Appeal, No. 25, May T., 1957, from judgment of Court of Common Pleas of Dauphin County, No. 59, Commonwealth Docket, 1954, in case of Commonwealth of Pennsylvania v. National Biscuit Company. Judgment affirmed; reargument refused January 2, 1958.
Roy J. Keefer, with him Leslie M. Swope, Charles J. Biddle, Hull, Leiby & Metzger and Drinker, Biddle & Reath, for appellant.
George W. Keitel, Deputy Attorney General, with him Thomas D. McBride, Attorney General, for appellee.
Before Jones, C.j., Bell, Chidsey, Musmanno, Arnold and Jones, JJ.
OPINION BY MR. JUSTICE CHIDSEY
This appeal by National Biscuit Company questions the amount of State tax imposed on it for the year 1952 under the Act of May 16, 1935, P.L. 184, which imposes a franchise tax on foreign corporations doing business in Pennsylvania.
Appellant was incorporated in New Jersey, has its principal office in New York City and is duly registered to do business in Pennsylvania where during the tax year in question it engaged in its business of the manufacture and sale of bakery products. Following the filing of its franchise tax report for said year and in conformity therewith, the tax payable by appellant was settled by the fiscal officers of the Commonwealth in the amount of $58,321.60. A petition for resettlement was refused. Appellant paid the tax but filed a petition for review with the Board of Finance and Revenue which was denied and the tax settlement sustained. On appeal, the Dauphin County Court (four judges sitting) upheld the action of the tax authorities and entered judgment nisi in favor of the Commonwealth and against appellant in the said amount of $58,321.60 (to be marked satisfied upon payment of costs). After consideration of exceptions filed, the court entered a final judgment affirming its judgment nisi. This appeal followed.
Appellant's contentions will be better understood by a preliminary reference to the tax legislation involved. Prior to the enactment of the Franchise Tax Act of 1935, both domestic and foreign corporations were subject to the Capital Stock Tax Act of June 1,
, P.L. 420, which, as repeatedly held by this Court, imposed a tax on property. Therefore, in the case of foreign corporations there was taxed only so much of the corporation's capital stock as the ratio of tangible assets within the Commonwealth bore to all of the assets of the foreign corporation wherever situated. This worked an unfair discrimination in favor of foreign corporations against domestic corporations (see Commonwealth v. Columbia Gas and Electric Corporation, 336 Pa. 209, at p. 215, 8 A.2d 404), which was remedied by abandonment of the capital stock tax as to foreign corporations and the imposition of a franchise tax in its stead. This was accomplished by amendment to the Capital Stock Tax Act of 1889: (See 72 PS § 1871 for the Act of 1889 as amended by the Act of 1935). The amendatory Act of 1935 is entitled "An Act to further amend ... by substituting a franchise tax on foreign corporations in lieu of the capital stock tax on such corporations". The new tax thus imposed on foreign corporations is, as termed in the title and in the body of the amendatory Act, a "franchise tax", i.e., a tax on the privilege of doing business in the Commonwealth as we have frequently stated. In order to determine the value of the exercise of this privilege conferred by the Commonwealth, the Franchise Tax Act provides a formula for the ascertainment of the corporation's activities within the State. The business transacted in the State is measured through allocation fractions involving the proportion which the tangible property in the State, the payroll in the State and the gross receipts in the State respectively bear to the total assets, payroll and gross receipts of the corporation. It is unnecessary to set forth in detail the factors composing the formula. They were discussed at length in the Columbia Gas case, 336 Pa., supra (see p. 214 et seq.) and in Commonwealth v. Ford Motor Company, 350 Pa. 236, (see
p. 240 et seq.), 38 A.2d 329 and the formula approved as a reasonable measure of value.
In accordance with the formula and as required thereunder for the determination and application of the allocation fractions necessary for the computation of the tax, the taxing departments in appraising appellant's entire capital stock included all of the defendant's tangible and intangible assets as listed in the balance sheet contained in its Franchise Tax Report for 1952, excepting its investment in shares of stock of subsidiary companies operating in foreign countries which, together with the income derived therefrom, was excluded; this exclusion is not in issue. Claiming that the tax in question is a property tax and therefore extraterritorial assets of the corporation may not be included in arriving at the taxable valuation, appellant asserts that the formula or method applicable under the Capital Stock Tax Act should be applied to it. By stipulation it was agreed that under the formula prescribed by the Franchise Tax Act the taxable valuation is $11,664,320, and the resulting tax $58,321.60 as settled; that if, as claimed by appellant, the method or formula used in settling capital stock tax against appellant prior to the enactment of the Franchise Tax Act were applied, the taxable valuation would be $5,734,202 and the tax thereon $28,671.01 which, since the tax as settled in the amount of $58,321.60 was paid, would entitle appellant to a credit of $29,650.59.
Appellant contends that the tax as computed and imposed on it offends various provisions of the State and Federal Constitutions. The contention rests upon the premise or assumption that the Franchise Tax Act of 1935 imposed a property tax. In cases decided by this Court following the passage of the Act of 1935 we unequivocally and repeatedly held that the franchise tax imposed by it is not a property tax but, as its name
implies, a tax levied for the privilege of doing business in the Commonwealth, and its constitutionality was upheld: Commonwealth v. Columbia Gas and Electric Corporation, supra (1939); Commonwealth v. Ford Motor Company, supra (1944); Commonwealth v. Quaker Oats Company, 350 Pa. 253 (1944), 38 A.2d 325; Commonwealth v. Monessen Amusement Company, Inc., 352 Pa. 120 (1945), 42 A.2d 158. The constitutional attacks upon the Act rested then, as they do now, upon the contention that the tax imposed by it is a property tax.
In Commonwealth v. Columbia Gas and Electric Corporation, supra, in which the constitutionality of the Franchise Tax Act was upheld in the first judicial interpretation of the tax, this Court said at p. 217 et seq.: "Did the legislature intend to change its old policy of levying a property tax and create in its stead a franchise tax upon foreign corporations? We concur with the court below in its conclusion that the tax is a franchise tax and not a property tax. The legislature in the title to the act called it a franchise tax. While not conclusive, some weight should be given to this designation in determining the nature of the tax. ... Whether this is a property tax or a franchise tax rests to some extent upon the method of its ascertainment and the incidence of the tax itself. Where a tax is imposed directly on specific property, it is a property tax. The incidence of a franchise or privilege tax is upon a franchise or privilege and not upon property or capital. ...
"Among the standards used for distinguishing a franchise tax from a property tax has been the method adopted for laying them and fixing the amount. ... The determination of the value of the franchise under the amendatory Act may bring into consideration property situated within the Commonwealth, and give to it
a functional value as part of organic unit. But the incidence of the tax is fixed upon the value of the franchise; not upon the property itself. To ascertain that taxable value there must, of course, be a method.
"Under the 1935 Act, the underlying element in the ascertainment of the value of the franchise is the value of the entire capital stock of each foreign corporation. We referred to this in Arrott's Estate, 322 Pa. 367, as being the base. The attempt to determine what part of the value of this base should be the taxable value called for by the Act is to ascertain with approximate correctness the equivalence of that value which the legislature deemed the franchise or right to do business in this State to have." (Emphasis supplied).
In Commonwealth v. Ford Motor Company, supra (appeal dismissed 324 U.S. 827), at p. 240 et seq. we said: "... This Act imposes a franchise or excise tax upon foreign corporations as distinguished from a property or ad valorem tax. Prior to 1935, foreign corporations doing business here were required to pay a capital stock tax, which, as a property tax, proved unsatisfactory and produced unfair results. As we stated in Arrott's Estate, 322 Pa. 367, 372, 185 A. 697, the Act of 1935, by changing the incidence of the foreign corporation tax, endeavored to achieve a more equitable measurement of taxation for this class of corporation. It accomplished this by imposing a franchise tax not upon capital stock but measured by capital stock. The tax base was determined, not by the allocation to Pennsylvania of an arbitrary percentage of the total capital stock of the corporation, but, through the use of a tripartite formula, by ascertaining, insofar as possible, the relation of the corporate activities in this State to the activities of the corporation everywhere. In the Columbia Gas and Electric Corp. case, supra, at page 216, we said: 'The tax base represents the value of
[the] right to do business in this State.' ... (Emphasis the Court's).
"In the Columbia Gas and Electric Corp. case, supra, we held that the tax, not being a property tax, but a tax upon the privilege of engaging in business in this Commonwealth, should be measured by a valuation reflecting capital so used as to affect the value of the Pennsylvania franchise, rather than a ...