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Carson Concrete Corp. v. Tax Review Board City of Philadelphia

Commonwealth Court of Pennsylvania

December 21, 2017

Carson Concrete Corp., Appellant
v.
Tax Review Board City of Philadelphia Carson Concrete Corp., Appellant
v.
Tax Review Board and City of Philadelphia

          Argued: October 19, 2017

          BEFORE: HONORABLE MARY HANNAH LEAVITT, President Judge HONORABLE ROBERT SIMPSON, Judge HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge

          OPINION

          ROBERT SIMPSON, JUDGE

         In these consolidated tax appeal cases, Carson Concrete Corporation (Carson) appeals from an order of the Court of Common Pleas of Philadelphia County[1] (trial court) that affirmed decisions of the City of Philadelphia's Tax Review Board (Board). The Board denied Taxpayer's petitions to review an audit assessment bill issued by the City for: (a) Business Income and Receipts (BIR) Taxes for the years 2000-2009; and, (b) Wage Tax for the years 2001-2009. For the reasons that follow, we affirm in part (as to the underlying tax liability), and vacate and remand in part (as to interest and penalties).

         I. Background

         Carson is a concrete construction company operating in the City of Philadelphia (City), its regional suburbs, Atlantic City, New Jersey and Miami, Florida. Carson has been in business for 47 years. Carson's president, Anthony J. Samango, Jr. (President) has been with Carson since 1968. In or about 2008, Carson moved its headquarters from Conshohocken in Montgomery County to Boothwyn in Delaware County. Carson asserted that as a result of a flood, it lost the actual contracts it had with subcontractors from 2000 to 2008. Therefore, these contracts did not make it to the relocated office.

         Carson's President testified before the Board that in 2000 Carson began facing skyrocketing workers' compensation insurance rates, which were three times its competitors' rates, because of jobsite accidents. As a consequence, the business climate and culture changed dramatically. To remain competitive, Carson decided to place all its field workers on subcontractors' payrolls for cost plus a fee. Therefore, after 2000, Carson asserts it did not have any of its own employees working in the City. Rather, for the next several years, the bulk of Carson's unionized field workers were employees of subcontractors. During that time, Carson maintained a small staff of managers and administrators at its office in Boothwyn, Pennsylvania. All of the employees paid local municipal taxes.

         In its decision, the Board noted, from 2000 to 2009, Carson did business in the City but did not file any BIR Tax returns, did not pay any BIR Tax, and did not pay any Wage Tax. Ultimately, the City became aware of Carson's failure to file tax returns or pay BIR or Wage Taxes.

         In September 2011, the City's Department of Revenue (Department) conducted an audit assessment of Carson, which resulted in an assessment for BIR Tax liabilities and Wage Tax liabilities. Following the audit, the City assessed Carson $1, 091, 787.45 in BIR Tax ($65, 709) and Wage Tax ($1, 026, 078.45) attributed to concrete construction laborers, which Carson contended were not its employees, but employees of subcontractors. With interest and penalties, the City's tax bill exceeded $4, 000, 000.

         After the City completed the audit, Carson requested a re-audit. In support of its request, Carson identified only one subcontractor, CIP Frames. Carson also provided invoices, bank statements and checks in support of its contention that employees of subcontractors, not Carson employees, performed the work in the City. Finding discrepancies among Carson's documents, which also lacked detail, the Department denied Carson's request for a re-audit.

         Carson filed two separate petitions for review with the Board challenging the assessments for both the BIR Tax and Wage Tax. After several continuances, the Board conducted a hearing on both petitions. Thereafter, the Board granted a 60-day period for the parties to submit briefs and supplement the record.

         As discussed above, President testified at the hearing that in the year 2001, in response to ultra-high workers' compensation premiums resulting from past accidents, Carson placed its field workers on subcontractor payrolls and thus no at 73; Reproduced Record (R.R.) at 212a. Consequently, in 2000, Carson had 100 employees employed in the City and paid the Wage Tax for them. Id. However, the next year there were no Carson employees working in the City. Id. Rather, Carson paid the subcontractor cost plus a fee. Bd. Hr'g at 25; R.R. at 213a.

         However, the City's Auditor, Lisa Bratz (Auditor) testified that the documents from CIP Frames, the only named subcontractor, appeared deceitful. In particular, Auditor testified:

[E]ach invoice matched the total on a weekly basis, but all it said was, for work done on 7/10 and then the money amount. So there was no saying where the job was, who worked on the job. There was no detail to any of the invoices. It just looked like invoices were made up.

Bd. Hr'g at 73; R.R. at 261a (emphasis added).

         When asked whether these types of invoices looked like typical invoices, Auditor replied: "No, because they weren't detailed at all. I've never seen such plain invoice sheets of paper." Id.

         In April 2016, after orally announcing its decision to deny Carson's review petitions, the Board issued decision letters officially denying Carson's petitions.

         In its decision, the Board made the following findings:

1) Following an audit by the [City] Department of Revenue, [Carson] filed this appeal of the audit assessments of:
[BIR Tax] for the years 1998 through 2010, Principal due of $65, 709 with interest of $78, 581.12 and penalty of $128, 751.54 as of the [Board] hearing date, for a total due of $273, 041.60.
Wage Tax for the years 2001 through 2009; Principal due of $1, 026, 078.45, with interest of $1, 205, 487.27 and penalty of $1, 783, 105.10 as of the [Board] hearing date, for a total due of $4, 014, 670.82.
2) [Carson] is a concrete construction company with its offices in Boothwyn, PA. [President] testified on behalf of [Carson] about its business activity and labor practices during the audit years, and his role regarding the actual work sites and the work of his son [Anthony J. Samango, III, Carson's Vice-President].
3) Carson did business in the [City] and in the surrounding suburbs before, during and after the tax years in question. [Carson] provided [Auditor] with a project list that confirmed work on City projects during the audit years.
4) [Carson] was a non-filer for [BIR Tax] and Wage Tax for all years under audit[.]
5) Prior to 2000, [Carson] filed [BIR Tax] returns and remitted taxes due the [City] and remitted Wage Tax for employees residing and/or working in [the City].
6) From 2000 through 2009, [Carson] did not file [BIR Tax] returns and did not remit [BIR Tax] or Wage Tax to the City.
7) In 2000, [Carson] had approximately 100 employees.
8) [President] testified to having only 4 to 10 employees from 2001 to 2009.
9) During the audit years, Carson had between 4 and 10 management and central office employees operating in their [sic] suburban office. These employees did not work or reside in [the City]. Most were not working at [Carson's] job sites.
10) [President] and [Vice-President] were intimately involved with all work sites. They bid the job and once the contract was awarded to [Carson], they would determine the equipment needed, what categories of skilled and unskilled workers were required and how many, and deal with work site issues as they came up.
11) [President] testified that all work was done with subcontractors paid a cost plus [markup] amount. But there was no information to establish that any subcontractors handled employee or work site issues.
12) For the City's audit, [Carson] only provided documentation and records for its work projects and labor costs for 2000. No documents or records were available for the audit years. Records were lost during an office move.
13) [Carson] was able to provide copies of its federal tax returns for the years under audit.
14) To determine the Wage Tax assessment, [Auditor] used actual wages & labor costs reported on [Carson's] federal tax returns from 1999-2009. [Auditor] used the 2000 year ratio of labor costs attributed to the [City] for all audit years in absence of any records to the contrary from [Carson].
15) [Carson's] federal tax returns did not itemize deductions for gross payments to subcontractors. The returns itemized direct labor and payroll costs designated for employees, including union dues for its workers.
16) [President] testified that his accountant took the labor costs from the subcontractor invoices and transferred those expenses directly to [Carson's] tax returns although those expenses were paid by subcontractors. This did not include any of the [markup] that [President] testified would have been payable to a subcontractor as profit.
17) As to the [BIR Tax] assessment, [Auditor] accepted [Carson's] federal tax returns as correctly documenting its income and expenses for each year. This resulted in a $0 assessment for the net income of the [BIR Tax]. The assessment under appeal is the tax amount due for the gross receipts portion of the [BIR Tax], calculated by applying the statutory tax rate to the gross receipts offered by [Carson] for business activity conducted in [the City]. No changes were made to [Carson's] reported gross receipts.
18) [Carson] did not refute that during the years under audit [Carson] performed work in [the City]. There were gross receipts attributable to [City] business activity.
19) [President] testified that from 2001 until 2010, the audit years, the company changed its way of business to a model where all projects were handed to independent subcontractors who used their own employees for all work. [President] testified that [Carson] did not employ its own workforce to complete its projects[.] Its only employees were the small office ...

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