          IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Upper Moreland Township,               :
                Appellant              :
                                       :
             v.                        : No. 144 C.D. 2016
                                       : ARGUED: October 19, 2016
7 Eleven, Inc.                         :


BEFORE:      HONORABLE MARY HANNAH LEAVITT, President Judge
             HONORABLE RENÉE COHN JUBELIRER, Judge
             HONORABLE P. KEVIN BROBSON, Judge
             HONORABLE ANNE E. COVEY, Judge
             HONORABLE MICHAEL H. WOJCIK, Judge
             HONORABLE JULIA K. HEARTHWAY, Judge
             HONORABLE JOSEPH M. COSGROVE, Judge


OPINION BY JUDGE HEARTHWAY                   FILED: April 13, 2017


             Upper Moreland Township (Township) appeals the decision of the
Court of Common Pleas of Montgomery County invalidating the Township’s tax
assessment of 7-Eleven, Inc. We affirm in part, reverse in part, and remand for
further proceedings consistent with this opinion.

             The trial court made the following findings of fact. 7-Eleven is a
Texas corporation with a registered business address in Dallas. 7-Eleven owns and
operates convenience stores throughout the United States. Some 7-Eleven stores
are “corporate stores,” which are owned and operated by 7-Eleven directly. Other
7-Eleven stores are “franchise stores,” which are licensed to franchisees and
operated according to the terms of a franchise agreement. Pursuant to the terms of
the franchise agreement, franchise stores pay to 7-Eleven a fee known as the “7-
Eleven Charge,” in exchange for various services provided to franchise stores by 7-
Eleven.


             From 2003 to 2011, the years relevant to this appeal, 7-Eleven
maintained a regional office for its Northeast Division in the Township. The
Northeast Division included 7-Eleven stores in Pennsylvania and New England.
Also within the Township was one corporate store and one franchise store. During
those years, 7-Eleven filed business privilege tax (BPT) returns with the Township;
these returns reported receipts generated by sales at the corporate store within the
Township, but did not include the 7-Eleven Charges collected by 7-Eleven from
franchise stores in the Northeast Division.


             Following an audit, the Township made an assessment of delinquent
BPTs based on 7-Eleven’s receipt of 7-Eleven Charges from stores in the
Northeast Division. The Township’s BPT is assessed at a rate of 3.5 mills on
taxable gross receipts. Pursuant to regulation,1 the Township calculates the gross
receipts of businesses with multistate offices engaged in interstate commerce by
combining (1) all receipts from within Pennsylvania; and (2) receipts from outside
of Pennsylvania multiplied by an apportionment factor. The regulation defines the
apportionment factor as the average of the following percentages:




      1
       REGULATIONS UNDER ARTICLE 1, “Business Privilege Tax,” OF CHAPTER 310
OF TITLE 2 OF THE UPPER MORELAND TOWNSHIP CODE PROVIDING FOR THE
ALLOCATION OF GROSS RECEIPTS IN THE CASE OF BUSINESSES WITH MULTI-
STATE OFFICES ENGAGED IN INTERSTATE COMMERCE (Regulations), at ¶ 2; See
Reproduced Record, at 1308a.


                                          2
             (i)     Wages, salaries, commissions and other
                     compensation in Township, as a percentage of total
                     wages, salaries and other compensation.
             (ii)    Receipts in Township as a percentage of total
                     receipts.
             (iii)   Value of the tangible personal and real property
                     owned or leased as situated within the Township as
                     a percentage of total tangible personal and real
                     property owned or leased.

Regulations at ¶ 2. However, in this case, the parties agreed to use only factor (ii),
receipts in Township as a percentage of total receipts, for determining the
apportionment factor. The Township then calculated the apportionment factor by
dividing the yearly 7-Eleven Charge gross receipts from within the Township by
the yearly 7-Eleven Charge gross receipts of the Northeast Division. Applying the
resulting apportionment factor to the 7-Eleven Charges from the Northeast
Division, the Township assessed 7-Eleven for the years 2003 to 2011, as follows:


             Total Principal Tax         $726,461.69
             Total Tax Penalties         $ 80,185.77
             Total Tax Interest          $917,466.65
             Total Assessment          $1,724,114.10


The principal tax due reflects the application to the Township’s BPT (3.5 mills) to
the sum of (1) 100% of the 7-Eleven Charges paid by franchise stores in
Pennsylvania; and (2) the 7-Eleven Charges paid by franchise stores in other
Northeast Division states after application of the apportionment factor.


             7-Eleven appealed the assessment to the Township’s Local Tax
Review Board. After a hearing officer sustained the assessment on administrative

                                          3
appeal, 7-Eleven appealed to the trial court. Following a three-day bench trial, the
trial court determined that the BPT imposed upon 7-Eleven was unconstitutional
and invalidated the assessment.


              The trial court’s conclusion that the BPT assessment was
unconstitutional was based on an application of Complete Auto Transit, Inc. v.
Brady, 430 U.S. 274 (1977), which addresses local taxation of interstate
commerce.     Under the standard enunciated in Complete Auto, a local tax on
interstate commerce is constitutionally permissible if (1) the taxpayer has a
substantial nexus with the taxing jurisdiction; (2) the tax does not discriminate
against interstate commerce; (3) the tax is fairly apportioned; and (4) there is a
reasonable relationship between the tax imposed upon the taxpayer and the
services provided by the taxing jurisdiction. Id. at 279. A tax assessment that does
not satisfy each prong of the Complete Auto test is unconstitutional. Id.


              The trial court found that the Township’s assessment failed to satisfy
the fair apportionment prong of the Complete Auto test.         Fair apportionment
requires that a local tax on interstate commerce be both internally and externally
consistent.   Goldberg v. Sweet, 488 U.S. 252, 260-61 (1989).         To determine
whether a tax is externally consistent, a court must apply a subjective inquiry of
whether a local tax assessment seeks to tax “only that ‘portion of the revenues
from the interstate activity which reasonably reflects the instate component of the
activity being taxed.’”     Philadelphia Eagles Football Club, Inc., v. City of
Philadelphia, 823 A.2d 108, 131 (Pa. 2003) (quoting Goldberg, 488 U.S. 252,
262).




                                          4
             The trial court found that the Township taxed 100% of the 7-Eleven
Charges from franchise stores within Pennsylvania. However, the trial court also
determined that the activity that generated these Pennsylvania 7-Eleven Charges
resulted from economic activity from both inside and outside of the state. The trial
court concluded that the Township’s failure to fairly apportion the Pennsylvania 7-
Eleven Charges rendered the Township’s assessment externally inconsistent and in
violation of the Complete Auto test.


             The Township appealed to this Court. Our standard of review in a
local tax appeal is limited to determining whether the trial court abused its
discretion or committed an error of law, or whether its decision is supported by
substantial evidence. Westinghouse Electric Corporation v. Board of Property
Assessment, Appeals and Review of Allegheny County, 652 A.2d 1306, 1309 (Pa.
1995).


             The Township argues that the trial court erred in finding that the
Pennsylvania 7-Eleven Charges resulted from interstate activities that required
apportionment. We disagree.


             7-Eleven presented extensive evidence before the trial court of the
various services that 7-Eleven provides to franchise stores in exchange for payment
of the 7-Eleven Charge. For example, the 7-Eleven Marketing Department is
situated entirely in Texas. (Reproduced Record (RR), at 0198a.) The Marketing
Department manages the advertising for all 7-Eleven stores in the country. Every
month, the Marketing Department develops point-of-sale signage that is distributed
for use in stores nationwide.      (RR at 0198a-99a.)     Similarly, the 7-Eleven
Information Systems Department is located in Texas. (RR at 0286a) A 7-Eleven
                                         5
employee in Massachusetts was responsible for providing information technology
support to all of the stores in the Northeast Division, including Pennsylvania
stores. (RR at 0227a-28a.) The evidence presented by 7-Eleven showed that many
services provided by 7-Eleven to Pennsylvania franchise stores are produced by
activity from beyond Pennsylvania.


               Through the testimony of Northeast Division Vice President Robert
Cozens,2 7-Eleven presented substantial evidence to support the trial court’s
finding that the 7-Eleven Charges collected from Pennsylvania franchise stores
were the product of interstate commerce.


               The Township also argues that the trial court erred in finding that the
Pennsylvania 7-Eleven Charges were subject to fair apportionment analysis
because those receipts reflected both interstate and intrastate activities.                     The
Township argues that 7-Eleven had the burden of proving what portion of the
Pennsylvania 7-Eleven Charges resulted from interstate commerce. The trial court
rejected this argument, noting that the very purpose of apportionment is to
rationally distinguish between interstate and intrastate receipts.




       2
           The Township also complains that the trial court erred by admitting a 7-Eleven
organizational chart into evidence because the chart was not identified in discovery or produced
until after a pre-trial conference. The trial court admitted the chart to aid in the understanding of
Mr. Cozen’s testimony regarding 7-Eleven’s operations. “The admission or exclusion of
evidence is within the sound discretion of the trial court[.]” Lehigh–Northampton Airport
Authority v. Fuller, 862 A.2d 159, 168 (Pa. Cmwlth. 2004) (citations omitted). Where Mr.
Cozen was subject to cross-examination about the chart by the Township, we discern no
prejudice to the Township resulting from admission of the chart and no abuse of discretion by the
trial court.


                                                 6
             In a constitutional challenge to the external consistency of local tax on
interstate commerce, the taxpayer bears the burden of showing by clear and cogent
evidence that the income attributed to a local taxing municipality is (1)
disproportionate to the business transacted by the taxpayer in that municipality; (2)
has resulted in a grossly distorted assessment on the taxpayer; or (3) is inherently
arbitrary or produced an unreasonable result. Philadelphia Eagles, 823 A.2d at
132. The constitutional challenge does not require a taxpayer to prove what
portion of receipts is derived from interstate verses intrastate commerce.


             In this case, the trial court heard substantial evidence from which to
conclude that the Township’s assessment was disproportionate because it failed to
fairly apportion the Pennsylvania 7-Eleven Charges when those charges reflected
both intrastate and interstate activities. If it was even possible for 7-Eleven to
accurately segregate the intrastate activity from that interstate activity underlying
the Pennsylvania 7-Eleven Charges, it was unnecessary. Fair apportionment is the
mechanism that performs the segregation function. See Moorman Manufacturing
Company v. Blair, 437 U.S. 267 (1978). Thus, the Township’s argument that 7-
Eleven was required to prove that a specific amount of the Pennsylvania 7-Eleven
Charges resulted from interstate commerce is without merit.


             The Township’s argument that 7-Eleven failed to segregate intrastate
from interstate receipts ignores the fact that 7-Eleven proved that all 7-Eleven
Charges are the product of interstate commerce. The taxation of those receipts
must therefore be apportioned to reflect the location of the various interstate
activities that generated the receipts.       Northwood Construction Company v.
Township of Upper Moreland, 856 A.2d 789, 804 (Pa. 2004). A local taxing
authority is entitled to tax its fair share of receipts from interstate commerce.
                                          7
Philadelphia Eagles, 823 A.2d at 134. Apportionment ensures that local taxing
entities tax only the portion of interstate commerce that reasonably reflects the
local component of the economic activity being taxed. Goldberg, 488 U.S. at 262.


                For the reasons set forth above, we affirm the trial court’s ruling that
the Township’s assessment violated the Commerce Clause. However, we find that
the trial court erred after reaching that conclusion in invalidating the assessment.
7-Eleven acknowledges that the trial court had the discretion to remand the matter
for a constitutional recalculation of the assessment. (7-Eleven Brief, at 18, n. 8.)
The record is clear in this case that the Township may constitutionally tax the 7-
Eleven Charges from the Northeast Division, including the Pennsylvania 7-Eleven
Charges, provided the taxed receipts are validly apportioned. It is also clear that 7-
Eleven has not paid those taxes. Under these circumstances, it was an abuse of
discretion for the trial court to invalidate the assessment outright instead of
remanding the matter for recalculation. Thus, in the interest of fairness to other
taxpayers in the Township, we find it appropriate for this matter to be remanded
for a recalculation of the tax due from 7-Eleven to the Township consistent with
this opinion.


                                          __________________________________
                                          JULIA K. HEARTHWAY, Judge




                                            8
          IN THE COMMONWEALTH COURT OF PENNSYLVANIA


Upper Moreland Township,                 :
                Appellant                :
                                         :
            v.                           : No. 144 C.D. 2016
                                         :
7 Eleven, Inc.                           :


                                    ORDER


            AND NOW, this 13th day of April, 2017, the order of the Montgomery
County Court of Common Pleas is affirmed in part and reversed in part, and this
matter is remanded for further proceedings consistent with the foregoing opinion.
            Jurisdiction relinquished.



                                         __________________________________
                                         JULIA K. HEARTHWAY, Judge
