Com. v. Gilmour Mfg. Co.

• Citation: 573 Pa. 143,822 A.2d 676
• Parties: COMMONWEALTH of Pennsylvania, Appellant, v. GILMOUR MANUFACTURING COMPANY, Appellee.
• Decision Date: 25 April 2003
• Court: United States State Supreme Court of Pennsylvania

822 A.2d 676

573 Pa. 143

COMMONWEALTH of Pennsylvania, Appellant, v. GILMOUR MANUFACTURING COMPANY, Appellee.

Supreme Court of Pennsylvania.

Argued April 30, 2001.

Decided April 25, 2003.

Carol L. Weitzel, Calvin Royer Koons, Harrisburg, for the Commonwealth of PA.

Joseph C. Bright, Philadelphia, Kevin Jon Moody, Harrisburg, for Gilmour Manufacturing Company.

Christopher Zettlemoyer, for Amicus-PA Chamber of Business & Industry.

Before FLAHERTY, C.J., and ZAPPALA, CAPPY, CASTILLE, NIGRO, NEWMAN and SAYLOR, JJ.

OPINION OF THE COURT

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 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.

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 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.

In 1991, the year pertinent to this appeal, Gilmour was entitled to apportionment for purposes of its CNI tax because some of its sales took place within Pennsylvania while others took place outside of Pennsylvania. In its 1991 CNI tax report, Gilmour excluded its "dock sales" to out-of-state purchasers from its calculation of the numerator of its sales factor, considering those sales to be out-of-state. The Department of Revenue, however, disagreed with Gilmour's calculations. Consistently with its interpretation of the relevant existing regulation, the Department recalculated Gilmour's taxes to include as sales in Pennsylvania dock sales where out-of-state purchasers retrieved the goods themselves.¹ Gilmour's out-of-state dock sales for 1991 totaled $2,385,362. Inclusion of the sales as Pennsylvania sales resulted in a $17,912 increase in the tax due.

Gilmour paid the increased tax but then petitioned for a refund. The Board of Finance and Revenue denied the petition. Gilmour then petitioned for review of the Board's decision in the Commonwealth Court, claiming that the Department's regulation was inconsistent with the Tax Reform Code.

The issue in the Commonwealth Court was the proper construction of Section 401(3)2(a)(16) of the Code, which provides as follows:

Sales of tangible personal property are in this State if the property is delivered or shipped to a purchaser, within this State regardless of the f.o.b. point or other conditions of the sale.

72 P.S. § 7401(3)2(a)(16).² The dispute centered on the meaning of the phrase "within this State." Gilmour essentially argued that the statute set forth a "destination" rule, while the Commonwealth maintained that the statute set forth a "delivery" rule. Under Gilmour's reading, the phrase "within this state" modifies the immediately preceding word "purchaser" as to goods either "delivered" or "shipped." Thus, a dock sale would be deemed in this state only if the purchaser was a Pennsylvania-based purchaser. Gilmour argued that goods purchased by out-of-state-based buyers and destined for out-of-state locations are out-of-state sales for purposes of the CNI tax, irrespective of whether the goods were delivered to the buyer in Pennsylvania. The Commonwealth, on the other hand, argued that the phrase "within this state" modified the word "delivered." Under this construction, a dock sale would be deemed to have occurred within Pennsylvania if the purchaser actually took delivery here, irrespective of the home state of the purchaser or the destination to which the purchaser was taking the goods.

A divided three-judge panel of the Commonwealth Court found in favor of the Commonwealth. The panel majority opinion authored by Judge Smith concluded that the Department's regulatory interpretation of dock sales was consistent with the statute, and therefore dock sales to out-of-state purchasers were calculable as Pennsylvania sales for purposes of determining the CNI tax. Gilmour Manufacturing Co. v. Commonwealth of Pennsylvania, 717 A.2d 619 (Pa.Cmwlth.1998) (Gilmour I).

Judge Doyle dissented without opinion.

Gilmour filed exceptions which the Commonwealth Court, sitting en banc, granted. Gilmour Manufacturing Co. v. Commonwealth of Pennsylvania, 750 A.2d 948 (Pa. Cmwlth.2000) (en banc) (Gilmour II).

The en banc majority, in an opinion by Judge Doyle, acknowledged that the administrative construction of the statute relied upon by the Department was entitled to some deference, but only so long as it tracked the meaning and intent of the statute and was not unreasonable. 750 A.2d at 948. The majority concluded, however, that the Department's interpretation, both as argued in the Commonwealth's brief and as reflected in the regulation, was inconsistent with the statute. In so holding, the majority considered case law from other jurisdictions construing identical, or nearly identical statutes (those decisions uniformly concluded that sales such as these should be deemed out-of-state sales), relevant principles of statutory construction, and the purpose of the CNI tax itself. Accordingly, the Gilmour II court entered judgment in favor of Gilmour in the amount of $17,912 plus interest. Judge Smith, joined by Judge Flaherty, dissented, reiterating the position taken in her earlier panel majority opinion in Gilmour I.

The question before us involves the proper interpretation of a statute. This is a question of law and, thus, our review is plenary. See C.B. ex rel. R.R.M. v. Commonwealth, Department of Public Welfare, 567 Pa. 141, 786 A.2d 176, 180 (2001)

. The General Assembly has directed in the Statutory Construction Act, 1 Pa.C.S. § 1501 et seq., that the object of interpretation and construction of all statutes is to ascertain and effectuate the intention of the General Assembly. See 1 Pa.C.S. §§ 1903(a), 1921(b). Generally speaking, the best indication of legislative intent is the plain language of a statute. See, e.g., Bowser v. Blom, 569 Pa. 609, 807 A.2d 830, 835 (2002) (citations omitted). Furthermore, in construing statutory language, "[w]ords and phrases shall be construed according to rules of grammar and according to their common and approved usage...." 1 Pa.C.S. § 1903. Another bedrock principle of statutory construction requires that a statute "be construed, if possible, to give effect to all its provisions," so that no provision is mere surplusage. 1 Pa.C.S. § 1921(a). Finally, the Act directs that all provisions of statutes imposing taxes are to be narrowly construed. Id. § 1928(b)(3); see also Ross-Araco Corp. v. Board of Finance and Revenue, 544 Pa. 74, 674 A.2d 691, 694 (1996).

The Commonwealth correctly argues that administrative interpretations of a statute, such as the Department's regulation interpreting the Tax Reform Code at issue here, are entitled to some deference, particularly where a statute is technical or complex. But, as the Commonwealth also concedes, and the Commonwealth Court properly recognized, such deference will exist only where the reviewing court is satisfied that the regulation tracks the meaning of the statute, as narrowly construed, and does not violate the intent of the legislation:

[A regulation] will survive or fail based on the following considerations.

'An interpretative rule ... depends for its validity ... upon the willingness of a reviewing court to say that it in fact tracks the meaning of the statute it interprets. While courts traditionally accord the interpretation of the agency charged with administration of the act some deference, the meaning of a statute is essentially a question of law for the court, and, when convinced that the interpretative regulation adopted by an administrative agency is unwise or violative of legislative intent, courts disregard the regulation.....'

Girard School Dist. v. Pittenger, 481 Pa. 91, 95, 392 A.2d 261, 263 (1978) (quoting Uniontown Area

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