Tax Review Board v. Slater System, Inc.

Opinion by Mr. Justice Bok, These are appeals from the judgment of the court below affirming the action of the Philadelphia Tax Review Board in holding appellants liable for the gross receipts tax under the mercantile license tax ordinance. — 479 — The two appeals involve companion cases which present one problem and concern tax assessments for the years 1953-1955. The facts are not disputed and the parties differ only in their legal conclusions. Various businesses, schools, and other institutions find it desirable as a “fringe benefit” to offer their employes food, mainly luncheon, at prices below those to be found in outside restaurants. These companies have the equipment, including space and napery and cutlery, and they hire Slater to provide the food and service. The disagreement between the parties is in Slater’s contention that it is only the agent for the companies and should be taxable on nothing but the management fee which it charges, and in the City’s contention that Slater is in the complete business of catering and operating cafeterias and should be taxable on its gross receipts, including management fee, operational costs, and the collected price of food sold to the employes. We think that the City’s view is the correct one. Slater’s brief never uses the word “catering” and its counsel before the Board said specifically that his client was not in the “catering” business. However, the purpose clauses of its Articles of Incorporation include the following: “To provide a complete food service and to operate cafeterias, restaurants, canteens and other food dispensing units for individuals, industrial and business establishments, institutions and other organizations of all kinds. Also, to act as consultants and advisors in the industrial feeding business and to buy and sell, prepare, dispense, serve, and otherwise deal in food and eatables of all kinds, and all other articles used in catering. . . . “The nature of the business for which this corporation is established, and the objects and purposes proposed to be transacted, promoted and carried on are: — 480 — Buying and selling, preparing, dispensing, serving, and otherwise dealing in food eatables of all kinds, and all other articles used in catering. To act as consultants and advisors for catering to hotels, boarding houses, fraternities, persons and organizations of all kinds.” (Emphasis ours) There was also offered in evidence a copy of Slater’s typical contract with its clients, which contains the following provisions: “1. Company hereby grants to Slater as am, independent contractor the exclusive right to sell food products, candy, tobacco, cigarettes and non-alcoholic beverages at its plant. “2. Company agrees at its expense to provide Slater with suitable cafeteria space (including adequate sanitary toilet facilities and dressing rooms for Slater’s employes) completely equipped and ready to operate. . . “3. Slater Agrees: “A. To operate upon its own credit a general catering lousiness for the employes and visitors of the Company and to furnish nutritious, wholesome, palatable food at such hours as Company may from time to time determine. “B. To submit for approval menus complete with prices to such person as Company shall designate at least twenty-four (24) hours in advance of offer for sale. . . “C. At all times to maintain an adequate staff of its employes on duty at Company’s plant . . . “D. To take advantage of all trade discounts, which shall be credited to the cost of operations and to practice all feasible economies in the operation of the food service. . . . “F. To bear any loss resulting from dishonest acts on the part of its employes. “GL To furnish Company with a certificate . . . that Slater carries workmen’s compensation, compre — 481 — hensive public liability, property damage and products liability insurance in such amounts as are acceptable to Company. The cost of such insurance shall be charged to the operation of the business conducted hereunder. “H. To return to company at expiration of this contract ‘the cafeteria premises and all equipment furnished by Company . . .’ ” (Emphasis ours) The facts are that Slater makes its contract with its client, buys the food on its own credit, stores it in its own warehouse, takes all discounts and other price advantages, supplies the labor, puts forth the meals as agreed upon with the client, charges and collects the prices set by the client, and banks the money so collected in its own bank. The client, as said above, provides the cafeteria space, the dining equipment, and the utility services. There is a set percentage of the gross receipts from employes to cover overhead, and another for management fee. If the receipts from food are less than all charges, the client pays Slater the deficit, and only in rare instances are the receipts larger than the charges and a refund is due the client. This arrangement strikes us as a general catering business run on the basis of cost plus a percentage fee. It is like the general contractor performing contracts on a “cost-plus-a-percentage” basis covered in §312(b) of the City’s Mercantile License Tax Regulations, adopted December 9, 1952, under which the contractor must report as his gross receipts the full contract price. To report and pay a tax only upon the management fee would be to make this tax a profit tax, which is not the design of the taxing ordinance. Appellant argues, to no purpose, that Slater was nothing but its client’s agent, and cites H. J. Heinz Co. v. School District of Pittsburgh, 170 Pa. Superior Ct. 441 (1952) 87 A. 2d 85, and Philadelphia School District v. Frankford Grocery Co., 376 Pa. 542 (1954), — 482 — 103 A. 2d 738. But in Heins the decision rested on the fact that Heinz, the taxpayer, operated its own restaurant without profit and hence was not liable for the tax. In Franhford the buying company was a nonprofit corporation and the stores for which it bought paid the tax. In the instant case Slater was in business for profit and made its money by contracting out its services and its skill as a caterer. As for its agency, each situation rests on its own facts, the main headings under which these fall appearing in Mature v. Angelo, 373 Pa. 593 (1953), 97 A. 2d 59. It is the actual relationship in the specific case that counts, and one may stand as both independent contractor and agent to another, as in Commonwealth v. Minds Coal Mining Corporation, 360 Pa. 7 (1948), 60 A. 2d 14; Restatement, Agency 2d, §2. In the instant case the essence of the relationship was, as Slater’s vice-president, Hutton, testified before the Tax Board, “to sell our professional skills”, realizing that “it takes a sum of many skills to do a full professional job of food service planning” on which “the client necessarily relies”. That the client nominated the menus and the prices to be charged its employes is no more than the shape and content of the service that it bought. Slater received no instructions from its clients how to order, store, prepare, and serve the food, and these things represent the very skills that Slater was employed to furnish and with which no one pretends its clients had anything to do. It retained essential and decisive control over the skillful service that it sold. Further, Slater had no concern for the prices the clients chose to charge their employes: the deficit to be paid to it was low or high depending on whether the prices charged for the food were low or high. We have held in Commonwealth v. Thorne Neale & Co., 264 Pa. 408 (1919), 107 A. 814, and B. & Z. Ma — 483 — chinery Co. v. Pittsburgh, 375 Pa. 250 (1953), 100 A. 2d 98, that a fixed commission or profit is consistent with a sales contract for limited profits, and that there is no presumption that one is a broker apart from the objective facts of the particular case. The tax ordinance was upheld, and the tax was declared to be an excise upon the privilege of doing business, measured by annual gross volume of business, in National Biscuit Co. v. Philadelphia, 374 Pa. 604 (1953), 98 A. 2d 182. The ordinance defines business as: “The carrying on or exercising for gain or profit within the City any trade, business, profession, vocation, or making sales to persons within the City, or any manufacturing, commercial or financial activity, service or business, including but not limited to manufacturers, brokers, wholesale dealers or wholesale vendors, retail dealers or retail vendors.” Slater, far from being a non-profit corporation, is clearly within this definition. It should report and pay the tax. The judgment is affirmed.