Commonwealth v. Advance-Wilson Industries, Inc. , 456 Pa. 200 ( 1974 )

Opinion by

Mr. Justice Pomeroy,

This is an appeal by the Commonwealth from a decision of the court below that application of the Corporate Net Income Tax¹ to appellee, Advance-Wilson Industries, Inc., be on a multiform basis.

Appellee, a Delaware corporation authorized to do business in Pennsylvania, filed its Corporate Net Income Tax Report for the fiscal year ended December 31, 1966 showing tax due in the amount of $11,850.38. The Department of Revenue settled the tax at $24,-400.43, and this determination was approved by the Department of the Auditor General. In arriving at this figure, the Commonwealth used the taxpayer’s entire taxable income as reported for Federal income tax purposes, which, of course, included income from its operations conducted outside of Pennsylvania. Appellee filed a petition for resettlement and a subsequent petition for review with the Board of Finance and Revenue. Both of these petitions were refused and an appeal was taken to the Commonwealth Court. That court reversed, and this appeal followed.

From a partial stipulation entered into by the parties and the testimony received in the court below, the following facts are established. Adyance-Wilson Industries, Inc., the appellee, has its principal office in New York City. It conducts its business through two operating divisions, Keystone Ridgeway Company [“Keystone”] and Electrolyzing Company [“Electrolyzing”]. The Keystone division operates three plants in Pennsylvania which are engaged in the manufacture and sale of ceramic tiles used in building construction. The Certificate of Authority issued by the Commonwealth of Pennsylvania to appellee as a foreign corporation permits appellee “to purchase, lease, produce, manufacture, sell and deal in and with building materials of all kinds”. The Electrolyzing division maintains places of business in Illinois and Rhode Island and conducts business throughout the United States. The business of this division is to receive machines or machine parts, equipment and tools which are subject to being abraded and, by an electrolyzing process, plate the worn parts of these items so as to increase their useful life. Between Keystone and Electrolyzing there is no money flow, no transfer of working capital, no sales or purchases nor any accounting transactions. There is no guarantee by either division of indebtedness of the other.

The development of the multiform concept in Pennsylvania and its application to corporate franchise and net income taxation were explored recently by this Court in Commonwealth v. ACF Industries, Inc., 441 Pa. 129, 271 A.2d 273 (1970) and need not be detailed again here. Suffice it to say that to sustain its claim to multiform tax treatment, and thereby exclude a portion of its income from the computation of the Pennsylvania Corporate Net Income Tax, a foreign corporation doing business in this Commonwealth must establish that it “is engaged in a separate business outside of Pennsylvania”. Commonwealth v. ACF Industries, Inc., supra at 135. On the basis of the facts recited above, the court below held that appellee had sustained its burden of proving that it is entitled to a multiform tax settlement. We agree and therefore affirm.

The Commonwealth first argues that the businesses conducted by appellee were not independent because certain administrative and other functions were performed for the two divisions by the home office, and profits from each division were remitted to the home office of the corporation. However, the following excerpts from our opinion in Commonwealth v. ACF Industries, Inc., supra, dispose of this contention:

“[W]e must focus upon the relationship between the Pennsylvania activity and the outside one, not the common relationships between these and the central corporate structure. Only if the impact of the latter on the operating units or activities is so pervasive as to negate any claim that they function independently from each other do we deny exclusion in this context.” 441 Pa. at 142.

“[Contributions of unrelated activities to the corporate whole do not vitiate a claim for exclusion, ... it is the interrelationship between the activities themselves which is the critical factor.” 441 Pa. at 139.

“[Performance by the corporate whole of policy, administrative, research and similar functions for otherwise independently operating units does not vitiate multiformity any more than does their common but independent contribution of benefits to the corporate whole.” 441 Pa. at 142.

“[T]he factors relied upon to characterize the enterprise as unitary are precisely those things which do not involve the interrelationship between operating divisions but rather the interrelationship between each division and the corporate superstructure — factors which would likely appear in every case, no matter how independently each division operated from the other.” 441 Pa. at 140.

The Commonwealth next argues that even if the two divisions qualify as separate businesses under the multiform concept, the income of both was taxable because both divisions, Electrolyzing as well as Keystone, conducted business in Pennsylvania. It is true that Electrolyzing solicited business in Pennsylvania, as it did throughout the country, by means of advertising circulars mailed from the plant in Illinois to prospective customers. Except for this activity, however, the record discloses no business activity of the division within the Commonwealth.

Were Electrolyzing a separate foreign corporation conducting only the same business that it now conducts as a division, it is undisputed that it could not be taxed by Pennsylvania. The solicitation of business by mail is not a sufficient nexus for the imposition of a corporate net income tax; such a corporation is not “doing business” in Pennsylvania. Commonwealth v. Eastman Kodak Co., 385 Pa. 607, 124 A.2d 100 (1956); Commonwealth v. United States Tobacco Co., 15 Pa. D. & C. 2d 176 (1957); see also 1 CCH, State Tax Rep., Pa., §10-101.55 (1971) (Answers by Pa. tax administrators to questions of Congressional Subcommittee). We see no reason for reaching a different result merely because the business is conducted under the same corporate umbrella as is a separate and unrelated Pennsylvania business.

In Commonwealth v. ACF Industries, Inc., supra, after reviewing all the ease law on the multiform concept in Pennsylvania, we found “a consistent attempt to allocate to Pennsylvania that fair share of . . . income reflective of activity here and to exclude . . . income not contributing to the exercise of the Pennsylvania franchise”. (Emphasis added.) The business of the Electrolyzing division has no connection with the exercise of the privilege granted to appellee by Pennsylvania to conduct the manufacture and sale of building materials in this state, and the limited mail solicitation activities of Electrolyzing in Pennsylvania do not amount to the doing of business. In short, neither that division’s tenuous relationship to the Pennsylvania division nor its own restricted activities within the state afford a basis for the imposition of the Pennsylvania Corporate Net Income Tax on that portion of the appellee’s income which is derived from its Electrolyzing Company division.

Judgment affirmed.

1 Corporate Net Income Tax Act, Act of May 16, 1935, P.L. 208, as amended, 72 P.S. §3420a et seq. (now Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, as amended, 72 P.S.§7402 et seq.).