On December 21st, the Supreme Court of Pennsylvania issued an opinion that carries significant potential benefits to Philadelphia taxpayers; a divided court held that taxpayers were entitled to credit for overpayments under Section 19-2610 of the Philadelphia Code, even if the period in which a refund can be sought had expired. City of Philadelphia v. City of Phila. Tax Rev. Board ex rel. Keystone Health Plan East, Inc., No. 19 EAP 2014, 2015 Pa. LEXIS 2988 (Pa. Dec. 21, 2015). While the City sought reargument, that motion was recently denied.
The taxpayers were subsidiaries of Independence Blue Cross that did business in the City of Philadelphia and were subject to its Business Privilege Tax (“BPT”), now known as the Business Income and Receipts Tax. The taxpayers reported their net income for the BPT based upon their federal taxable income, and the dispute with the City arose after the IRS audited the taxpayers’ federal returns for 2004 and 2005 and concluded that they had underreported their deductions. Keystone, 2015 Pa. LEXIS 2988 at *3.
As their federal taxable income had been overstated, the taxpayers had also overpaid the City for BPT in the same tax years. Under the relevant regulations, the taxpayers were required to file amended BPT returns within 75 days after the IRS determination. The taxpayers filed amended returns and sought a refund, but the Philadelphia Department of Revenue rejected the refund claim because Section 19-1703(1)(d) of the Philadelphia Code required that a refund claim be filed within the later of three years of payment “or the due date.” Id. at *4 (quoting Phila. Code § 19-1703(1)(d)). The taxpayers pursued an appeal to the Philadelphia Tax Review Board and argued that they had filed a refund claim within three years of the due date since the regulations provided that they had 75 days to file amended returns after the IRS determination. Id. The Board rejected that contention, reasoning that the “due date” for purposes of the refund limitations period was the original due date for the return, not the date when an amended return was required under the regulation. While the Board denied the requested refunds, it ruled that the City was required to provide the taxpayers with credits for their overpayments. Id.
After a divided Commonwealth Court affirmed, the dispute reached the Supreme Court, where the bulk of the focus was on the appropriate construction of the refund limitations period. Despite a well-developed argument that their refund claims were timely, the taxpayers lost, as the entire court concluded that they were required to file a refund claim within three years of either the relevant tax payments or the payment due date. Id. at *13; id. at *18 (Saylor, C.J. concurring and dissenting).
On the subject of credits, however, the taxpayers prevailed. The relevant provision of the Philadelphia Code provides that “[t]he Department shall promulgate regulations to provide for estimated tax payments to be paid concurrently with the filing of any return, and for credits to be granted on any overpayment of estimated tax payment.” Phila. Code § 19-2610. Significantly, the limitations provision for refund claims made no reference to credits; it simply set a deadline for “[e]very petition for refund of moneys collected by the Department [of Revenue].” Phila. Code § 19-1703(1)(d). The majority of the Court applied the plain language of this provision, which contained no limitations period, and refused to impute the limitations period for refunds upon the requirement that taxpayers receive credits for overpayments. Keystone, 2015 Pa. LEXIS 2988 at *16-*17.
The majority offered two rationales: first, it reasoned that credits were materially different from refunds as they were not an immediate liability, id. at *17; second, it was unwilling to rewrite the City’s ordinances; viewing the language of Section 19-2610 as plain and unambiguous, the majority applied it as written, id.
Presumably the City will address this issue by amending Section 19-1703, Section 19-2610, or both. But in the meantime, taxpayers enjoy a right to claim open-ended credits for overpayments.