Factor representation not required in computing PA capital-stock tax.

• Author: Ochsenschlager, Thomas P.
• Position: Pennsylvania

In a very close (4-to-3) decision, the Pennsylvania Supreme Court held that the Commonwealth is not required to include unitary subsidiaries' factors in determining the apportionment formula of the capital-stock-tax calculation, even though the unitary subsidiaries' value is included in determining the net-worth tax (Unisys Corp. v. Commonwealth of Pa. (10/25/02)). The majority took this position under the pretext that the taxpayer (1) failed to prove the alleged distortion was of a Constitutional magnitude and (2) did not establish the appropriateness of its distortion calculation.

Background

Unisys Corporation, a Delaware corporation, conducts business throughout the U.S. and has its primary offices and corporate headquarters in Pennsylvania. During the period in question, it directly or indirectly owned the stock of more than 100 domestic and foreign affiliates that transacted business in more than 100 countries.

The Pennsylvania franchise tax, which is imposed on foreign corporations authorized to do business there, is partially based on the value generated by a taxpayer and its subsidiaries. The taxpayer apportions this "broad based" value by applying a mathematical average of in-state property, payroll and gross receipts to property, payroll and gross receipts everywhere. The corporation's value has two components--consolidated net worth (subject to a 25% reduction), which includes a corporation's investment in subsidiaries, and average net book income, which includes dividends received from subsidiaries.

When Unisys filed its 1985 and 1986 franchise tax returns, it did not include its unitary subsidiaries' value in determining its overall value before apportionment. As a result, the Department of Revenue (DOR) increased the corporation's value to include its consolidated net worth and dividends from subsidiaries, without adjusting the apportionment formula to include the unitary subsidiaries' property, payroll and sales. The inclusion of these other factors is commonly referred to as "factor representation." In protest, Unisys filed resettlement petitions with the Board of Appeals, and subsequently with the Board of Finance and Revenue. On denial by both, it filed an appeal with the Commonwealth Court.

Commonwealth Court

Unisys claimed that the DOR'S apportionment formula violated the Constitution's Commerce and Due Process clauses, as well as Pennsylvania's fair-apportionment statutes. The Commonwealth Court determined that the...