Unisys Corp. v. COM., BD. OF FINANCE & REVENUE

• Decision Date: 25 October 2002
• Citation: Unisys Corp. v. COM., BD. OF FINANCE & REVENUE, 812 A.2d 448, 571 Pa. 139 (Pa. 2002)
• Parties: UNISYS CORPORATION, Appellee v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE & REVENUE, Appellant (Three Cases). Unisys Corporation, Appellant v. Commonwealth of Pennsylvania, Board of Finance & Revenue, Appellee (Three Cases).
• Court: Pennsylvania Supreme Court

812 A.2d 448

571 Pa. 139

UNISYS CORPORATION, Appellee v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE & REVENUE, Appellant (Three Cases).

Unisys Corporation, Appellant v. Commonwealth of Pennsylvania, Board of Finance & Revenue, Appellee (Three Cases).

Supreme Court of Pennsylvania.

Argued December 5, 2000.

Re-Submitted August 21, 2002.

Decided October 25, 2002.

Reargument Denied December 31, 2002.

Kevin A. Moury, Harrisburg, for the Com. of PA, and Bd. of Finance & Revenue. Joseph C. Bright, Kevin Jon Moody, Philadelphia, for Unisys Corp.

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

OPINION

Justice SAYLOR.

These consolidated appeals concern constitutional and statutory challenges to the methodology employed by the Department of Revenue to calculate Pennsylvania franchise tax obligations of an out-of-state corporation conducting business activities in the Commonwealth.

Corollary to the capital stock tax imposed on domestic (Pennsylvania) corporations, the Commonwealth imposes a franchise tax upon foreign (out-of-state) corporations authorized to do business within its borders. In conformance with federal constitutional requirements, the tax is ostensibly designed to reach only value attributable to the conduct of instate business activity. Nevertheless, the initial tax base is quite broad in that it subsumes measures of value generated by the taxpayer and its subsidiary corporations, both in and out of state. In attempting to adjust this broad tax base to isolate in-state value prior to application of the tax rate, the taxing statute incorporates principles of formulary apportionment. Unlike the methodology utilized to determine the tax base, however, the apportionment formula prescribed by the taxing statute, as interpreted by the Department, does not take into account factors representing in- and out-of-state value generated by taxpayer subsidiaries. Unisys's present challenges are centered upon the absence of factor representation in single-entity, franchise value apportionment. Unisys is a Delaware corporation with its principal offices in Blue Bell, Pennsylvania, conducting business in all states of the United States; it was formerly named Burroughs Corporation and is the successor by merger to Sperry Corporation.¹ Throughout the tax years in question, Unisys owned, directly or indirectly, the stock of more than one hundred domestic and foreign affiliates doing business in more than one hundred countries. Despite such ownership (and plain requirements of the taxing statute), in its franchise tax returns, Unisys calculated its tax base without reference to value attributable to its subsidiaries. In settling Unisys's franchise tax for the applicable years, however, the Department increased the tax base to include certain measures of out-of-state value. Nevertheless, in adjusting the tax base to arrive at a taxable value, the Department did not incorporate into the apportionment formula any indices of value pertaining to the out-of-state subsidiaries, which, according to Unisys, had the effect of distorting its tax liability (or, more specifically, increasing the taxable value by some fortyfive percent). Unisys filed resettlement petitions with the Department, which were denied, then with the Pennsylvania Board of Finance and Revenue (the Board). The Board also denied Unisys's petitions, and the company lodged appeals in the Commonwealth Court sitting effectively as a trial court, see Pa.R.A.P. 1571, with the present appeals concerning the tax years ending March 31, 1985, and 1986 (Sperry Corporation returns), and December 31, 1986 (Unisys returns). At all stages of the litigation, Unisys contended that the apportionment formula applied by the Department violated the Commerce and Due Process Clauses of the United States Constitution, U.S. CONST. art. I, § 8, cl. 3;² U.S. CONST. amend XIV, § 1, as well as statutory fair apportionment provisions set forth in Section 401 of the Tax Reform Code of 1971,³ 72 P.S. § 7401(3)2.(a)(18).

Pursuant to the procedure for review of Board determinations, see Pa.R.A.P. 1571, the Commonwealth Court considered the appeal on a stipulation submitted by the parties. A divided, en banc court determined that the franchise tax imposed was consistent with constitutional precepts, but that Unisys was nevertheless entitled to statutory relief. See Unisys Corp. v. Commonwealth, 726 A.2d 1096, 1103, 1105 (Pa. Cmwlth.1999). The majority opened its opinion with a detailed overview of the mechanics of the taxing statute applicable to foreign corporations doing business in Pennsylvania. Under Section 601 of the Tax Code, 72 P.S. § 7601, the tax base, termed the capital stock value of the corporation, is first determined by a statutory formula based upon the corporation's net worth (the sum of the entity's issued and outstanding capital stock, surplus and undivided profits as per books ..., 72 P.S. § 7601(a)), and average net income ([t]he sum of the net income or loss for each of the current and immediately preceding four years, divided by five, 72 P.S. § 7601(a)). For such purposes, the taxpayer's net worth includes net worth of subsidiaries, see 72 P.S. § 7601(a) (In the case of any entity which has investments in other corporations, the net worth shall be the consolidated net worth of such entity[.]).⁴ Net income, however, is assessed on a separate-company, unconsolidated basis (exclusive of the net income or loss of subsidiary corporations), although it includes dividends received from subsidiaries. See 72 P.S. § 7601(a); 61 PA.CODE § 155.26(a), (b); see also Philadelphia Suburban Corp. v. Commonwealth, 535 Pa. 298, 303-05, 635 A.2d 116, 119-20 (1993). See generally Unisys, 726 A.2d at 1098-99. The statute defines capital stock value as the average of seventy-five percent of net worth and capitalized average net income, subject to a fixed deduction.⁵

Following calculation of the tax base, one of two elective methods of apportionment is employed to arrive at a taxable value, again, in deference to the constitutional proscription against state taxation of value earned outside the state's borders. The method applicable to foreign corporations per the terms of the Tax Code is known as three-factor apportionment, see 72 P.S. §§ 7602(b), 7401(3)2.(a)(9)(B), 7603.⁶ This method compares certain instate business activities of a taxpayer with all such of its activities, regardless of the location. Specifically, the formula calculates the mathematical average of three ratios: intrastate property to property everywhere; intrastate payroll to payroll everywhere; and intrastate sales to sales everywhere. Therefore, the apportionment fraction equals:

Property in PA Payroll in PA Sales in PA _______________________ + ___________________ + ____________________ u3 = Apportionment factor Property everywhere Payroll everywhere Sales everywhere

Unisys, 726 A.2d at 1099 (citing 72 P.S. § 7602(b)(1)). In the application of this formula, the Commonwealth Court majority emphasized that:

As consistently interpreted and applied by the Department, the property, payroll and sales figures that comprise the three fractions represent only the property, payroll and sales of the taxpayer itself, and not of the taxpayer's subsidiaries. Thus, under this method, while the net worth of and dividends paid by certain subsidiaries of a corporation are included in the corporation's actual value, the property, payroll and sales of those subsidiaries are not considered in the apportionment formula.

Unisys, 726 A.2d at 1099 (emphasis added). After apportionment, the tax due is then computed by applying the millage rate to the taxable value.⁷ Having reviewed the relevant provisions of the Tax Code, the Unisys majority proceeded to consider the pertinent constitutional precepts as developed in seminal decisions of the United States Supreme Court, principally, Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983); Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978); Norfolk & W. Ry. Co. v. Missouri State Tax Comm'n, 390 U.S. 317, 88 S.Ct. 995, 19 L.Ed.2d 1201 (1968); and Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S.Ct. 385, 75 L.Ed. 879 (1931).⁸ The starting point of these decisions, again, was the limitation arising under the Commerce Clause upon taxation by states of corporate income or value generated beyond their borders. See Unisys, 726 A.2d at 1100. See generally Container Corp.,463 U.S. at 164,103 S.Ct. at 2939; Goldberg v. Sweet, 488 U.S. 252, 260-61, 109 S.Ct. 582, 588, 102 L.Ed.2d 607 (1989). Upon consideration of the difficulties attendant to the delineation of in-state income or value via geographic or transactional accounting,⁹ the Supreme Court has concluded that the Commerce and Due Process Clauses afford the states latitude to include multijurisdictional income/value within a corporation's tax base, provided that certain governing conditions are satisfied. See Container Corp.,463 U.S. at 164-65,103 S.Ct. at 2940,cited in Unisys, 726 A.2d at 1100-01. As recognized by the Commonwealth Court, the requirement primarily here at issue is fair apportionment of a unitary business enterprise. See id.¹⁰

This requirement is comprised of two interrelated concepts. First, in order for a state to assess multijurisdictional income/value (including that which is attributable to subsidiary corporations), the Supreme Court has determined that the taxpayer must be part of a unitary business enterprise, assessed primarily according to the degree of functional integration, centralization of management, and economies of scale arising from its inter-entity dynamics. See Unisys, 726 A.2d at 1100 (describing a unitary business enterprise as "an enterprise which carries out distinct...