No. 8 M.D. Appeal Docket 1983, Appeal from the final Order of the Commonwealth Court of Pennsylvania at No. 156 C.D. 1974. No. 9 M.D. Appeal Docket 1983, Appeal from the final Order of the Commonwealth Court of Pennsylvania at No. 593 C.D. 1979.
Harry J. Rubin, Harrisburg, for appellants.
Eugene J. Anastasio, Deputy Atty. Gen., for appellee.
Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ. Zappala, J., files a dissenting opinion which Nix, C.j., and McDermott, J., join.
These are consolidated appeals from orders of the Commonwealth Court which affirmed*fn1 resettlement orders of the Board of Finance and Revenue that increased the amounts of corporate income tax due the Commonwealth from the appellants, Paris Manufacturing Company and Doe Spun, Inc., each of which is a corporation engaged in business in this Commonwealth as well as in foreign jurisdictions. The tax increases arose pursuant to determinations by the Department of Revenue that appellants' apportionments of business incomes between this and other jurisdictions
understated incomes taxable by this Commonwealth.
Based upon stipulations submitted by the parties, the following factual background has been established. Paris Manufacturing Company, a producer of garment finishing equipment, is incorporated in this Commonwealth and maintains just one manufacturing facility, that plant being situated in Brockway, Pennsylvania. Executive offices, including those of the company's president, are located in Cambridge, Massachusetts, and from those offices emanate all activities affecting sales of equipment manufactured in Pennsylvania. Sales efforts are comprised of advertisements in trade journals, trade show exhibitions in New Jersey and Illinois, and the services of three salesmen retained through an affiliated corporation, over which Paris Manufacturing Company's president in Cambridge also presides, who solicit orders nationwide. All orders received are subject to approval at the offices in Cambridge. During the tax year in question, ending December 31, 1971, sales were made to customers in forty-three states, the District of Columbia, and several foreign countries.
The other appellant, Doe Spun, Inc., is incorporated in Delaware and engages in the design, manufacture, and sale of children's clothing. It maintains manufacturing facilities and several factory-outlet retail stores in Pennsylvania and Maryland, office facilities in Pennsylvania and New York, and a large showroom in New York City. During the tax year in question, ending April 30, 1975, sales were made to customers in each of the fifty states and in the District of Columbia, such sales having been procured through eighteen salesmen, each stationed in his own territory. Supervision of the salesmen's activities, as well as initial processing of the orders they procure, occurs in New York City. Certain customers having long-established relationships with Doe Spun, Inc. deal directly with sales executives at the showroom-office in New York City rather than through regional salesmen. The showroom is utilized for meetings with customers' buyers, and contains exhibits of the company's
entire product line. Sales promotions are also directed from that location, and include trade show exhibitions conducted throughout the country and advertisements in national trade publications. In addition, all of the company's designers and fashion coordinators are located in New York City, due to the fact that their functions are integrated with sales efforts.
Clearly, therefore, the appellant corporations engage in business activities both inside and outside of Pennsylvania, rendering it necessary to determine, through apportionment, the amount of income subject to taxation by this Commonwealth. The Tax Reform Code of 1971 provides for this amount to be determined by multiplying a corporation's total net income by an apportionment figure calculated for each tax period as the average of three statutory fractions: 1.) the property fraction (value of real and tangible personal property owned or rented in Pennsylvania/value of all such property of the taxpayer everywhere); 2.) the payroll fraction (compensation paid in Pennsylvania/total compensation paid by the taxpayer everywhere); and 3.) the sales fraction (sales in Pennsylvania/total sales by the taxpayer everywhere). 72 P.S. § 7401(3)2(a)(9), (10), (13), (15) (Supp.1983). Calculated in this manner for each of the appellants, the three fractions, and the related apportionment figures, are as follows.
Property Payroll Sales Apportionment
Paris Manufacturing Co. .9554 .8969 .1362 ...