Under the Bank and Trust Company Shares Tax, Pennsylvania taxes banks and trust companies that are located within the Commonwealth. The amount of the tax is a function of the book value of the institution’s equity capital. If institutions are combined, then their aggregate book value drives the amount of the tax. 72 P.S. § 7101.1(c)(2).
Historically, the book value was subject to an averaging position (eliminated in 2013), that looked at a six year average of book value to determine the tax base. Recently, the Supreme Court of Pennsylvania looked at a challenge to that provision based upon the uniformity clause of the Pennsylvania Constitution, Pa. Const. Art. VIII, § 1. See Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011, slip op. (Dec. 27, 2013).
The taxpayer was the survivor of a merger of two institutions that had previously been subject to the Shares Tax; it argued that the tax violated the uniformity clause because it treated the survivor of two Pennsylvania-based institutions differently than it treated the survivor of a Pennsylvania based institution and an out of state bank. Lebanon Valley Farmers Bank, slip op. at 3.
The issue arose because prior case law held that the combination provision only applied to “institutions,” which was defined to include only banks and trust companies with a physical presence in the Commonwealth. See First Union National Bank v. Commonwealth, 867 A.2d 711, 716 (Pa. Commw. 2005), aff’d per curiam, 901 A.2d 981 (Pa. 2006). Given the existence of this case law, when an in-state bank and an out-of-state banks combined, the calculation of the average book value to determine the tax base excluded the out-of-state bank’s assets for the pre-combination years. Lebanon Valley Farmers Bank, slip op. at 3. A similar result occurred if two in-state banks combined: if one was in existence for under six years, the average included a zero for that institution for the relevant years. Id., slip op. at 4.
The Commonwealth Court had initially sustained the government’s position, but it ultimately concluded that the construction of the application provision created a lack of uniform treatment that required relief; consequently, it ordered that the averaging provision be inapplicable to survivors of a combination with an out-of-state bank or a bank that had been in existence for fewer than six years. Lebanon Valley Farmers Bank v. Commonwealth, 27 A.3d 288, 292-93 (Pa. Commw. 2011).
The Supreme Court reversed. The majority concluded that the averaging provision did not violate the uniformity requirement. Focusing primarily on the context of a combination of an in-state and an out-of-state bank, the Court reasoned that the combination added assets to the tax base that had previously not been subject to the tax; as a consequence, the majority concluded that the fact that the averaging provision reflected that reality did not result in a violation of the uniformity requirement.
The dissent took a different tack. While also rejecting the Commonwealth Court’s decision to limit the scope of the averaging provision, the dissenters reasoned that the Court should re-examine the scope of the term “institution” and hold the averaging provision should be construed to include the average value of assets for an out-of-state bank in calculating the book value for an institution that results from the combination of an in-state and out-of-state bank. See Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011, slip op. at 5-9 (Dec. 27, 2013) (Saylor, J. dissenting). They viewed the averaging provision not as a tax on the assets held in prior years but as a method of fairly assessing book value in the current year to determine that year’s tax.
The recent amendment eliminating the averaging provision limits the impact of this decision, but the case is of interest because it highlights how difficult it is to predict the outcome in uniformity challenges. It is hard to discern clear guidance on which disparities are permissible and which are not as the cases seem to turn closely on their specific facts.
Jim Malone is a tax lawyer in Philadelphia. © 2014, Malone LLC.