Court Opinion

ID: 9751417
Source: CourtListenerOpinion
Date Created: 2023-08-28 16:25:43.449291+00
Date Added: 2024-06-11T07:26:45.871421
License: Public Domain

Justice SAYLOR
dissenting.
The Commonwealth opens its brief with a detailed argument that an incorrect assumption clouded this Court’s initial determination that the manufacturing exemption in Pennsylvania’s scheme of capital stock/franchise taxation facially discriminates against interstate commerce. See PPG Industries, Inc. v. Commonwealth, 567 Pa. 565, 790 A.2d 252 (1999)(“PPG I”). Specifically, the Commonwealth asserts as follows:
In its interim decision of June 17,1999, this Court held that, as it had been applied to PPG’s headquarters, the manufacturing exemption in 72 P.S. § 7602 discriminated against interstate commerce, and thus concluded that Section 7602 is unconstitutional on its face. The issue actually before the Court, however, was quite narrow: the methodology used in applying the manufacturing exemption to the property and payroll at PPG’s administrative headquarters. We believe that, in focusing on this narrow issue, the parties unwittingly may have given the Court the impression that a) the methodology used for PPG’s headquarters is required by the statute itself; and b) the exemption is computed for all manufacturing assets as it was computed for PPG’s head-' quarters. Neither is the case.
*597Rather, the methodology used for PPG’s headquarters utilized a secondary apportionment factor which is not found in the statute itself, but which the Department of Revenue developed administratively to deal with the unusual situation presented by PPG’s headquarters. That methodology, unfortunately, does indeed discriminate against out-of-state activities. But in all other cases, the primary apportionment methodology — which is found in the statute itself— operates neutrally as to in-state and out-of-state activities. Apparently, the parties failed to make this clear to the Court, and the Coqrt issued its interim decision under this misapprehension, understandably concluding that Section 7602 is facially unconstitutional.
The Court’s decision, however, is not yet final: the Court has retained jurisdiction and now has an opportunity to adopt a remedy to cure the constitutional infirmity. Since the issue we have described will directly affect the scope of that remedy, we believe that it is appropriate for the parties respectfully to draw the Supreme Court’s attention to the fundamental misunderstanding which underlies the interim decision.
This is especially true in light of the consequences which ride on this decision. Section 7602 is not a compensatory tax, and if it is unconstitutional on its face, then the manufacturing exemption must fall in its entirety. We estimate that, if this were to occur, the capital stoch/fran-chise tax paid by manufacturers would rise by over 500%, or over $600 million in the most recent fiscal year. The Court should not permit consequences of this magnitude to happen simply because the parties to a single case failed to make the law clear to a reviewing court.
Brief at 8-9 (emphasis in original). In subsequent passages of its brief, the Commonwealth presents an extensive and, in my view, compelling explanation of the distinction between the administrative methodology developed by the Department of Revenue (the “Department”) exclusively to apply the manufacturing exemption to PPG’s in-state headquarters activities and the established, statutory apportionment scheme which is ap*598plied in all other cases. Judge Colins’ factual findings on remand reflect the agreement of the Commonwealth and PPG that Pennsylvania’s scheme of capital stock and franchise taxation is not broadly unconstitutional, but that solely the methodology used by the Commonwealth relative to PPG’s headquarters offended Commerce Clause non-discrimination principles.
The majority declines to address the parties’ joint position on the strength of this Court’s prior decision.1 See Majority Opinion, at 267-68 n.ll. In the highly unusual circumstances presented, however, I believe the position must be addressed. The Court retains jurisdiction over the case; the constitutional validity of a legislative enactment is involved and remains unchallenged by either party; and the analysis underlying this Court’s prior determination of unconstitutionality is a critical component of the selection of remedy presently before us. Accordingly, I would conclude as follows:
I. The Manufacturing Exemption is not Facially Discriminatory
The capital stock exemption for in-state manufacturing operations (the “manufacturing exemption”) is set forth in Section 602(a) of the Tax Reform Code of 1971 (“Tax Code”).2 The relevant provisions of that section are recited by the majority. See Majority Opinion, at 263 n.3. In particular, Section 602(a) exempts from state taxation the capital stock of corporations organized specifically for manufacturing, processing, research or development (hereinafter, “manufacturing”), “which is invested in and actually and exclusively employed in carrying on” manufacturing within the state. See 72 P.S. § 7602(a). Thus, capital stock “invested in any property or business not strictly incident or appurtenant” to manufacturing activities is subject to taxation, the legislative object being to exempt only so much of the capital stock as is invested “purely” in manufacturing. Id.
*599As the majority notes, PPG elected to compute its tax liability under li the three-factor appoitionment formula set forth in Section 602(b) of the Tax Code, 72 P.S. § 7602(b).3 That section imports the manufacturing exemption from Section 602(a), see 72 P.S. § 7602(b)(1), and further specifies that it must be applied within the three-factor apportionment context by excluding from the numerators of the payroll, property, and sales fractions all payroll, property, or sales “attributable to” manufacturing activities within the Commonwealth. See 72 P.S. § 7602(b)(1)(i). Notably, however, these numerators also exclude payroll, property, and sales related to all out-of-state business activities, see 72 P.S. § 7401(3)2.(a)(9(B), 10, 13, 15), as they must to comport with Due Process and Commerce Clause constraints. See generally Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.S. 458, 464, 120 S.Ct. 1022, 1026, 145 L.Ed.2d 974 (2000). Thus, under Section 602(b), all payroll, property, or sales directly-involved in manufacturing anytvhere — within or outside Pennsylvania — are excluded from the numerators of the apportionment fractions. On its face, therefore, while the Tax Code distinguishes between manufacturing and other business pursuits, it does not discriminate between in-state and out-of-state manufacturing, both of which are exempt from taxation. For Commerce Clause purposes, then, the manufacturing exemption is not facially discriminatory.4
II. The Headquarters Subfactor is Facially Discriminatory
In auditing PPG’s submissions for 1983, the Department was faced with an unusual circumstance: a company that *600centralized at its Pennsylvania headquarters the administration of all of its in-state and out-of-state 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 com■puted 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-of-state 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 *601headquarters — are taxed more or less heavily depending upon whether the manufacturing operations they administer are instate 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 *602subfactor, or sub-apportionment methodology, discriminates against interstate commerce.7
III. The Majority’s Holding Rests Entirely Upon an Analysis of the Headquarters Subfactor
In its interim decision, this Court relied for its holding exclusively upon the fluctuation in PPG’s headquarters’ tax liability occasioned by changes in location of PPG’s manufacturing facilities extrinsic to those headquarters, such fluctuation being a consequence of the headquarters subfactor method employed by the Department. The Court stated:
[B]y use of the Department’s sub-apportionment methodology, PPG’s headquarters’ tax increases as PPG expands out-of-state activity which lacks tax nexus to Pennsylvania, even if there is no equivalent increase in headquarters’ payroll.
PPG I, 565 Pa. at 575-577, 790 A.2d at 258, 1999 WL 396902 at *5 (quoting Brief for PPG at 20-21)(emphasis added).
This holding depends upon an interpretation of the statutory manufacturing exemption under which business operations extrinsic to a corporation’s headquarters are permitted to “reach back” to the headquarters and determine the exempt portion of the latter. Were it not for this reach-back capability — embodied in the headquarters subfactor methodology developed by the Department — there would be no change to a company’s Pennsylvania tax liability when a manufacturing facility is built, expanded, or reduced in-state or out-of-state. The reason is, as previously noted, that all manufacturing property, payroll, and sales (whether in-state or out-of-state) are excluded from the apportionment fraction numerators. Hence, but for the Department’s use of the headquarters subfactor methodology, there would have been no basis upon which to conclude that the exemption operates to discriminate against out-of-state commerce.8
*603The parties do not dispute that use of the headquarters subfactor constituted an administrative solution — a secondary apportionment factor developed by the Department specifically to handle taxation of PPG’s headquarters, see Stipulation of Facts (S/F) 28-30, R.R. 24a — the primary apportionment method being the averaging of the payroll, property, and sales figures as prescribed by Section 401 (3)2. (a) of the Tax Code, 72 P.S. § 7401(3)2.(a); nor do the parties dispute that, apart from the use of the headquarters sub factor, the statute is constitutional. See R.R. at 41A, 72A. There is also no doubt that the Court’s evaluation of the effect of the headquarters subfactor formed the basis of its invalidation of the statutory manufacturing exemption in PPG I. Therefore, as the Department correctly observes, the PPG I decision must have been based upon an assumption that the secondary apportionment scheme used by the Department relative to PPG’s headquarters comprised an integral part of the 'primary scheme as set forth in the statute. See Brief for Appellee at 7-11. A review of PPG I confirms that such was an assumption — and not a holding — as that opinion is devoid of any discussion of the question or any analysis by which a conclusion can be drawn that the secondary apportionment factor is statutorily required.
*604IV. This Court. Should Interpret the Statute to Disallow Use of the Headquarters Subfactor
Reviewing courts have a “duty to declare a statute constitutional if this can reasonably be done,” Triumph Hosiery Mills v. Commonwealth, 469 Pa. 92, 96, 364 A.2d 919, 921 (1976)(quotation omitted), as it is “presumed ‘[t]hat the General Assembly does not intend to violate the Constitution’.... ” Id. (quoting Statutory Construction Act, 1 Pa.C.S. § 1922(3)). Presently, this can reasonably be done in the following manner.
As previously discussed, Section 602(b) of the Tax Code, 72 P.S. § 7602(b), declares that the manufacturing exemption must be implemented via exclusion from the apportionment factor numerators of all payroll, property, and sales “attributable to” manufacturing activities. While the functions of a corporation’s free-standing, mixed-use headquarters, such as planning and coordination of manufacturing'operations extrinsic to the headquarters, are arguably “attributable to” the company’s manufacturing activities in a broad sense, it must not be overlooked that the manufacturing exemption imported into Section 602(b) is restrictively defined in Section 602(a). The exemption applies only to capital stock that is “invested purely in” manufacturing activities, and “actually and exclusively employed in carrying on” those activities, in the first instance. 72 P.S. § 7602(a); see § 7602(b) (importing the exemption from Section 602(a)). Furthermore, as with all tax exemptions, where there is any doubt as to its applicability, the manufacturing exemption at issue must be strictly construed against the taxpayer. See 1 Pa.C.S. § 1928(b)(5); Commonwealth v. Peters Orchard Co., 511 Pa. 465, 473, 515 A.2d 550, 554 (1986); cf. Commonwealth v. Greenville Steel Car Co., 469 Pa. 444, 451, 366 A.2d 569, 573 (1976)( noting that, “[a]s applied to a domestic corporation electing to be treated as a foreign corporation the use of the three factor apportionment formula ... is in the nature of an exemption or deduction and, as such, must be'strictly construed”). Where, as here, a corporation’s manufacturing operations take place at locations extrinsic to its mixed-use headquarters, there is *605indeed some doubt that the headquarters-based administrative undertakings relative to those operations are “strictly incident or appurtenant” to the manufacturing business, or that the headquarters property and payroll are “exclusively and actually employed in carrying on” manufacturing, for purposes of Section 602, 72 P.S. § 7602.9 Such doubt, as noted, should be resolved in favor of taxation by holding that none of PPG’s headquarters qualifies for the manufacturing exemption, thus eliminating the exemption’s purported discrimination against interstate commerce. As the statute is not otherwise facially discriminatory, it should be upheld.
V. Conclusion
In accordance with the above, I would clarify the disposition announced in PPG I to indicate that the statutory manufacturing exemption violates the Commerce Clause solely to the extent that it is interpreted to require use of the headquarters subfactor methodology employed by the Department in its effort to handle the unusual situation presented by PPG’s headquarters. Alternatively, at the present juncture in the case, the Court could achieve the same result by adopting the fourth remedy proposed by the Commonwealth Court on remand, namely, “[i]nterpret[ing] the exemption to exclude any corporate assets not strictly incident or appurtenant to the manufacturing business, that is, PPG’s corporate headquarters.” See Majority Opinion, at 265. In either event, the taxing statute would remain intact. Applying either such construction would comport with our duties under the Statutory Construction Act to interpret tax exemptions strictly against the taxpayer and to uphold legislative enactments where this can reasonably be done. Barring either outcome, if the General Assembly were to amend the manufacturing exemption to exclude headquarters payroll, property, and sales, the resulting legislation would pass Commerce Clause scrutiny.
Justice CASTILLE joins this dissenting opinion.

. I was ineligible to participate in PPG I, as the case was argued prior to my tenure on this Court.

. Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7602(a).

. Under the three-factor approach, the taxpayer's payroll, property, and sales intrastate are compared with payroll, property, and sales everywhere, to arrive at the apportionment fraction. See Majority Opinion, at 264 n.5.

. The majority states that, were this Court to simply strike the words "within the State" irom the statute, the manufacturing exemption would then apply to both in-state and out-of-state manufacturing. See Majority Opinion, at 268. However, because out-of-state business activities are not taxed at all, the exemption has never had any application to out-of-state manufacturing.

. No sales were attributed to PPG’s headquarters.

. The Commonwealth Court determined that this scheme did not fail the test enunciated in Boston Stock Exchange because “nothing moving in interstate commerce is measured or affected by the exemption.” PPG Industries, Inc. v. Commonwealth, 681 A.2d 824, 830 (Pa.Cmwlth. 1995). That assertion overlooks the fact tha1 the material, labor, and financing necessary to construct or expand manufacturing operations potentially entail interstate elements.

. The stale taxes analyzed in the other two Supreme Court cases that the majority chiefly relies upon were also invalidated based upon this same feature. See Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 400, 104 S.Ct. 1856, 1863, 80 L.Ed.2d 388 (1984); Fulton Corp. v. Faulkner, 516 U.S. 325, 333, 116 S.Ct. 848, 855, 133 L.Ed.2d 796 (1996).

. The PPG I opinion contains a statement which, at first glance, appears to hold that the ''reach-back” capability is mandated by the *603statute. In particular, the court stated, "The Commonwealth Court, thus correctly determined that PPG’s headquarters’ properly and payroll are entitled to the manufacturing exemption only insofar as the headquarters’ employees administer manufacturing plants actually located in the Commonwealth.” PPG I, 567 Pa. at 572, 790 A.2d at 256. The issue decided in that portion of the opinion, however, did not pertain to whether or not the statute mandated that any of the headquarters property or payroll should be exempt, but rather dealt with the question of whether out-of-state manufacturing activities entitled PPG to an exemption for the portion of the headquarters administering such activities. There was no discussion of the primary question of whether any of the headquarters capital stock should be exempt in the first instance, on the ground that no manufacturing occurred at headquarters. Taken in context, then, the Court's statement merely served to exclude from the exemption that portion of the headquarters associated with out-of-state manufacturing activities.

. We need not decide whether the same planning and other administrative functions would qualify for the exemption if they occurred on-site at the manufacturing plañís, as that question is not before the Court.