In an opinion released today, the Pennsylvania Supreme Court found the Commonwealth’s 2007 net loss carryover cap scheme–which limited the amount of loss a taxpayer cold carry over to 12.5% or $3 million, whichever was greater–unconstitutional. Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, No. 6 EAP 2016 (October 18, 2017). The taxpayer in Nextel had argued that the statute was unconstitutional “as applied” to its situation, and had requested a refund of nearly $4 million.


The Court held that the cap, found in 72 P.S. §7401(3)4.(c)(1)(A)(II), had the effect of creating different effective tax rates and classifications in violation Article 8, Section 1 of the Pennsylvania Constitution, commonly known as the “Uniformity Clause.” The Court agreed with Nextel’s argument that the cap allowed “smaller” taxpayers to use deductions up to the $3 million limit that would result in no tax liability if the taxpayer had $3 million or less of income. On the other hand, the cap scheme would not permit the same treatment of large taxpayers with income of over $3 million. The “smaller” taxpayer base with 98.8% of all Pennsylvania taxpayers in 2007. As a result of this differential treatment, the Court found the cap unconstitutional.


The Court then turn its attention to the remedy. Nextel had argued that the only appropriate remedy would be for the court to award it the requested refund. The Court undertook a “severability analysis” which is required when addressing an “as applied” rather than “facial” challenge to a statute. Ultimately, the Court disagreed with Nextel’s remedy argument and instead severed the flat $3 million piece of the cap from the statute. Nextel was denied its requested $4 million refund.


The ramifications of this case are many and will severely impact small businesses that have heretofore relied on the flat dollar piece of the cap to offset most, if not all of their income. This will likely result in the General Assembly revisiting this topic to address important concerns like that one in a constitutionally permissible way. We will keep you updated on developments springing from this decision.