Appeals from the Orders of the Board of Finance and Revenue in the case of In Re: Paris Manufacturing Co., Inc., Docket No. R-35, and in the case of In Re: Doe Spun, Inc., Docket No. R-2859.
Harry J. Rubin, Krekstein, Rubin and Lasday, for petitioners.
Eugene J. Anastasio, with him Michael A. Roman, Deputy Attorneys General, for respondent.
President Judge Crumlish, Jr. and Judges Mencer, Rogers, Williams, Jr. and Craig. Opinion by Judge Rogers. Judge Palladino did not participate in the decision in this case.
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In these consolidated cases, Paris Manufacturing Company, Inc. and Doe Spun, Inc., corporations doing business in this Commonwealth as well as in foreign jurisdictions, have appealed from resettlement orders of the Board of Finance and Revenue which, as to each appellant, increased the amount of corporate net income tax due the Commonwealth on the basis of a determination that the method employed by the appellants to allocate and apportion their business income between this and the other jurisdictions in which they conduct business did not "fairly represent the extent of the taxpayer's business activity in this State. . ." within the meaning of Article IV of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, 72 P.S. § 7401 (3)2(a)(18) and, therefore, that the Board was authorized to recalculate the proportion of income taxable
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in the Commonwealth by disregarding untaxed sales in other states.
On the basis of stipulations submitted by the parties we find the following facts to have been established:
Paris Manufacturing Company manufactures specialized garment finishing equipment at its plant in Brockway, Pennsylvania. The company has no other manufacturing facilities. Executive offices are maintained and some sales activity takes place in Cambridge, Massachusetts where the company's president is located.
During the tax year at issue, 1971, virtually all of the company's tangible property and approximately ninety per cent of its wages and salary were attributable to its Pennsylvania operations. Only about 7.4% of the company's sales took place in Pennsylvania and only about 14.7% of the company's sales were destined to the two states (Pennsylvania and Massachusetts) where the company is subject to a corporate income tax. On the basis of these characteristics of its multi-state operations and as is authorized by the Tax Reform Code, Paris Manufacturing Company calculated the proportion of its income subject to Pennsylvania tax (the apportionment percentage) by averaging the Pennsylvania Proportions of its tangible property (100%), wages and salaries (89.69%) and sales (7.4%) thereby concluding that 65.6972% of its income was taxable by the Commonwealth.
Following a Petition for Resettlement to the Department of Revenue and a Petition for Review to the Board of Finance and Revenue, the Board recalculated the company's apportionment percentage as 92.6449% by eliminating from consideration in the sales component denominator gross receipts from sales destined to states where the company was not subject to a corporate income tax. This procedure is commonly
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known and has been referred to by the parties as the "throw out" rule.*fn1 The result is an increase in the company's tax liability from $2,643.00 to $3,585.29.
Doe Spun, Inc. is a Delaware Corporation authorized to do business in Pennsylvania and engaged in the design, manufacture, and sale of children's clothing. In connection with those activities, Doe Spun maintains manufacturing facilities and retail sales outlets in Pennsylvania and Maryland, office facilities in Pennsylvania and New York City, and a showroom in New York City. Direct sales activities are conducted by eighteen commissioned salesmen assigned to specified territories encompassing ...