This is a brief update on recent Pennsylvania tax developments. It is intended to provide an overview of issues and cases to watch, as well as administrative and legislative developments.
For more information on any of these developments, contact one of the authors or the Reed Smith State Tax attorney with whom you usually work.
Commonwealth Court Rules on Philadelphia Statute of Limitation for Refunds/Credits Resulting from Federal Audit Adjustments
The Pennsylvania Commonwealth Court, in City of Philadelphia v. Philadelphia Tax Review Board, et al.,1 ruled that taxpayers who filed business tax refund claims as a result of a federal audit are entitled to credits against future taxes, even though the statute of limitations for refund claims had expired. Any company that paid Philadelphia Business Privilege Tax (“BPT”) and received favorable federal audit adjustments after the deadline to file a refund claim should reconsider its options in light of this decision.
The taxpayers in this case timely reported and paid their 2003 and 2004 Philadelphia BPT. Then, in 2009, after the 3-year statute of limitations for filing a refund claim expired, the taxpayers’ 2003 and 2004 federal taxable income was reduced as a result of federal audits. The taxpayers properly filed amended BPT returns reporting the federal audit changes. The taxpayers also petitioned for refunds of the resulting overpayments. The Philadelphia Department of Revenue refused to issue refunds because the petitions were filed after the expiration of the 3-year statute of limitations.
The taxpayers appealed to the Philadelphia Tax Review Board, and the Board agreed with the Department that the taxpayers’ refund petitions were untimely. However, the Board awarded the taxpayers credits equal to the amount of tax overpaid. In November, the Commonwealth Court affirmed the denial of the refund claims and upheld the award of credits to the taxpayers. According to the court, the three-year limitations period on refunds was inapplicable to credits; unlike refunds, taxpayers could receive credits for overpayments at any time.
On January 7, the Commonwealth Court denied the city’s request to rehear the case en banc. The city did not file an appeal with the Pennsylvania Supreme Court, so this is a final decision.
Pennsylvania Taxation of Trusts – the Aftermath of the McNeil Case
Last year, in McNeil Trust v. Commonwealth,2 the Commonwealth Court held that the imposition of tax on a Delaware trust that was administered in Delaware and had no Pennsylvania income or assets in the tax year violated the Commerce Clause of the U.S. Constitution. The Commonwealth did not appeal this decision. Many trust taxpayers have filed refund claims and taken tax return positions asserting that, based on McNeil, they cannot be subject to Pennsylvania tax.
The Department of Revenue recently indicated that, if you take a McNeil position on a tax return, you will likely be assessed and have to prove your case on appeal. Reed Smith clients have been able to obtain complete relief on this issue at the administrative appeal level.
Marcellus Shale Impact Fee is on the Rocks
On December 19 in Robinson Township v. Commonwealth,3 the Pennsylvania Supreme Court ruled that certain provisions of Act 13 are unconstitutional (Act 13 contains the 2012 amendments to the Pennsylvania Oil and Gas Act).
Act 13 gave each county the power to impose a $40,000 to $60,000 flat fee—the "Impact Fee"—for a well’s first year of operation, with the amount of the fee declining over the next 15 years. The Act did not contain any refund procedures for Impact Fees paid in error. And although enacted in 2012, Act 13 also authorized a retroactive Impact Fee on all wells drilled before 2012.
The Act further included zoning and setback requirements, and it was these zoning and setback requirements that the Robinson Township court found to be unconstitutional.
Now, the Supreme Court has ordered the Commonwealth Court to determine if the unconstitutional zoning and setback provisions are "severable" from the rest of the Act. If not, then Act 13 will be unconstitutional in its entirety. If that happens, any company that paid the Impact Fee would be entitled to a refund.
But there are practical problems to obtaining a refund. Consider the following issues: (1) the PUC—not the Department of Revenue—administers the Impact Fee, and the PUC is not equipped to deal with refund claims (especially the millions of dollars of claims that we are discussing here); (2) the Impact Fee is disbursed by the PUC to the individual counties, and those counties will have likely already spent the money and could not refund it even if they wanted to; (3) the Act never contemplated refunds in the first place; and (4) it could be three to five years before the Robinson Township case is final—so statute-of-limitations issues may also come into play. And that’s just the tip of the iceberg.
Sound confusing? It is. That’s why your company should have a strategy in place in advance of making this year’s Impact Fee payment April 1. Without a plan, that money is likely gone for good after you pay it—even if the entire Act is found unconstitutional down the road.
One final note, even if the Commonwealth Court allows the Impact Fee to remain in effect, there is still a question of whether the retroactive component of the fee violates the due process provisions of the Pennsylvania and U.S. Constitutions. The retroactivity issue is only relevant to fees paid on wells drilled before 2012.
Sales Tax Class Action Suits – Are They Allowed in Pennsylvania?
Two class action suits against retailers are pending in courts in Pennsylvania. In both cases, the plaintiffs allege that the retailer collected sales tax on the full price of items when customers used discount coupons. The plaintiffs are seeking refunds of the tax paid on the discounted portion of the purchases, along with treble damages and attorneys’ fees.
This is not the first time a plaintiff has brought a sales tax class action suit in Pennsylvania courts. The previous attempts, however, have been unsuccessful. For example, in 2011, in the case of Stoloff v. Neiman Marcus Group, Inc., the Pennsylvania Superior Court held that "primary jurisdiction over the tax-refund claims belong to the [Revenue] Department."4
The pending cases have bounced back and forth between federal and state courts in Pennsylvania. At this time, whether these cases will face the same fate as the Neiman Marcus case or whether they will be permitted to proceed, is unclear. We will continue to monitor these cases and provide updates accordingly.
2014-2015 Budget: No Major Tax Bill Expected
During his February 4 annual budget address, Gov. Corbett gave little mention to tax reform—only mentioning proposals to change the liquid fuels tax and the wholesale oil and gas tax. Gov. Corbett’s Executive Budget includes the continued phase-out of the capital stock/foreign franchise tax, which will be completely eliminated for tax years beginning on or after January 1, 2016. Given the large tax reform package passed during last year’s legislative session, we do not expect major changes this year.
Board of Finance and Revenue Changes Set to Take Effect April 1
New Board of Finance and Revenue procedures will be effective beginning April 1, 2014. As noted in our last quarterly update (see Pennsylvania Tax Developments), the enactment of Act 52 in 2013 overhauled the Board of Finance and Revenue, which is the second and final level of administrative review in a Pennsylvania tax appeal before going to Commonwealth Court.
Regulations are being drafted to flesh out the procedures that will govern appeals falling under the jurisdiction of the new Board. The new Board will consist of three members—two will be appointed by the governor (and confirmed by the Senate), and the third member will be the Treasurer or the Treasurer’s designee. If the new Board is not constituted by April, the existing Board members stay in place until at least two of the new Board members are in place. However, the new Board procedures take effect April 1 even if the existing members remain.
As a reminder, here are several noteworthy new procedures set to take effect April 1:
The Board will have statutory compromise authority.
The Department of Revenue will no longer have a designee sitting on the Board. Instead, the Department will be a party to the proceedings and may be represented by counsel in that capacity.
Taxpayers will receive a copy of anything the Department submits and will have a chance to comment on the Department’s submission.
Ex parte communications with the Board will no longer be allowed.
All Board decisions will be published (after redacting confidential information) and accessible on the Internet.
Supreme Court Validates Bank Shares Tax
On December 27, 2013, the Pennsylvania Supreme Court in Lebanon Valley Farmer’s Bank v. Commonwealth held that the statutory method for computing the Bank Shares Tax for banks engaging in merger transactions was constitutional.5
The Lebanon Valley constitutional challenge focused on the unique tax base for the Bank Shares Tax, which was a six-year average of a bank’s equity.6 More specifically, the constitutional issue involved how to compute the tax base for a bank that was involved in a merger. Under the statute, the tax base for a bank involved in a merger was computed by combining the pre-merger equity of the merged banks.7 That provision was the subject of litigation in First Union National Bank v. Commonwealth almost a decade ago, and in that case the court held that the historical equity of an out-of-state bank could not be combined with that of an in-state bank when the two merged.8 As a result of First Union, the survivor of a merger of an out-of-state bank into an in-state bank typically could end up paying less tax than an otherwise similar survivor of a merger of two in-state banks.
Lebanon Valley involved the merger of two in-state banks. Lebanon Valley argued, under the uniformity clause of the Pennsylvania constitution, that its merger must be treated the same as the merger of an out-of-state bank into an in-state bank—that is, the survivor of a merger of two in-state banks must be entitled to dilute its tax base in the same manner as the survivor of a merger of an out-of-state bank into an in-state bank.
After lengthy litigation, the Pennsylvania Supreme Court concluded that it was permissible for the legislature to classify these two transactions differently because "[t]he merger or combination of two institutions, both previously taxed on their historic average values, is a different scenario than a combination that introduces previously untaxable assets to the calculation."9 As a result, the court held that the different treatment did not violate constitutional uniformity principles.10
The Bank Shares Tax was substantially amended effective January 1, 2014. Thus, the Lebanon Valley decision is of limited impact on a go-forward basis.
1. 97 & 98 C.D. 2013.
2. 67 A.3d 185 (Commw. Ct. 2013)
3. No. 63 MAP 2012.
4. 24 A.3d 366, 373 (Pa. Super. 2011).
5. Lebanon Valley Farmer’s Bank v. Commonwealth, No. 78 MAP 2011, 2013 WL 6823061 (Pa. Dec. 27, 2013) [hereinafter Lebanon Valley].
6. 72 P.S. 7701.1(a) (1994). For more background on the history (and constitutionality) of this averaging provision, see generally Fidelity Bank, N.A. v. Commonwealth, 645 A.2d 452 (Pa. Commw. 1994).
7. 72. P.S. § 7701.1.
8. First Union National Bank v. Commonwealth, 885 A.2d 112 (Pa. Commw. Ct. 2005) (en banc), aff’d per curiam 901 A.2d 981 (Pa. 2006).
10. Lebanon Valley, 2013 WL 6823061 at *6.