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decided: April 14, 1986.


Appeal from the Order of the Commonwealth Court at Docket No. 265 C.D. 1981. Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ. Hutchinson, J., joined in the Majority Opinion and filed a Concurring Opinion. Larsen and Flaherty, JJ., filed Dissenting Opinions in which Papadakos, J., joined.

Author: Zappala

[ 510 Pa. Page 327]


This is a direct appeal from an order of the Commonwealth Court, our jurisdiction being derived from 42 Pa.C.S. § 723(b). Commonwealth Court affirmed the order of the Board of Finance and Revenue, sustaining the Department of Revenue's assessment filed against the Appellant, Vernon C. Buckley, for failure to pay personal income tax. At issue is the constitutionality of the 1978 Reciprocal Personal Income Tax Agreement between Pennsylvania and New Jersey insofar as it distinguishes between "compensation" and "net profits".

The Appellant is a resident of New Jersey who practices his profession as an osteopathic physician and surgeon from an office in Philadelphia. Between 1971 and 1977, the Appellant paid the Pennsylvania personal income tax. In 1978, he filed a personal income tax return reporting a net profit of $33,798.91 but asserting no tax liability. Appellant argued that pursuant to the Reciprocal Personal Income Tax Agreement between Pennsylvania and New Jersey he, as a non-resident, was exempt from the tax. Successive petitions for review to the Department of Revenue Board of Appeals and the Board of Finance and Review resulted in the sustaining of the assessment for a tax deficiency.

[ 510 Pa. Page 328]

In December of 1976, Pennsylvania and New Jersey entered into an agreement which became effective in 1978. The agreement provides that persons who reside in one state and are employed in the other may file certificates of non-residence with their employers and thereby exempt themselves from filing returns and paying personal income taxes on compensation paid in the state where they are employed. Employers receiving such certificates of non-residence are obligated to withhold income tax at the rate appropriate for the residence state of the employees and to remit the taxes so collected to that state. The agreement further provides that nothing in it "shall be interpreted to exempt a resident of Pennsylvania or New Jersey who has taxable income in the Commonwealth or State of non-residence other than in the form of compensation from liability for payment of income tax or filing an income tax return with regard to such other taxable income."

Because of this latter provision, the Appellant is clearly not entitled to exemption from Pennsylvania's personal income tax as a non-resident; the entire $33,798.91 of his income earned in Pennsylvania is "net profits" and not "compensation." For purposes of the personal income tax imposed under the Tax Reform Code of 1971, "compensation" includes "[a]ll salaries, wages, commissions, bonuses and incentive payments whether based on profits or otherwise, fees, tips and similar remuneration received for services rendered, whether directly or through an agent and whether in case or in property . . . ." 72 P.S. § 7303(a)(1). "Net profits" are distinguished as being "[t]he net income from the operation of a business, profession, or other activity, after provision for all costs and expenses incurred in the conduct thereof determined either on a cash or accrual basis in accordance with accepted accounting principles and practices, but without deduction of taxes based on income." 72 P.S. § 7303(a)(2).

In response to the conclusion that the Agreement does not permit a non-residence exemption for net profits, the Appellant challenges the Agreement as violative of the equal protection clause, Amendment XIV, Section 1, of the

[ 510 Pa. Page 329]

United States Constitution and the uniformity clause of the Pennsylvania Constitution, Article VIII, Section I.*fn1

It has often been stated that uniformity and equal protection clause challenges of taxing legislation, like challenges to the exercise of the police power where the legislature also enjoys broad discretion, are subject to review according to the "rational basis" standard. See Leonard v. Thornburgh, 507 Pa. 317, 489 A.2d 1349 (1985) and cases cited therein. See also Snider v. Thornburgh, 496 Pa. 159, 436 A.2d 593 (1981). The classification at issue is analyzed "to determine whether it is reasonable, not arbitrary, and rests upon a difference having a fair and substantial relation to the object of the legislation." Snider v. Thornburgh, 496 Pa. at 168, 436 A.2d at 597. The burden rests upon the taxpayer to demonstrate that the classification is unreasonable, F.J. Busse Co. v. Pittsburgh, 443 Pa. 349, 279 A.2d 14 (1971), a burden which has been characterized as "heavy", Amidon v. Kane, 444 Pa. 38, 279 A.2d 53 (1971). A challenger must overcome the presumption of constitutionality afforded all acts of the General Assembly, 1 Pa.C.S. § 1922(3), and legislation will not be declared unconstitutional unless it "clearly palpably, and plainly violates the constitution." Snider v. Thornburgh, 496 Pa. at 166, 436 A.2d at 598.

We begin by noting that while the Appellant asserts that the taxing scheme permitted by the agreement is irrational, he does little to demonstrate the unreasonableness he perceives. The mere assertion that there is no justification for the distinction between wage earners and self-employed persons cannot be considered sufficient to meet the challenger's heavy burden of proof. Neither is it sufficient to present, as Appellant does, one or two examples of the different results accruing to different persons because of the legislative classification. Different results

[ 510 Pa. Page 330]

    are the necessary product of statutory differentiation. It is only where the legislative scheme is based on distinctions irrelevant to the statutory purpose and affects related objects of the legislation ...

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