Governor Wolf and other Pennsylvania lawmakers recently passed the state budget for FY22-23 (the “Budget”). Coming in at $45.2 billion, the negotiations entailed to finalize the Budget appear to be worth the effort by having the best of both worlds- increased revenue placing Pennsylvania in a strong fiscal position without having to increase any taxes.

In fact, as part of the Budget’s tax policy, Pennsylvania is lowering its corporate net income tax (“CNIT”) rate from 9.99% to 8.99% for the 2023 tax year. From there, the CNIT rate will continue to decrease by 0.5% each year until the CNIT reaches a baseline 4.99% rate in 2031.

This phased reduction is a change welcomed by both sides of the aisle, with the hope that Pennsylvania will become more attractive for businesses. Comparatively, the current 9.99% CNIT is one of the highest in the country. Set against Pennsylvania’s neighboring states- except for Ohio since it has no corporate income tax- New York, New Jersey, and Maryland, have current corporate tax rates of 7.25%, 11.5% and 8.25%, respectively. It stands to reason that the 4.99% rate by 2031 has the potential to incentivize more commercial activity in Pennsylvania.

By increasing revenue for Pennsylvania while simultaneously lowering the CNIT and not increasing individual income taxes or the sales and use tax, the Budget’s tax reforms might seem almost magical at first glance. However, this is not the case, for two reasons.

First, Pennsylvania is widening the scope of income sourced to Pennsylvania via intangible assets.  The Commonwealth will now cast a wider net on intangibles in general by pivoting from the current Cost-of-Performance method sourcing, to Market-based sourcing for tax years beginning after January 1, 2023. The implications of this transition are too numerous to discuss at length here and the DOR has been specifically instructed to draft new regulations to implement this new tax base. Essentially, the difference between the two methods is implied in the names. Cost-of-Performance looks to where the services are performed whereas the Market method looks to the location of the customers.

Second, even though the CNIT rate is lower, the threshold for corporations becoming subject to the CNIT and creating nexus within Pennsylvania has become easier. Bolstered by the U.S. Supreme Court’s Wayfair decision, corporations with sales in Pennsylvania exceeding a $500,000 threshold are now subject to the CNIT, irrespective of whether or not the corporation has any physical presence within the Commonwealth.

It is easy to see how the two prongs work hand-in-hand together to expand the tax base- customers purchasing intangible assets for customers within Pennsylvania as opposed to intangibles created in Pennsylvania casts a wider net, pulling non-Pennsylvania based corporations in closer to establish nexus with a lower dollar benchmark.

If you have any questions about Pennsylvania’s budget or any Pennsylvania state tax matter, please feel free to contact any member of the McNees State and Local tax team.




With historical drops in common level ratios throughout Pennsylvania’s 67 counties from last year to this year, commercial or industrial property owners should be reviewing their assessed values for potential reductions for the 2023 tax year.

The annual assessment appeal deadline of August 1, 2022 for assessed values effective for tax year January 1, 2023 is quickly approaching for the following Pennsylvania Counties:

Adams, Bucks, Butler, Cambria, Chester, Dauphin, Erie, Fayette, Franklin, Indiana,  Lackawanna, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York.

The annual assessment appeal deadline of September 1, 2022 for assessed values effective for tax year January 1, 2023 is on the horizon for the following Pennsylvania Counties:

Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntington, Jefferson, Juniata, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Washington, and Westmoreland.

There are a few oddball counties that have to be different and thus the annual assessment appeal deadline for Berks County is August 15, 2022 and Wyoming County is August 31, 2022.  Philadelphia County is not a specific date, but instead the annual appeal deadline is the first Monday in October, which is the 3rd this year. Allegheny County is the only county that has a deadline, March 31, that is actually during the year that you are appealing. Thus, the appeal deadline for assessed values effective for tax year January 1, 2023 in Allegheny County is March 31, 2023.

Wayne County is going through a countywide reassessment, effective for January 1, 2023 and thus all property owners in Wayne County will have 40-days to file a formal appeal with the Wayne County Board of Assessment Appeals from the mailing date on the Notice of Assessment stating the new assessed value effective for January 1, 2023.

Each county has its own separate set of local rules pertaining to assessment appeals that need to be navigated in order to successfully file an annual assessment appeal.  If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact Paul Morcom at 717-237-5364 to determine if an appeal is warranted for tax year 2023.

This past May, the Pennsylvania Department of Revenue issued REV-717, an updated guide for retailers on the Commonwealth’s State and Local Sales, Use and Hotel Occupancy Tax.

Interestingly, the portion of REV-717 discussing computer hardware and software specifically enumerated non-fungible tokens (“NFTs”) as being subject to Pennsylvania’s sales and use tax.

NFTs have recently grown in popularity due to publicity from high profile purchases by celebrities like Steph Curry and Eminem. NFTs are essentially digital assets that can consist of anything from art, to music, or videos, which can then be financially secured using the blockchain system, similar to cryptocurrencies such as Bitcoin. As the name suggests, NFTs are usually unique, one-of-a-kind items which generates their value.

As of today, several other states and jurisdictions are contemplating whether to have NFTs subject to their sales and use taxes, such as Washington and Puerto Rico. The Multistate Tax Commission and the Streamlined Sales Tax Governing Board are also considering whether NFTs should be classified as digital assets for sales tax purposes.

The trouble with taxation of NFTs, however, derives from their unique nature. By virtue of no two NFTs being the same, the tax treatment could also vary from NFT to NFT, depending on whether it is tangible, intangible, or some combination of the two. Simply stated, there may not be a “one size fits all” solution, and proper tax treatment may depend on the underlying asset of the NFT.

To make matters more complex, the IRS has yet to issue any guidance on the tax treatment of NFTs in any notices or bulletins, other than issue warnings of the money laundering risks NFTs pose due to using the anonymous blockchain system.

In short, if the popularity of NFTs is here to stay, then an interesting set of tax issues is likely to follow to determine the proper tax treatment of NFT sales, whether they occur in Pennsylvania or anywhere else on the earth.

If you have any questions about non-fungible tokens or any state tax matter, please feel free to contact Justin Abodalo (717-237-5362) or any member of the McNees State and Local tax team.


In Circle of Seasons Charter School v. Northwestern Lehigh School District, 273 A.3d 23 (Pa. Cmwlth. 2022), the Pennsylvania Commonwealth Court reversed the trial court decision, and the matter was remanded to the common pleas court to transfer the matter to the County of Lehigh Board of Assessment Appeals via a nunc pro tunc appeal in order to consider the merits of Circle of Seasons Charter School’s (“Circle of Seasons”) challenge to Lehigh County’s (“County”) assessment notices and the Northwestern Lehigh School District’s (“School District”) tax invoices.

In May of 2017, Circle of Seasons acquired two parcels of land from Penn State’s Lehigh Valley campus to be exclusively used for charter school activities. At the time of the purchase, the properties were tax exempt because they were part of the Lehigh Valley campus of Pennsylvania State University.  On or around June 5, 2017, County issued property assessment notices that revised the tax status of these properties from “non-taxable assessed” to “taxable assessed,” effective January 1, 2018.  The assessment notices were undated, but stated that any appeal of the assessment revision had to be filed by July 17, 2017 or an “annual appeal” could be filed by August 1, 2017.

In July of 2017, the School District issued two invoices to Circle of Seasons for the 2017 and 2018 tax years, totaling nearly $112,000. Circle of Seasons asserted the invoices were unlawful because the properties’ tax status did not change until January 1, 2018 and it never received a proper notice from the County revising the tax status of the properties because the notices were not dated, making it difficult to decipher the deadline to file an appeal of the assessments.

On June 15, 2018, Circle of Seasons refinanced the properties and at closing paid $125,000 for “delinquent taxes” to the School District. A month later Circle of Seasons filed an appeal to the County of Lehigh Board of Assessment Appeals (the “Board”).  A hearing was held before the Board on September 20, 2018 which agreed the properties were non-taxable effective June 1, 2019, but made no decision on the taxes due to be paid at the end of 2018.

On June 6, 2019, Circle of Seasons filed a formal demand for a refund with the School District. After the School District failed to respond, Circle of Seasons filed a complaint with the trial court on December 17, 2019 asserting the Tax Refund Law and unjust enrichment. The School District filed preliminary objections arguing that Circle of Friends failed to exhaust its statutory remedies under the Consolidated County Assessment Law and thus the trial court lacked subject matter jurisdiction over Circle of Seasons’ complaint.  The trial court agreed and dismissed the complaint with prejudice.

On appeal, the Commonwealth Court began its analysis with the statutory definition and purpose of charter schools and noted that real property used by a charter school for any purpose is exempt from all types of real estate tax and that once a charter school demonstrates it is using its property for purposes consistent with the charter school law, the burden of proof shifts to the school district to showcase otherwise.

The Commonwealth Court then proceeded to explain Pennsylvania’s Assessment Law and the Tax Refund Law.  Under these laws, a defective notice received does not automatically void the assessment. Rather, the aggrieved party has a right to a hearing.  In instances where the aggrieved party pays the taxes in dispute and subsequently seeks a refund, and if the school district refuses to refund the money paid, the right to a hearing converts to a right to file suit in the court of common pleas in the county the school district resides.

As applied to Circle of Seasons, the notices were defective because they were not dated, and the School District refused to refund the money paid for the 2017 and 2018 tax years, even though Circle of Seasons’ properties were deemed non-taxable in 2019.  The School District argued Circle of Seasons waived its right to challenge the defective notice because it paid the real estate taxes.  The Commonwealth Court held that the trial court erred in dismissing the action with prejudice and should have considered whether Circle of Seasons should have been able to file an appeal nunc pro tunc due to the County’s administrative error.

Due to the fact the notices were not dated, this gave rise to a level of administrative negligence on the County’s part that warranted a nunc pro tunc hearing.  As such, the proper resolution for the trial court was to transfer the matter to the appeals board, rather than dismiss it with prejudice. Accordingly, the Commonwealth Court reversed the trial court’s dismissal with prejudice and remanded to the trial court with specific directions to transfer the matter to the appeals board for the tax years in dispute.

The take away: Circle of Seasons serves as an important reminder to both taxpayers and taxing authorities alike. Administrative procedures are put in place to preserve taxpayers’ rights.  Whether sending an assessment or receiving one, it behooves one to be cognizant of administrative layouts to either avoid years of litigation or assert your rights, respectively, from the onset of a potential tax dispute.


On June 8, 2022, the Pennsylvania Supreme Court denied the City of Philadelphia’s (the “City”) Petition for Allowance of Appeal from the decision of the Commonwealth Court in Duffield House Assocs., L.P. v. City of Phila., 260 A.3d 329 (Pa. Cmwlth. 2021) (“Duffield House”).  In that case, the Commonwealth Court had affirmed the trial court’s order, striking of the property owners’ tax year 2018 real estate tax assessments as unconstitutional and ordering a refund of any tax increase over the prior year assessments.  The City claimed at trial, and on appeal, that it had not chosen to reassess the property owners’ properties because of their commercial nature — which would have violated the Uniformity Clause of the Pennsylvania Constitution, according to the Pennsylvania Supreme Court’s landmark holding in Valley Forge Towers Apts. N, LP v. Upper Merion Area Sch. Dist. & Keystone Realty Advisors, LLC, 163 A.3d 962 (Pa. 2017).  Rather, the City claimed that it has reassessed only commercial properties because ratio studies performed by the City’s Office of Property Assessment (“OPA”) showed that commercial properties were the “most underassessed” properties in the City and had been “grossly underassessed’ for several years.  Duffield House, 260 A.3d at 344.  But the evidence at trial established otherwise.  Id.  Expert testimony showed that “there was no gross disparity between the accuracy of assessments of commercial and non-commercial properties which would render the assessment of residential properties for 2018 unnecessary.”  Id.  In addition, the City’s own expert testified that the OPA’s ratio studies were “seriously flawed” and “unreliable.”  Id. 344-45.  The record was also replete with evidence — including official statements in public press releases — establishing that the City intentionally targeted commercial properties, and only commercial properties, for reassessment in tax year 2018.  Id.  345-46.  The Commonwealth Court concluded that the trial court had appropriately exercised its discretion in awarding refunds to the property owners.  Id.  346-48.  After the Supreme Court’s denial of the City’s Petition, the City no longer has any remaining avenue of appeal.  The City is now stuck having to pay substantial refunds of both real estate taxes and use and occupancy taxes, plus interest.

The City’s Office of Property Assessment is planning to post the results of reassessments of all properties in Philadelphia by Monday, May 9, 2022.

The new values of more than 580,000 residential, commercial, industrial, and institutional properties in Philadelphia are to take effect for Tax Year 2023, with property taxes due on March 31, 2023. Citywide reassessments scheduled for Tax Years 2021 and 2022 were postponed due to issues posed by the COVID-19 pandemic.

The new values are not yet available online, but are expected to be posted at by Monday, May 9, 2022. Written notices of the new values are scheduled to be mailed out by September 1, 2022 at the latest.

In Quality Driven Copack, Inc. v. Commonwealth of Pennsylvania, No. 879 F.R. 2013 (decided December 29, 2021) (opinion not reported), the Pennsylvania Commonwealth Court (the “Commonwealth Court”) held that for the Taxpayer to qualify under the manufacturing exclusion for sales and use tax purposes, there must be a physical change in form to the product or products. The Commonwealth Court also reversed the Board of Finance and Revenue’s (the “BFR”) determination that sales and use tax was properly assessed on the Taxpayer relative to the use of help supply services and subsequently remanded the matter back to the BFR.

The Taxpayer is a Pennsylvania corporation engaged in the business of assembling pre-cooked frozen ingredients into frozen sandwiches and other entrees to be sold at wholesale.  To create its finished product, the Taxpayer would purchase the food components, blend them together, and then freeze them to be sold as frozen meals.  The Taxpayer claimed that it was engaged in manufacturing and processing for sales and use tax purposes in Pennsylvania as is defined under 72 P.S. § Section 201(c) and (d) and 61 Pa. Code § 32.1.

Taxpayer vehemently argued that the materials utilized in its manufacturing process, while initially various food items, were transformed by its manufacturing process into a full meal, ready for quick preparation and consumption by the ultimate consumer. Taxpayer referenced the case of Edwin Bell Cooperage Co v. Pittsburgh, 112 A.2d 662 (Pa. Super. 1955), stating that the assembly of kegs and barrels from existing parts was determined to be manufacturing because the finished keg is a permanent structure with parts which are not interchangeable and cannot be taken apart and reassembled – thus a new product is made out of materials which in combination create an article with distinctive character and use.

The Commonwealth Court disagreed, finding the Taxpayer’s comparison to the Edwin Bell Cooperage Co. case unconvincing.  The Taxpayer was met with staunch disagreement from the Commonwealth Court, which argued that a physical change in form, composition or character is missing from the Taxpayer’s packaging operation. The Commonwealth Court instead paralleled the Taxpayer’s operations to that in Commonwealth v. Tetley Tea Co., 220 A.2d 832 (Pa. 1966), in which the separation of tea from foreign matter, blending it, and placing precise amounts in specifically designed bags was not manufacturing because the entire process started and ended with tea.  The Commonwealth Court emphasized that merely assembling pre-cooked frozen food ingredients in a package is not manufacturing under the strict and limited definition in the Tax Code.

In addition to its manufacturing arguments, the Taxpayer also claimed that use tax was erroneously assessed on expense transactions including certain services that it claims were erroneously characterized as help supply services.  The Commonwealth Court argued that the services provided by the staffing contractors hired by the Taxpayer are taxable help supply services because the Taxpayer retained control over the production operation and employed a plant manager to oversee all activities of the plant.  The Commonwealth Court looked closely at the degree of ground-level direction provided by the contractor versus that retained by the Taxpayer.  The Commonwealth Court concluded that evidence presented by the Taxpayer, including affidavits from a supervisor for one of the vendors that provided labor to the Taxpayer and the vice president of Taxpayer’s company, showed that the contractors worked independently on the plant floor with very little oversight by the Taxpayer and therefore, the Commonwealth Court could not say that the Taxpayer provided the requisite level of direction for the third party labor services to be considered taxable help supply services.

Ultimately, the Commonwealth Court reversed the BFR’s decision that sales and use tax was properly assessed on the Taxpayer relative to the use of help supply services but remanded the matter back to the BFR to determine what amount, if any, the Taxpayer was assessed in sales and use tax as it relates to the help supply services.  The Commonwealth did affirm the Orders of the BFR relative to whether the Taxpayer was engaged in manufacturing for purposes of a sales and use tax exclusion.

Many taxpayers are quick to jump on this manufacturing exclusion from sales and use tax – but as seen here, it is not an easy argument to make – the taxpayer must be able to meet the threshold set in the Tax Code calling for a physical change in form rather than a mere assembly of individual items into packaging and calling it manufacturing.

If you have any questions about this Decision or any state tax matter, please feel free to contact Meghan Holjes (717-237-5390) or any member of the McNees State and Local tax team.

In February, the City of Philadelphia published FAQs regarding expiration of the temporary nexus waiver that had been in place during the COVID-19 pandemic.  During the pandemic, the City had temporarily waived its legal nexus threshold that considers the presence of employees working temporarily from home within the City as sufficient to establish nexus for businesses located outside the City for purposes of the City’s Business Income and Receipts Tax.  The waiver had applied when an employee worked from home solely as a result of the pandemic.  The City reminds employers that its temporary waiver policy ended on June 30, 2021.  Therefore, a business located outside the City that continues to have Philadelphia resident employee(s) working from home after June 30, 2021 will be considered to have nexus in 2021 based on the activities of those remote worker(s).  The determination of what constitutes a “remote workforce” in Philadelphia is based on the facts and circumstances, considering factors such as official company policies regarding remote work arrangements and the nature and regularity of business activity in Philadelphia.

For any questions regarding nexus in the City of Philadelphia, please contact Sharon Paxton, Esquire (717-237-5393), Paul R. Morcom, Esquire (717-237-5364), or Adam Koelsch, Esquire (717-237-5305).

As a result of changes in federal and state laws related to stormwater management, municipalities across the Commonwealth have been forced – in order to comply with the new laws – to seek new funding sources and to regulate businesses located within the municipality.  The deadline for compliance for municipalities is quickly approaching – September 30, 2022.  Not only are municipalities required to comply with new measures, but often the resulting new municipal regulations and ordinances are then challenged in court.  One such challenge, for the City of Chester, concluded in December of 2021 by a decision from Judge Covey in the Commonwealth Court of Pennsylvania.

In the unreported memorandum decision of Appeal of Best Homes DDJ, LLC, 239-40 C.D. 2020 (Pa. Cmwlth. Ct. Dec. 23, 2021), Judge Covey affirmed the decisions made by the Delaware County Court of Common Pleas and held that the City of Chester Stormwater Authority’s (“Authority”) Municipal Separate Storm Sewer System (“MS4”) fees were not an impermissible tax.

In Appeal of Best Homes DDJ, LLC, the Appellants are Authority rate/fee-payers.  Some of those Appellants, including the lead Appellant, Best Homes DDJ, LLC, have removed itself from the litigation since the filing of the initial case.  On January 17, 2018 (and later, in an amended action), Appellants filed the case in the trial court seeking injunctive relief from the Authority’s new stormwater user fee.  In their complaint, Appellants claimed that the Authority was assessing Appellants an illegal tax for stormwater management, repairs, and maintenance. Specifically, Appellants’ allegations included:

  1. The Authority was improperly formed because the Authority was created in October 2016, and the first public meeting was not held until February 2017, approximately four months passed before the Authority even attempted to comply with Section 704 of the Sunshine Act;
  2. The Authority was improperly run;
  3. The services for which the Authority are charging are duplicative of the services performed by the Delaware County Regional Water Authority (“DELCORA”);
  4. The monies the Authority is assessing City of Chester property owners are an illegal tax;
  5. The Authority’s services are duplicative, unnecessary, and unreasonable;
  6. The Authority’s fee scheme is not reasonably related to the services provided; and
  7. The fee scheme is unreasonable and arbitrary.

On December 13, 2019, the trial court denied the request for injunctive relief, later denied Appellants’ Post-Trial Motions, and then Appellants filed an appeal to the Commonwealth Court of Pennsylvania.

The following issues were raised on appeal:

  1. Whether the trial court erred or abused its discretion by denying Appellants’ Post-Trial Motion;
  2. Whether the trial court erred or abused its discretion by denying Appellants’ Petition;
  3. Whether the trial court erred or abused its discretion by concluding that the Authority was properly formed and did not violate Section 704 of the Sunshine Act or Sections 5607(b)(2) and (d)(9) of the Municipality Authorities Act (“MAA”);
  4. Whether the trial court erred or abused its discretion by basing its determination solely on the finding that the Authority did not violate the MAA; and
  5. Whether the trial court erred or abused its discretion by failing to enter any findings of fact or conclusions of law regarding the additional issues of law and fact on which Appellants’ case was predicated.

Judge Covey affirmed the trial court’s decision for the following reasonings:

For Issues One and Two, Appellants failed to develop the issues in the argument section of its brief, which constituted waiver of the issues.

For Issue Three, the trial court did not err or abuse its discretion by concluding that the Authority did not violate Section 704 of the Sunshine Act or Sections 5607(b)(2) and (d)(9) of the MAA, for the following reasons:

Sunshine Act Claim

Section 704 of the Sunshine Act requires:

Official action and deliberations by a quorum of the members of an agency shall take place at a meeting open to the public unless closed under [S]ection[s] 707 (relating to exceptions to open meetings), 708 (relating to executive sessions)[,] or 712 (relating to General Assembly meetings covered) [of the Sunshine Act, 65 Pa.C.S. §§ 707, 708, 712].

65 Pa.C.S. § 704.  As noted above, Appellants assert that because the Authority was created in October 2016, and the first public meeting was not held until February 2017, approximately four months passed before the Authority even attempted to comply with Section 704 of the Sunshine Act.  However, Section 713 of the Sunshine Act provides:

A legal challenge under this chapter shall be filed within 30 days from the date of a meeting which is open, or within 30 days from the discovery of any action that occurred at a meeting which was not open at which this chapter was violated, provided that, in the case of a meeting which was not open, no legal challenge may be commenced more than one year from the date of said meeting. The court may enjoin any challenged action until a judicial determination of the legality of the meeting at which the action was adopted is reached. Should the court determine that the meeting did not meet the requirements of this chapter, it may in its discretion find that any or all official action taken at the meeting shall be invalid. Should the court determine that the meeting met the requirements of this chapter, all official action taken at the meeting shall be fully effective.

65 Pa.C.S. § 713.

Moreover, Judge Covey found that there is no record evidence establishing the existence of closed Authority meetings, let alone whether official action was taken, and/or whether the action was cured by later open meetings. Notwithstanding, because Appellants allege that the private meetings occurred before October 2016, i.e., the date the letters of incorporation were received, and Appellants did not file the Complaint until January 17, 2018, Appellant’s claims as to the Authority’s Sunshine Act violations are beyond the required one-year filing period, and thus, untimely.

Section 5607(b)(2) of the MAA

Section 5607(b) of the MAA provides, in relevant part:

Limitations.–This section is subject to the following limitations:

. . .

 (2) The purpose and intent of this chapter being to benefit the people of the Commonwealth by, among other things, increasing their commerce, health, safety and prosperity and not to unnecessarily burden or interfere with existing business by the establishment of competitive enterprises, none of the powers granted by this chapter shall be exercised in the construction, financing, improvement, maintenance, extension or operation of any project or projects or providing financing for insurance reserves which in whole or in part shall duplicate or compete with existing enterprises serving substantially the same purposes. . . .

63 Pa.C.S. § 5607(b).

The Appellants argue the Authority’s services duplicate and compete with DELCORA’s services in violation with this section of the MAA.  That argument, however, according to the court, is without merit.  DELCORA’s Director of Operations and Maintenance testified that DELCORA has absolutely no control over Chester’s stormwater inlets and pipes into the combined sewer system, and further that DELCORA has absolutely no control over any MS4 stormwater infrastructure whatsoever.  The trial court concluded, as a result, that the Authority’s services do not duplicate or interfere with DELCORA’s services.  Thus, no error by the trial court.

Section 5607(d)(9) of the MAA:

Section 5607(d) of the MAA provides, in relative part:

Every authority may exercise all powers necessary or convenient for the carrying out of the purposes set forth in this section, including, but without limiting the generality of the foregoing,  the following rights and powers:

 . . . .

 (9) To fix, alter, charge and collect rates and other charges in the area served by its facilities at reasonable and uniform rates to be determined exclusively by it for the purpose of providing for the payment of the expenses of the authority, the construction, improvement, repair, maintenance and operation of its facilities and properties . . . . Any person questioning the reasonableness or uniformity of a rate fixed by an authority or the adequacy, safety and reasonableness of the authority’s services, including extensions thereof, may bring suit against the authority in the court of common pleas of the county where the project is located . . . .

 53 Pa.C.S. § 5607(d).  When the reasonableness of a fee is challenged, Pennsylvania courts have determined that the party challenging the fee bears the burden of proving its unreasonable.  Appellants contend that the Authority failed to adopt a proper budget and the Authority failed to reveal any of the analytical process or computations that support the Authority’s final fee determination.  This argument, however, failed, according to the court, because the Authority had an expert testify at trial as to how the Authority initiates the implementation of its fees and how the fees are reasonably related to services or projects that the Authority will produce and execute.  The trial court found the expert’s testimony credible and the Authority’s fees, thus, were reasonable.  Accordingly, the Commonwealth Court found no errors on trial court’s part.

In addition, Appellants argued that the Authority’s assessed fee is an impermissible tax. Specifically, Appellants contend that the charges are a tax because it generates revenue and are a burden placed upon property owners to raise money for public purposes.  Appellants assert that the Authority has raised and used revenue for projects unrelated to stormwater.  Judge Covey reasoned that the Commonwealth Court has held:

[I]n determining whether a levy under a municipal ordinance is a tax or a true fee, “[t]he common distinction is that taxes are revenue-producing measures authorized under the taxing power of government; while fees are regulatory measures intended to cover the cost of administering a regulatory scheme authorized under the police power of government.”

 Rizzo v. City of Phila., 668 A.2d 236, 237 (Pa. Cmwlth. 1995) quoting City of Phila. v. Se. Pa. Transp. Auth., 303 A.2d 247, 251 (Pa. Cmwlth. 1973).  Moreover, Judge Covey cited the reasoning in Borough of W. Chester v. Pa. State Sys. of Higher Educ.:

whether the [Authority’s] [s]tormwater [c]harge constitutes a tax or a fee depends upon whether the [s]tormwater [s]ystem provides a discrete benefit to [Appellants], as opposed to generally aiding the environment and the public at large; whether the value of the [s]tormwater [s]ystem to [Appellants] is reasonably proportional to the amount of the stormwater charge; and, apart from general operation, maintenance and repair of the [s]tormwater [s]ystem, how exactly [] the [Authority] utilize[s] the funds generated by the [s]tormwater [c]harge.

Pa. Cmwlth. No. 260 M.D. 2018, filed July 15, 2019, slip op. at 11.  And the reasoning from the Rizzo case, which provided:  “[T]he party challenging a fee on the ground that it constitutes an unlawful tax bears the initial burden of establishing that the fees were not in fact used to reimburse the municipality for . . . providing a service.” 668 A.2d at 237.

Judge Covey found no record evidence that the Authority’s collected fees were unrelated to stormwater.  Furthermore, Judge Covey found that the Appellants did not establish that the Authority does not provide a discrete benefit to Appellants or that the value of the Authority to Appellants is not reasonably proportional to the amount of the fees.  Accordingly, Appellants failed to meet its burden of proving the fees are, in actuality, revenue-raising taxes rather than valid fees.  Thus, the trial court did not err.

For Issues Four and Five, the trial court did not err or abuse its discretion by basing its determination solely on the finding that the Authority did not violate the MAA or by failing to enter any findings of fact or conclusions of law regarding the additional issues of law and fact on which Appellants’ case was predicated.  This is so because the trial court concluded that Appellants did not establish a clear right to relief since they failed to meet their burden of proving the allegations set forth in their complaint.  As a result, given that the trial court clearly explained the reasons for its conclusion in its opinion, there was no reason for the trial court to enter any findings of fact or conclusions of law regarding the additional issues.

In conclusion, the Authority’s stormwater user fees were found to be acceptable.  Appeal of Best Homes DDJ, LLC makes it clear that it will take significant fact evidence in order to overturn a new stormwater user fee.  It is incumbent upon the rate payer to develop the facts, which in this specific case, are nearly non-existent.  Reasonableness, in comparison to the benefits gained from the ratepayer will be critical for the court, as will proportionality.  Finally, courts will be looking to see whether the new fee is revenue-raising, which would make it more likely a tax.

If you have questions about Appeal of Best Homes DDJ, LLC or matters related to the new implementations of stormwater fees and stormwater authorities, please contact Ryan Gonder (717-237-5340 or or any member of the McNees State and Local Tax team.

There has been a flurry of litigation in recent years involving taxpayer challenges to the constitutionality of Pennsylvania’s statutory cap on net loss carryover (“NOL”) deductions for tax years prior to 2017.  First came the Pennsylvania Supreme Court’s decision in Nextel Communications of the Mid-Atlantic, Inc., 171 A.3d 682 (Pa. 2017), in which the Court ruled that the Commonwealth’s 2007 NOL provision – which limited the NOL deduction to 12.5% of taxable income or $3 million, whichever was greater – violated the Uniformity Clause of the Pennsylvania Constitution.  The flat dollar cap was found to be unconstitutional because one class of corporate taxpayers (those with taxable income of $3 million or less) could employ the NOL deduction to reduce their taxable income (and tax) to zero.  However, corporate taxpayers with income over the NOL dollar cap were entitled to offset only a portion of their taxable income for a given year through the NOL deduction, regardless of the amount of unused losses incurred in prior years that were otherwise available to be carried forward for Corporate Net Income Tax (“CNI”) purposes.  The Court in Nextel remedied the Uniformity Clause violation by severing the flat dollar portion of the NOL cap, but retaining the percentage limitation.  The end result was that Nextel did not receive a refund.

In the most recent litigation development, in General Motors Corporation v. Commonwealth, No. 12 MAP 2020 (Dec. 22, 2021), the Pennsylvania Supreme Court considered an appeal filed by General Motors Corporation challenging the constitutionality of the NOL cap in place for tax year 2001.  Both General Motors and the Commonwealth agreed that the dollar-based cap on NOL deductions for tax year 2001 violated the Uniformity Clause.  However, they disagreed on whether Nextel should be applied retroactively and, if so, on the proper remedy to be applied.  Unlike the 2007 tax year at issue in Nextel, when the NOL cap had both a flat-dollar and a percentage limitation, there was only a flat-dollar cap of $2 million in place during the tax year at issue in General Motors. The Court rejected the Commonwealth’s argument that the Nextel decision should apply only on a prospective basis because it established a new principle of law.  Instead, the Court determined that Nextel “‘steadfastly adhered’ to a century of case law interpreting the Uniformity Clause to invalidate tax ‘classifications based solely upon the quantity or value of the property being taxed.’”  Having concluded that Nextel applies retroactively, the Court had to consider the proper remedy to be applied to cure the constitutional violation.

Since the Court did not have the option of severing the flat dollar cap and leaving the percentage limitation in place, as it did in Nextel, its options for addressing the Uniformity Clause violation in General Motors were limited to severing only the flat-dollar cap, resulting in unlimited NOL deductions for taxpayers, or severing the NOL deduction in its entirety, resulting in no NOL deductions.  The Court concluded that severance of the NOL deduction in its entirety was more consistent with legislative intent, as evidenced by the history of the NOL deduction provision.  Accordingly, the Court reversed the Commonwealth Court’s decision severing only the flat-dollar cap, and instead severed the NOL deduction for the 2001 tax year in its entirety.

Notwithstanding the Court’s decision to strike the NOL deduction for the 2001 tax year, it ultimately awarded relief to General Motors on the basis that the Due Process Clause of the U.S. Constitution requires the Commonwealth to provide “meaningful backward-looking relief” to rectify the inequality suffered by General Motors in comparison to corporate taxpayers that were permitted to use the NOL deduction to offset all of their taxable income for 2001.  It is too late for the Commonwealth to remedy that inequality by assessing corporate taxpayers that previously utilized the 2001 NOL deduction to fully offset their Pennsylvania taxable income.  The Court therefore determined that the only way to equalize the actual tax positions of corporate taxpayers for tax year 2001is to refund the tax paid by General Motors as a result of the cap on its NOL deduction.  The Court affirmed the order of the Commonwealth Court to the extent it remanded the case to the Board of Finance and Revenue to recalculate General Motors’ 2001 CNI without capping its NOL deduction and to issue a refund based upon that recalculation.

The deadline for the Commonwealth to request review of the Pennsylvania Supreme Court’s decision in General Motors by the United States Supreme Court has not yet expired, so it is unclear whether this is a final decision.  In any event, unanswered questions remain that likely will be addressed in future Pennsylvania court decisions.  For example, Pennsylvania’s courts will be tasked with determining whether the Due Process Clause of the U.S. Constitution requires that unlimited NOL deductions be granted to taxpayers with pending appeals for tax years when the NOL cap included both dollar-based and percentage-based limitations.  That precise issue likely will be addressed in Alcatel-Lucent USA Inc. v. Commonwealth, No. 803 F.R. 2017, which involves the 2014 NOL provision.  Like the year at issue in Nextel, the 2014 provision included both a flat dollar cap and a percentage limitation.  The Commonwealth Court issued a decision in September 2021 in Alcatel-Lucent, holding that the Department of Revenue’s policy of applying Nextel only prospectively did not violate the state and Federal constitutions.  The Commonwealth Court also rejected the taxpayer’s arguments that it was entitled to relief under the Due Process Clause of the U.S. Constitution.  The taxpayer filed Exceptions to the Commonwealth Court’s initial decision and briefing on those Exceptions is ongoing.

Based on the rationale of the Pennsylvania Supreme Court’s decision in General Motors, it appears that the Commonwealth Court will be required to reconsider the analysis in its initial decision in Alcatel-Lucent.  First, the Pennsylvania Supreme Court determined in General Motors that Nextel applies retroactively, which is inconsistent with the Commonwealth Court’s initial decision in Alcatel-Lucent.  It remains to be seen whether the courts will determine that the Due Process Clause of the U.S. Constitution requires that Alcatel-Lucent be granted an unlimited NOL deduction for tax year 2014.  However, in General Motors, the Pennsylvania Supreme Court observed in a footnote that “Nextel did not present this Court with a robust due process argument based upon McKesson . . ., as does GM in the case at bar.”  And, Justice Saylor, in a dissenting opinion in General Motors noted that “the majority’s present due process analysis, if applied in Nextel, would seem to require a different result in that matter.”

We will provide additional updates as new developments occur.  If you have questions regarding these cases, please contact Sharon Paxton, Esquire (717-237-5393), or any member of the McNees State and Local Tax team.