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UPS Worldwide Forwarding, Inc. v. Com., 843 A.2d 438

Facts

UPS Worldwide Forwarding, Inc. (Taxpayer) is a subsidiary of UPS-America and had no employees during the tax years in question. All services were performed by employees of affiliated companies, and Taxpayer paid payroll costs billed by its parent company. The dispute arose over whether Taxpayer could include a payroll factor in its tax apportionment formula, which would lower its tax liability.

Taxpayer had no employees as a matter of the law of employment during the tax years at issue. In fact, all of Taxpayer's services were performed by employees of affiliated companies and independent contractors.

Issue

Whether UPS Worldwide Forwarding, Inc. is entitled to include a payroll factor in its Corporate Net Income Tax and Franchise Tax apportionment formula despite having no employees.

The sole legal issue in this case involves Taxpayer's payroll factor. Specifically, the question is whether Taxpayer is entitled and required to include the amounts it transferred to UPS–AS to fund payroll costs for the individuals who performed Taxpayer's network planning and logistic functions in its payroll factor for the CNI and Franchise Tax apportionment for the 1996 and 1997 tax years.

Rule

The apportionment formula for corporate taxes in Pennsylvania includes property, payroll, and sales factors, with the numerator representing business conducted within Pennsylvania and the denominator representing business conducted everywhere else.

By way of background, Section 401 of the Tax Reform Code permits a company that does not transact all of its business within the Commonwealth … to apportion its tax liability based upon the ratio of the company's business transacted in the Commonwealth to its total business.

Analysis

The court analyzed the stipulation of facts and determined that Taxpayer had no employees and therefore could not include a payroll factor in its tax calculations. The court distinguished this case from a previous ruling in American Gas, where the taxpayer had employees and a management agreement with its parent company. The absence of a written agreement and the lack of control over employees further supported the Commonwealth's position.

The situation in this case is similar to American Gas, in that the taxpayers were both using out of state companies to furnish services to a related company in Pennsylvania and, in both cases, an expense was charged for the services performed. There are, however, important differences.

Conclusion

The Commonwealth Court affirmed the Board's orders, concluding that the payroll factor must be disregarded in the tax apportionment calculation for the tax years at issue.

Accordingly, the orders of the Board are affirmed.

Who won?

The Commonwealth prevailed because the court found that UPS Worldwide Forwarding, Inc. had no employees and therefore could not include a payroll factor in its tax calculations.

The Commonwealth asserts that Taxpayer has no payroll. Therefore, only the property and sales factors should be included in the apportionment formula, thereby resulting in a higher total tax.

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