Appeal from judgment of Court of Common Pleas of Dauphin County, No. 333 Commonwealth Docket, 1964, in case of Commonwealth v. Eli Lilly & Company.
Henry T. Reath, with him Sanford D. Beecher, and Duane, Morris & Hecksher, for appellant.
Vincent X. Yakowicz, Deputy Attorney General, with him Eugene J. Anastasio, Deputy Attorney General, and William C. Sennett, Attorney General, for Commonwealth, appellee.
Bell, C. J., Jones, Cohen, Eagen, O'Brien, Roberts and Pomeroy, JJ. Opinion by Mr. Justice Cohen. Mr. Justice Roberts concurs in the result.
Eli Lilly and Company (Lilly) is an Indiana corporation engaged in the production of biological and pharmaceutical products. In marketing these products Lilly follows a dual procedure in which a not-too-fine line is drawn between the actual selling and various promotional activities conducted by it. Virtually all of Lilley's sales are made by it to independent wholesale distributors with whom it has entered into franchising agreements. These distributors in turn sell to retail druggists and hospitals, and the druggists sell to physicians and other individual customers.
Lilly itself maintains a staff of employees through territories, districts and regions whose primary function is to stimulate demand for Lilly's products. The essential cog in this structure is the territorial "detail man" who visits doctors, hospitals and drug stores in his territory on a regular basis to urge their use of Lilly's products. These detail men also perform certain functions for Lilly with the distributors, but direct selling as such is not one of them.
In Pennsylvania Lilly maintained four district offices in 1959 (the tax year involved here) to which the territorial detail men reported. A district manager was in charge of each office. At the pinnacle of this hierarchy
is the region formed of a number of districts. All of Pennsylvania was part of a region located in Indianapolis under the authority of a regional director.
Lilly maintained no inventories in Pennsylvania. All orders from its Pennsylvania distributors were filled from inventories located in Indianapolis.
In 1959 Lilly filed a Corporation Income Tax report with Pennsylvania. In the numerator of its gross receipts fraction it excluded all receipts from sales to Pennsylvania distributors. On settlement the taxing departments included all of these sales in the numerator. The Board of Finance and Revenue, on subsequent Petition for Review by Lilly, reduced the amount included in the numerator; but the parties agree that the amount eliminated is not in controversy and that the numerator now includes receipts from sales by Lilly to Pennsylvania distributors. The effect of this action was to increase the numerator from $247,274 (admitted by Lilly) to $7,769,623. Lilly appealed to the court below which sustained the Commonwealth's position. Lilly then appealed to this Court.
Neither party places any emphasis on the activities of the detail men and district managers. Rather, it is the relationship between Lilly and the independent distributors and the sales from the former to the latter which form the core of the ...