Pennsylvania Supreme Court Issues Split Decision in Case Where Department of Revenue Filed Against OAG

March 01, 2023

The Pennsylvania Supreme Court recently issued a split decision in an unusual case where the Pennsylvania Department of Revenue (the Department) sided with the taxpayer against the commonwealth Office of Attorney General (OAG), which was challenging the Department’s longstanding interpretation of the cost of performance (COP) sales sourcing statute.

Pennsylvania’s OAG is permitted under the Commonwealth Attorneys Act (CAA) to take legal action challenging the Department’s tax position.


The Pennsylvania Supreme Court issued its decision in Synthes USA HQ Inc. v. Commonwealth on February 25. [1] The unconventional case originally only concerned a matter of statutory interpretation—the question of how to correctly apply Pennsylvania’s COP sales sourcing statute. The OAG has long been at odds with the Department on this issue. When Synthes filed its brief in the Commonwealth Court of Pennsylvania, taking a position consistent with how the Department has traditionally interpreted the COP statute, the OAG responded by filing its brief and taking a diametrically opposed position.

In response, the Department intervened in the case and became a party alongside Synthes, opposite the OAG, which is highly unusual. Normally, the tax litigation unit of the OAG takes over a case when it is appealed to Commonwealth Court and coordinates with the Department on matters pertaining to both settlement and litigation.


The Pennsylvania Supreme Court, in weighing this peculiar situation, rejected the Department’s argument that the OAG does not have the authority to take a legal position that conflicts with the legal position of the Department. The court pointed out that the attorney general is the independently elected chief legal officer for the commonwealth, stating, “While the Attorney General regularly represents the Department, it is not the Department’s law firm.” [2] When the OAG’s interpretation of the law is irreconcilable with a commonwealth agency’s interpretation, the CAA allows for the commonwealth agency and the OAG to pursue adverse positions opposite one another in litigation.

The court was persuaded by the Department’s and Synthes’ argument that the term “income producing activities” as used in the COP statute means the activities that occur where the taxpayer’s customer receives the benefit of the service. [3] The court diminished the relevancy of other states’ judicial decisions interpreting this language consistent with OAG’s interpretation, noting that variations in regulations among the states reduced uniformity. The court’s reading of the law is tantamount to a traditional market-based sourcing (MBS) method of sales apportionment.

Pointing to its decision in Commonwealth v. Gilmour Manufacturing, which applied Pennsylvania’s statutory MBS method to the sale of tangible property, the court reiterated that the purpose for the sales factor is to “represent the contribution of Pennsylvania consumers and purchasers to the entity’s sales.” [4] From there, the court held that to give effect to that intent, the focus of sales sourcing must be upon the customer’s location.


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[1] Synthes USA HQ, Inc. v. Commonwealth, 11 MAP 2021 (Feb. 22, 2023).

[2] Id. at p. 22.

[3] N.B. – Pennsylvania law changed to MBS for sales of services beginning in 2014 and for all other sales beginning in 2023.

[4] Commonwealth v. Gilmour Manufacturing, 822 A.2d 676, 683 (Pa. 2003).