Appeals from the Order of the Board of Finance and Revenue in cases of Blumenthal Brothers Chocolate Company v. Commonwealth of Pennsylvania. Transferred from the Court of Common Pleas of Dauphin County to the Commonwealth Court of Pennsylvania, September 1, 1970.
William P. Thorn, with him Wolf, Block, Schorr & Solis-Cohen, Leslie B. Handler, and Handler & Handler, for appellant.
Edward T. Baker, Deputy Attorney General, for appellee.
President Judge Bowman and Judges Crumlish, Jr., Kramer, Wilkinson, Jr., Mencer and Rogers. The evidentiary hearing was held before Judge Manderino and by stipulation, the parties agreed to submit the case to the judges of the court other than Judge Manderino who did not participate in the legal argument nor in the decision. Opinion by President Judge Bowman.
These tax appeals by Blumenthal Brothers Chocolate Company challenge resettlement of appellant's 1965 and 1966 fiscal year corporate net income tax liability, which resettlements were sustained by the Board of Finance and Revenue and from which action the instant appeals were taken.
The Corporate Net Income Tax Act, Act of May 16, 1935, P.L. 208, as amended, 72 P.S. § 3420a et seq., imposes a tax upon that portion of corporate net income reflecting business carried on within Pennsylvania which, as relevant here, is determined by application of the so-called tangible property, the wages and salaries and the gross receipts fractions.
Appellant does not take issue with the Commonwealth's allocation and apportionment of its tangible property or its wages and salaries. It does, however, challenge the inclusion of its entire gross receipts for fiscal 1965 and 1966 within its taxable net income.
The "Corporate Net Income Tax Act" directs that: "Of the remaining third [after tangible property and wages and salaries have been apportioned between business activities within and outside the Commonwealth], such portion shall be attributed to business carried on within the Commonwealth, as shall be found by multiplying said third by a fraction, whose numerator is the amount of the taxpayer's gross receipts from business assignable to this Commonwealth as hereinafter provided, and whose denominator is the amount of the taxpayer's gross receipts from all its business. . . ."
72 P.S. § 3420b(2)(c)(3).
As to that portion of gross receipts which should be assigned to a corporation's business transactions outside of the Commonwealth, the Act further defines which gross receipts may properly escape taxation and adds a warning to the effect that the Commonwealth looks to substance rather than form in calculating the gross receipts fraction. "The amount of the corporation's gross receipts from business assignable to this Commonwealth shall be, (1) the amount of its gross receipts for the taxable year except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with, or sent out from, premises for the transaction of business maintained by the taxpayer outside of the Commonwealth, and except rentals and royalties, and interest and dividends, (2) rentals or royalties from property situated, or from the use of patents, within this Commonwealth, and (3) dividends and interest, except such dividends and interest attributable to the business conducted on premises maintained by the taxpayer outside the Commonwealth. If a corporation maintains an office, warehouse, or other place of business in a state other than this Commonwealth for the purpose of reducing its
tax under this subsection, the department shall, in determining the amount of its gross receipts from business assignable to this Commonwealth, include therein the gross receipts attributed by the corporation to the business conducted at such place of business in another state." 72 P.S. § 3420b(2).
Appellant asserts that sales made by two of its representatives in northern New Jersey should not be included in the gross receipts allocated to its business activities in Pennsylvania because such sales were ". . . negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with, or sent out from, premises for the transaction of business maintained by the taxpayer [corporation] outside of the Commonwealth. . . ." The substance of appellant's argument is that sales totaling over $5,000,000 for each of the fiscal years (of total receipts of about $16,000,000 for each year) should be excluded from the numerator of the gross receipts fraction because the two representatives were employees of the appellant who were making sales of appellant's product on behalf of the corporation from out of state offices maintained by the appellant.
The basic facts are not in dispute. The controversy generating these appeals concerns the characterization which the parties place upon the sales activities of the two representatives, one a company called E. Berg and Sons and the other an individual named Charles R. Pariente. However, since no stipulation as to the facts has been entered into by the parties, it is necessary for this Court to make such findings as are necessary for disposition of the case.*fn1 Act of April 22, 1874, P.L. 109, 12 P.S. § 689.
1. Blumenthal Brothers Chocolate Company (Blumenthal) was a Pennsylvania corporation organized in 1926 engaged in the business of manufacturing and merchandising chocolate, cocoa, and candy products during the fiscal years 1965 and 1966.*fn2
2. Blumenthal used approximately thirty representatives outside the state of Pennsylvania who were independent food or candy brokers rather than direct salesmen of the corporation.
3. Blumenthal also employed several direct representatives, two of whom operated in the metropolitan New York area from northern New Jersey.
4. These two representatives were E. Berg and Sons (Berg) and Charles R. Pariente (Pariente) who together generated over $5,000,000 in sales for Blumenthal ...