Com. v. Buckley

• Decision Date: 14 April 1986
• Citation: 508 A.2d 281,510 Pa. 326
• Parties: COMMONWEALTH of Pennsylvania, Appellee, v. Vernon C. BUCKLEY, Appellant.
• Court: Pennsylvania Supreme Court

Page 281

508 A.2d 281

510 Pa. 326

COMMONWEALTH of Pennsylvania, Appellee, v. Vernon C. BUCKLEY, Appellant.

Supreme Court of Pennsylvania.

Argued May 15, 1985.

Decided April 14, 1986.

[510 Pa. 327] Vernon C. Buckley, pro se.

Robert Coyne, Harrisburg, for appellee.

Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, HUTCHINSON, ZAPPALA and PAPADAKOS, JJ.

OPINION

ZAPPALA, Justice.

This is a direct appeal from an order of the Commonwealth Court, our jurisdiction being derived from 42 Pa.C.S. § 723(b). Commonwealth Court affirmed the order of the Board of Finance and Revenue, sustaining the Department of Revenue's assessment filed against the Appellant, Vernon C. Buckley, for failure to pay personal income tax. At issue is the constitutionality of the 1978 Reciprocal Personal Income Tax Agreement between Pennsylvania and New Jersey insofar as it distinguishes between "compensation" and "net profits".

The Appellant is a resident of New Jersey who practices his profession as an osteopathic physician and surgeon from an office in Philadelphia. Between 1971 and 1977, the Appellant paid the Pennsylvania personal income tax. In 1978, he filed a personal income tax return reporting a net profit of $33,798.91 but asserting no tax liability. Appellant argued that pursuant to the Reciprocal Personal Income Tax Agreement between Pennsylvania and New Jersey he, as a non-resident, was exempt from the tax. Successive petitions for review to the Department of Revenue Board of Appeals and the Board of Finance and Review resulted in the sustaining of the assessment for a tax deficiency.

In December of 1976, Pennsylvania and New Jersey entered into an agreement which became effective in 1978. The agreement provides that persons who reside in one state and are employed in the other may file certificates of non-residence with their employers and thereby exempt themselves from filing returns and paying personal income taxes on compensation paid in the state where they are employed. Employers receiving such certificates of non-residence are obligated to withhold income tax at the rate appropriate for the residence state of the employees and to remit the taxes so collected to that state. The agreement further provides that nothing in it "shall be interpreted to exempt a resident of Pennsylvania or New Jersey who has taxable income in the Commonwealth or State of non-residence other than in the form of compensation from liability for payment of income tax or filing an income tax return with regard to such other taxable income."

Because of this latter provision, the Appellant is clearly not entitled to exemption from Pennsylvania's personal income tax as a non-resident; the entire $33,798.91 of his income earned in Pennsylvania is "net profits" and not "compensation." For purposes of the personal income tax imposed under the Tax Reform Code of 1971, "compensation" includes "[a]ll salaries, wages, commissions, bonuses and incentive payments whether based on profits or otherwise, fees, tips and similar remuneration received for services rendered, whether directly or through an agent and whether in case or in property...." 72 P.S. § 7303(a)(1). "Net profits" are distinguished as being "[t]he net income from the operation of a business, profession, or other activity, after provision for all costs and expenses incurred in the conduct thereof determined either on a cash or accrual basis in accordance with accepted accounting principles and practices, but without deduction of taxes based on income." 72 P.S. § 7303(a)(2).

In response to the conclusion that the Agreement does not permit a non-residence exemption for net profits, the Appellant challenges the Agreement as violative of the equal protection clause, Amendment XIV, Section 1, of the United States Constitution and the uniformity clause of the Pennsylvania Constitution, Article VIII, Section I. ¹

It has often been stated that uniformity and equal protection clause challenges of taxing legislation, like challenges to the exercise of the police power where the legislature also enjoys broad discretion, are subject to review according to the "rational basis" standard. See Leonard v. Thornburgh, 507 Pa. 317, 489 A.2d 1349 (1985) and cases cited therein. See also Snider v. Thornburgh, 496 Pa. 159, 436 A.2d 593 (1981). The classification at issue is analyzed "to determine whether it is reasonable, not arbitrary, and rests upon a difference having a fair and substantial relation to the object of the legislation." Snider v. Thornburgh, 496 Pa. at 168, 436 A.2d at 597. The burden rests upon the taxpayer to demonstrate that the classification is unreasonable, F.J. Busse Co. v. Pittsburgh, 443 Pa. 349, 279 A.2d 14 (1971), a burden which has been characterized as "heavy", Amidon v. Kane, 444 Pa. 38, 279 A.2d 53 (1971). A challenger must overcome the presumption of constitutionality afforded all acts of the General Assembly, 1 Pa.C.S. § 1922(3), and legislation will not be declared unconstitutional unless it "clearly palpably, and plainly violates the constitution." Snider v. Thornburgh, 496 Pa. at 166, 436 A.2d at 598.

We begin by noting that while the Appellant asserts that the taxing scheme permitted by the agreement is irrational, he does little to demonstrate the unreasonableness he perceives. The mere assertion that there is no justification for the distinction between wage earners and self-employed persons cannot be considered sufficient to meet the challenger's heavy burden of proof. Neither is it sufficient to present, as Appellant does, one or two examples of the different results accruing to different persons because of the legislative classification. Different results are the necessary product of statutory differentiation. It is only where the legislative scheme is based on distinctions irrelevant to the statutory purpose and affects related objects of the legislation differently that the scheme can be said to be irrational.

We need not search long and hard to recognize a rational basis for the challenged legislation. A worker receiving compensation has little choice about where he earns his income. The business entity by which he is employed and from which he derives compensation determines the location where his skills and labor will be put to use. The interests in promoting interstate commerce and economic comity between separate sovereigns provide ample reason for the policy of treating interstate commuters as though their income was earned in the state of their residence rather than in the state of their employment. A person operating a business from which he derives net profits is not similarly situated. As the proprietor of the business he has the freedom to locate at a place of his own choice. The tax consequences of earning profits in a state other than the state of his residence must be considered as factors entering into his business decision to so locate.

The ease of administration in collecting and reporting personal income tax withholding money adds to the rational basis for this statute. Without the interstate agreement each New Jersey resident receiving compensation in Pennsylvania would have tax money withheld from his pay at the Pennsylvania rate. He would then be required to annually file a Pennsylvania tax return in which he claimed non-residence and a full refund of money withheld. He would also be required to file a New Jersey tax return in which he reported his full income to New Jersey taxing authorities and pay the appropriate New Jersey tax. A similar scenario would apply in the case of all Pennsylvania residents working in New Jersey. Under the statute, however, this entire process is simplified by allowing the employer to withhold not at the rate of the state where it is located, but at the rate of the employee's residence state. The employee is thus exempted from filing, and the authorities are relieved of the burden of processing returns for refunds in the employing-state and separate returns for payment in the residence-state.

By contrast, in the case of an individual earning net profits there is no withholding of either Pennsylvania or New Jersey tax. The responsibility for ensuring that the tax is collected (paid) lies not with an employer but with the taxpayer himself. The requisite forms for reporting the manner in which money was earned, the taxable status of that money, and appropriate credits, if any, for taxes paid on that money to another jurisdiction, will be the same regardless of the residence and business addresses of such a person. Rational decision-making does not mandate that by choosing to relieve the administrative burdens of a large number of taxpayers who are not in the first instance required to ensure collection of taxes, the Commonwealth must also reduce the administrative burdens encountered by a much smaller group who are primarily responsible for "collecting" and reporting their own taxes.

The Order of the Commonwealth Court is affirmed.

HUTCHINSON, J., joined in the Majority Opinion and filed a Concurring Opinion.

LARSEN and FLAHERTY, JJ., filed Dissenting Opinions in which PAPADAKOS, J., joined.

HUTCHINSON, Judge, concurring.

I join the majority opinion.

I note appellant's argument that the effect of the Agreement is that his total tax liability is higher than that of a non-resident whose income in Pennsylvania is in the form of compensation. He cites as the reason for this disparity the fact that the wage earner can use his Philadelphia Income Tax to offset his New Jersey income tax and does not file a Pennsylvania income tax return. The self-employed person, in contrast, can use the Philadelphia tax to offset his New Jersey income tax but is required to pay Pennsylvania income...