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decided: December 11, 1986.


Appeal from the Order of the Commonwealth Court at Nos. 690, 691, and 692 C.D. 1982; 88 Cmwlth Ct. 153, Nix, C.j., and Larsen, Flaherty, McDermott, Hutchinson, Zappala and Papadakos, JJ.

Author: Mcdermott

[ 513 Pa. Page 76]


This is an appeal from the order of the Commonwealth Court reversing the orders of the Board of Finance and Revenue which assessed a franchise tax against Clairol Incorporated (hereinafter "Clairol") for the years 1975 through 1977.*fn1 The parties to the instant action filed a stipulation of facts regarding the level of Clairol's business activities in the Commonwealth of Pennsylvania during the years in question. The relevant facts are as follows.

Clairol is a corporation organized and existing under the laws of Delaware. Its corporate headquarters are located in New York, its home office in Connecticut, and its manufacturing facilities are located in Connecticut and California.

[ 513 Pa. Page 77]

Clairol manufactures and sells products and small electrical appliances relating to hair and cosmetic care.

During the years in question Clairol did not possess a certificate to do business in Pennsylvania. It had no offices, plants, warehouses, or bank accounts within the Commonwealth. No subcontractors were employed nor vehicles owned in Pennsylvania; all shipments of Clairol merchandise entered Pennsylvania by common carrier.

Clairol employed no regional managers in Pennsylvania. It had four (4) district managers in the Commonwealth whose job it was to call on retailers, display samples, distribute promotional literature, help set up displays, conduct inventories of major accounts (place orders if necessary), and supervise the other salespeople. There were thirty-one (31) salespeople employed by Clairol in Pennsylvania who operated out of their individual homes and performed myriad duties. Those in the Consumer Products Division solicited orders for fifteen to twenty (15-20) accounts in Pennsylvania, visited several thousand retailers to promote and rotate products and take inventories, and provided the retailers with information on promotions. The salespeople in the Professional Products Division were responsible for soliciting orders from approximately thirty (30) distributors, visiting over eight thousand (8,000) beauty salons, and offering demonstrations of their products. Clairol also had one or two salespeople assigned to its Appliance Division who made calls on wholesale accounts only to promote sales and present special promotional deals.

Sales personnel were only reimbursed for phone calls relating to Clairol business. They did not receive any compensation for the use of their homes. No orders were accepted or approved in Pennsylvania and all credit approvals occurred outside of the Commonwealth. No payment of any kind was accepted in Pennsylvania. All advertising (print, radio and t.v.) originated in New York. Furthermore, even ads with local media affiliates were handled by agents in New York.

[ 513 Pa. Page 78]

Based on the foregoing, the Department of Revenue determined that Clairol was subject to the Pennsylvania Franchise Tax*fn2 for the years 1975, 1976 and 1977.*fn3 This determination was affirmed by the Board of Finance and Revenue. On appeal, the Commonwealth Court reversed.

The Commonwealth Court held "that Clairol's activities consist[ed] solely of soliciting orders for its products" and thus fell short of the qualification of "doing business." Clairol, Inc. v. Commonwealth of Pennsylvania, 88 Pa. Comwlth.Ct. 153, 158, 489 A.2d 286, 289 (1985). Relying on several decisions which discussed the imposition of a corporate income tax on foreign corporations, the Commonwealth Court concluded that "doing business" required solicitation coupled with other activities. Id. at 160, 489 A.2d at 290. See generally Business Tax Bureau of the School District of Philadelphia v. American Cyanamid Co., 426 Pa. 69, 231 A.2d 116 (1967); Lutz v. Foster & Kester Co., 367 Pa. 125, 79 A.2d 222 (1951); Shambe v. Delaware & H.R. Co., 288 Pa. 240, 135 A. 755 (1927).

In appealing the decision of the Commonwealth Court the Commonwealth argues that: the lower court incorrectly viewed the case from a perspective of "solicitation" rather than "doing business": and the Supreme Court cases relied upon by the court dealt with a corporate income tax and not a franchise tax. Clairol, in defending its position, rests its argument. on the Commonwealth Court's holding that mere solicitation does not constitute "doing business" for purposes of the Franchise Tax.

The fundamental issue presented in the instant appeal is whether Clairol's activities in Pennsylvania during the years in question subject it to the Pennsylvania Franchise Tax as defined in 72 Pa.S. ยง 7601 et seq. Resolution of this issue

[ 513 Pa. Page 79]

    requires us to first examine the unique aspects of a franchise tax.

A franchise tax is purely a tax on the right and privilege to conduct business within the Commonwealth. See Commonwealth v. National Biscuit Company, 390 Pa. 642, 136 A.2d 821 (1957); Commonwealth v. Columbia Gas and Electric Corporation, 336 Pa. 209, 8 A.2d 404 (1939); Black's Law Dictionary 593 (5th ed. 1979). Hence, a foreign corporation is not necessarily exempt from the franchise tax merely because it possesses no tangible property within the Commonwealth. See Commonwealth v. American Gas Co., 352 Pa. 113, 42 A.2d 161 (1945).

Under the Franchise Tax Act a determination of whether a corporation is subject to the tax is dependent ...

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