February 27th, 2023 by Rieders Travis in Miscellaneous

Synthes USA HQ, Inc. v. Commonwealth, 2023 Pa. LEXIS 230 (S. Ct. February 22, 2023) (Donohue, J.)  This case involves when Pennsylvania taxes are due where there are out-of-state customers and sales.  This complex tax case not only looks at standing on the part of the Pennsylvania tax services, but also the interpretation.  So a jurisdiction issue on the part of agencies is involved as well as the substance.  The parties next dispute the method for sourcing sales of services between Pennsylvania and other states in order to calculate Synthes’ 2011 income taxable in Pennsylvania. The relevant provisions of Pennsylvania’s Tax Reform Code derive from the Uniform Division of Income for Tax Purposes Act (“UDITPA”) which was drafted in 1957 by the National Conference of Commissioners on Uniform State Laws.  As the name suggests, the UDITPA was created to provide a uniform system of dividing a corporation’s net income amongst the states in which it conducts business. The goal of the UDITPA was to “simplify the task of tax collection and reporting and to ensure that 100 percent of a multistate firm’s income – neither more nor less – is taxable by the states.” Walter Hellerstein, Construing the Uniform Division of Income for Tax Purposes Act: Reflections on the Illinois Supreme Court’s Reading of the “Throwback” Rule, 45 U. Chi. L. Rev. 768, 775 (1978). Sales of services are in Pennsylvania if “[t]he income-producing activity is performed in this State,” or if the “income-producing activity is performed both in and outside this State and a greater proportion of the income-producing activity is performed in this State than in any other state, based on costs of performance.” 72 P.S. § 7401(3)2.(a)(17). Unfortunately, the critical terms of this provision are undefined by the General Assembly. As advocated by the parties and as evidenced by the divergent interpretations of the Commonwealth Court’s judges in this case, colorable arguments can be made that the “income-producing activity” occurs either where the taxpayer produces the service or where the customer receives the service. As has been noted, the proportion of a corporation’s commercial activity in Pennsylvania is measured, as least initially and in 2011, by looking to the corporation’s property, payroll, and sales in Pennsylvania as compared to its property, payroll, and sales as a whole. 72 P.S. § 7401(3)2.(a)(15). The activity relevant to the property and payroll factors is the production process to the extent it is occurring within the state borders, whereas the activity relevant to the sales factor is that of the state’s consumers buying the good, service, or other product. See Swain, 83 Tul. L. Rev. at 288 (“The property and payroll factors are intended to give weight to the states in which production occurs (‘origin’ states), while the sales factor is intended to give weight to the states that provide the market for the taxpayer’s products (‘market’ states or ‘destination’ states).”); see also AT & T Corp., 358 P.3d at 980 (distinguishing property and payroll factors’, which “estimate the state’s share of responsibility for the income stream by focusing on production” from the sales factor, which “generally tracks the extent to which the taxpayer takes advantage of the taxing state’s market”). For all the reasons set forth above, we affirm the order of the Commonwealth Court remanding for issuance of a refund to Synthes in regard to its 2011 corporate net income tax.  There is a concurring opinion.

Attorney Cliff Rieders

Attorney Cliff RiedersCliff Rieders is a Nationally Board Certified Trial Lawyer practicing personal injury law. A large part of his practice involves multi-district litigation, including cases related to pharmaceuticals, vitamin supplements and medical devices. He is admitted in several state and federal courts, as well as the Supreme Court of the United States. Rieders is the past regional president of the Federal Bar Association and is a life member of the distinguished American Law Institute, which promulgates proposed rules adopted by many state courts. He is a past president of the Pennsylvania Association for Justice, formerly Pennsylvania Trial Lawyers Association. As a founder of the Pennsylvania Patient Safety Authority, he served on the Board for 15 years.

Not only has Rieders held many highly esteemed, leadership positions, he authored legislation related to the Patient Safety Authority and the Mcare Act, which governs medical and hospital liability actions in Pennsylvania. He authored texts upon which both practitioners and judges rely, including Pennsylvania Malpractice Laws and Forms, and Financial Responsibility Law Issues in Pennsylvania, the latter governing auto and truck collisions in Pennsylvania. In addition, he wrote several books on the practice of law in Pennsylvania regarding wrongful death and survivor actions, insurance bad faith, legal malpractice claims and worker rights, among others. Rieders also serves as a resource to practitioners as a regular speaker for Celesq, an arm of the world’s largest legal publisher, Thomson Reuters West Publishing.

As recognition of his wide range of contribution to his profession and of his dedication to protecting the rights of his clients, he received numerous awards, among them the George F. Douglas Amicus Curiae Award, the Milton D. Rosenberg Award, the B’nai B’rith Justice Award, and awards of recognition from the Pennsylvania Trial Lawyers. [ Attorney Bio ]



Article Categories