Opinion ID: 2301352
Heading Depth: 1
Heading Rank: 2

Heading: The Headquarters Subfactor is Facially Discriminatory

Text: In auditing PPG's submissions for 1983, the Department was faced with an unusual circumstance: a company that centralized at its Pennsylvania headquarters the administration of all of its in-state and out-ofstate manufacturing activities. Acting upon the premise that the headquarters qualified for the manufacturing exemption to the extent its activities pertained to manufacturing operations in Pennsylvania, the Department formulated a so-called headquarters subfactor to determine what percentage of PPG's headquarters' property and payroll were tax-exempt. [5] This subfactor was computed by dividing PPG's Pennsylvania non-headquarters payroll by PPG's non-headquarters payroll everywhere, yielding a fraction of 0.22. Hence, twenty-two percent of PPG's headquarters' property and payroll was deemed exempt under the manufacturing exemption. In Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977), the Supreme Court struck down a New York State securities transfer tax. See id. at 328, 97 S.Ct. at 606. The tax at issue imposed a heavier burden on transactions involving an out-ofstate sale than those in which the sale was made on a New York exchange. The Court explained that New York's discriminatory treatment of out-of-state sales is made possible only because some other taxable event (transfer, delivery or agreement to sell) takes place in the State. Thus the State is using its power to tax an in-state operation as a means of requiring other business operations to be performed in the home State. As a consequence, the flow of securities sales is diverted from the most economically efficient channels and directed to New York. This diversion of interstate commerce and diminution of free competition in securities sales are wholly inconsistent with the free trade purposes of the Commerce Clause. Id. at 336, 97 S.Ct. at 610 (internal quotation omitted). Here, the effect of the headquarters subfactor used by the Department is directly analogous to the operation of the New York statute invalidated in Boston Stock Exchange. In-state operationsin this case, administrative activities at PPG's headquartersare taxed more or less heavily depending upon whether the manufacturing operations they administer are in-state or out-of-state. This scheme rewards companies such as PPG that move manufacturing operations into Pennsylvania in the form of a reduced state tax burden on its headquarters; it likewise penalizes companies (in the form of an increased tax burden on their headquarters) that move their manufacturing operations out of state. Therefore, the headquarters subfactor developed by the Department discriminates against interstate commerce and is unconstitutional under Boston Stock Exchange. [6] It is important to note, however, that the offending feature of the tax scheme is not that companies are able to avail themselves of a favorable tax climate for manufacturing activities by moving such operations to Pennsylvania. Indeed, to the contrary, the Court in Boston Stock Exchange was careful to observe that [o]ur decision today does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry. Boston Stock Exchange, 429 U.S. at 336, 97 S.Ct. at 610. If Pennsylvania is able to compete effectively with other states for manufacturing business because of the manufacturing exemption here at issue, such competition lies at the heart of a free trade policy such as that promoted by the Commerce Clause. Id. at 337, 97 S.Ct. at 610; accord Trinova Corp. v. Michigan Dep't of Treasury, 498 U.S. 358, 385-86, 111 S.Ct. 818, 835, 112 L.Ed.2d 884 (1991). Rather, the unconstitutional aspect of the headquarters subfactor methodology is that the tax imposed by Pennsylvania on PPG's headquarters increases as other PPG business operations are moved or expanded out of state, and likewise decreases as those operations are moved or expanded in-state. It is on this basis that the headquarters subfactor, or sub-apportionment methodology, discriminates against interstate commerce. [7]