. (Erieview) petitions for review of an

order of the Board of Finance and Revenue (Board) Sustaining the

Department of Revenue’s (Revenue) assessment of corporate net

income! (CNI) and corporate franchise? taxes for the years 1983

through 1985. We affirm.

The facts of the case are stipulated, and the Court adopts

them. Erieview is a Delaware corporation with headquarters in

Ohio. During the tax years in question, Erieview engaged in

interstate motor transportation of property with Interstate Commerce

Commission authorization as a contract carrier with irregular routes.

Erieview has no certificate of public convenience from the

Pennsylvania Public Utility Commission to engage in intrastate

—

‘Sections 401-412 of the Tax Reform Code of 1971, Act of March 4,

1971, P.L. 6, as amended, 72 P.S. §§ 7401-7412.

*Sections 601-606 of the Tax Reform Code of 1971, Act of March 4,

1971, P.L. 6, as amended, 72 P.S. §§ 7601-7606.

8a

transportation, and it has no certificate of authority from the

Pennsylvania Department of State.

Erieview transports property through Pennsylvania (pass-

through miles), delivers property to Pennsylvania destinations from

outside the state, and picks up property in Pennsylvania for delivery

out of state. In each of the tax years in question, Erieview logged

approximately 2 million highway miles in Pennsylvania, constituting

approximately 15 to 18 percent of its total transportation miles for

each year. Erieview owns no property in Pennsylvania and has no

Pennsylvania business establishment or employees. All of Erieview’s

transportation business is conducted using equipment leased from

independent owner-operators. The leases give Erieview exclusive

possession, control, and use of the equipment and complete

responsibility. e

In the tax years 1983 through 1985, Erieview, as a motor

carrier for hire, filed and paid Pennsylvania gross receipts tax’ based

on interstate miles travelled in Pennsylvania. The gross receipts tax

is an excise tax paid for the use of Commonwealth highways. 72

P.S. § 2184. Erieview did not file Pennsylvania tax returns. Based

on the foregoing information, Revenue’s Bureau of Examination

requested that Erieview file corporate net income tax and foreign

corporation franchise tax reports. Erieview paid settlement amounts

due, and in administrative reviews Erieview argued that it was not

subject to the taxes. On appeal, the Board denied relief.

Erieview now requests that this Court find the assessment of

the CNI and franchise taxes unconstitutional and inconsistent with

Pennsylvania law. Erieview alleges that the imposition of the taxes

_

3Sections 1-9 of the Act of June 22, 1931, P.L. 694, as amended, 72

P.S. §§ 2183-2191.

9a

EE

violates the Due Process Clause of the Fourteenth Amendment‘ and

creates an impermissible burden on interstate commerce’.

The Pennsylvania Taxes

The CNI tax applies to Erieview as a corporation doing

business in the Commonwealth, carrying on activities in the

Commonwealth, and having capital employed or used in the

Commonwealth. 72 P.S. § 7401(1)(i)-(iii). Because Erieview is a

trucking company whose entire business is not transacted within the

Commonwealth, the tax assessment is based on the amount of

Erieview’s total net business income apportionable to revenue miles

within the Commonwealth. 72 P.S. § 7401(3)2(b)(1). The franchise

tax similarly applies to Erieview as a foreign entity doing business,

Carrying on activities, and having capital employed or used in the

Commonwealth; and the assessment is apportioned using revenue

miles within the Commonwealth. 72 P.S. §§ 7601, 7602(b).

__ State Taxation of Interstate Commerce

Having addressed numerous cases involving due process and

Commerce Clause challenges to state taxation of foreign

corporations, the U.S. Supreme Court has provided the framework

for our analysis. We begin by applying the tests for each of the

constitutional requirements to determine whether the Commonwealth

has the authority to tax Erieview at all. Allied-Signal, Inc. v.

Director, Division of Taxation, 504 U.S. 768, 112 S.Ct. 2251, 119

L.Ed.2d 533 (1992). If we determine that the state does have the

authority to tax, we then appiy the unitary business principle to

determine “the reach of the State’s legitimate power to tax.” Jd. at

___, 112 S.Ct. at 2258.

*U.S. Const. amend. XIV.

5U.S. Const. art. I, § 8, cl. 3.

10a

The Due Process Clause requires a minimum connection

between the interstate activities and the taxing state and that the

income attributed to the state be rationally related to the intrastate

value of the corporate business. Quill Corporation v. North Dakota,

504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992); Mobil Oil

Corporation v. Commissioner of Taxes of Vermont, 445 U.S. 425,

100 S.Ct. 1223, 63 L.Ed.2d 510 (1980). As noted in Quill, the

minimum connection or nexus necessary for due process is based in

the principles of fair play and substantial justice the court has

developed in the area of judicial jurisdiction.* Using that standard,

a state can constitutionally tax a corporation’s activities when the

corporation has fair warning that the activity might subject it to the

state’s jurisdiction. Quill, 504 U.S.at___, 112 S.Ct. at 1911.

“[IJn the case of a tax on an activity, there must be a

connection to the activity itself, rather than a connection only to the

actor the State seeks to tax.” Allied-Signal, 504 U.S. at__, 112

S.Ct. at 2258. In the instant case, Erieview has purposefully directed

its activities at the Pennsylvania economic market, and the

Pennsylvania taxes are rationally related to value Erieview receives

from being able to carry on its activities in the Commonwealth.

Erieview engages in the business activity of interstate transportation

of property, and 15 to 20 percent of that activity (as measured in

revenue miles) takes place within the Commonwealth. “[T]he

requirements of due process are met irrespective of a corporation’s

lack of physical presence in the taxing State.” Quill, 504 U.S. at

__, 112 S.Ct. at 1911.

Commerce Clause restrictions on state taxation are currently

embodied in the four-part test set forth in Complete Auto Transit, Inc.

v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). A

)

*See International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct 154,

) 90 L.Ed.95 (1945) (traditional notions of fair play and substantial justice); Shaffer

v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977); Burger King

Corporation v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174; 85 L.Ed.2d 528 (1985)

(purposeful availment of the benefits of an economic market even when the

corporation has no physical presence in the state).

lla

eee emer me

'

tax will be sustained against a Commerce Clause challenge so long

as the tax meets all four requirements: The “tax [1] is applied to an

activity with a substantial nexus with the taxing State, [2] is fairly

apportioned, [3] does not discriminate against interstate commerce,

and [4] is fairly related to the services provided by the State.” Jd. at

279, 97 S.Ct. at 1079.

The challenged Pennsylvania taxes meet the substantial nexus

requirement. In this case, the taxed activity is transportation of

property, and that activity has a substantial nexus with the

Commonwealth. The nexus in this case is the same as that found in

C.1. Whitten Transfer Company v. Department of Revenue, 34

Pa.Commonwealth Ct. 37, 382 A.2d 1251 (1978), wherein we

sustained a Commerce Clause challenge to the application of the CNI

and franchise taxes to a foreign corporation engaged in interstate

freight transportation. In that case, we referred to the fact that the

corporation had a certificate of ‘authority to do business in

Pennsylvania in our discussion of the activity’s substantial nexus with

the Commonwealth, but by no means is such authorization essential

to, or determinative of, the required nexus. The presence or absence

of the certificate has no bearing on the volume of a corporation’s

business activities within the Commonwealth and its ability to take

advantage of the Commonwealth’s economy and services. In fact,

the Commonwealth’s proportionate share of Erieview’s total revenue

miles is greater than its share in C.J. Whitten, and C.I. Whitten had

a certificate of authorization. Jd. at 43-44, 382 A.2d at 1253-54.

The second and third parts of the Complete Auto Transit test

address the potential problem of multiple taxation. The Pennsylvania

CNI and franchise taxes are fairly apportioned and do not

discriminate against interstate commerce. The taxes are assessed

against both domestic and foreign corporations, and the use of an

apportionment formula ensures that the Commonwealth takes no

more than its fair share based on a comparison of total revenue miles

and revenue miles within the Commonwealth. We came to the

identical conclusions in C.J. Whitten Transfer: “The apportionment

fraction used in computing Whitten’s taxes assures that Whitten’s

interstate activities bear no more than ‘a fair share of the cost of the

12a

local government whose protection it enjoys.”’” Jd. at 46, 382 A.2d

at 1255 (quoting Central Greyhound Lines, Inc. of New York v.

Mealey, 334 U.S. 653, 663, 68 S.Ct. 1260, 1266, 92 L.Ed. 1633

(1948) (quoting Freeman v. Hewit, 329 U.S. 249, 253, 67 S.Ct. 274,

277, 91 L.Ed. 265 (1946)).

That Erieview might be subject to double taxation does not

necessarily mean that Pennsylvania’s taxation places an undue burden

on interstate commerce. The apportionment formula ensures that the

Commonwealth taxes no more of the activity than is attributable to

activities carried on within its borders. Assuming that each state

applies its taxes only to those business activities having the required

nexus, multiple taxation should be avoided.’ In Mobil Oil

Corporation, the U.S. Supreme Court rejected the corporation’s

argument that Vermont could not tax a portion of its dividend income

because New York, its domicile, could tax all of its dividend income.

Erieview cannot likewise avoid Pennsylvania taxes by raising the

possibility of multiple taxation in the event that its domicile also taxes

amounts apportionable to Pennsylvania.

The Pennsylvania taxes are fairly related to services provided

by the Commonwealth. Erieview benefits directly and indirectly

from the Commonwealth’s protection, opportunities, and services.

Notably, Erieview avails itself of access to the Commonwealth’s

economic market and enjoys the benefits and protections of its

courts, laws, and law enforcement. Erieview uses the

. Although there is no clear holding on the

issue, prominent commentators have

suggested that income derived from

interstate activities may be taxed in full by

the domiciliary state and on an apportioned

basis by nondomiciliary states in which the

activities are conducted without offending

the commerce clause.

David F. Shores, State Taxation of Interstate Commerce: Quill, Allied Signal and

a Proposal, 72 Neb.L.Rev. 682, 717 n. 150 (1993).

13a

Commonwealth’s roadways and bridges and shares in the benefits of

its roadway maintenance and safety services.

Having determined that Pennsylvania may constitutionally tax

Erieview as a foreign corporation doing business and employing

capital in the Commonwealth, we now turn to the unitary business

principle to ascertain the scope of that power to tax.*

{T]he unitary business rule is a recognition of two

imperatives: the States’ wide authority to devise

formulae for an accurate assessment of a

corporation’s intrastate value or income; and the

necessary limit on the States’ authority to tax value

or income which cannot in fairness be attributed to

the taxpayer’s activities within the State.

Allied-Signal, 504 U.S. at __, 112 S.Ct. at 2259: The unitary

business principle permits a state to tax its proportionate share of the

value of the unitary multistate business operation. The same

principles that permit a state to tax a foreign corporation’s in-state

capital stock by reference to its unitary business also allow

proportional valuation of a unitary business in enterprises of other

sorts. /d.at_ -__, 112 S.Ct. at 2258-59. The principle has long

applied to franchise and income taxes as well as to property taxes.

Id.; see, e.g., Underwood Typewriter Co. v. Chamberlain, 254 U.S.

113, 41 S.Ct. 45, 65 L.Ed. 165 (1920) (income tax).

*The unitary business principle is invoked most often in cases where the

taxing State attempts to reach income obtained from sources unrelated to the

unitary business activity; for example, dividend income, which arises from

investment activity, would not be apportionable if the dividend payor’s activities

are unrelated to the corporation’s activities in the taxing state. See, e.g., Mobil

Oil Corporation (dividend income apportionable as unitary business income);

ASARCO Incorporated v. Idaho State Tax Commission, 458 U.S. 307, 102 .S.Ct.

3103, 73 L.Ed.2d 787 (1982) and F.W. Woolworth Co. v. Taxation & Revenue

Department, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d. 819 (1982) (dividend

income not apportionable because not part of unitary business income).

l4a

Accordingly, Erieview is subject to the Commonwealth’s

CNI and franchise taxes, which have been constitutionally applied in

accordance with the requirements of Due Process and Commerce

Clauses.

ORDER

AND NOW, this Ist day of February, 1995, judgment in the

above-captioned matter is entered in favor of the Commonwealth in

the amount of $79,769:

Corporate

Franchise Tax Net Income Tax

1983 $3,977 $20,252

1984 7,320 20,450

1985 7,320 20,450

Judgment becomes final unless exceptions are filed within thirty (30)

days of the entry of this order pursuant to Pa.R.A.P. 1571(i).

15a

IN THE

COMMONWEALTH COURT OF PENNSYLVANIA

Nos. 437, 438, 439, 440, 441, 442 F.R. 1992

(Consolidated)

ERIEVIEW CARTAGE, INC.,

Petitioner,

vs.

COMMONWEALTH OF PENNSYLVANIA DEPARTMENT

OF REVENUE,

Respondent.

On Appeal from the Orders of the

Board of Finance and Revenue

at Docket Nos. 92-8559 through 92-8564

STIPULATION OF FACTS

Counsel for Petitioner Counsel for Re:pondent

LAWRENCE A. SALIBRA, II KEVIN A. MOURY

Erieview Cartage, Inc. Deputy Attorney General

6060 Parkland Blvd. Commonwealth of Pennsylvania

Mayfield Heights, OH 44124 = Tax Litigation Unit

(216) 423-6918 Strawberry Square, 15th Floor

Walnut and Third Street

Harrisburg, Pennsylvania 17120

FREDERIC M. WILF (717) 783-1460

Saul, Ewing, Remick & Saul

1055 Westlakes Drive, Suite 150

Berwyn, Pennsylvania 19312

(610) 251-5082

16a

STIPULATION OF FACTS

AND NOW, this 25th day of April, 1996, pursuant to Rule

1571(f) of the Pennsylvania Rules of Appellate Procedure, it is

hereby stipulated and agreed by and between Kevin A. Moury,

Deputy Attorney General, counsel for the Commonwealth of

Pennsylvania Department of Revenue (hereinafter “Department of

Revenue”) and Lawrence A. Salibra, II, and Frederic M. Wilf,

counsel for Petitioner, Erieview Cartage, Inc. (hereinafter

“Erieview”), that the following facts may be accepted as true for the

purposes of trial of this matter, that all exhibits referred to herein and

attached hereto are incorporated into this stipulation and made a part

hereof, and that where such exhibits are not the original documents

referred to, they are true and correct copies thereof.

1. Erieview is a Delaware Corporation organized and

existing under the laws of that state. Erieview maintains its

headquarters in Warren, Ohio. Erieview is a subsidiary of Alcan

Aluminum Corporation, an Ohio corporation which throughout all

relevant times hereto conducted business in Pennsylvania and was

subject to Pennsylvania Corporate Net Income and Franchise Tax.

17a

2. During the tax years 1986 through 1988 (the “tax

period”), Erieview provided interstate motor transportation of

property as an Interstate Commerce Commission (ICC) commonly

controlled contract carrier and a common carrier with irregular route

authority. Copies of Erieview’s ICC rights during the period are

attached hereto, made a part hereof and marked as Exhibit A.

During the tax period, Erieview was not authorized by the

Pennsylvania Public Utility Commission to engage in intrastate

transportation within Pennsylvania.

3. During the tax period, Erieview’s operations

consisted of the transportation of property:

a. Through Pennsylvania, from points of origin

outside of Pennsylvania to points of destination outside of

Pennsylvania; and

b. Out of Pennsylvania, from points of origin —

within Pennsylvania (pick-up) to points of destination outside

of Pennsylvania (delivery); and

18a

Cc. Into Pennsylvania, from points of origin

outside of Pennsylvania (pick-up) to points of destination

within Pennsyivania (delivery).

4. During the tax period, Erieview served dozens of

customers with locations in Pennsylvania, most of whom were

business not related in any manner to Erieview. By example, four

of these customers were:

a. Alcan Aluminum Corporation, Erieview’s

parent corporation, located in Williamsburg, Pennsylvania;

b. Lockhart Iron and Steel, located in McKee’s

Rock, Pennsylvania;

c. Pre-Finished Metals, located in Morrisville,

Pennsylvania;

d. J.T. Ryerson, located in Philadelphia,

Pennsylvania.

5. Erieview’s mileage in Pennsylvania highways totalled

1,861,211 miles in 1986, 1,766,995 miles in 1987, and 1,536,002

miles on Pennsylvania’s highways in 1988. During the tax period,

Pennsylvania mileage represented 17.6% total Erieview mileage in

19a

1986, 15.4% in 1987, and 12.9% in 1988. Tabulated, the numbers

appear as follows:

1986 1,861,211 10,587,260 17.6%

1987 1,766,995 11,443,839 15.4%

1988 1,536,002 11,906,952 12.9%

6. During the tax period, Erieview operated both within

Pennsylvania and without Pennsylvania solely with drivers and

equipment leased from independent contractors. A typical lease

agreement is attached hereto, made a part hereof and marked as

Exhibit B.

pA None of the motor vehicles used in interstate

commerce were owned by Erieview. All of the independent

contractors had the right to contract with other entities, even those in

competition with Erieview, because there were no restrictions on

such lessors in any agreements, written or oral, with Erieview.

During the tax period, for all other States in which Erieview

operated, it operated in the same manner as it operated within

Pennsylvania. Thus, Erieview operated in all other such States solely

with personnel and equipment leased from independent contractors.

8. During the tax period, Erieview did not engage in

intrastate transportation within Pennsylvania, i.e., the transportation

of property from a point within Pennsylvania (pick-up) to a point of

destination also within Pennsylvania (delivery).

9. During the tax period, Erieview maintained no office

or other place of business within Pennsylvania.

10. During the tax period, Erieview employed

approximately 20 employees including officers. None of the

employees were actually engaged in operating equipment used in

interstate motor transportation of property, either within or without

Pennsylvania. During the tax period, none of Erieview’s employees

worked within Pennsylvania.

11. Throughout the tax period, Erieview did not own any

motor vehicles that were used to transport property under Erieview’s

ICC authority.

12. During the tax period, Erieview filed Pennsylvania

Gross Receipts Tax Reports (Operators of Motor Vehicles for Hire)

and Motor Carrier Road Tax Reports (as the carrier of record).

Erieview paid road taxes to Pennsylvania in the amount of $15,980

2la

for the tax year 1986, $17,214 for tax year 1987, and $15,161 for

tax year 1988. Copies of the Gross Receipts Tax Reports are

attached hereto, made a part hereof and marked as Exhibit C.

13. In response to Erieview’s filing of Gross Receipts

Tax Reports, the Department of Revenue required Erieview to file

Pennsylvania Corporate Tax Reports for corporate net income and

franchise taxes for the tax years 1986, 1987 and 1988. Settlements

of such reports were mailed to Erieview. A copy of these tax reports

and settlements are attached hereto, made a part hereof and marked

as Exhibit D (1986 tax year), Exhibit E (1987 tax year), Exhibit F

(1988 tax year), and Exhibit G (settlements).

14. The settlements described in paragraph 13 above

were the subject of administrative reviews, in which Erieview argued

that it was not subject to the Corporate Net Income tax or the

Franchise Tax on the grounds that the application of such taxes to

Erieview violate Pennsylvania law and the U.S. Constitution. These

administrative appeals were denied, and Erieview has exhausted all

of its administrative appeals. Erieview timely filed its petitions for

review for this appeal to the Commonwealth Court.

22a

mere

15. The sole issue for determination in these cases is

whether Erieview is subject to the Pennsylvania Corporate Net

Income Tax and the Franchise Tax based on Pennsylvania law and

whether such tax is permitted or prohibited by the United States

Constitution.

16. If this Court finds-in favor of Erieview, it should

enter an order that Erieview is not subject to the Corporate Net

Income Tax and the Franchise Tax, and direct that Erieview’s 1986

through 1988 corporate net income tax or franchise tax should be

reduced to zero.

17. If this Court finds in favor of the Department of

Revenue, it should enter an Order affirming the decision of the Board

of Finance and Revenue in each of these cases, and order that

Erieview’s 1986 through 1988 corporate net income and franchise

taxes be sustained, with interest as provided by law.

18. The parties reserve the right to object to any fact

contained in this Stipulation on the grounds of relevancy or

materiality.

Respectfully submitted,

Counsel for Petitioner, Counsel for the Respondent

Erieview Cartage, Inc.: Commonwealth of Pennsylvania:

__/s/ /s/

Lawrence A. Salibra, Il Kevin A. Moury

Erieview Cartage, Inc. Deputy Attorney General

6060 Parkland Blvd. Commonwealth of Pennsy:vania

Mayfield Heights, Ohio 44124 Tax Litigation Unit :,

(216) 423-6918 Strawberry Square, 15th Floor

Walnut and Third Street

Harrisburg, Pennsylvania 17120

(717) 783-1460

RTECS: /s/

Frederic M. Wilf

Saul, Ewing, Remick & Saul

1055 Westlakes Drive, Suite 150

Berwyn, Pennsylvania 19312

(610) 251-5082

24a