FIRST NATIONAL BANK OF FREDERICKSBURG, Appellee, v. COMMONWEALTH of Pennsylvania, Appellant.
No. unknown
Supreme Court of Pennsylvania.
Decided Feb. 3, 1989.
553 A.2d 937
Argued May 11, 1988.
By the application of skill and labor to material, appellant substantially changes indistinguishable spools of thread into distinctive insignia based upon the designs submitted by appellant‘s customers. The attachment of the insignia to a ready-made shirt substantially changes that shirt in the same way that the application of ink to blank paper substantially changes that paper by making it a different and more valuable commodity.1 What is the difference if one prints with thread on cloth or with ink on paper.
The contrary conclusion reached by the majority contravenes the purpose of the legislature in exempting manufacturers from the capital stock tax. See Golden Triangle Broadcasting, Inc. v. City of Pittsburgh, 483 Pa. 525, 397 A.2d 1147 (1979) (Larsen, J., dissenting) (legislative limits on taxation of manufacturers is intended to encourage the growth of manufacturing in this Commonwealth).
Accordingly, I would reverse the order of Commonwealth Court and remand for the recalculation of appellant‘s capital stock tax refund for the years 1982 and 1983.
PAPADAKOS, J., joins in this dissenting opinion.
Frank A. Sinon, Sherill T. Moyer, Jack F. Hurley, Jr., Harrisburg, Calvin D. Spitler, Lebanon, for appellee.
John J. Brennan, Gordon W. Gerber, Kathleen M. McCarthy, Philadelphia, P.J. DiQuinzio, Devon, for amicus curiae PA. Bankers Assn.
OPINION
NIX, Chief Justice.
This appeal calls into question the constitutionality of Act 66 of 1983, the Single Exise Tax statute,1 promulgated by the General Assembly as a direct result of this Court‘s decision in Dale National Bank v. Commonwealth, 502 Pa. 170, 465 A.2d 965 (1983). That decision struck down as violative of federal law the method of computing the Bank Shares Tax2 which required the taxpayer to include obligations of the United States owned by the taxpayer in its total assets for the purpose of calculating net worth. The Single Exise Tax, a one-time tax upon all taxpayers which claim a benefit from Dale National Bank, “for the privilege of doing business in this Commonwealth,”
The mechanics of the Single Excise Tax, although at first blush appearing complex, are rather simple. The tax is calculated by multiplying the aggregate amount of the excise tax payable by a fraction, the numerator of which is the total of the refunds claimed or to be claimed and the unpaid shares taxes by each taxpayer as a result of Dale National Bank and the denominator of which is the total of refunds claimed or to be claimed and unpaid shares taxes of all taxpayers.
Act 66 further provides that a taxpayer subject to its terms must make a lump sum payment of the excise tax on or before April 15, 1984.
First National Bank of Fredericksburg, a bank incorporated under the laws of the United States and having its principle place of business in Fredericksburg, Pennsylvania, paid its bank shares taxes in the full amounts settled by the Department of Revenue for the tax years 1978 through 1983, inclusive. On August 30, 1983, the bank petitioned the Board of Finance and Revenue (“The Board“) for a full refund of the shares taxes paid, claiming that the department had improperly considered the value of the United States securities owned by the bank in calculating the tax owed, in violation of
In the interim, we decided Dale National Bank, and the General Assembly responded with Act 66. In compliance with section 7 of the Act, adding section 1304 of the Tax Reform Code,
The bank thereupon petitioned the Board of Appeals of the Department of Revenue for a resettlement of the Single Excise Tax assessed. The Board of Appeals denied the petition on September 5, 1984. The bank then sought review with the Board of Finance and Revenue which
On appeal, the Commonwealth Court, sitting en banc, reversed the order of the Board and remanded the matter to the department for a resettlement of the bank‘s Single Excise Tax. 103 Pa.Cmwlth. 337, 520 A.2d 895. The court concluded that Act 66 deprived the bank of due process of law by extinguishing its right to recover the tax refund to which it was entitled. Moreover, the legislature, in promulgating the Single Excise Tax legislation, had impermissibly infringed upon the authority of this Court to curtail the operation of a state law which unconstitutionally conflicted with federal law, in violation of the doctrine of separation of powers. The court was careful to tailor its conclusions to apply solely to First National Bank of Fredericksburg, and expressly refused to address the bank‘s contention that the Act is unconstitutional per se.
Fearing that the decision of the Commonwealth Court would extend beyond the instant litigant and thus have grave ramifications upon the state fisc,5 the Commonwealth filed a direct appeal to this Court pursuant to
The Commonwealth presents two arguments which it believes would mandate our reversing or modifying the order under review. It contends that the Commonwealth Court incorrectly assumed without deciding that our decision in Dale National Bank should be given retroactive effect. Were the decision to be applied prospectively only, i.e., to bank shares taxes assessed subsequent to the decision, the instant taxpayer would have had no right to a refund on the bank shares taxes paid. In the alternative, the Commonwealth contends that the bank was only enti
I.
First National Bank of Fredericksburg‘s Right to a Refund
The initial question presented to this Court is whether Dale National Bank provided taxpayers subject to the bank shares tax with a legal right to a refund of taxes erroneously assessed by including United States obligations in their tax base. As the Commonwealth correctly notes, this inquiry is essential to our subsequent determination of the constitutionality of the Single Excise Tax. Because the Single Excise Tax is effective only to the extent tax revenues are lost by reason of the Dale National Bank decision,
The instant litigants disagree on whether we resolved the question of the applicability of Dale National Bank to similarly situated taxpayers in that decision. It is the Commonwealth‘s position that we decided nothing more in that case than whether the consideration of United States securities in the assessment of the bank shares tax conflicted with
“If the Court sustains the position of the Petitioner as to the exclusion of U.S. securities and accrued interest thereon ... it is agreed that the Petitioner‘s Bank Shares Tax as of January 1, 1978 is $-0-____”
The applicability of a judicial pronouncement to other litigants or potential litigants is a matter of judicial discretion to be resolved on a case-by-case basis. August v. Stasak, 492 Pa. 550, 424 A.2d 1328 (1981). See Incollingo v. Ewing, 444 Pa. 299, 282 A.2d 206 (1971). The authority within the judiciary to determine the reach of its decisions does not however preclude the legislature from independently providing persons with legal rights as a result of judicial pronouncements. Where a litigant‘s right to some legal remedy may be derived from statute, it would be a meaningless exercise for a court to determine whether an identical right is vested in the litigant as a result of prior decisional law.
First National Bank of Fredericksburg contends that section 503(a)(4) of the Fiscal Code,
The Board of Finance and Revenue shall have the power, and its duty shall be, (a) Except as hereinafter provided with respect to the Department of Transportation, to hear and determine any petition for the refund of taxes, license fees, penalties, fines, bonuses or other moneys paid to the Commonwealth and to which the Commonwealth is not rightfully or equitably entitled and,
upon the allowance of any such petition, to refund such taxes, license fees, penalties, fines, bonuses or other moneys, out of the fund into which such taxes, license fees, penalties, fines, bonuses or other moneys were originally paid, or to credit the account of the person, association, corporation, body politic, or public officer entitled to the refund____ All such petitions for refund must be filed with the board within two years of the payment of which refund is requested, or within two years of the settlement in the case of taxes or bonus, whichever period last expired, except (4) When any tax or other money has been paid to the Commonwealth, under a provision of an act of Assembly subsequently held by final judgment of a court of competent jurisdiction to be unconstitutional, or under an interpretation of such provision subsequently held by such court to be erroneous. In such case, the petition to the board may be filed either prior or subsequent to such final judgment but must be filed within five years of the payment of which a refund is requested, or within five years of the settlement of such taxes, bonus or other moneys due the Commonwealth, whichever period last expires. The board shall have jurisdiction to hear and determine any petition for refund filed prior to such final judgment only if, at the time of the filing thereof, proceedings are pending in a court of competent jurisdiction wherein the claims of unconstitutionality or erroneous interpretation made in the petition for refund may be established, and in such case the board shall not act upon the petition for refund until the final judgment determining the question or questions involved in such petition has been handed down.
Section 503(a)(4) has been given a broad reading by this Court. In Hotel Casey Co. v. Ross, 343 Pa. 573, 23 A.2d 737 (1942), the Court reversed an order of the Dauphin County Court of Common Pleas (predecessor to the Commonwealth Court) which quashed a taxpayer‘s petition for a writ of mandamus to compel the Board of Finance and
[I]f an application is made for a refund under § 503 of the Fiscal Code within the period of limitations fixed thereby and it appears that there was a tax paid to the Commonwealth to which the Commonwealth was not equitably or rightfully entitled, the provision for a refund or credit is mandatory.
Hotel Casey, 343 Pa. at 580, 23 A.2d at 741. Although the Court in Hotel Casey never expressly concluded that section 503(a)(4) provided the taxpayer with a legal right, this conclusion is inherent in its reversal of the order denying mandamus, which is a remedy available to persons aggrieved by the improper acts of an executive officer or agency of the Commonwealth. See
A taxpayer thus has a right to a refund under section 503(a)(4) if two conditions are met: (1) the petition must be filed within five years of the settlement or payment of the tax, and (2) the taxpayer must prove that a court of competent jurisdiction has held, since the payment of the tax, that the statute under which payment was made had been erroneously interpreted. See Federal Deposit Insurance Corp. v. Board of Finance and Revenue, 368 Pa. 463, 84 A.2d 495 (1951).9 First National Bank of Fredericksburg has met
We therefore conclude that First National Bank of Fredericksburg, as a taxpayer aggrieved by the Commonwealth‘s settlement of bank shares taxes under an erroneous interpretation of Article VII of the Tax Reform Code of 1971,
Pro Rata Deduction
Although the Commonwealth‘s failure to appeal the resettlement orders entered May 30, 1984, did not preclude our consideration of the issue of the bank‘s right to a refund, this omission does preclude our consideration of whether First National Bank of Fredericksburg‘s right to a refund was limited to a pro rata formulation. Regardless of the reasoning employed by the Board in granting the refund, the amount thereof was clear and could have been contested on appeal by the Commonwealth if it believed a pro rata deduction was all that was required by Dale National Bank. The Commonwealth, having failed to except to the amount of the refund, cannot now question it in this collateral review.
II.
Having concluded that a taxpayer against which bank shares taxes were improperly assessed on United States obligations has a legally enforceable right to a refund of these taxes, we must next determine whether the General Assembly has unconstitutionally infringed upon that right in enacting Article XIII of the Tax Reform Code in section 7 of Act 66 of 1983.
The Court in American Bank found the new language of section 742 “sweeping“: “Under the plain language of the 1959 amendment ... the tax is barred regardless of its form if federal obligations must be considered, either directly or indirectly, in computing the tax.” 463 U.S. at 862, 103 S.Ct. at 3374, 77 L.Ed.2d at 1079 (emphasis in original). The Court concluded that “Congress meant to bar shares taxes to the extent they consider federal obligations in the computation of the tax,” 463 U.S. at 864, 103 S.Ct. at 3375, 77 L.Ed.2d at 1080, and accordingly struck down a state shares tax based on an equity capital formula.
A similar method of computing net worth of individual bank shares existed in Pennsylvania at the time of American Bank. When confronted with the legality of this practice in Dale National Bank, we followed the lead of the United States Supreme Court.
The Single Excise Tax was enacted as a legislative response to the Dale National Bank decision. The tax is imposed only upon those taxpayers which have claimed or intend to claim refunds, or have refused to pay taxes assessed, as a result of Dale National Bank,
It is of no moment that the Single Excise Tax is not a tax upon bank shares but instead is a surcharge upon refunds and taxes unpaid. The prohibition of section 742 extends to all state taxes, regardless of form:
Nor can the 1959 amendment be read to apply only to income taxes; it reaches “every form of tax ...” (emphasis supplied). Indeed, Congress felt compelled to exempt estate and inheritance and franchise taxes from the scope of its amendment precisely because the amendment was not limited to income taxes. Congress understood the
amendment‘s effect; both the Senate and House Reports explained that the amendment “makes it clear that both the principal and interest on US obligations are exempt from all State taxes except nondiscriminatory franchise, etc., taxes” (emphasis supplied). Senate Report, at 2; House Report, at 2. Congress intended to sweep away formal distinctions and to invalidate all taxes measured directly or indirectly by the value of federal obligations, except those specified in the amendment.
American Bank, 463 U.S. at 867, 103 S.Ct. at 3377, 77 L.Ed.2d at 1082.
Any suggestion that the Single Excise Tax is a nondiscriminatory franchise tax and is thus exempt from section 742 is totally devoid of merit. The tax is imposed only upon those taxpayers that have contested the settlement of the bank shares tax by reason of Dale National Bank. Although the statute professes to be a tax “for the privilege of doing business in this Commonwealth,”
Having resolved that the Single Excise Tax is a contradiction of federal law in violation of Article VI, clause 2 of the federal constitution, we need not consider the numerous other issues presented by First National Bank of Fredericksburg regarding the constitutionality of the legislation.
LARSEN, J., files a dissenting opinion in which PAPADAKOS, J., joins.
LARSEN, Justice, dissenting.
I agree that Section 503(a)(4) of the Fiscal Code,
§ 503. Refunds of state taxes, license fees, et cetera
The Board of Finance and Revenue shall have the power, and its duty shall be,
(a) Except as hereinafter provided with respect to the Department of Transportation, to hear and determine any petition for refund of the taxes, license fees, penalties, fines, bonuses or other moneys paid to the Commonwealth and to which the Commonwealth is not rightfully or equitably entitled and, upon the allowance of any such petition, to refund such taxes, license fees, penalties, fines, bonuses or other moneys, out of the fund into which such taxes, license fees, penalties, fines, bonuses or other moneys were originally paid, or to credit the account of the person, association, corporation, body politic, or public officer entitled to the refund____
(4) “When any tax or other money has been paid to the Commonwealth, under a provision of an act of Assembly subsequently held by final judgment of a court of competent jurisdiction to be unconstitutional, or under an interpretation of such provision subsequently held by such court to be erroneous. In such case, the petition to the board may be filed either prior or subsequent to such final judgment but must be filed within five years of the payment of which a refund is requested, or within five years of the settlement of such taxes, bonus or other
moneys due the Commonwealth, whichever period last expires. The board shall have jurisdiction to hear and determine any petition for refund filed prior to such final judgment only if, at the time of the filing thereof, proceedings are pending in a court of competent jurisdiction wherein the claims of unconstitutionality or erroneous interpretation made in the petition for refund may be established, and in such case the board shall not act upon the petition for refund until the final judgment determining the question or questions involved in such petition has been handed down.”1
“If the Court sustains the position of the [bank] as to the exclusion of U.S. Securities and accrued interest thereon, ..., it is agreed that the [bank‘s] bank share tax as of January 1, 1978 is $-0-____”
In Dale, this Court stated: “We hold, in accordance with the recent decision of the Supreme Court of the United States in American Bank and Trust Co. v. Dallas County, 463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 (1983), interpreting
The majority assumes that as a result of the Dale decision, the appellee First National Bank, as a matter of law, is entitled to a full deduction of the amount of the federal obligations held by the bank from the value of the stocks, so that all of its tax liability was eliminated for the tax years in question. The majority‘s assumption is only true if Dale is to be applied retroactively.2 However, as the majority points out, because of the stipulation between the parties in Dale, the issue of retroactivity was not before us then and thus we did not address it at that time.
In Chevron Oil Company v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the Supreme Court enunciated three separate factors that are to be considered in determining whether a decision should be applied retroactively or prospectively:
“First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, ... or by deciding an issue of first impression whose resolution was not clearly foreshadowed____ Second, it has been stressed that ‘we must * * * weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation‘____ Finally we have weighed the inequity imposed by retroactive application, for ‘[w]here a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the “injustice or hardship” by a holding of nonretroactivity.’ ” ...
Id. at 106, 107, 92 S.Ct. at 355, 30 L.Ed.2d at 306 (citations omitted). We recognized in Gibson v. Commonwealth, 490
First, our decision in Dale, which applied the United States Supreme Court‘s American Bank decision, established a new rule of law overriding past precedent. For more than a century the United States Supreme Court recognized bank shares taxes as an exception to the general rule that national banks are immune from taxation by the states. See Van Allen v. Assessors, 3 Wall 573, 18 L.Ed. 229 (1866). Under that exception, it was lawful for states to tax bank shares without excluding the value of the bank‘s federal obligations holdings. In Society for Savings v. Bowers, 349 U.S. 143, 148, 75 S.Ct. 607, 610, 99 L.Ed. 950 (1955), the United States Supreme Court, in an opinion by Justice Harlan, recognized that “this exception to the general rule of immunity is firmly embedded in the law.” In American Bank, decided July 5, 1983, the United States Supreme Court analyzed a 1959 Amendment to Rev.Stat. § 3701,
Second, in weighing the merits and demerits of the rule and its purpose and effect, it is clear that the new rule‘s purpose is fully accomplished by prospective application. One of the primary purposes of the new rule is to encourage investments in federal obligations and to protect the borrowing power of the United States Government. See Society For Savings v. Bowers, supra. The appellant Commonwealth in its brief, and the Pennsylvania Bankers Association in its amicus curiae brief, argue that the purpose of the new rule is amply achieved by prospective application. I agree. Encouraging investments in United States obligations, and protecting the borrowing power of the federal government is not defeated and is given effect by prospective application of Dale.
Third, in weighing the equities involved in this case, it is apparent that retroactive application of the new rule would cause an inequity or hardship to the Commonwealth. The appellant Commonwealth points out in its brief that “Pennsylvania set its shares tax rate on the assumption that United States obligations were includible in the tax base.”6 The taxes were collected and spent by the Commonwealth in providing banks with regulatory services and other public services for banks and all taxpayers. For years Pennsylvania relied upon the established interpretation of the bank shares tax in imposing taxes on banks to meet a significant portion of the Commonwealth‘s annual budget. Conversely, no inequity or hardship results to the bank by a purely prospective application of the new rule. In the face of “firmly embedded” law, no bank could claim that it relied upon a reduction in the share tax liability because of its ownership of federal obligations prior to July, 1983. Retroactive application of Dale mandating refunds of the bank shares taxes paid would cause a hardship on the Commonwealth and provide the bank with an undeserved windfall. In short, the Commonwealth reasonably relied upon a pre
PAPADAKOS, J., joins in this dissenting opinion.