DocketNumber: Appeal, No. 3656 C.D. 1983
Citation Numbers: 100 Pa. Commw. 74, 514 A.2d 260
Judges: Barbieri, Craig, Doyle
Filed Date: 8/20/1986
Status: Precedential
Modified Date: 6/24/2022
Opinion by
This is an appeal by Electro-Space Fabricators, Inc. (Petitioner), a Pennsylvania corporation, from the order of the Pennsylvania Board of Finance and Revenue (Board) which refused to resettle Petitioners capital stock tax liability for the year ending December 31, 1981. This case comes before us on a stipulation of facts submitted by both parties which we hereby adopt and presents as its sole issue whether a domestic corporation which is not subject to tax in any state except Pennsylvania may elect to use the “three factor apportionment method” set forth in Article IV of the Tax Reform Code of 1971 (Code)
Petitioner is incorporated in Pennsylvania and conducts all of its business from its headquarters in Topton, Pennsylvania. During the 1981 tax year, Petitioner was not subject to a net income tax, franchise tax, or corporate stock tax in any state other than Pennsylvania. For purposes of this appeal, the parties have stipulated that Petitioners capital stock value is $6,000,000.00.
Under Section 602(a) of the Code,
In this case, Petitioners use of the three-factor apportionment method would reduce its tax base considerably, because although it has no property and wages assignable to other states, all of its Pennsylvania property and wages are exempt from taxation through the manufacturing exemption.
The Commonwealth contends that Petitioner is prohibited from electing the three factor apportionment method by the decision in Commonwealth v. Greenville Steel Car Co., 469 Pa. 444, 366 A.2d 569 (1976). In Greenville, the Pennsylvania Supreme Court held that in order for a domestic corporation to use the three factor apportionment formula in Article IV of the Code, the corporation must first establish that it is taxable in another state. Id. at 451, 366 A.2d at 573. The Court based its decision upon the provisions of Article IV which state:
Any taxpayer having income from business activity which is taxable both within and without this State . . . shall allocate and apportion his net income as provided in this definition.
For purposes of allocation and apportionment of income under this definition, a taxpayer is taxable in another state if in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.
Petitioner acknowledges the holding in Greenville and freely concedes in its brief that “Article IV established taxability in another state as a condition precedent for the use of the three factor method for purposes of apportioning income within and without the Commonwealth.” Petitioner contends nonetheless that the Greenville decision is not controlling in the present case. Petitioner argues that unlike the corporation in Greenville, it is not using the three factor method to allocate and apportion its property, wages and sales to states other than Pennsylvania; it is using the method solely to calculate the amount of exemption allowed its Pennsylvania assets used in manufacturing. Petitioner claims that Greenville did not decide whether the three factor method was available to a domestic corporation for purposes of calculating the amount of its manufacturing exemption since such an exemption was not available during 1971, the tax year considered in the Greenville opinion.
We find these arguments difficult to comprehend. First, the stipulation of facts submitted by the parties indicates that Petitioner does intend to use the three factor method to allocate a portion of its sales to states other than Pennsylvania.
Petitioner also cites Gilbert Associates, Inc. v. Commonwealth, 498 Pa. 514, 447 A.2d 944 (1982), in which the Supreme Court held that Section 602 of the Code was unconstitutional because it did not allow foreign corporations the same option of calculating their taxes by use of either the single factor method or the three factor method.
As applied to a domestic corporation electing to be treated as a foreign corporation, the use of the three factor apportionment formula is a legislative grant by which the taxpayer can reduce its tax liability. Use of the formula is in the nature of an exemption or deduction and, as such, must be strictly construed.
Id. at 451, 366 A.2d at 573. Thus, at least with respect to domestic corporations, the holding in Greenville is authoritative and controls this Courts disposition of the present matter.
In the present case Petitioner has admitted that it is a Pennsylvania corporation not subject to taxation in any state other than Pennsylvania. It thus has not met the condition precedent to the use of the three factor method in Article IV, and under the controlling authority of Greenville, must be prohibited from using such method.
Order
Now, August 20, 1986, unless exceptions are filed within thirty days of the date of this order judgment shall be entered in favor of the Commonwealth in the amount of $20,583.97 plus six percent legal interest per annum.
Sections 401-412 of the Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §§7401-7412.
72 P.S. §7602(a).
72 P.S. §7602(b).
The three factor apportionment method can be described by the following equation.
Average Value of Tangible Property in Pennsylvania _ x
Average Value of all Tangible Property
Wages, Salaries, etc, in Pennsylvania _ y
Total Wages, Salaries, etc.
Sales Assignable to Pennsylvania _ £
Total Sales Everywhere
X + Y + Z x Value of Capital Stock _ gase
3
The manufacturing exemption was set forth by a provision in Section 602(a) which, prior to 1983, stated:
Provided, that the provisions of this section shall not apply to the taxation of the capital stock of corporations, limited partnerships and joint-stock associations organized for manufacturing, processing, research or development purposes, which is invested in and actually and exclusively employed in carrying on manufacturing, processing, research or development within the State. . . .
The same manufacturing exemption applied to corporations using the three factor method under language in Section 602(b) which referenced the above provision. The exemption appears under similar language in the current version of Sections 602(a) and 602(b).
With exempted assets excluded, the fractions were as follows:
Non-exempt Property in Pennsylvania _ 0 = 0
All Property 2,814.77
Non-exempt Wages in Pennsylvania = 0 _ 0
Total Wages 2,802,001
Sales Assignable to Pennsylvania _ 352,089 _ .035658
Total Sales 9,521,899
Thus, the average fraction was .035658
Although the manufacturing exemption had appeared in previous tax statutes, it was omitted from the present Code when the Code was enacted in March of 1971. The manufacturing exemption was reinstated by Section 5 of the Act of August 31, 1971, P.L. 362.
See supra, note 6.
See supra, note 5.
Subsequent to Gilbert, Section 602(b) was amended by Section 8 of the Act of December 23, 1983, P.L. 370, to permit a foreign corporation to use the single iactor method of 602(a).