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decided: March 23, 1978.


No. 16 May Term, 1977, Appeal from the Judgment and Final Order dated March 31, 1976 of the Commonwealth Court of Pennsylvania at No. 1516 C.D. 1974, Which Decision Sustained the Decision and Order of the Board of Finance and Revenue at Board Docket No. R-774 (1974)


Rhoads, Sinon & Reader, Frank A. Sinon, Robert L. Weldon, Sherill T. Moyer, Harrisburg, for appellant.

Eugene J. Anastasio, Vincent J. Dopko, Deputy Attys. Gen., for appellee.

Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Jones, former C. J., did not participate in the decision of this case. Roberts, J., filed a dissenting opinion in which Eagen, C. J., joined.

Author: Manderino

[ 478 Pa. Page 127]


This case presents the important question of whether Pennsylvania's Corporation Income Tax can be validly applied

[ 478 Pa. Page 128]

    to a foreign corporation which is engaged solely in interstate commerce but solicits business in this Commonwealth through the use of field representatives.

The relevant facts are not in dispute. Appellant, United States Tobacco Company, is a New Jersey Corporation engaged in the manufacture and sale of tobacco products. Its products are sold exclusively in interstate commerce, in part to Pennsylvania customers. For the time period in question, appellant had no manufacturing plants in Pennsylvania, no warehouses or other structures in which inventory was stored, no offices in this state, maintained no bank accounts nor kept any corporate records, and held no corporate meetings in Pennsylvania.

Appellant's sole contact with Pennsylvania is through ten so-called "missionary representatives." These representatives, furnished with company cars, visit independent wholesalers to inform them of company activities and promotions, and sometime take orders for appellant's products. Orders obtained are sent to Greenwich, Connecticut for approval or rejection, and if approved, are filled by shipment from a point outside Pennsylvania. The representatives do not have the authority to accept an order, have no agency powers whatsoever, and no authority to adjust or settle claims, collect accounts receivable, or otherwise handle any money belonging to or due appellant.

These representatives also visit various retail outlets. On these visits, the representatives carry samples of new products. These samples are purchased from wholesalers in Pennsylvania at the wholesale price. If a retailer agrees to purchase those samples, the retailer pays the representative the same price. Hence, no profit is realized on these incidental sales. Representatives also check the retailer's existing inventory of appellant's tobacco products to determine if the products are fresh and attractively displayed. The representatives set up counter displays and sometimes give the retailers free samples of appellant's products in exchange for more extensive counter space. The representatives maintain daily reports of their activities.

[ 478 Pa. Page 129]

These retailers order their products directly from the independent wholesalers who, in turn, send their own orders to appellant's headquarters outside Pennsylvania.

Appellant's solicitation activities were previously the subject of litigation in this Commonwealth, and it was determined that its activities did not create a constitutional taxable nexus, Commonwealth v. United States Tobacco Co., 70 Dauph. 217 (1957). The matter at that time did not reach this Court.

Pursuant to Article V of the Tax Reform Code of 1971, as amended, 72 P.S. §§ 7501-7506 (Supp.1977-78), which imposes on corporations "carrying on activities" in Pennsylvania a tax based on taxable income derived from sources in the Commonwealth, the Commonwealth settled appellant's Corporation Income Tax for the year 1971 in the amount of $70,878.52. On August 13, 1974, the Resettlement Board denied appellant's petition for resettlement. The Board of Finance and Review subsequently sustained the settlement, as did the Commonwealth Court. United States Tobacco Co. v. Commonwealth, 22 Pa. Commw. 211, 348 A.2d 755 (1975). Appellant then exercised its right of appeal to this Court. See The Appellate Court Jurisdiction Act of 1970, § 203, 17 P.S. § 211.203 (Supp.1977-78).

Throughout this entire litigation appellant has presented three issues for resolution. Appellant claims (1) that imposing Pennsylvania's Corporation Income Tax against appellant, a foreign corporation engaged solely in the solicitation of orders for sale in interstate commerce, violates federal statutory law exempting such activity from this kind of state taxation; (2) that because of appellant's minimal contacts with Pennsylvania, Pennsylvania's Corporation Income Tax is unconstitutional as applied to appellant; and (3) that if appellant is subject to this state tax, Pennsylvania's "add back" of corporation income tax, after apportioning appellant's income to Pennsylvania activities to determine appellant's ultimate tax liability, is void for want of statutory authority, or alternatively, is unconstitutional because it

[ 478 Pa. Page 130]

    taxes more of appellant's income than Pennsylvania can legally reach.

We agree with appellant that federal statutory law exempts it from Pennsylvania's Corporation Income Tax, and reverse the order of the Commonwealth Court directing appellant to pay the tax. We therefore need not address appellant's constitutional arguments, nor do we address the issues relating to the computation (add back) of appellant's ultimate tax liability. Our holding that Congress intended to exempt appellant from this Pennsylvania tax cannot be understood without setting forth some historical background.

A state can constitutionally tax a corporation that engages solely in interstate commerce, whether the tax be called a "net income" tax, a tax on a corporation's "going concern value," or a tax on the privilege of engaging in business within a particular state. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). The Commerce Clause, however, by its own force, places some limitation on a state's power to exact taxes from interstate concerns. A tax will be held valid only if the state exacts a constitutionally fair demand for that aspect of interstate commerce to which it bears a special relation. E. g., Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 95 S.Ct. 1538, 44 L.Ed.2d 1 (1975). State taxes which affect interstate commerce must also be consonant with constitutional concepts of due process. A nexus must exist between the tax and activities within the state for which the tax is exacted, and "the [controlling] question is whether the state has given anything for which it can ask return." Standard Steel Co. v. Washington Dep't of Revenue, 419 U.S. 560, 562, 95 S.Ct. 706, 708, 42 L.Ed.2d 719, 722 (1975), citing Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 85 L.Ed. 267, 270-71 (1940).

United States Supreme Court decisions delineating the extent of a state's power to tax interstate commerce reflect a judicial balancing between the interests of the several states in deriving revenue from activities in interstate commerce

[ 478 Pa. Page 131]

    and the burdens imposed upon the interstate corporation by pursuit of that interest. Increasingly in recent years, the balance has been struck in favor of the states: if a particular tax is fairly apportioned and does not discriminate against interstate commerce, the Supreme Court has permitted states to "pursue [their] own fiscal policies, unembarrassed by the Constitution." Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 249, 85 L.Ed. 267, 270 (1940).

When a foreign corporation's contacts within the state fall below a certain minimal level, however, a state may not constitutionally exact a tax on those activities. As early as 1887, the Supreme Court held that an out-of-state business could send employees ("drummers") into another state to solicit sales, and if no other activities were involved, no taxable nexus was established. Robbins v. Shelby County Taxing Dist., 120 U.S. 489, 7 S.Ct. 592, 30 L.Ed. 694 (1887). In Norton Co. v. Illinois Dep't of Revenue, 340 U.S. 534, 537, 71 S.Ct. 377, 380, 95 L.Ed. 517, 520 (1951), the principle was succinctly stated:

"Where a corporation chooses to stay at home in all respects except to send abroad advertising or drummers to solicit orders which are sent directly to the home office for acceptance, filling, and delivery back to the buyer, it is obvious that the state of the buyer has no local grip on the seller. Unless some local incident occurs sufficient to bring the transaction within its taxing power, the vendor is not taxable."

Eight years after its decision in Norton, however, the Supreme Court decided Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959), and denied certiorari in Brown-Forman Distillers Corp. v. Collector of Revenue, 234 La. 651, 101 So.2d 70 (1958), cert. denied, 359 U.S. 28, 79 S.Ct. 602, 3 L.Ed.2d 625 (1959). In Northwestern States, the Court upheld a Minnesota tax on the Minnesota income of an Iowa cement manufacturer who maintained a sales office and staff in Minnesota to solicit orders and encourage cement users there to

[ 478 Pa. Page 132]

    order Northwestern cement when ordering from local wholesalers. In Brown-Forman, a decision which the Supreme Court refused to disturb, the Louisiana Supreme Court upheld a similar tax on a Kentucky corporation whose Louisiana activities were limited to the presence of "missionary men" who solicited Kentucky wholesalers and sometimes assisted those wholesalers in obtaining suitable displays of the products in the various retail establishments. These decisions prompted "serious apprehension in the commercial community" that activity in another state limited to soliciting business would subject interstate concerns to multiple state taxation. See S.Rep.No. 658, 86th Cong., 1st Sess., at 2 (1959); HR Rep. No. 936, 86th Cong., 1st Sess., at 1 (1959); 1959 U.S.Code Congressional and Administrative News pp. 2548-61.

Congress's response to Northwestern States and Brown-Forman, and the statute relied on by appellant in this appeal, was Pub.L. 86-272, now codified at 15 U.S.C. §§ 381-384 (1970). By this statute, Congress sought to allay the fear that "mere solicitation" would subject interstate businesses to multiple state taxation. See Heublein v. South Carolina Tax Comm'n, 409 U.S. 275, 280, 93 S.Ct. 483, 34 L.Ed.2d 472, 479 ...

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