On November 16, 2017, the Pennsylvania Department of Revenue (“Department”) issued Corporation Tax Bulletin 2017-01 in order to clarify the Department’s stance on the net operating loss deduction.  The Department will revise its forms and procedures to implement the Pennsylvania Supreme Court’s decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, Dkt. No. 6 EAP 2016 (10/18/2017), which found that the $3 million cap on the net operating loss deduction (“NOL”) violated the Uniformity Clause of the Pennsylvania Constitution. The decision left in place the portion of the statute that limits the NOL deduction at 12.5% of taxable income for the 2007 tax year at issue.

On November 1, 2017, Nextel filed an Application for Reargument with the Court regarding the appropriate remedy to apply to the 2007 tax year. Accordingly, while this NOL issue remains open, the Department is taking a proactive approach to provide clarity to corporate taxpayers. Taxpayers are therefore advised that the flat-dollar cap on the NOL, currently at $5 million, will not be available for taxable years beginning in 2017 and thereafter. However, the NOL limitation of 30% of taxable income will continue to be effective for taxable years beginning in 2017.

Please contact a member of the McNees SALT Group if you have questions regarding the Pennsylvania NOL deduction or the Nextel case.

 

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.

We are writing to update you on the status of budget negotiations in the Pennsylvania General Assembly that no longer includes the potential storage tax that we wrote about earlier this week but does include a new hotel tax. The idea of a hotel tax developed rapidly from closed door negotiations and caught the hotel and tourism industries by surprise.  As indicated in our McNees Client Alert and media coverage, there was a proposed storage tax in a revenue proposal circulating earlier in the week.  The opposition to this tax voiced significant concern about the broadly written language that would be detrimental to the logistics and warehousing industry as well as economies in Pennsylvania.  As a result, the idea lasted no more than a few days because there was not enough support for the revenue plan.  It came apart by Tuesday afternoon.  

 

After it emerged, the hotel tax idea and related revenue plan moved fast yesterday and was included in an omnibus amendment to the Tax Code.   Today House leaders continue their work to secure support to pass the new revenue plan including this hotel tax.  However, we expect this tax proposal to receive significant opposition much like the warehousing tax.  So, its future remains unseen. Meanwhile, expanded gambling remains part of the House revenue package. It is not clear if the Governor supports the hotel tax and other items in the revenue package.  

 

We are monitoring developments in the capitol today and will be reviewing language of the amendment to the Tax Code as well as other pieces of legislation that will be filed with respect to the budget. Please contact us should you have any questions. 

 

 

Urgent Alert from the McNees Wallace and Nurick Government Relations and State and Local Tax Groups

The Pennsylvania General Assembly continues to battle over revenue sources while the state remains without a complete state budget. And when it seems impossible, things actually continue to worsen with the House and Senate scheduled sessions to begin this afternoon. Over the weekend, the idea of a storage tax was discussed and it now seems to be more of a reality than a week ago.  And this tax is allegedly to replace a Marcellus Shale production tax.  This means the new targets for tax revenue are those who provide and use warehousing services and storage of items (“items” as defined by the proposed language seems to encompass almost anything) as well as anyone in the logistics business.  In essence, this tax would impose a 6% sales tax and have broad and expensive impact on almost every business. And the idea appears to be moving quickly through the capitol.

 

As covered in the media, the Pennsylvania General Assembly approved a budget spending bill without revenue sources at the end of June, and Governor Wolf allowed it to become law without his signature. Since then, lawmakers have fought over how to come-up with the $2.2 billion to pay for it.  Recently, the Republican-controlled Senate passed a revenue package that included more than $500 million in new taxes, including an extraction tax on shale gas drillers, new and increased taxes on consumer utilities such as electric, natural gas, telephone and expansion of the sales tax to online retailers. Also, the Senate plan would borrow against the tobacco settlement fund and include revenue from expanded gambling. Governor Wolf supported the Senate plan.

 

Most recently, the Senate rejected the House GOP’s no-new tax revenue plan that relied heavily on fund transfers and the sale of future tobacco settlement fund payments. Similar to the Senate plan, it included revenue from expanded gambling. Last week, it was expected that a conference committee process would begin soon.  This would be the most recent effort to settle the differences and write a new revenue bill.  However, the chambers and parties within them have strong positions on what should and should not be included for raising revenue.

 

The now fast moving issue that arose on Friday night during budget discussions in the Pennsylvania General Assembly involves a Storage Tax.  And, as of today, there remains uncertainty as to whether or not the language is written to reflect the intent of the tax.  This potential tax has been raised before during this year and in prior years under prior governors, but it was eventually pulled from the table.  However, it is now alive again and during a time of critical need for resolution on how to find revenue to support the already passed spending plan.  At this juncture, we believe there are a number of legislators opposed to the idea, including many in the south central caucus.  However, the idea appears to have enough support that it continued to be discussed through the weekend with potential for momentum beginning on Monday.

 

If this tax is passed, it will have a significant and expensive impact on many Pennsylvania businesses.   The draft language is very concerning because it appears to impact all businesses that provide warehousing and storage space as well as those who pay for storage space and warehousing services in PA.  Also significant is that it provides full discretion to the Commonwealth to implement, and, we expect the Department of Revenue to apply it very broadly in order to raise much needed revenue.

 

Some have argued in the past that a broad storage tax will result in layoffs and storage and distribution businesses closing and selecting other states to establish their business.  Others argue that a storage tax would result in consumers being double taxed when they purchase goods at the store and also when distribution centers pass along the storage tax to their consumers.  And, this tax would work against any efforts the Commonwealth or municipalities within it make to attract businesses to locate or expand in Pennsylvania because competing states could immediately look at least “6% cheaper” for doing business.  For example, it does not seem logical that Amazon, which is looking for a second headquarters in North America, would even consider a proposal from the Commonwealth if this tax is a reality and applicable to their business.

 

Clearly this will be very detrimental to the warehouses and trucking hubs that line Interstates as well as their clients.    In fact, this could affect the national supply chain that some argue already exists in Pennsylvania’s warehouse industry.  And, we expect it will also be very bad for business in the energy, gas industries such as refineries, those who are wet gas midstream operators and/or in the business of ordinary storage of gasoline, etc. as well as increase costs for Pennsylvania’s agriculture industry and food distributors.

 

Please contact us should you wish to discuss in detail.  We believe time is of the essence as the General Assembly works on closing the gap between its spending plan and funding sources.   We recognize the challenges for the state to find revenue. But we also know our clients and the challenges they already face with increased costs of doing business in PA.  McNees Wallace & Nurick’s Government Relations and State and Local Tax practice groups are working to help clients who oppose a storage tax.  Please contact us should you have interest in talking with legislators regarding the impact of a storage tax on your business.

The McNees State and Local Tax team regularly posts timely and important Pennsylvania tax information on Twitter.  Please give us a follow!

Randy L. Varner  @RandyLVarner

Sharon R. Paxton  @SharonPaxton7

Paul R. Morcom  @MorcomPASALT