Just a few days before the holiday, the Commonwealth Court of Pennsylvania issued a decision awarding it a $3.9 million refund in a challenge to the structure of the net loss carryover (NLC) provision of Pennsylvania’s Corporate Net Income Tax. Nextel Comms. of the Mid-Atlantic, Inc. v. Commonwealth, No. 98 F.R. 2012, 2015 Pa. Commw. LEXIS 520 (Pa. Commw. Nov. 23, 2015). Nextel’s argument was that the structure of the NLC provision improperly treated taxpayers differently based upon their income, in violation of the Uniformity Clause of the Pennsylvania Constitution, which provides that “[a]ll taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax. . . .” PA. CONST. art. VIII, § 1.
The Commonwealth Court accepted Nextel’s argument and held that the NLC provision violated the uniformity requirement; the problem was that the NLC deduction had a cap structure that limited the deduction to the greater of a percentage of taxable income or a flat dollar amount. Nextel, 2015 Pa. Commw. LEXIS 520 at *4-*5. In the court’s view, this created as situation in which some corporations escaped the tax altogether solely because their taxable income fell below the flat dollar cap. Id. at *18-*20. The dissenting judges agreed that the structure of the NLC provision was improper; they only quarreled with the majority’s decision to award a refund as the remedy.
Nextel is a very important opinion for corporations subject to tax in Pennsylvania, and normally it would merit extended discussion here. Last week, however, I was one of several Pennsylvania practitioners interviewed by Jennifer McLoughlin of Bloomberg’ BNA’s Daily Tax Report, and her article provides an excellent analysis of the case and its implications.
You can read Jennifer’s article here >> $3.9M Refund to Sprint Subsidiary Signals Potential Relief for Corporate Taxpayers.