Appeal, No. 12, May T., 1948, from judgment of Common Pleas, Dauphin Co., Commonwealth Docket, 1943, No. 587, in case of Commonwealth v. The Minds Coal Mining Corporation. Judgment affirmed.

Same case below: 60 Pa. D. C. 149.

Appeal from resettlement of corporate net income tax.

The facts appear in the following opinions of the court below by RICHARDS, P. J., specially sitting.

This is an appeal by the defendant from the resettlement of its corporate net income tax for the calendar year 1941. This case was tried by the court without a jury pursuant to stipulation filed. Testimony was taken by the court and submitted on an agreed statement of facts. The appellant contends that the Commonwealth improperly assigned to Pennsylvania receipts from the sale of coal made by its agent outside of this State.

Facts

The defendant is a corporation of the State of West Virginia duly authorized to engage in business in this State and actually so engaged during the tax year in question. It owns and operates a coal mine in West Virginia, maintains a mine office there, and has a mailing address at P. O. Box 1086, Elkins, West Virginia. It mines no coal in Pennsylvania. It does, however, maintain its only executive and administrative office at Ramey, Pennsylvania and two of its officers are chiefly situated there. The defendant made a contract with the Bulah Coal Mining Corporation, hereinafter referred to as "Bulah," whereby the latter agreed to act as sales agent of the defendant. Bulah maintains its own offices in New York, had its own salesmen and sub-agents, and procured sales totalling $1,585,847.27 during the year 1941. By the contract Bulah agreed to act as sales agent and authorized representative of the defendant for the sale of bituminous coal, and to observe certain price limitations and Federal regulations. It agreed to make contracts with purchasers; to invoice all shipments of coal direct to the customers or other agents; to collect for sales; and to assume the credit risk. Orders for coal were forwarded by Bulah to the mines of the defendant in West Virginia, where coal was allotted by the superintendent of the defendant to fill the several orders. The coal was shipped from West Virginia, Bulah being the consignor. The defendant billed Bulah for the coal and paid it the stipulated commissions. Bulah alone collected from the purchaser and was responsible to the purchaser.

The resettlement excluded from both numerator and denominator of the wages and salary fraction the commissions paid to Bulah. This is because the commissions were not payable to employees. The appellant concedes this to be correct. However, the numerator of the gross receipts fraction contained the above figure of $1,585,847, representing sales made by Bulah. The denominator included all gross receipts everywhere. The gross receipts fraction was thus determined to be 1,585,849 — ------- (sic). The appellant questions the numerator 1,655,302 only. The tax was resettled in the amount of $1,361.56. These are the most salient facts, but others will be found in our findings.

Question Involved

Did the Commonwealth properly include in the numerator of the gross receipts fraction the proceeds of the sale of coal procured by Bulah?

Discussion

The tax here involved was settled pursuant to the provisions of the Corporate Net Income Tax Act, 1935, P. L. 208, as amended and reënacted from time to time, including 1941, P. L. 62; 72 PS 3420b, pocket part. Section 2, subsection 2(c) of this Act, provides, inter alia, that when all the business of a corporation is not conducted in Pennsylvania:

"(c) The remainder of such net income shall be divided into three equal parts . . .

. . . . . . . .

"(3) Of the remaining third, such portion shall be attributed to business carried on within the Commonwealth, as shall be found by multiplying said third by a fraction, whose numerator is the amount of the taxpayer's gross receipts from business assignable to this Commonwealth as hereinafter provided, and whose denominator is the amount of the taxpayer's gross receipts from all its business . . .

. . . . . . . .

"The amount of the corporation's gross receipts from business assignable to this Commonwealth shall be the amount of its gross receipts for the taxable year from, (1) sales, fees, and commissions, except those negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with, or sent out from, premises for the transaction of business maintained by the taxpayer outside of the Commonwealth, . . ."

It is admitted that the appellant does not transact all its business in Pennsylvania. By virtue of the above provision, therefore, its gross receipts from sales of coal are assignable to Pennsylvania, unless the defendant comes within the exception. The only sales excepted are those "negotiated or effected in behalf of the corporation by agents or agencies chiefly situated at, connected with, or sent out from, premises for the transactions of business maintained by the taxpayer outside of the Commonwealth." (Italics ours.) The sales negotiated by Bulah were not obtained by agents working out of premises maintained by the defendant outside the Commonwealth. Under the statute they are, therefore, assignable to Pennsylvania. But, says the defendant, Bulah was an independent contractor and its activities must be disregarded (see brief, page 9). We know of no case where it has been so held. The Continental Rubber case, 50 Dauphin 432, 347 Pa. 514, referred to by counsel, does not so hold. In fact, the opinion of the Supreme Court, in discussing the contention that sales were made by an independent contractor, stated "This would affect the terms of the last two fractions." We think the difference is this: If sales are negotiated or effected through an agency maintained by the taxpayer outside of this Commonwealth, they are not assignable to Pennsylvania; but if they are negotiated or effected by other means, as for example, by an independent contractor serving as a sales agent in another State, maintaining its own offices there, and having its own salesmen or sub-agents, they are assignable to Pennsylvania. Without prejudging any future case, we may say that we definitely so hold in this instance. We think that this conclusion is in no way in conflict with our decisions in the Frick case, 55 Dauphin 62, or in the Continental Rubber case, supra. In fact in the Continental Rubber case, the Commonwealth was endeavoring to establish the existence of an independent contractor in order to assign the sales to Pennsylvania.

In justice to the defendant, however, we will say that its contention is not based upon the theory that the defendant maintained premises in New York through Bulah. Rather, it assumes that all of Bulah's activities must be disregarded. Being disregarded, it argues, the sales were effected by the defendant's superintendent at the mine in West Virginia when he caused the coal to be loaded on cars in fulfillment of orders. It may be true that title to the coal passed at that point and at that time. But this is certainly not the only meaning of the term "sale" as used in the Act. The sale must be negotiated or effected. Clearly Bulah performed this function. It procured the orders and the contracts which resulted in the sale of coal. We think the words "negotiated or effected" relate to the activities which brought about or resulted in a sale. In fact, we think the Supreme Court has so held. In the Quaker Oats case, 350 Pa. 253, the Court was considering the meaning of "negotiated or effected" and what sales should be attributed to Pennsylvania. Mr. Justice ALLEN M. STEARNE, speaking for the Supreme Court, said at page 259:

"Appellant would have us construe this to mean that sales attributable to Pennsylvania must be only those which are both negotiated and effected within the State, using 'effected' in the sense of consummated, or completed. Such a construction would, of course, enable this appellant, or any foreign corporation, to eliminate the third allocative fraction from the tax formula by so arranging its sales machinery that all contracts would be 'accepted,' and therefore consummated, at the home office. This is clearly contrary to the intention of the legislature, which was that the gross receipts fraction should reflect that portion of corporate activity conducted in this State resulting in gross receipts to the corporation in the form of sales, rents and royalties. To assign to the word 'effected' the meaning urged upon us by appellant would controvert and frustrate the legislative purpose. 'Effected' has no technical meaning as a legal word of art. It is used in different senses, and often, loosely in contracts and statutes. Here, it is clear that it was intended to mean 'accomplished' or 'brought about': See Webster's New International Dictionary (unabridged). Given that meaning, it is consistent with the context and purpose of the section. The case of Commonwealth v. Continental Rubber Works, 347 Pa. 514, cited by appellant, supports this construction and opposes the construction for which appellant contends. There we held that sales negotiated by a branch sales office in New York, but approved and accepted in Pennsylvania, were assignable outside of Pennsylvania under Section 21 (b) above quoted. While it is true that the legislature excepted sales negotiated or effected outside of Pennsylvania, it is clear that it would not have intended the inclusion in the fraction of only those sales which were both negotiated and technically completed in this State, or by salesmen operating from agencies in this State."

In our opinion, Bulah undoubtedly negotiated the sales in question. It also effected the sales. Its activities brought about or accomplished the sales here involved. The superintendent at the mine filled orders. He performed the final act of executing the sales. But he neither negotiated or effected the sales. If it should be argued that he did in fact so do, one would wonder why it was necessary to enlist the services of Bulah. Are the activities of the latter to be totally disregarded? We think not.

It is to be observed that neither the Commonwealth nor the defendant contends that any sales of coal were made by appellant to Bulah. We agree with this conclusion. The contract between the appellant and Bulah contemplated only that sales should be made by the latter for the former for stipulated commissions.

We know of no provision of the law that sales must be negotiated or effected by an employe. Even though it be conceded that Bulah was an independent contractor, it does not follow that sales negotiated or effected by it cannot be assigned to Pennsylvania. Had Bulah maintained an office in Pennsylvania, from which the sales in question were negotiated, would they be eliminated from the gross receipts fraction merely because Bulah was an independent contractor? We suspect that they would not. In our opinion, the error of the defendant's contention lies in the assumption that sales by an independent contractor acting as a sales agent must be disregarded and the sales attributed to the superintendent at the mines. We have discussed this above.

While it may not, strictly speaking, be relevant, we note that the appellant has requested us to make a conclusion of law to the effect that of the total net income of $56,872 to be allocated, only $955.96 is attributable to Pennsylvania. Upon this basis, and applying the fractions in question, it would conclude that the total tax due is but $66.92. This is surely not placing a very high value upon the right to do business in this State.

The appeal and specification of objections raise certain constitutional questions. These were not mentioned in the argument or in the briefs. In view of this, we have deemed it unnecessary to discuss them in this opinion, particularly since the reported cases have already held that there is no merit in the several contentions. Also, the Commonwealth raises the question that the specifications of objections are inadequate to sustain the present contention of the defendant. However, we have no doubt that paragraphs 9, and 10, are amply broad enough to cover the defendant's position.

We note that the defendant has paid tax in the amount of $1,393.93, and interest charges in the amount of $38.93 or a total of $1,432.86. This is $32.37 in excess of its tax and interest liability under the settlements in question. The provisions of The Fiscal Code, 1929 P. L. 343, Art. XIV, Sec. 1408, 72 PS 1408, relating to Attorney General's commissions, was repealed by the Act of 1945, P. L. 528, Sec. 9. However, this repeal is effective only for the year 1944, and thereafter. Consequently in this case the Attorney General is entitled to a commission.

We have acted upon the requests of both parties for findings of fact and conclusions of law. Those which we have affirmed we adopt as the findings and conclusions of the court. In addition, we make the following

Conclusions of Law

1. The Bulah Coal Mining Corporation, as a result of a contract, became the sales agent and authorized representative of the defendant for the sale of its coal.

2. Bulah negotiated and effected sales of coal for the defendant, for the tax year in question, in the amount of $1,585,847.

3. The sales negotiated and effected by Bulah were not by agents or agencies chiefly situate at, connected with, or sent out from, premises for the transaction of business maintained by the taxpayer outside the Commonwealth.

4. The sales here involved were not effected by the defendant in West Virginia.

5. The sales procured by Bulah are attributable to Pennsylvania.

6. Tax was properly resettled in the amount of $1,361.56.

7. The amount of tax in dispute is $1,294.64.

8. No interest is due.

9. The amount owing by the defendant for its corporate income tax liability for the year 1941, is as follows:

Tax as resettled ..................... $1,361.56 Interest as settled .................. 38.93 Attorney General's commission being 5% on the tax in dispute .............. 64.73 ----------- $1,465.22 Credit for payments made ............. 1,432.86 ----------- Balance due ........................ $32.36

10. Judgment should be entered in favor of the Commonwealth and against the defendant for the balance of $32.36.

Opinion for the court en banc.

This case comes before us after argument on exceptions filed to our opinion of Dec. 23, 1946. The exceptions are forty-two in number. They complain of alleged errors of omission and commission. Notwithstanding the patent industry of counsel, we think the fundamental issues may be more simply stated. The real ground of complaint is our failure to find: (1) that the Bulah Coal Mining Corporation is an independent contractor; (2) that in making the sales in question it was engaged in its own business and not in the business of the defendant; and (3) that the proceeds from the sales of the coal, consequently, could not be assigned to Pennsylvania.

Whether or not Bulah was an independent contractor is, in our opinion, irrelevant. The real test is whether or not Bulah was an agent of the defendant for the purpose of negotiating sales of the defendant's coal. If so, the sales are attributable to Pennsylvania under the statutory provisions. The coal sold belonged to the defendant and not to Bulah. The business of the defendant was to mine and sell coal. We cannot conceive how any person could reach the conclusion that Bulah did not negotiate and effect sales of the defendant's coal.

The defendant concedes that Bulah was an agent of the defendant for the sale of coal. It insists, however, that Bulah was an independent contractor, liable only for the terminal result; that the defendant had no control over or liability for Bulah or its employes with regard to their activities in negotiating sales or otherwise; and that in making sales, Bulah was engaged in its own business and not in the defendant's business.

In our view of the case, the activities of Bulah have a two-fold aspect. First, in negotiating the sales, it was promoting the business of the defendant. It sold the defendant's coal, not its own coal. The proceeds of the sales belonged to the defendant, and not to Bulah. Secondly, in rendering the service to the defendant it was promoting its own interests at the same time. The commissions earned by its efforts are corporate receipts to Bulah and result from corporate activity by it. The earning of commissions was its own business.

The Restatement of the Law of Agency makes clear the difference between an agent who is a servant, and an agent who is not a servant but is an independent contractor. It deals with the different liability of the principal as to agents who are servants and those who are not. It considers also the difference as to right of control in each case. We quote from said Restatement the following excerpts:

"b. The word 'servant' is used in contrast with 'independent contractor,' a term which includes all persons who contract to do something for another and who are not servants with respect thereto. An agent who is not a servant is, therefore, an independent contractor when he contracts to act on account of the principal. Thus, a broker who contracts to sell goods for his principal is an independent contractor as distinguished from a servant. Although, under some conditions, the principal is bound by the broker's unauthorized contracts and representations, the principal is not liable to third persons for tangible harm resulting from his unauthorized physical conduct within the scope of the employment, as the principal would be for similar conduct by a servant; nor does the principal have the duties or immunities of a master towards the broker. While an agent who contracts to act and who is not a servant is therefore an independent contractor, not all independent contractors are agents." Section 2b, p. 12.

"c. Independent Contractors. It is important to distinguish between a servant and an agent who is not a servant, since ordinarily a principal is not liable for the incidental acts of negligence in the performance of duties committed by an agent who is not a servant (see § 250). One who is employed to make contracts may, however, be a servant. Thus, a shop girl or a traveling salesman may be a servant and cause the employer to be liable for negligent injuries to a customer or for negligent driving while traveling to visit prospective customers. The important distinction is between service in which the actor's physical activities and his time are surrendered to the control of the master, and service under an agreement to accomplish results or to use care and skill in accomplishing results. Those rendering service but retaining control over the manner of doing it are not servants. They may be agents, agreeing only to use care and skill to accomplish a result and subject to the fiduciary duties of loyalty and obedience to the wishes of the principal; or they may be persons employed to accomplish or to use care to accomplish physical results, without fiduciary obligations, as where a contractor is paid to build a house. An agent who is not subject to control as to the manner in which he performs the acts that constitute the execution of his agency is in a similar relation to the principal as to such conduct as one who agrees only to accomplish mere physical results. For the purpose of determining liability, they are both 'independent contractors' and do not cause the person for whom the enterprise is undertaken to be responsible, under the rule stated in § 219." Section 220, comment c.

It would thus seem that control over the means of performance is not the test of agency, but is the test of the relationship of master and servant. The agent may be an independent contractor, who by contract is responsible only for the end result but who is not subject to control by the principal and whose tortions or illegal acts are not attributed to his principal. On the other hand, the agent may be an employe or servant, subject to control as to the ways and means employed, and having the capacity of making his principal liable for the tortions or unlawful acts. In our opinion the criterion in the present case is the fact that Bulah was the agent of the defendant in selling the defendant's coal. The other matters may be interesting but in our judgment are not controlling.

Counsel for the defendant has in effect charged us with inconsistency in disposing of the Continental Rubber Company case, 50 Dauphin County Reporter 432, the Frick case, 55 Dauphin County Reporter 62, and in the instant case. We will now examine this charge.

In the Continental Rubber Company case we held that the defendant maintained its own branch office in Buffalo, N.Y., from which the sales in question were made, and that such sales were not attributable to Pennsylvania.

In the Frick case we held that the branch managers of the defendant made no sales, and that the sales to factors were made from the home office in Pennsylvania. These sales were assigned to Pennsylvania. The sales made by factors were not involved in the case.

In the present case, we held that the sales were made on behalf of the defendant by its agent and were attributable to Pennsylvania because not made from an office maintained by the taxpayer outside of the State.

We see no inconsistency of treatment in these three cases.

Counsel has likewise stated that in the Continental Rubber Company case we made a conclusion of law that had Prince been an independent contractor the sales would not be assigned to Pennsylvania. This does not seem to be mentioned in our opinion and we have been unable to find the conclusion of law in the file. If, however, we made such a conclusion, we can only say that it was unnecessary to the disposition of that case, as it did not swing on that point.

We have carefully considered the exceptions and have not found anything that we consider error. We will, therefore, dismiss them.

And Now, to-wit: August 12, 1947, each of the exceptions is dismissed at the cost of the defendant.

Taxpayer appealed.