Oral argument was held June 11 in the highly unusual case of Synthes USA HQ Inc. v. Commonwealth of Pennsylvania.1 The Attorney General faced skeptical questioning from the Commonwealth Court, with one judge suggesting that the Attorney General was “defeating,” rather than representing, the interests of the Department of Revenue.
Synthes involves the question of how receipts from services were required to be sourced in tax year 2011, before Pennsylvania’s legislative change to market-based sourcing in 2014. Synthes, a Pennsylvania-based company, seeks a refund of tax pursuant to a market-based interpretation of Pennsylvania’s pre-2014 cost-of-performance (COP) statute.2 Pennsylvania’s Board of Finance and Revenue agreed with Synthes that a market-based interpretation of the COP statute was consistent with the Department of Revenue’s position, but denied Synthes’s refund claim because Synthes failed to prove where the benefit of its services were received. Synthes appealed to the Commonwealth Court.
In its brief at the Commonwealth Court, the Attorney General argued that Synthes was not entitled to a refund because the Department’s market-based interpretation of the COP statute is incorrect. The Attorney General’s brief went further, disclaiming representation of the Department because the Attorney General represents “the Commonwealth of Pennsylvania, not the DOR.”3 In response, the Department requested the court’s permission to intervene, arguing that the Attorney General is not adequately representing its interests, and that as the agency responsible for administering the state’s taxes, it is the proper party to the case.4
Synthes, the Attorney General, and the Department all presented argument before a seven-judge panel of the court sitting en banc. The Department argued first, advocating for its market-based interpretation of the statute—specifically, that it considers the income-producing activity to be performed where the benefit of the service is received. Synthes argued next, characterizing the case as an evidentiary issue—the Board of Finance and Revenue denied its refund claim because it failed to show where the benefit of its service was received. Synthes and the Attorney General subsequently stipulated to where the benefit was received, so the court should rule in its favor, Synthes argued.
Arguing third, the Attorney General was bombarded by questions for the duration of its twenty-minute allotment. The questioning centered around the Attorney General’s interpretation of the Commonwealth Attorneys Act, 71 Pa. Stat. § 732-4204(c), which states that “the Attorney General shall represent the Commonwealth and all Commonwealth agencies . . . in any action brought by or against the Commonwealth or its agencies . . . .”
Several judges were skeptical of the Attorney General’s position that it, rather than the Department, is the sole authority on the Commonwealth’s interests in tax cases. One judge noted that “the Commonwealth” is a legal fiction, comprised of its various agencies, and that the Department of Revenue is the agency responsible for interpreting and administering the tax laws. Another suggested that the Attorney General is effectively a “law firm,” and the Department is its client, noting that here, the Attorney General failed to represent its client and, in fact, was actively defeating its client’s position. After the attorney representing the Attorney General stated that it has a duty to correct the Department’s misinterpretation of the apportionment statute, the judge responded that correcting misinterpretations of statutes is the court’s duty, not the Attorney General’s.
Given the court’s forceful questioning, and the obvious importance of a case involving a public dispute between two arms of the state’s executive branch, we expect an equally forceful opinion.
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1No. 108 F.R. 2016 (Pa. Commw. Ct. pet. filed Feb. 10, 2016).
272 Pa. Stat. § 7401(3)2.(a)(17) (2013).
3Resp’ts Br. 12 (Jan. 22, 2020).
4Pennsylvania Department of Revenue’s Application for Special Relief in the Nature of an Application to Intervene 7–8 (Feb. 11, 2020).
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