Carpe diem, the Latin exhortation to “seize the day” (or more accurately pluck it) has been a favorite theme of poets ranging from Horace to Andrew Marvell. And for Pennsylvania taxpayers, it happens to be good advice concerning tax refunds, because the seemingly straight-forward limitations provision for refund claims continues to confound courts, lawyers, and taxpayers.
Here’s what it says:
For a tax collected by the Department of Revenue, a taxpayer who has actually paid tax, interest or penalty to the Commonwealth or to an agent or licensee of the Commonwealth authorized to collect taxes may petition the Department of Revenue for refund or credit of the tax, interest or penalty. Except as otherwise provided by statute, a petition for refund must be made to the department within three years of actual payment of the tax, interest or penalty.
72 P.S. § 10003.1(a) (emphasis added). While that sounds simple, there are complications:
- Corporations and many individuals make estimated tax payments quarterly; are those payments of tax when they are made?
- Employees have tax withheld from their paychecks, typically biweekly; are those payments of tax when they are made?
If the above payments represent the “actual payment of tax” at the time they are made, taxpayers are subject to a rolling statute of limitations as each payment is made.
Another complication is that at the time the payments are made, the taxpayer does not know what her tax liability is because the tax year has not yet closed. It is only when the taxpayer’s return is finalized that her liability becomes clear. Arguably, some or all of the payments may not actually be payments of “tax.”
Last week, the Pennsylvania Supreme Court addressed the construction of the refund limitations provision in Mission Funding Alpha v. Commonwealth, No. 2 MAP 2016, 2017 Pa. LEXIS 3191 (Nov. 22, 2017), rev’g 129 A.3d 614 (Pa. Commw. 2015).
Mission Funding Alpha involved Pennsylvania’s Foreign Franchise Tax, but the relevant limitations period is a common one that governs a variety of state taxes. The facts of the case follow a pattern that is common for multi-state businesses: The company made its quarterly estimated payments, but it filed its 2007 return late without requesting an extension. The actual filing date for the return (technically a “report” under Pennsylvania’s tax procedure for corporations) was September 19, 2008. 2017 Pa. LEXIS 3191 at *3. The Department of Revenue processed the report and issued a penalty assessment for the late filing. The taxpayer made no additional payments because the amounts on deposit were sufficient to satisfy its liability and to generate a credit for the next tax year. Id. at *3 & n.1.
The taxpayer subsequently concluded that it had overpaid its Foreign Franchise Tax, and it filed a refund petition on September 16, 2011, which was rejected by the Board of Appeals. The Board’s order indicated that the petition came more than three years after the payment date of April 15, 2008. Id. at *3. The Board of Finance and Revenue affirmed, concluding that the taxpayer had paid its tax on April 15, 2008, the date when its report was due. Id. at *4.
The taxpayer then appealed to Commonwealth Court, where it argued that no “actual payment of . . . tax” occurred until it filed its report in September 2008, because it was only at that point that its tax liability became definite. Id. at *5. It was a clever argument, and the Commonwealth Court was persuaded.
The Supreme Court, however, was not. After summarizing the Commonwealth Court’s decision and the parties’ competing arguments, the majority opinion indicated that “[w]e are not persuaded by the Commonwealth Court’s reasoning and instead find a more straightforward reading of the statutory language is appropriate.” Id. at *24. In the Court’s view, the taxpayer’s obligation to pay its franchise tax liability became due on April 15, 2008. Among other things, the Supreme Court pointed to the requirements for estimated franchise tax payments in 72 P.S. § 10003.2(c)(2). 2017 Pa. LEXIS 3191 at *25. The relevant provision stated that
Payment of estimated capital stock and franchise tax shall be made in equal installments on or before the fifteenth day of the third, sixth, ninth and twelfth months of the taxable year. The remaining portion of the capital stock and franchise tax due, if any, shall be paid upon the date the corporation’s annual report is required to be filed without reference to any extension of time for filing such report.
72 P.S. § 10003.2(c)(2) (emphasis supplied). The due date for payment of Corporate Net Income Tax is governed by identical language in another clause of the same statute. See 72 P.S. § 10003.2(c)(1). Similar language applies under Pennsylvania’s Personal Income Tax. See 72 P.S. § 7332 (“A person required to make and file a return under this article shall, without assessment, notice or demand, pay any tax due thereon to the department on or before the date fixed for filing such return (determined without regard to any extension of time for filing the return)”).
In light of the statutory language quoted above, the Court majority observed that the Commonwealth had deemed the taxpayer’s liabilities “satisfied as of April 15, 2008, despite the fact that it had not yet filed its annual report.” 2017 Pa. LEXIS 3191 at *25. In the majority’s view, the Commonwealth Court’s decision that the payment of tax as of April 15, 2008 did not start the three-year limitations period for a refund claim ignored the plain language of the governing statute.
In the course of explaining its rejection of the taxpayer’s contrary arguments, the Court majority also indicated that the use of the phrase “actual payment of tax” in the refund limitations statute reflected “the General Assembly’s intent to provide taxpayers with the ability to request a refund of any tax overpayments in a single refund petition filed within three years of the date on which the Department applied funds submitted by the taxpayer in full satisfaction of its liability.” Id. at *30 (footnote omitted).
The majority opinion concluded by stating its holding: “[W]e hold the ‘actual payment of the tax’ for purposes of determining when the refund period begins is the act of transferring money or credits by the taxpayer to the Department, and the Department’s acceptance of the money or credits in full satisfaction of tax liability.” Id. at *35.
While that may suggest that the Court has announced a simple rule that petitions must always be filed within three years of the due date for the return, the majority opinion cautioned that its holding was “based on the facts before us.” Id. For good measure, Justice Donohue wrote a brief concurrence emphasizing that the operation of the limitations period was not that simple and that Mission Funding Alpha turned on the fact that the taxpayer’s credits and estimated payments were sufficient to satisfy its liabilities as of the date its return was due. Id. at *41 (Donohue, J. concurring).
Justice Donohue posited a situation in which a taxpayer made no estimated payments and then filed late, tendering full payment with the late return. Under this scenario, the refund limitations period would be tied to the date the return was filed and payment was tendered. Id. at *42 (Donohue, J. concurring). Alternatively, for a taxpayer who submits inadequate estimated payments, and then files a late return tendering payment for the balance, the refund period for the estimated payments would commence on the date the return was due, while the period for subsequent payment would run from the date it was tendered. Id. at *42-*43 (Donohue, J. concurring). These appear to be logical extensions of the majority’s rationale, but they do not have the majority’s endorsement.
Justice Mundy filed a dissenting opinion that offered a strong rationale for tying the “actual payment of tax” to the filing of a return, noting, for example, that the Department of Revenue could not determine whether the taxpayer owed interest until it actually filed its return. Id. at *47 (Mundy, J. dissenting).
The array of opinions from the Court confirm that the issue is complicated, but the lesson for taxpayers is straightforward: Don’t delay. Assume the due date for the return triggers the refund period, and file any refund petition within three years of that date.