Fedex Ground Package System, Inc. v. Commonwealth

OPINION BY

Judge McGINLEY.

The Commonwealth of Pennsylvania Department of Revenue (Department) has filed exceptions to this Court’s order filed April 17, 2006, which reversed the order of the Board of Finance and Revenue denying FedEx Ground Package System, Inc.’s (Taxpayer) petitions for refund of its corporate net income and franchise taxes for the year ended 1999.

The only issue is how to compute the numerator of the apportionment fraction used to determine the proportion of Taxpayer’s income and value subject to Pennsylvania corporate taxes.

Section 401 of the revenue miles apportionment statute, 72 P.S. § 7401(3)2(b)(l)¹, requires that a truck company, such as Fed Ex, that transacts business both inside and outside Pennsylvania, determine the proportion of its income and value subject to corporate taxes by computation of a special, single-factor apportionment fraction.

The Department contends that the apportionment fraction numerator should be computed by multiplying everywhere receipts per mile ($3.93) by the total number of miles that it transported property in Pennsylvania (28,119,379). This Court agreed with Taxpayer that the apportionment fraction numerator must be computed by multiplying Taxpayer’s average receipts per mile for transporting property in Pennsylvania ($2.94) by the total number of miles that the property is transported in Pennsylvania (28,119,379).

Both parties agree that Taxpayer’s apportionment denominator must be computed by multiplying Taxpayer’s average receipts per mile everywhere ($3.93) by the total number of miles that Taxpayer transported property everywhere (470,-035,455).

Section 401 of the revenue miles apportionment statute provides:

1) All business income of railroad, truck, bus or airline companies shall be apportioned to this Commonwealth by multiplying the income by a fraction, the numerator of which is the taxpayer’s total revenue miles within this Commonwealth during the tax period and the denominator of which is the total revenue miles of the taxpayer everywhere during the tax period. For purposes of this paragraph revenue mile shall mean the average receipts derived from the transportation by the taxpayer of persons or property one mile ....

72 P.S. § 7401(3)2(b)(l) (Emphasis added).

The Department asserts that this Court “rewrote” the revenue apportionment miles fraction in a manner which altered its clear and plain meaning. It contends that the statute contains a single definition of “revenue mile” which is “receipts derived from the transportation of by the taxpayers of persons or property one mile.” The Department asserts that this Court added “Pennsylvania” to the numerator to create a new “Pennsylvania revenue mile.” It further maintains that this Court erroneously turned the revenue apportionment miles fraction into a “sales fraction” because it apportions receipts and not miles.

Taxpayer counters that the phrase “within this Commonwealth” modifies the immediately preceding words “revenue miles.” Further, since a revenue mile is defined as average receipts from transporting people or property one mile, the panel correctly concluded that “revenue miles within this Commonwealth” means “average receipts for transporting people or property one mile within this Commonwealth.”

This Court’s interpretation is consistent with the fundamental principles of apportionment that the numerator should only reflect Pennsylvania activity. This Court applied the definition of “revenue mile” in place of that defined term to determine the plain meaning of the statute. In other words, this Court took the definition of “revenue mile” contained in the second sentence of the statute and substituted that definition for the words “revenue mile” each time the term appeared in the first sentence of the statute. The Court did not re-write the statute. Rather, it gave effect to the statutory definition of “revenue mile” as required by fundamental principles of statutory construction.

The statute clearly requires, first, that Taxpayer figure out what it earned, on average, per mile in Pennsylvania. In this case, Taxpayer earned an average of $2.94 per mile when it transported persons and property within Pennsylvania. To calculate the numerator of the apportionment fraction (which is to reflect income derived from Pennsylvania activity only), that figure must then be multiplied by the actual number of miles Taxpayer transported property and persons in Pennsylvania. That figure yields the average income Taxpayer earned by transporting persons and property in Pennsylvania. So, on the average, Taxpayer earned $2.94 per mile in Pennsylvania and it transported persons and property 28,119,379 miles in Pennsylvania. The product of those two numbers equals “the average receipts derived from the transportation by the taxpayer of persons or property one mile within this Commonwealth”, which is unerringly consistent and in lock step with the language of the statute.

The Department’s method of multiplying “average receipts everywhere” by “Pennsylvania miles” yields an illusory figure which represents nothing in terms of being relevant to what Taxpayer actually earned from its activities in Pennsylvania. It certainly does not represent the average income earned by the taxpayer from its activities in Pennsylvania which, by its clear language, is the object of the apportionment statute’s numerator.

On the other hand, multiplying “Pennsylvania miles” by “Pennsylvania average receipts” yields the average income derived from Taxpayer’s Pennsylvania activity — which is the precise function of the numerator in apportionment formulas. The resulting Pennsylvania revenue miles (which, mindfully, is described in terms of average receipts) is divided by Taxpayer’s overall revenue miles to arrive at the apportionment fraction.

In fact, the Department neglects to insert Taxpayer’s “average receipts per mile for transporting property in Pennsylvania” into the calculation. So, basically, under its interpretation, the income earned by Taxpayer as the result of its activity in Pennsylvania is irrelevant to the apportionment calculation. This is absolutely contrary to the basic function of the numerator in an apportionment fraction which is to derive the average income a taxpayer earns as the result of its activity in Pennsylvania.

Taxpayer, in a compelling example, emphasizes the defect in the Department’s interpretation. Under the Department’s interpretation “average receipts per mile everywhere” would be included in both the numerator and the denominator. Again, the parties agree that Taxpayer’s apportionment denominator must be computed by multiplying Taxpayer’s average receipts per mile everywhere by the total number of miles that Taxpayer transported property everywhere. Applying simple mathematical principles, by including the same multiplier (“average receipts per mile everywhere ”) in both the numerator and the denominator, one simply cancels out the other, an exercise in futility.² What remains, under the Department’s interpretation, is Pennsylvania miles over everywhere miles. The Department acknowledges that the revenue miles statute includes two central concepts, revenue and miles. The Department’s interpretation removes the revenue concept from the formula which clearly ignores the General Assembly’s use of the term “average receipts.”

Average receipts-per x Pa. miles driven Everywhere mile

Average reeeipts-per x Miles driven everywhere Everywhere-müe

The Department nevertheless maintains that Taxpayer’s interpretation erroneously transforms the revenue apportionment miles fraction into a “sales fraction” because it apportions receipts and not miles. This argument is specious because, again, “revenue mile” is defined in terms of “average receipts.” Expressing the numerator in terms of average receipts does not convert the revenue miles apportionment fraction into a “sales fraction” simply because it allocates income. The Department’s method essentially reduces the fraction to miles over miles, which was clearly not the intent of General Assembly. Otherwise, the General Assembly would not have specifically defined revenue mile in terms of average receipts.

The rationale behind apportionment statutes is to ensure that the Commonwealth taxes a fair share of Taxpayer’s income. Under the Department’s interpretation Taxpayer would pay Pennsylvania taxes on income it earned outside the Commonwealth because the Department’s interpretation fails to limit the numerator of the fraction to Pennsylvania activity. Instead, it has, by effectively including Taxpayer’s “average receipts everywhere” in both the numerator and the denominator, inappropriately apportioned Taxpayer’s business income based on the number of “conventional miles” it transported persons and property in Pennsylvania instead of on Taxpayer’s “revenue miles” as required by the statute.

If the General Assembly intended the revenue miles fraction to be Pennsylvania miles over everywhere miles, it certainly would have crafted the statute that way.

The Department’s exceptions are denied. The matter is remanded to the Board to remand to the Department to recalculate Taxpayer’s corporate net income taxes and franchise taxes for 1999 and issue Taxpayer’s refunds in accordance with this Court’s opinion filed on April 17, 2006.

ORDER

AND NOW, this 27th day of April, 2007, the Exceptions of the Commonwealth of Pennsylvania Department of Revenue are hereby denied. The matter is remanded to the Board to remand to the Department to recalculate Taxpayer’s corporate net income taxes and franchise taxes for 1999 and issue Taxpayer’s refunds in accordance with this Court’s opinion filed on April 17, 2006.

1 . Act of March 4, 1971, P.L. 6, No. 2, art. IV. as amended.

2 . Taxpayer directs this Court to Lawrence S. Leif, College Algebra 43 (1995) (under cancellation law of algebra, factors common to both the numerator and denominator of a fraction are eliminated).