Appeal from the Order of the Commonwealth Court of Pennsylvania entered February 2, 1987, at Nos. 1457 and 1458, Consolidated, C.D. 1985. 103 Pa. Commwlth. 408,
Nix, C.j., Larsen, Flaherty, McDermott, Zappala, Papadakos, and Stout, JJ. Nix, C.j., joins the majority opinion and files a concurring opinion. Larsen, J., files a dissenting opinion which is joined by Papadakos, J.
The issue presented in this case, as in the companion case, Ski Roundtop v. Commonwealth of Pennsylvania, 520 Pa. 227, 553 A.2d 928, also decided this date, is whether the taxpayer, Kimberton Company, is entitled to the manufacturing exemption from the Capital Stock Tax Act of March 4, 1971, P.L. 6, No. 2, art. VI, § 62, 72 P.S. § 7602.
Kimberton filed timely tax reports for fiscal years 1982 and 1983, but the Department of Revenue disagreed with the taxpayer's valuation of its assets and increased Kimberton's
capital stock tax valuations. Kimberton appealed to the Board of Appeals with respect to the 1982 determination, and directly to the Board of Finance and Revenue with respect to the 1983 determination. Both appeals were denied and Kimberton appealed to Commonwealth Court, which consolidated the appeals and affirmed the prior determinations. 103 Pa. Commw. 408, 520 A.2d 904. Kimberton appealed to this Court pursuant to Pa.R.A.P. 1102(a)(2) and 42 Pa.C.S. § (723)(b).
Kimberton's business consists of placing embroidered designs on ready-made sports clothing, mostly shirts. Kimberton does not embroider clothing for the general public, but only in response to orders given by customers for the creation of a particular embroidered design on specified types of clothing. After the the embroidery is stitched onto a ready-made piece of clothing, the embroidered piece is then sold to the customer.
In greater detail, Kimberton's operation works as follows: upon receiving the order and determining the design to be embroidered, Kimberton secures the required types of clothing to be embroidered from its own inventories, which it purchases ready-made from various wholesale suppliers. It then produces a Jacquard pattern which is used to control Kimberton's automatic sewing machines, and delivers the Jacquard pattern and the unembroidered clothing to the machine operator for production. The Jacquard pattern is a tape which contains instructions in the form of punched holes in a stiff cardboard material which controls the position of the material beneath the sewing machine heads. The average number of stitches per design is 3,000, with some designs requiring as many as 10,000, and the designs may be produced in one or many colors. Kimberton employs 210 persons and operates twenty-nine automatic sewing machines, each of which can produce an average of 200 pieces per day. When the plant is in full operation with a night shift, a daily rate of 7,200 pieces can be sustained.
The Commonwealth argues that Kimberton does not qualify as a manufacturer because it does not create a new and different product, and because there is no substantial transformation
of form, quality or adaptability of use. Further, the Commonwealth claims that Kimberton's work does not require a high degree of labor or skill, but rather that Kimberton does only the sort of thing that can be done at home. In sum, the Commonwealth states that Kimberton merely decorates an existing product, it does not create a new and different product.
Kimberton, on the other hand, argues that its product does meet all of the criteria for manufacturing: it applies skill and labor to a product which changes the material into a new, different and useful article. Further, it argues that changes wrought from thread to an insignia are not superficial. In Ski Roundtop v. Commonwealth, supra, we held that manufacturing is defined as "(1) the application of labor and skill (2) which changes a material (3) substantially (4) into a new, different and useful item." 520 Pa. at 231, 553 A.2d at 930. The issue in this case is whether Kimberton's embroidery meets these requirements.
Commonwealth Court concluded that if the item Kimberton produces is the embroidered insignia itself, rather than the insignia and the shirt together, what is produced is not a manufactured item because it cannot exist without the underlying garment. Thus, according to Commonwealth court, Kimberton's item is "not a 'product' at all." In the alternative, if Kimberton's product is an embroidered shirt, and not merely the embroidery itself, the taxpayer still does not qualify for an exemption, according to Commonwealth Court, because the product with which it ends (a shirt) is not different from the product with which it began (a shirt). In sum, Commonwealth Court concluded: "The finished product is altered only superficially in ...