Appealed From No. 14,545. State Agency Board of Finance and Revenue.
Before: Honorable James Gardner Colins, President Judge, Honorable Bernard L. McGINLEY, Judge, Honorable Doris A. Smith, Judge, Honorable Dan Pellegrini, Judge, Honorable Rochelle S. Friedman, Judge, Honorable James R. Kelley, Judge, Honorable Bonnie Brigance Leadbetter, Judge. Opinion BY President Judge Colins.
The opinion of the court was delivered by: Colins
OPINION BY PRESIDENT JUDGE COLINS
House of Lloyd, Inc. filed exceptions to the October 28, 1996 opinion and order of the Commonwealth Court of Pennsylvania. House of Lloyd v. Commonwealth, 684 A.2d 213 (Pa. Commw. 1996). In that opinion, we affirmed the Department of Revenue's (Revenue) assessment of use tax deficiencies pursuant to Section 202(b) of the Tax Reform Code of 1971 (Code). *fn1
The facts underlying this controversy, as set forth in our opinion, follow:
House of Lloyd is a Missouri corporation with its principal place of business in Grandview, Missouri. House of Lloyd sells its products in Pennsylvania through a network of home party hostesses. The House of Lloyd sales distribution system consists of a hierarchy of district managers, supervisors, demonstrators, and hostesses. House of Lloyd contracts with district managers, who are recruited from the top selling supervisors.
District managers sign a District Manager Agreement with House of Lloyd in which they agree to recruit and train supervisors and demonstrators. Each district manager receives commissions on all sales attributable to her supervisors, and each district manager generally also works as supervisor and demonstrator, for which she receives regular commissions (i.e., no district manager level commissions).
Supervisors sign a Supervisor Agreement (form supplied by House of Lloyd) with a district manager in which they agree to recruit and train demonstrators in exchange for commissions based on demonstrator sales. Supervisors generally also act as demonstrators, for which they receive regular commissions.
Demonstrators sign a Demonstrator Agreement (form supplied by House of Lloyd) with a supervisor in which they agree to demonstrate and sell House of Lloyd products and recruit hostesses. Each demonstrator receives commissions on her party and non-party sales. The party hostess makes her home available for a sales demonstration to which she invites interested members of her family and community. For each home party, the hostess receives a free gift (a dollar amount to spend on House of Lloyd products).
Each district manager, supervisor, and demonstrator receives a sample kit from the House of Lloyd to be used in promoting and selling House of Lloyd products. A sample kit consists of a selection of products, a bundle of about fifty catalogs, and order forms and has a retail value of $300. A district manager is entitled to keep the kit when the required demonstrator sales are met. A supervisor is entitled to keep a kit at no charge when her demonstrator sales reach $1,500. A demonstrator is entitled to keep the kit when her personal sales reach $1,500; however, House of Lloyd retains the first $75 in commissions as a deposit. Sample kits must be returned in saleable condition upon request, if not "earned," or they may be purchased for $150 each.
District managers, supervisors, and demonstrators are eligible for House of Lloyd's incentive program. Demonstrators, supervisors, and district managers earn incentive points based on meeting sales goals and participation in sales and recruitment programs; points can be redeemed for non-House of Lloyd merchandise.
Id. at 215 (footnote omitted).
In our October 28, 1996 opinion, we affirmed the Commonwealth's assessment of use tax against the taxpayer's use of sample kits, incentive prizes, and hostess free goods after concluding: 1) the tax does not violate Commerce Clause restrictions as embodied in the four-part test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 51 L. Ed. 2d 326, 97 S. Ct. 1076 (1977); and 2) the taxpayer uses the taxed items within the Commonwealth as "use" is ...