No. 60 January Term, 1978, Appeal from Order of the Commonwealth Court of Pennsylvania at No. 842 C.D. 1974
William P. Thorn, Alan J. Davis, Philadelphia Co., for appellant.
Vincent J. Dopko, Deputy Atty. Gen., Dauphin Co., for appellee.
Eagen, C. J., and O'Brien, Roberts, Nix, Larsen and Flaherty, JJ.
This appeal is from an order of the Commonwealth Court which set the capital stock tax liability of appellant, After Six, Inc., a domestic corporation, for the fiscal year ending June 30, 1972, at $87,342.
Because of the complexity of the issues involved, a preliminary discussion of both the statutory and case law relating to the capital stock tax is necessary. Under the Tax Reform Code of 1971,*fn1 both a corporation incorporated under the laws of this Commonwealth (domestic corporation) and a corporation elsewhere (foreign corporation) doing business in Pennsylvania are subject to an annual tax based on the value of the corporation's capital stock. In the case of a domestic corporation, the tax is called a capital stock tax*fn2 and is justified on the basic constitutional premise that a corporation's property may be taxed in the state of its creation. A foreign corporation, on the other hand, pays a franchise tax.*fn3 As a state cannot constitutionally tax property and assets located outside the state, the franchise tax is a business privilege tax and not a property tax. Commonwealth v. Columbia Gas & Electric, 336 Pa. 209, 8 A.2d 404 (1939).
In calculating either the capital stock tax or the franchise tax, the reporting corporation must first calculate the "actual value" of its capital stock. The Tax Reform Code allows the following criteria be considered: the average selling price for the stock during the year; corporate earnings;
dividends paid by the corporation; and corporate net assets. 72 P.S. § 7601.*fn4
In the case of domestic corporations, the Tax Reform Code provides: "That every domestic corporation . . . shall be subject to . . . a tax at a rate of ten mills, upon each dollar of the actual value of its whole capital stock of all kinds . . . ." 72 P.S. § 7602(a). There are, however, certain assets which are exempted from the capital stock tax.*fn5 Since a state cannot constitutionally levy a property tax on tangible property located outside the state, such property must be excluded from the capital stock tax. Delaware, Lackawanna & Western Railroad Co. v. Pennsylvania, 198 U.S. 341, 25 S.Ct. 669, 49 L.Ed. 1077 (1905).*fn6 A domestic corporation may also exclude from its capital stock tax the value of the shares of its domestic subsidiaries because the subsidiaries have already paid their own capital stock tax. While the Legislature may impose double taxation, no such intention appeared in the Capital Stock Tax Law of 1889. Commonwealth v. Fall Brook Coal Co., 156 Pa. 488, 26 A. 1071 (1893). A domestic corporation may exclude the value of shares of stock in a corporation if the domestic corporation owns a majority of the issued and outstanding voting stock of the subsidiary corporation insofar as the stock of the subsidiary represents property and assets located outside the Commonwealth. Act of April 20, 1927, P.L. 311, § 1, as amended, Act of June 22, 1931, P.L. 687, § 1, 72 P.S. § 1894.*fn7
Once a domestic corporation has valued its capital stock and then has determined what exempt assets it owns, it may then calculate its tax due as follows:
taxable assets (total assets - exempt assets)*fn8 total assets X actual value X ten mills = tax due
As previously mentioned, foreign corporations pay a franchise tax which is designed to measure business activity in the Commonwealth. After determining the actual value of its capital stock, the foreign corporation must arrive at taxable value, 72 P.S. § 7602(b), by applying an apportionment factor to the actual value of its capital stock. The apportionment factor is arrived at as follows:
tangible property in Pennsylvania/total tangible property = %(1)
wages, salaries, etc. assignable in Pennsylvania/total wages, salaries, etc. %(2)
sales assignable in Pennsylvania/total sales %(3)
(%(1) %(2) %(3))/3 = apportionment factor*fn9
actual value X apportionment factor X 10 mills = tax due
In the franchise tax area, there are no statutorily exempt assets. In fact, the value of a domestic subsidiary must be included in the valuation of foreign parent corporation's capital stock; since the foreign corporation is paying a franchise tax and the domestic subsidiary has paid a capital stock tax, there is no double taxation because two distinct taxes are ...