WHAT A DIFFERENCE A COORDINATING CONJUNCTION
MAKES: A SURVEY OF GLATFELTER PULPWOOD CO. V.
COMMONWEALTH
I. INTRODUCTION
According to the Supreme Court of Pennsylvania's holding in
Glatfelter Pulpwood Co. v. Commonwealth,1 the change of a
coordinating conjunction within the statutory definition of
"business income" may cause a drastic increase in the corporate tax
bill of businesses conducting activity in Pennsylvania. More
specifically, the court held that the sale of Delaware timberland
owned by Glatfelter Pulpwood Company (Glatfelter) constituted
business income, therefore subjecting a portion of the net gain to
Pennsylvania's corporate tax, because the acquisition and
subsequent management of the timberland was an integral part of
Glatfelter's Pennsylvania business.2 In stark contrast to the court's
pre-2001 business income analyses,3 the court determined that it
need not examine whether the disposition of the timberland was an
integral part of Glatfelter's business because the newly amended
statutory definition of business income only requires that "either
the acquisition, management, or disposition of the property" be an
integral part of the taxpayer's business.4
Not only did the court hold that Glatfelter was subject to
Pennsylvania's corporate tax, the court also held that the forty-two
percent net gain apportioned to Pennsylvania was proper.5 The
court held Delaware timberland was related to Glatfelter's
Pennsylvania business,6 the duplicative taxation was fair, and the
taxation was consistent with the Due Process and Commerce
1
Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993 (Pa. 2013).
Id. at 1004.
3
See Laurel Pipe Line Co. v. Commonwealth, 642 A.2d 472, 475 (Pa.
1994) (noting that the disposition of an unused pipeline was not business income
because the "disposition" was not an integral part of the taxpayer's business).
4
Glatfelter Pulpwood Co., 61 A.3d at 1003 (emphasis in original).
5
Id. at 1007, 1011-12.
6
Id. at 1011.
2
407
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Clauses of the United States Constitution.7 Part II of this survey
discusses the background of the statutory definition of "business
income," the application of the definition prior to the 2001
amendment, the background of possible exclusions from business
income, and the requirements for an apportionment to be
constitutional. Part III analyzes the various arguments of the
parties in Glatfelter Pulpwood Co. as well as the majority and
dissenting opinions. Part IV evaluates the majority opinion and
discusses the court's questionable dicta. Finally, Part V provides a
brief summary of the issues posed in Glatfelter Pulpwood Co. and
notes the potential impact of the court's holding.
II. BACKGROUND
A. Historical Classification of Business Income
Prior to 2001, the Tax Reform Code of 1971 defined "business
income" as follows: "income arising from transactions and activity
in the regular course of the taxpayer's trade or business and
includes income from tangible and intangible property if the
acquisition, management, and disposition of the property constitute
integral parts of the taxpayer's regular trade or business
operations."8 Since the Tax Reform Code of 1971 was enacted,
Pennsylvania courts adopted two independent tests, the
transactional test and the functional test, to determine whether the
statutory definition was met.9 These tests were first used by the
Commonwealth Court of Pennsylvania in Welded Tube Co. of
America v. Commonwealth.10
In Welded Tube, the sole issue was whether the gains from the
sale of a manufacturing facility located in Philadelphia constituted
business income of the Welded Tube Company.11 The
Commonwealth Court of Pennsylvania noted there was no
7
Id. at 1011-13.
72 PA. STAT. ANN. § 7401(3)2.(a)(1)(A) (West 2000) (amended 2001).
9
See, e.g., Ross-Araco Corp. v. Bd. of Fin. & Revenue, 674 A.2d 691, 694
(Pa. 1996).
10
Welded Tube Co. of Am. v. Commonwealth, 515 A.2d 988 (Pa.
Commw. Ct. 1986).
11
Id. at 989.
8
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409
Pennsylvania case-law that distinguished business income from
non-business income.12 The court recognized, however, that
Pennsylvania's tax code was modeled after the Uniform Division
of Income for Tax Purposes Act (UDITPA),13 and other states with
tax codes similarly modeled after the UDITPA had developed the
transactional and functional tests.14 Based on the first clause of the
statutory definition of business income,15 the transactional test
establishes that "gain is classified as business income if it is
derived from transactions in which the taxpayer regularly
engages."16 Two important considerations under the transactional
test are: (1) the nature and frequency of similar transactions by the
business; and (2) the subsequent use of the income derived from
the transaction.17 Based on the second clause of the statutory
definition of business income, the functional test dictates that "the
gain arising from the sale of an asset will be classified as business
income if the asset produced business income while it was owned
by the taxpayer. The extraordinary nature or infrequency of the
transaction is irrelevant."18
The Commonwealth Court of Pennsylvania in Welded Tube
held that, applying either test, the sale of the manufacturing facility
was business income.19 Focusing on the transactional test, the
court stated that although Welded Tube Company's primary
business was the manufacturing of metal piping, the company
regularly purchased property for the expansion of the business, and
therefore the acquisition of the manufacturing facility in
Philadelphia was an integral part of the business.20 Further, the
court noted that the gain from the sale was reinvested in the
12
Id. at 993.
UNIF. DIV. OF INCOME FOR TAX PURPOSES ACT § 1(a), (e) (1957).
14
See Atlantic Richfield Co. v. State, 601 P.2d 628, 631 (Colo. 1979)
(using the transactional test); General Care Corp. v. Olsen, 705 S.W.2d 642, 645
(Tenn. 1983) (using the functional test).
15
"[I]ncome arising from transactions and activity in the regular course of
the taxpayer's trade or business." 72 PA. STAT. ANN. § 7401(3)2.(a)(1)(A) (West
2000) (amended 2001).
16
Welded Tube, 515 A.2d at 993.
17
Id.
18
Id. at 994 (internal citations omitted).
19
Id.
20
Id.
13
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ongoing business of the Welded Tube Company.21 Consequently,
the gain from the disposal of the property was business income.22
The Supreme Court of Pennsylvania later adopted the
transactional and functional tests in Laurel Pipe Line Co. v.
Commonwealth.23 Laurel Pipe Line Company (Laurel), an Ohio
corporation, engaged in the business of transporting petroleum
from refineries in Philadelphia to Pittsburgh.24 Laurel sold one of
its pipelines and declared a dividend, distributing the gain to
shareholders fifteen days after the sale.25 Upon filing its
Pennsylvania corporate income tax return, Laurel treated the gain
from the sale of the pipeline as non-business income.26 Laurel and
the Pennsylvania Department of Revenue entered into a settlement
agreement in which the gain was classified as business income.27
Laurel's subsequent petitions for resettlement to the Board of
Appeals and the Board of Finance and Revenue were ultimately
denied.28 The Commonwealth Court of Pennsylvania, applying the
functional test, held that the gain was business income.29 The
Commonwealth Court of Pennsylvania reasoned, similar to its
reasoning in Welded Tube, that the pipeline produced business
income when it was operational, and the sale of the pipeline was
"necessary to [Laurel's] continued, overall business viability and
was thus an integral part of [Laurel's] regular course of business."30
The Supreme Court of Pennsylvania reversed the
Commonwealth Court of Pennsylvania and held that the gain was
non-business income.31 Although the Supreme Court of
21
Id.
Welded Tube, 515 A.2d at 995.
23
Laurel Pipe Line Co. v. Commonwealth, 642 A.2d 472, 474-75 (Pa.
1994).
24
Id. at 473.
25
Id.
26
Id. at 473-74.
27
Id. at 474.
28
Id.
29
Laurel Pipe Line Co. v. Commonwealth, 615 A.2d 841, 846 (Pa.
Commw. Ct. 1992).
30
Id.
31
Laurel Pipe Line Co., 642 A.2d at 474.
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411
Pennsylvania adopted the transactional and functional test32 it did
not apply either test in its analysis.33 If the Supreme Court of
Pennsylvania applied the functional test, there is little doubt that
the gain would have been classified as business income; the
pipeline (asset) undoubtedly generated business income while it
was owned by Laurel. Instead, the court looked no further than the
statutory language: "the acquisition, management, and disposition
of the property constitute integral parts of the taxpayer's regular
trade or business operations."34 In rejecting the Commonwealth
Court of Pennsylvania's analysis, the Supreme Court of
Pennsylvania stated, "[t]he Commonwealth Court has thus stated
that a singular disposition of an unprofitable pipeline is an integral
part of the company's regular business because, if not sold, the
company's other business would suffer financially. We disagree
with this conclusion."35
The Supreme Court of Pennsylvania emphasized that the
statutory definition of business income was conjunctive; the
acquisition, management, and disposition had to be an integral part
of the taxpayer's regular business.36 According to the court, the
disposition of the pipeline was not an integral part of Laurel's
regular business, but a liquidation of assets.37 Laurel evidenced this
by declaring a dividend and not reinvesting the gain back into the
business.38 In holding that the gain from the pipeline was nonbusiness income, the court was persuaded by McVean & Barlow,
Inc. v. New Mexico Bureau of Revenue,39 a factually analogous
case decided by the Court of Appeals of New Mexico.40 In
McVean & Barlow, Inc., the Court of Appeals of New Mexico
32
See Ross-Araco Corp. v. Bd. of Fin. & Revenue, 674 A.2d 691, 694 (Pa.
1996) (stating that the Supreme Court of Pennsylvania adopted the transactional
and functional test in Laurel Pipe Line Co.).
33
Laurel Pipe Line Co., 642 A.2d at 475 (citing 72 PA. STAT. ANN.
§ 7401(3)2.(a)(1)(A) (amended 2001)).
34
tit. 72, § 7401(3)2.(a)(1)(A) (emphasis added).
35
Laurel Pipe Line Co., 642 A.2d at 475.
36
Id.
37
Id.
38
Id.
39
McVean & Barlow, Inc. v. N.M. Bureau of Revenue, 543 P.2d 489
(N.M. Ct. App. 1975).
40
Laurel Pipe Line Co., 642 A.2d at 476.
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interpreted a statute identical to Pennsylvania's and held that the
company was not in the business of buying and selling pipelines,
and therefore the disposition was not an integral part of McVean &
Barlow's regular business, but merely a liquidation of assets.41
Four years after the Supreme Court of Pennsylvania decided
Laurel Pipe Line Co., in Ross-Araco Corp. v Commonwealth,42 a
case factually analogous to Glatfelter Pulpwood Co., the court was
again confronted with the question of whether the sale of an asset
was business income. Ross-Araco was a New Jersey corporation
engaged in general construction in Pennsylvania, as well as other
states.43 The company owned 24.5 acres in New Jersey; 3 acres
were actually used by Ross-Araco and the remaining 21.5 were
unimproved.44 The company sold the unimproved portion of the
property and invested the entire gain in United States Treasury
Notes.45 Upon filing its corporate income tax return in
Pennsylvania, the Board of Finance and Revenue ultimately
determined that the gain from the sale of land constituted business
income.46 The Commonwealth Court of Pennsylvania reversed the
Board of Finance and Revenue, holding that the disposition of the
land was not a regular part of Ross-Araco's business, but "a
transaction of 'an extraordinary nature outside the regular course of
its trade or business.' "47 The Supreme Court of Pennsylvania
affirmed the court's holding.48 Again, the court found that the sale
of real estate was not a part of Ross-Araco's regular trade or
business.49 Further, although the court recognized that investment
income can constitute business income, the court found that
investment was not part of the company's trade or business.50 Thus,
41
McVean & Barlow, Inc., 543 P.2d at 490, 492.
Ross-Araco Corp. v. Bd. of Fin. & Revenue, 674 A.2d 691 (Pa. 1996).
43
Id. at 692.
44
Id.
45
Id. at 692-93.
46
Id. at 693.
47
Ross-Araco Corp. v. Bd. of Fin. & Revenue, 644 A.2d 235, 238 (Pa.
Commw. Ct. 1994).
48
Ross-Araco Corp., 674 A.2d at 697.
49
Id.
50
Id.
42
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413
again following the statutory language, the court held that the gain
from the sale of land was non-business income.51
In 2001, the statutory language, that the Supreme Court of
Pennsylvania consistently analyzed to determine whether the sale
of assets was business income, was amended.52 The amendment
changed the statutory definition of business income from
conjunctive to disjunctive.53 Thus, after the 2001 amendment, the
statutory definition of "business income" is: "income arising from
transactions and activity in the regular course of the taxpayer's
trade or business and includes income from tangible and intangible
property if either the acquisition, the management, or the
disposition of the property constitutes an integral part of the
taxpayer's regular trade or business operations."54
B. Apportionment
Even in the event that gains from the sale of assets are
classified as business income, the income may be excluded from
taxable income if it was derived from a separate business or
activities that are unrelated to Pennsylvania.55 If the business
income, however, is related to activities carried on in multiple
states, "a [s]tate may tax a fairly apportioned share of the total
income of a multi-state enterprise if that enterprise constitutes a
'unitary business.' "56 Thus, after the income is classified as
business income, it is next necessary to determine if the business
income can be severed from Pennsylvania. If it is not severable,
the question becomes how much of the business income is
Pennsylvania's fairly apportioned share.
Starting with the question of whether the business income is
severable from Pennsylvania, the Supreme Court of Pennsylvania
has recognized that income may be excluded if the "multiform
51
Id.
See Act of June 22, 2001, P.L. 353, Act 2001-23.
53
See 72 PA. STAT. ANN. § 7401(3)2.(a)(1)(A) (West Supp. 2013).
54
Id. (emphasis added).
55
Commonwealth v. ACF Indus., Inc., 271 A.2d 273, 276 (Pa. 1970).
56
Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993, 1008 (Pa.
2013) (citing MeadWestvaco ex rel. Mead Corp. v. Ill. Dep't of Revenue, 553
U.S. 16, 19, 26 (2008)).
52
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concept" or the "unrelated asset concept" is satisfied.57 Pursuant to
the former, income is properly excluded if the taxpayer is "engaged
in a separate business outside of Pennsylvania."58 The latter allows
income to be properly excluded if the taxpayer "owns an asset or
assets unrelated to the exercise of [the taxpayer's] franchise or the
conduct of its activities in Pennsylvania."59 However, if the
business income is generated by a unitary business – that is, " 'an
enterprise which carries out distinct multijurisdictional activities
resulting in ultimate profit or value derived from the entire
business operation' "60 – the business income must be included
based on fair apportionment.61
For example, in Commonwealth v. ACF Industries, Inc.,62 the
Supreme Court of Pennsylvania, applying the unrelated asset
concept, held that the gain from the sale of stock was excludable.63
ACF Industries was a New Jersey corporation engaged in
manufacturing railroad cars and tankers within Pennsylvania.64
Contemplating a merger with Republic Aviation Corporation, a
company engaged in manufacturing aerospace equipment for the
United States government, ACF purchased over 200,000 shares of
Republic's stock.65 ACF later decided not to merge with Republic
and sold the stock for a substantial gain.66 ACF excluded the gain
from its Pennsylvania corporate income tax.67 The Supreme Court
of Pennsylvania, reversing the Commonwealth Court of
Pennsylvania, held that the stock was unrelated to the
manufacturing of railroad cars – ACF's Pennsylvania business
activity.68
57
ACF Indus., Inc., 271 A.2d at 276.
Id.
59
Id.
60
Unisys Corp. v. Bd. of Fin. & Revenue, 812 A.2d 448, 454 (Pa. 2002)
(citation omitted).
61
See MeadWestvaco, 553 U.S. at 19, 26.
62
Commonwealth v. ACF Indus., Inc., 271 A.2d 273 (Pa. 1970).
63
Id. at 281.
64
Id. at 274.
65
Id.
66
Id. at 275.
67
Id.
68
ACF Indus., Inc., 271 A.2d at 281.
58
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415
Moving to the fair apportionment inquiry, although "a State
may apply an apportionment formula to the taxpayer's total income
in order to obtain a 'rough approximation' of the corporate income
that is 'reasonably related to the activities conducted within the
taxing State,' "69 the Due Process and Commerce Clauses limit
states' ability to tax out-of-state activities.70 Namely, the Due
Process Clause requires a nexus between the state and the subject
of the taxation, and "a rational relationship between the tax and the
'values connected with the taxing state.' "71 The Commerce Clause
prohibits taxation that discriminates against or burdens interstate
commerce.72 The Supreme Court of the United States has stated
that "[t]he 'broad inquiry' subsumed in both constitutional
requirements is 'whether the taxing power exerted by the state
bears fiscal relation to protection, opportunities and benefits given
by the state' – that is, 'whether the state has given anything for
which it can ask return.' "73
III. ANALYSIS: GLATFELTER PULPWOOD CO. V. COMMONWEALTH
A. Factual Background
Glatfelter is a company incorporated in Maryland and
headquartered in Spring Grove, Pennsylvania.74 It is a subsidiary
of P.H. Glatfelter Corporation, which operates a paper mill,
producing various paper products.75 Glatfelter's only business
activity is the procurement of pulpwood for its parent company at
the lowest possible cost.76 In an attempt to keep the price of
pulpwood low, Glatfelter harvests its own timberland in several
states.77 Specific to the case at hand, Glatfelter owned 19,249 acres
69
Exxon Corp. v. Dep't of Revenue of Wis., 447 U.S. 207, 223 (1980).
See MeadWestvaco ex rel. Mead Corp. v. Ill. Dep't of Revenue, 553 U.S.
16, 24 (2008).
71
Id.
72
Id.
73
Id. at 24-25.
74
Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993, 996-97 (Pa.
2013).
75
Id. at 997.
76
Id.
77
Id.
70
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of timberland in Delaware.78 In 2004, Glatfelter sold 4,882 acres of
its Delaware timberland, resulting in a net gain of $55,355,452.79
Glatfelter paid taxes on 100% of the net gain to Delaware.80
B. Procedural History
After filing its 2004 Pennsylvania corporate tax return,
Glatfelter filed an amended return claiming that the gain from the
sale of the Delaware timberland "should have been considered as
non-business income allocated to Delaware."81 As a result of the
amendment, Glatfelter claimed that it suffered a net loss for the
2004 tax year, and its tax liability was zero.82 The Pennsylvania
Department of Revenue refused Glatfelter's attempt to reclassify
the net gain from the sale of the Delaware timberland as a nonbusiness income.83 The Department of Revenue found that
Glatfelter's business income for 2004 was $52,327,343 and
apportioned forty-two percent of the business income to
Pennsylvania.84 Glatfelter's appeal to the Department of Revenue's
Board of Appeals was denied.85 The subsequent appeal to the
Pennsylvania Board of Finance and Revenue was denied because
the gains satisfied the functional test.86 The Commonwealth Court
of Pennsylvania, sitting en banc, affirmed the Board's holding that
the net gain was business income.87
C. Issues and Arguments on Appeal
On appeal, Glatfelter raised three issues: (1) whether the net
gain from the sale of the Delaware timberland was non-business
income; (2) whether the sale was unrelated to Glatfelter's
78
Id.
Id.
80
Glatfelter Pulpwood Co., 61 A.3d at 997.
81
Id.
82
Id.
83
Id.
84
Id.; see also id. at 997 n.3 (noting that Glatfelter's tax liability was
$2,190,579).
85
Id. at 998.
86
Glatfelter Pulpwood Co., 61 A.3d at 998.
87
See Glatfelter Pulpwood Co. v. Commonwealth, 19 A.3d 572, 574, 580
(Pa. Commw. Ct. 2011) (en banc).
79
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417
Pennsylvania business; and (3) whether the apportionment of fortytwo percent to Pennsylvania was unfair and thus violated the Due
Process Clause and Commerce Clause of the United States
Constitution.88 Glatfelter's arguments for each issue, as well as the
Commonwealth's counterarguments, will be discussed in seriatim.
Glatfelter argued that the gain was non-business income
because the sale of the timberland was a liquidation of assets
related to a unique aspect of Glatfelter's business.89 Glatfelter
supported this argument by distinguishing between the timber
grown on the land and the land itself.90 Further, the gain was not
reinvested back into Glatfelter's regular business activities.91 The
Commonwealth responded by arguing that the gain was business
income because the timberlands, "from their acquisition to their
management to their disposition, were wholly integrated into
[Glatfelter's] business."92 In addition, the Commonwealth argued
that the holding in Laurel Pipe Line Co. was inapposite because
the statutory definition has since changed and the facts of Laurel
Pipe Line Co. were distinguishable.93
Next, Glatfelter argued that the sale of the timberland was
unrelated to Glatfelter's activity in Pennsylvania – the unrelated
asset concept.94 Glatfelter argued that it was engaged in two
separate businesses: (1) procurement of pulpwood; and (2) selling
and liquidating timberlands.95 The harvest and sale of pulpwood,
according to Glatfelter, was the only activity related to
Pennsylvania.96 However, the liquidation of the timberlands was a
" 'discrete' business enterprise unrelated to [Glatfelter's]
procurement of pulpwood."97 The Commonwealth again responded
by arguing that Glatfelter was operating a unitary business, and all
88
See Glatfelter Pulpwood Co., 61 A.3d at 998.
Id. at 1002.
90
Id.
91
Id. (relying on Laurel Pipe Line Co. v. Commonwealth, 642 A.2d 472
(Pa. 1994)).
92
Id.
93
Id. at 1002-03.
94
Glatfelter Pulpwood Co., 61 A.3d at 1006.
95
Id.
96
Id.
97
Id. at 1005 (citing Reply Brief for Appellant at 7, Glatfelter Pulpwood
Co. v. Commonwealth, 61 A.3d 993 (Pa. 2013)).
89
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aspects of Glatfelter's activities in Delaware were related to
Pennsylvania.98
Last, Glatfelter argued that Pennsylvania's tax on forty-two
percent of the net gain was an unfair – and therefore
unconstitutional – duplicative taxation because it already paid
Delaware tax on 100% of the gain.99 In addition, Glatfelter argued
that the forty-two percent apportionment was "out of all proportion
to the business transacted by [Glatfelter] in the state,"100 and
Pennsylvania provides no services – "fire or police protection,
highways, sewer, water, recording of deeds, or judicial
enforcement" – as it relates to the Delaware timberland.101 The
Commonwealth responded that because Glatfelter conducted a
unitary business, apportionment was lawful.102 Further,
Pennsylvania " 'preserves and fosters the market' for nearly 100%
of [Glatfelter's] sales, maintains infrastructure, and is [the location
of Glatfelter's] headquarters."103
D. Supreme Court of Pennsylvania's Holding
The Supreme Court of Pennsylvania agreed with the
Commonwealth on all three issues raised on appeal and affirmed
the Commonwealth Court of Pennsylvania's holding.104 The
Supreme Court of Pennsylvania, in holding that the net gain from
the sale of the Delaware timberland was business income, relied
solely on the newly amended statutory definition.105 The court
emphasized that the amendment changed the definition from
conjunctive to disjunctive, thereby only requiring the acquisition,
management, or disposition of the property to be an integral part of
the taxpayer's regular business.106 As a result, the court looked no
98
Id. (citing Brief for Appellee at 19-20, Glatfelter Pulpwood Co. v.
Commonwealth, 61 A.3d 993 (Pa. 2013)).
99
Id. at 1005.
100
Glatfelter Pulpwood Co., 61 A.3d at 1007 (citing Brief for Appellant at
47-49, Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993 (Pa. 2013)).
101
Id.
102
Id. at 1007-08
103
Id. at 1008.
104
Id. at 1013.
105
Id. at 1003.
106
Glatfelter Pulpwood Co., 61 A.3d at 1003-04.
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419
further than Glatfelter's own stipulations of fact to determine that
the acquisition and management were integral parts of Glatfelter's
business: Glatfelter engaged in the acquisition and management of
the timberland to guarantee that it could achieve its only business
objective – procure pulpwood for its parent company.107 Because
of the disjunctive nature of the statutory language, the court held
that a determination of whether the disposition of the timberland
was an integral part of Glatfelter's business was unnecessary.108
Further, the court agreed with the Commonwealth that Glatfelter's
reliance on Laurel Pipe Line Co. was misplaced because Laurel
Pipe Line Co. was decided before the statutory definition
changed.109
Similarly, the court was not persuaded by Glatfelter's
argument, using the unrelated asset concept, that the Delaware
timberland was unrelated to its Pennsylvania activities.110 Again
looking to Glatfelter's own stipulations of fact, the court found that
Glatfelter's sole business activity was the procurement of
pulpwood for its Pennsylvania parent.111 As part of that sole
business activity, Glatfelter purchased the timberland in
question.112 Thus, the court held that, unlike the facts presented in
ACF Industries, Inc., the Delaware timberland was integrally
related to Glatfelter's Pennsylvania business activities.113 Further,
the court held that "[t]he timberlands were not converted to an
'unrelated asset' merely by virtue of the fact that [Glatfelter] made
a strategic business decision to sell them."114
Lastly, the court held that the forty-two percent apportionment
to Pennsylvania was compliant with the Due Process Clause and
the Commerce Clause of the United States Constitution.115 The
court noted, as a threshold issue, apportionment requires the
107
Id. at 1004.
Id.
109
Id.
110
See id. at 1006-07.
111
Id. at 1007.
112
Glatfelter Pulpwood Co., 61 A.3d at 1006-07.
113
Id. at 1007.
114
Id.
115
Id. at 1011-12.
108
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business to be "unitary."116 The court's discussion and holding on
the previous two issues concluded that Glatfelter was a unitary
business.117 Further, contrary to Glatfelter's argument that the
apportionment did not bear a rational relationship between the sale
of the timberland and Glatfelter's Pennsylvania activities, the court
held that because the timberlands were used solely to provide
Glatfelter's Pennsylvania parent with pulpwood, the sale was
rationally related to its Pennsylvania activities.118 Next, the court
held that the apportionment was fair because Glatfelter receives
many benefits from Pennsylvania – it is the location of Glatfelter's
headquarters, its sole customer is in Pennsylvania and therefore
Pennsylvania preserves the market for nearly 100% of Glatfelter's
sales, and Pennsylvania maintains infrastructure for the
transportation of Glatfelter's product.119 Finally, the court denied
the argument that because the tax is duplicative, it is
unconstitutional.120
E. Dissent
As the lone dissenter, Justice Eakin stated that Laurel Pipe
Line Co. should have controlled the outcome of the case.121
According to Justice Eakin, the court in Laurel Pipe Line Co. did
not focus on the then conjunctive nature of the statutory definition
of business income.122 The emphasis was on whether the
disposition was an integral part of Laurel's business.123 As a result,
argued Justice Eakin, the subsequent change in the definition of
business income had no effect on the holding in Laurel Pipe Line
Co.124 In all cases that have addressed the issue (a taxpayer who
has acquired, managed, and disposed of the asset)– the inquiry
turned on the integrality of the asset to the taxpayer's regular
business. Thus, Justice Eakin would have held that land
116
Id. at 1009.
Id. at 1011.
118
Glatfelter Pulpwood Co., 61 A.3d at 1012.
119
Id.
120
Id. at 1012-13.
121
Id. at 1013 (Eakin, J., dissenting).
122
Id. at 1014.
123
Id.
124
Glatfelter Pulpwood Co., 61 A.3d at 1014 (Eakin, J., dissenting).
117
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421
transactions were not an integral part of Glatfelter's business of
procuring pulpwood and, therefore, not business income.125 In his
dissenting opinion, Justice Eakin also spent time questioning the
viability of the function test.126 Because the function test was
developed from the prior statutory definition, according to Justice
Eakin, "a significant change to [the statutory] language suggests a
need to reexamine the continued viability of a test which is based
on the pre-amendment language. Where a test is an interpretation
of a clause that is subsequently changed, it is the test itself that is
in question."127
IV. EVALUATION
The change of the statutory definition of "business income"
from conjunctive to disjunctive may drastically increase the
corporate tax bill of corporations engaging in business activity in
Pennsylvania, following the Supreme Court of Pennsylvania's
holding in Glatfelter Pulpwood Co. Had the definition of business
income remained unchanged, Glatfelter would have suffered a loss
for the 2004 tax year, with a corporate tax liability of zero.
Because of the amendment to the definition and the Supreme Court
of Pennsylvania's subsequent interpretation of the new definition,
Glatfelter had a tax liability of over $2,000,000 for the 2004 tax
year. What a difference a coordinating conjunction makes. This is
not to say that the Supreme Court of Pennsylvania's analysis and
holding were incorrect, it is only to suggest that, at a minimum, the
amendment, as well as the court's subsequent holding, may retard
corporations' willingness to dispose of unprofitable assets. At a
maximum, the amendment and holding may render some corporate
assets illiquid because the tax liability would prove disposition
unsound. In turn, the corporations may be less willing or able to
declare dividends, and the corporations' stockholders suffer a
decline in – you guessed it – taxable income. It is a lose-lose
situation, but this is a problem for the legislature to fix, not the
courts.
125
Id.
Id.
127
Id.
126
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The court was correct to focus on the clear, unambiguous
statutory language to analyze whether the net gain from the
disposition of the timberland was business income. "When the
words of a statute are clear and free from all ambiguity, the letter
of it is not to be disregarded under the pretext of pursuing its
spirit."128 The post-2001 definition of business income clearly and
unambiguously dictates that business income includes income
from property if either the acquisition, management, or disposition
of the property is an integral part of the taxpayer's regular
business.129 As the court discussed extensively, to Glatfelter's own
demise, it stipulated that the timberland was acquired as a strategic
decision in attempt to satisfy its sole business activity – pulpwood
procurement. The acquisition was clearly an integral part of
Glatfelter's business. Because of the clear statutory language, this
was the end of the inquiry.
Justice Eakin, however, rightfully questions the continued
viability of the functional test after the statutory amendment. The
functional test is not a fait accompli. As Justice Eakin points out,
the functional test was developed under the old statutory language,
and the subsequent amendment calls into question its continued
existence.130 In dicta, the court suggests that the amendment was
minor and only meant to clarify existing law; thus, the viability of
the functional test is not questionable.131 Later in the opinion, the
court agreed with the Commonwealth that Laurel Pipe Line Co.
did not control the outcome of the case because the statute had
been "amended in a highly relevant manner."132 The court cannot
have it both ways. If the statutory definition had been amended in a
highly significant manner, as the court relies on to reach its
holding, the continued existence of the functional test is in
question.133 If the amendment was only minor, and only meant to
128
1 PA. CONS. STAT. § 1921(b) (1975).
See 72 PA. STAT. ANN. § 7401(3)2.(a)(1)(A) (West Supp. 2013).
130
Glatfelter Pulpwood Co., 61 A.3d at 1014 (Eakin, J., dissenting).
131
Id. at 1000 n.5.
132
Id. at 1003.
133
Commonwealth v. Stratton, 50 A.3d 1284, 1290 (Pa. 2012) ("[W]hen
the legislature uses two different words, we must also presume that 'it must have
meant for the words to have separate meanings.' " (citations omitted)).
129
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clarify, the court should reach a holding analogous to Laurel Pipe
Line Co.
Outside of the effect the statutory amendment has on the
functional test, it is unclear what benefit the functional test adds to
the analytical process. At the outset, the functional test was
questionable. Above the statutory definition, the only element the
functional test adds is whether "the gain arose from the sale of an
asset that produced business income while it was owned by the
taxpayer."134 However, since this element was first enunciated in
Welded Tube, the Supreme Court of Pennsylvania has not applied
it, and rightfully so.135 When the court first enunciated the test
under the pre-2001 statutory language, it strayed into the
legislative function. Had the legislature intended for business
income to include gains from the sale of assets that produced
business income while it was in operation, it would have said so.
Thus, because the functional test is so far afield from the pre-2001
language of the statutory text, it is not in compliance with
Pennsylvania's rules of statutory construction.136
Now that the statutory language has been amended, the
functional test adds nothing to the analysis. If the asset produced
business income while it was in operation, the acquisition or
management of the asset is certainly an integral part of the
taxpayer's business. Therefore, the net gain from the disposition of
such an asset is business income. Lastly, by the court's own
language, the use of the functional test should no longer be
necessary. The court based its decision on the fact that the new
statutory language was clear and unambiguous;137 as a result, the
rules of statutory construction dictate that the court should look no
further than the explicit text of the statute.138
134
Glatfelter Pulpwood Co., 61 A.3d at 1000.
See, e.g., id. at 1003; Ross-Araco Corp. v. Bd. of Fin. & Revenue, 674
A.2d 691, 694 (Pa. 1996); Laurel Pipe Line Co. v. Commonwealth, 642 A.2d
472, 475 (Pa. 1994); see also Welded Tube Co. of Am. v. Commonwealth, 515
A.2d 988, 994 (Pa. Commw. Ct. 1986).
136
See 1 PA. CONS. STAT. § 1921(b) (1975) ("When the words of a statute
are clear and free from all ambiguity, the letter of it is not to be disregarded
under the pretext of pursing its spirit.").
137
Glatfelter Pulpwood Co., 61 A.3d at 1003.
138
tit. 1, § 1921(b).
135
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V. CONCLUSION
In sum, in Glatfelter Pulpwood Co., the Supreme Court of
Pennsylvania held that the net gain from the sale of timberland was
business income because the acquisition and management of the
property was an integral part of Glatfelter's business. The statutory
definition of business income was amended in 2001; it is no longer
necessary that the disposition of corporate assets be an integral part
of the taxpayer's regular business, only that the acquisition,
management or disposition be an integral part of the business. As a
result, the statutory amendment and the courts' holding may
significantly impact corporations' tax liability and willingness or
ability to liquidate assets.
Langdon Ramsburg*
*
Juris Doctor Candidate, Widener University School of Law (Harrisburg),
May 2014. This survey is dedicated to the members of my family. Without
them, law school would not have been possible. In particular, my wife, Valerie,
deserves long overdue recognition. For her absolute and unwavering support
throughout law school, I am indebted and forever grateful.