21 Pa. Commw. 186 | Pa. Commw. Ct. | 1975
Opinion by
Triumph Hosiery Hills, Inc. (appellant) is a New York corporation which transacts a part of its business in Pennsylvania. By exercising its privilege to engage in business within this state, appellant is necessarily subject to the imposition of the Pennsylvania corporate net income tax.
Subsequent to appellant’s filing of its Pennsylvania corporate net income tax return for the year ending December 81, 1971, the Department of Revenue disagreed with the method employed by appellant in the computation of its tax liability, and settled the tax due to a higher amount. This action precipitated administrative review procedures culminating in the rejection of appellant’s contentions.
“In arriving at 'taxable income’ for Federal tax purposes . . . any corporate net income tax due to the Commonwealth pursuant to the provisions of this article shall not be allowed as a deduction and the amount of corporate net income tax so due and excluded from Federal taxable income under the Internal Revenue Code shall not be apportioned but shall be subject to tax at the rate imposed under this article.” (Emphasis added.)
Initially, this provision requires taxpayers to “add-back,” to their federal taxable incomes, the deductions taken on their federal returns for the Pennsylvania corporate net income tax.
It cannot be gainsaid that the proscription against apportionment of the “add-back” is glaringly inappropriate within the context of section 401(3)1, since that
“In case the entire business of any corporation ... is not transacted within this Commonwealth, the tax imposed by this article shall be based upon such portion of the taxable income of such corporation . . . as defined in subclause 1 hereof... ,”5 (Emphasis added.)
Appellant argues that because section 401(3)2 defines the “taxable income” of multistate corporations in terms of “such portion of the taxable income ... as defined in subclause 1 [section 401(3)1],” and that because the “add-back” of the federal deduction for the Pennsylvania corporate net income tax is an integral part of the subclause 1 definition of “taxable income,” that, therefore, said “add-back,” as well as the other components of the subclause 1 definition, must be apportioned in computing appellant’s Pennsylvania taxable income. We agree with appellant’s premises, but not with its conclusion.
Despite its (mis-),placement in section 401(3)1, we feel that the proscription against apportionment of the federal deduction/“add-back” cannot be disregarded in deference to appellant’s perception of the “clear intent”
Therefore, we adopt the Commonwealth’s interpretation of sections 401 (3)1 and 401 (3)2. When computing its tax base for purposes of the Pennsylvania corporate net income tax, a corporation whose entire business is not transacted in Pennsylvania may apportion its taxable income except insofar as said taxable income represents the “add-back” of that corporation’s federal tax deduction for the Pennsylvania corporate net income tax.
Anticipating the possibility that this Court might so conclude, appellant also raises a multifaceted constitutional objection to the statute as so construed. Citing the
We need not address each of the four constitutional principles asserted. Within the parameters of this controversy they are collectively directed to the same question: Whether by denying a multistate corporation the right to apportion the “add-back” of the federal deduction for the Pennsylvania corporate net income tax, d'o sections 401(3)1 and 401(3)2 create two distinct classes of taxpayers, and thereby discriminate against multistate corporations ?
The purposes of apportionment, on a constitutional level, are to prevent any single state from taxing more than its just share of a multistate corporation’s income or property, and to preclude state government partiality towards purely intrastate interests. The proscription against allocation of the federal deduction/“add-back” frustrates neither purpose, and, in fact, affords a buffer against prospective allegations of reverse discrimination.
The constitutional principles here raised dictate that all components of a particular tax base which are uniquely local in character are properly and constitutionally within the potential ambit of local taxation. In many cases, this “localism” is predetermined by the situs of the tax base component (e.g. real property taxes) or by the restricted bounds of the taxpayer’s domain (e.g. all of the taxpayer’s business transacted solely within the taxing state), and resort to more detailed analysis becomes unnecessary. However, in local tax situations
Sections 401(3)1 and 401(3)2 require that the federal deduction for only the Pennsylvania corporate net income tax be returned to the base figure of federal taxable income in computing the taxable income for application of the Pennsylvania tax. Thus, this particular component has been localized prior to the application of the appropriate apportionment formulae. Apportionment has occurred in the first instance, that is, at the time when the multistate corporate taxpayer determines what portion of its total federal deduction for state taxes represents the Pennsylvania corporate net income tax. Further apportionment of this particular component of the tax base would be nugatory under the mandates of both the Pennsylvania and Federal Constitutions, and would likely have negative repercussions. Local corporations, who are expressly required to include 100% of their federal deductions for the Pennsylvania corporate net income tax within the tax base, could identify a “double apportionment” so afforded multistate corporations as a clear violation of the very same constitutional provisions (excepting the commerce clause) here propounded by appellant.
Accordingly, we enter the following
Order
Now, September 5, 1975, unless exceptions are filed hereto within thirty (30) days, the Chief Clerk is hereby directed to enter judgment against Triumph Hosiery Mills, Inc. and in favor of the Commonwealth, in the amount of $159,764.58. The Chief Clerk is further directed to mark said judgment “satisfied” inasmuch as the full amount of said judgment has been paid by Triumph Hosiery Mills, Inc.
. Article IV of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, as amended, 72 P.S. §7401 et seq., henceforth referred to as Code.
. The procedures for settlement, resettlement and review are set forth in section 407 of the Code, as amended, 72 P.S. §7407.
. Section 401(3) 1 of the Code, as amended, 72 P.S. §7401(3) 1.
. This perhaps resounds in confusion but, presumably, in computing their federal deductions for state taxes, corporate taxpayers approximate their potential liabilities for the Pennsylvania corporate net income tax. Then, to determine their actual liabilities for the Pennsylvania tax, section 401(3)1 requires the taxpayers to return this approximation to the tax base.
. 72 P.S. §7401(3)2. The remainer of section 401 delineates the factors to be utilized in determining the proper portion of the taxable income of a multistate corporation to be allocated to Pennsylvania.
. Section 1933 of the Statutory Construction Act of 1972, 1 Pa. C.S. §1933.
. Pa. Const, art. VIII, §1.
. U.S. Const, amend, XIV, §1 (equal protection and due process) and U.S. Const, art. I, §8, cl. 3 (commerce).