Commonwealth v. Gilmour Mfg. Co.

Commonwealth v. Gilmour Mfg. Co.

Opinion

 [*145]  [**677]   OPINION OF THE COURT

MR. JUSTICE CASTILLE

This appeal presents a tax issue of first impression for this Court: whether a Pennsylvania corporation's sales of goods to out-of-state purchasers, who retrieve the goods at the seller's place of business in Pennsylvania and then transport the goods outside of Pennsylvania, should be included in the Pennsylvania corporation's calculation of corporate net income ("CNI") tax under the Tax Reform Code of 1971, 72 P.S. § 7101 et seq. For the reasons that follow, we agree with the Commonwealth Court that the Pennsylvania Department of Revenue's regulation, which treats such sales as in-state sales, is contrary to the Code and, accordingly, we affirm.

This matter proceeded in Commonwealth Court based upon a stipulation of facts pursuant to Appellate Rule 1571(f). The stipulation constituted the entire record of the proceeding and [***2]  thus the relevant facts are undisputed. Appellee, Gilmour Manufacturing Company, a Pennsylvania corporation, manufactures lawn and garden products at a facility in Somerset County, Pennsylvania. The parties agree that the products constitute tangible personal property. Gilmour sells its goods throughout the United States, most often shipping them to out-of-state purchasers through common carriers and paying the freight charges for the shipping. Some of Gilmour's out-of-state customers, however, prefer to retrieve the products themselves at Gilmour's Pennsylvania loading dock. Gilmour refers to these customer pick-up transactions as "dock sales," for which Gilmour provides a freight allowance to its customers. Gilmour generally knows the destination to which its out-of-state "dock sale" customers transport the products. The proper tax treatment of Gilmour's "dock sales" income is the issue before this Court.

 [*146]  By way of background, ] Section 401 of the Tax Reform Code permits a company that does not transact all of its business within the Commonwealth, such as Gilmour, to apportion its tax liability based upon the ratio of the company's business transacted in the Commonwealth to its total [***3]  business. 72 P.S. § 7401. The apportionment formula is an arithmetic average of three factors, i.e., property, payroll and sales factors. As to each factor, the numerator represents business conducted within Pennsylvania and the denominator represents business conducted everywhere else. The property and payroll factors are not in dispute on this appeal; it is the sales factor, and more particularly the numerator of that factor (i.e., sales conducted in Pennsylvania), which is at issue.

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