HAB Industries, Inc. v. City of Allentown

• Decision Date: 27 February 1995
• Citation: 168 Pa.Cmwlth. 151,649 A.2d 198
• Parties: HAB INDUSTRIES, INC., Appellant, v. CITY OF ALLENTOWN.
• Court: Pennsylvania Commonwealth Court

Page 198

649 A.2d 198

168 Pa.Cmwlth. 151

HAB INDUSTRIES, INC., Appellant, v. CITY OF ALLENTOWN.

Commonwealth Court of Pennsylvania.

Argued Sept. 19, 1994.

Decided Oct. 20, 1994.

Petition for Allowance of Appeal Discontinued Feb. 27, 1995.

Michael D. Shepard, for appellant.

Patricia A. Siemiontkowski, Asst. City Sol., for appellee.

Before PELLEGRINI and KELLEY, JJ., and SILVESTRI, Senior Judge.

KELLEY, Judge.

HAB Industries, Inc. (HAB) appeals from an order of the court of Common Pleas of Lehigh County (trial court) denying HAB's petition for review of the City of Allentown's imposition upon HAB of a business privilege tax for the years 1971 through 1990.

The parties herein have stipulated to the following relevant facts. See Reproduced Record (R.) pp. 14a-17a.

HAB is a Pennsylvania business corporation with its principal place of business located on South Albert Street, Allentown, Pennsylvania. During the years 1971 through 1990, HAB has been engaged in the business of treating unfinished cloth in a variety of ways, including bleaching, scouring, dyeing printing, bulking, napping, slitting or cutting, tentering, resinating, calendaring, gumming, adjusting stretch, curing, flame retarding, heat setting, mildew proofing, and imparting permanent press, water repellence and dimensional stability.

In the course of its business, HAB receives newly constructed fabric from a knitter, which has knitted the fabric from yarn. Newly constructed fabric as it comes from the knitter does not represent finished consumer goods. Rather, such fabric must pass through various finishing processes. HAB provides these finishing processes.

Finishing enhances the appearance of the fabric and adds to its serviceability and durability, thus increasing its value. Finishing processes have assumed great importance in the textile industry. This phase of textile finishing is undertaken by a group of middlemen called "converters."

Unfinished fabric that comes to HAB from a knitter is known as "gray goods" or "griege goods." The term "gray goods" does not imply that the fabric is gray in color. The terms "gray goods" and "griege goods" denote any unfinished fabric as it comes from the knitter.

Conversion of "gray goods" includes the various types of finishing processes performed by HAB, as well as subsequent dyeing and printing, which are also a significant part of HAB's business. Finishing may take many forms and must be adapted to the kind of fiber and yarn used in the fabric and to its intended purpose. One type of gray goods may emerge from a certain finishing process in a form suitable for making curtains while the identical gray goods put through another finishing process can be used for dress material.

HAB does not take title to the goods which it finishes. Rather, HAB usually enters into a contract with a converter to perform the finishing functions described above. The converter buys the yarn which is knitted into fabric by a knitter. The knitter in turn ships the knitted fabric to HAB so that HAB can perform the finishing functions described above. Once those functions have been performed, HAB, at the direction of its converter customer, sends the finished goods to a cutter; i.e., the party that will transform the finished fabric into finished goods which can be sold to wholesalers or retailers.

In some cases, HAB contracts directly with a cutter to perform the necessary finishing functions. In such instances, no converter is involved.

On April 17, 1990, the City of Allentown, Department of Administration and Finance (Allentown) sent HAB a decision seeking payment of Allentown's business privilege taxes, related license fees, and a one percent (1%) per month penalty charges for license years 1971-72 through 1989-90, totalling $222,355.37. On May 9, 1990, HAB filed a petition for review of Allentown's decision with the trial court seeking a determination that HAB is exempt from the business privilege tax on the basis of the manufacturing exemption mandated by The Local Tax Enabling Act ¹ (LTEA) and the City of Allentown Ordinance No. 11851, Section III(c)(5). ² In the alternative, HAB also challenged the rate at which the tax would be levied against HAB.

At a hearing held before the trial court on March 13, 1993, HAB presented the expert testimony of Professor Frank Scardino of the Philadelphia College of Textiles and Science. Professor Scardino opined that HAB's finishing processes actually transform the unfinished fabric into something new, different and useable.

The trial court found that the treatment of the unfinished cloth by HAB increased the value of the griege goods between $4.00-$8.00 per pound; that in order to perform its work, HAB must add several types of chemicals in differing amounts in specific sequence; and that it is clear that skill and labor are necessary.

However, the trial court denied HAB's petition for review based on this court's holding in City of Reading v. 45 Noble Street, Inc., 50 Pa.Commonwealth Ct. 431, 413 A.2d 1153 (1980). In City of Reading, we held that 45 Noble Street's processing of textiles did not constitute manufacturing; therefore, the company was not entitled to the manufacturing exemption found in section 2(4) of the LTEA. 53 P.S. § 6902(4).

In addition, the trial court pointed out that the legislature included in the Tax Reform Code of 1971 ³ statutory definitions of "manufacture" and "processing". Specifically, section 201 of the code defines processing as, inter alia, "[t]he scouring, carbonizing, cording combing, throwing, twisting or winding of natural or synthetic fibers, or the spinning, bleaching, dyeing, printing or finishing of yarns or fabrics, when such activities are performed prior to sale to the ultimate consumer." 72 P.S. § 7201(d)(2).

Thus, the trial court concluded that HAB was not entitled to a manufacturing exemption from the imposition of Allentown's business privilege tax. The trial court concluded further that HAB is engaged in a service business and therefore is subject to the business privilege tax at a rate of three mills.

On appeal to this court, HAB contends that the trial court erred in determining that it was subject to Allentown's business privilege tax. ⁴ HAB argues that City of Reading is inapplicable in this case because (1) it predates our Supreme Court's decisions in Bindex Corp. v. City of Pittsburgh, 504 Pa. 584, 475 A.2d 1320 (1984), wherein the Supreme Court clarified the definition of "manufacturing", and Harsco Corp. v. City of Pittsburgh, 516 Pa. 562, 533 A.2d 1012 (1987); and (2) each case must be decided on its own facts and it is unknown what evidence, if any, was presented in City of Reading. HAB argues that the evidence in the present case is undisputed and shows that through its manufacturing processes and its skill and labor, it creates a new, different and useable article.

Section 2(4) of the LTEA provides as follows:

To levy, assess and collect a tax on goods and articles manufactured in such political subdivision or on the by-products of manufacture, or on minerals, timber, natural resources and farm products produced in such political subdivision or on the preparation or processing thereof for use or market, or on any privilege, act or transaction related to the business of manufacturing, the product, preparation or processing of minerals, timber and natural resources, or farm products, by manufacturers, by producers and by farmers with respect to the goods, articles and products of their own manufacture, production or growth, or on any privilege, act or transaction relating to the business of processing by-products of manufacture, or on the transportation, loading, unloading or dumping or storage of such goods, articles, products or by-products; except that local authorities may levy, assess and collect taxes on the occupation, occupational privilege, per capita and earned income or net profits of natural persons engaged in the above activities whether doing business as individual proprietorship or as members of partnerships or other associations.

53 P.S. § 6902(4).

We believe that our previous decision in City of Reading is controlling and affirm the trial court. This court in City of Reading, guided by our Supreme Court's 1902 decision in Commonwealth v. Keystone Laundry Co., 203 Pa. 289, 52 A. 326 (1902) ⁵, stated as follows:

The record indicates that [45 Noble Street] contracts to treat unfinished cloth, referred to as "griege", in a variety of ways, including: dyeing, autoclaving, bulking, adjusting stretch, curing, flame retarding, heat setting, mildew proofing, imparting permanent press, water repellence and dimensional stability, and changing terry cloth to velour. Although the "finished cloth" may be different from the original in color, dimension, stretch, stain, heat and water resistance, texture and bulk, the product is cloth, not a new and different article.

* * * * * *

[F]inishing cloth, treating it chemically and imparting it with new physical characteristics, does not result in a new and different product.

City of Reading, 50 Pa.Commonwealth Ct. at 435-36, 413 A.2d at 1156.

While it is true that we do not know exactly what evidence was presented in City of Reading, it is clear from the above-quoted language that 45 Noble Street was in the same business of treating unfinished cloth and treated unfinished cloth or griege in the same manner as HAB does in the instant case. See Stipulation of Facts, R. at pp. 14a-17a. Consequently, HAB's argument that we should disregard City of Reading on the basis that we do not know what evidence was presented therein must fail.

HAB's contention that City of Reading has been rendered "bad law" based on our Supreme Court's decisions in Bindex and Harsco must also fail. In Bindex, the Supreme Court pointed out that there exists no statutory definition of the term manufacturing in the LTEA ⁶; accordingly, the Bindex court analyzed the history of...