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March 3, 1962



Charles W. Hull, with him William H. Wood, and Hull, Leiby and Metzger, for appellant.

N. David Rahal, Deputy Attorney General, with him David Stahl, Attorney General, for Commonwealth, appellee.

Before Bell, C.j., Musmanno, Jones, Cohen and Eagen, JJ.

Author: Musmanno

[ 406 Pa. Page 324]


The basic and only question to be decided in this appeal may be stated as follows: Is the production of ice by artificial methods for commercial purposes to be regarded as "manufacturing"? What is the difference, so far as the process of freezing is concerned, between placing a glass of water on an outer window sill (in January with the temperature under 32 degrees) and pouring water into vats where it is treated by chemicals and machinery so that it is transformed into shiny frozen blocks?

The parties involved in this appeal seek an answer to this question not out of intellectual curiosity but because the answer is transformed into money. The Commonwealth of Pennsylvania, anxious and eager as it has to be to raise funds, in order to run the government, has nevertheless, because of certain policies which it is unnecessary to discuss here, decided to exempt from payment of franchise taxes corporations which are engaged in manufacturing enterprises.

It is thus to the benefit of any corporation to have its business considered as manufacturing because it pays less taxes than those businesses which produce their commodities through the process of non-manufacture. The appellant in this case, the American Ice Company, once enjoyed exemption from state taxation because its ice-making activity was regarded as manufacture under the capital stock tax law but now it has been billed by the Commonwealth for corporate franchise taxes on that same ice-making activity, though both the capital stock tax and franchise tax laws provide for manufacturing exemptions. This inconsistency, if inconsistency it is, brought into existence the present litigation, which arose as follows.

The American Ice Company is a New Jersey corporation qualified to do business in Pennsylvania as a foreign corporation since 1912. The Pennsylvania Certificate

[ 406 Pa. Page 325]

    of Authority issued to it in 1933 under the 1933 Pennsylvania Business Corporation Law authorized it to engage, inter alia, in the business of "manufacturing" ice. The Pennsylvania Capital Stock Tax Act of June 1, 1889, P.L. 420, § 21 et seq., as amended (72 PS § 1871 et seq.), provided for a manufacturing tax exemption applicable to both foreign and domestic corporations. The taxing officers classified the ice-making of this corporation as a manufacturing operation and thus levied no tax on its capital stock.

In 1935, however, the Capital Stock Tax Act was amended by the Act of May 16, 1935, P.L. 184, § 1 (72 PS § 1871), by imposing a corporate franchise tax upon foreign corporations doing business within the Commonwealth of Pennsylvania. From 1935, therefore, the American Ice Company became subject to this franchise tax (the capital stock tax remained as to domestic corporations). Since, however, this franchise tax amendment made no provision for a "manufacturing" exemption, no problem arose in this connection until 1956 when the Legislature enacted the amendment of March 15, 1956, P.L. (1955) 1285, § 1 (72 PS § 1871), by providing certain formulas which enabled "manufacturing corporations" to enjoy substantial tax reductions.

In preparing its 1958 Franchise Tax Report, the appellant corporation assumed that its ice business, no different from what it had been prior to 1935, was again entitled to the "manufacturing" exemption for franchise tax purposes, as it had previously enjoyed the manufacturing tax exemption for capital tax purposes.

However, the taxing officers, in settling the corporation's franchise tax account, withdrew the "manufacturing" exemption which it had allowed under the capital stock tax legislation. This withdrawal operated to increase the corporation's franchise tax liability for the year 1958 from $1,081.62 to $3,264.50.

[ 406 Pa. Page 326]

The corporation petitioned for resettlement under The Fiscal Code, 72 PS § 1102, protesting the disallowance of the exemption. The petition being refused, it petitioned for review under § 1103 of the Code and the review was refused. It then appealed to the Court of Common Pleas of Dauphin County which sustained the settlement of the appellant's franchise tax liability for the year 1958. An appeal to this Court followed.

The technical question involved is whether a foreign corporation engaged in making artificial ice is entitled to the "manufacturing" exemption under the franchise tax legislation ( § 21 of the Act of 1889, P.L. 420, as amended, 72 PS § 1871). The actual stake presently involved is $2,182.88, but the decision will, of course, reflect many more thousands of dollars which may or may not have to be paid in the future, dependent on the rule herein announced.

All this brings us back to the question announced at the outset: Is the production of ice by artificial methods for commercial purposes to be regarded as "manufacturing"? This question would appear to have been definitively resolved by our Court in Armour and Company v. Pittsburgh, 363 Pa. 109. In that case the same contentions as to large and extensive plants, intricate machinery and delicate operations were made as are made in the instant case and all of them were rejected by this Court. In that case the Court held that the changing of water into ice with the aid of the alleged intricate machinery and large and extensive plants did not of itself make ice a manufactured article and that therefore it was subject to the mercantile license tax levied by the City and the School District of Pittsburgh. Justice, later Chief Justice, STERN, speaking for a unanimous Court, said, "... It was said in Commonwealth v. Weiland Packing Co., 292 Pa. 447, 450, 451, 141 A. 148, 149, that 'the process of manufacture

[ 406 Pa. Page 327]

    brings about the production of some new article by the application of skill and labor to the original substance or material out of which such new product emerges. If however there is merely a superficial change in the original materials or substances and no substantial and well signalized transformation in form, qualities and adaptability in use, quite different from the originals, it cannot properly and with reason be held that a new article or object has emerged, - a new production been created.' Nor is it of legal significance in this connection that the operations thus conducted require large and extensive plants and organizations, trained men and intricate machinery, for even though the labor be skilled, the operations delicate, a large plant involved, and expensive machinery utilized, such factors, neither ...

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