The Pennsylvania Supreme Court has affirmed an April 2007 decision of the Pennsylvania Commonwealth Court, which had agreed with Reed Smith’s arguments and had held in favor of the taxpayer. See FedEx Ground Package System, Inc. v. Commonwealth of Pennsylvania, 922 A.2d 978 (Pa. Cmwlth. 2007), aff’d 55 and 56 MAP 2007 (Dec. 27, 2007) (per curium).
The issue in FedEx Ground was the interpretation of Pennsylvania’s revenue-miles fraction, which is the apportionment fraction used to apportion the income and value of transportation companies for purposes of Pennsylvania’s corporate net income and franchise taxes.
The Department of Revenue asserted that its unwritten policy since 1971 had been to compute this fraction based solely on the number of miles driven inside Pennsylvania and in total. As a result of the court’s decision, taxpayers can now reflect the revenue generated by those miles in their fraction.
The decision has significance beyond the transportation industry. The decision represents a rejection of the argument that state revenue departments are entitled to deference in matters of statutory interpretation— even in the face of a “well settled practice.” Taxpayers should continue to fight unwritten “policy” positions that would increase their tax even if those policies have been followed, as in this case, for 36 years.
Also, the decision implicitly recognizes the principle that the apportionment fraction should represent only in-state activity. (Under the Department of Revenue’s unwritten policy, everywhere activity would have been considered in computing the numerator of the fraction.) This principle could be applied to other states to conclude that an apportionment fraction should not be manipulated simply because of a lack of activity in other states (e.g., the throwout rule).