A group of Pennsylvania fireworks sellers recently filed a complaint in Commonwealth Court, challenging whether the Pennsylvania General Assembly properly enacted Act 43 of 2017 (the 2017 Tax Act). Although the plaintiffs’ primary target in the lawsuit (Phantom Fireworks Showrooms, LLC et al. v. Tom W. Wolf Governor of the Commonwealth of Pennsylvania, et al., Docket No. 21 MD 2018) is the new 12% tax on the sale of certain fireworks, if the plaintiffs’ suit succeeds, the result could be invalidating the entire 2017 Tax Act.

The 2017 Tax Act contained some important changes to Pennsylvania tax laws that became effective in late 2016 or on January 1, 2017, including the addition of new rules requiring personal income tax withholding from non-employees, sales and use tax reporting requirements for remote sellers, changes to the statutory cap on net operating loss carryforwards for corporations, changes to the time periods for appealing tax assessments and administrative decisions, and an additional two-year period for municipalities to apply for Keystone Opportunity Zone designation. See our discussion of the 2017 Tax Act here.

The complaint alleges that the 2017 Tax Act violates the Pennsylvania Constitution because the General Assembly failed to follow constitutional requirements for enacting legislation. Among the plaintiffs’ four arguments are:

• The 2017 Tax Act did not have a single subject. The Pennsylvania Constitution requires that each act passed by the General Assembly (other than appropriations bills) have a single subject and that subject must be set forth in the act’s title. The 2017 Tax Act includes provisions relating to taxation, bond issuances, and fireworks regulation. As a result, the plaintiffs argue that the 2017 Tax Act did not have a single subject.
• The 2017 Tax Act did not properly repeal prior law regulating the sale of fireworks. The Pennsylvania Constitution requires a bill that repeals existing law to set forth the repealed text in full and indicate it is being repealed. The 2017 Tax Act referred to the prior law regulating fireworks by reference but did not include a strike-through of language that the 2017 Tax Act intended to repeal.

The plaintiffs have asked the court to declare the 2017 Tax Act unconstitutional in its entirety. Even if a court agrees with the plaintiffs, it could grant narrower relief and repeal only the parts of the 2017 Tax Act impacting fireworks sales. However, if the plaintiffs succeed in striking down the entire 2017 Tax Act, repeal would invalidate all of the provisions listed above.

The General Assembly could fix alleged constitutional deformities by properly retroactively reenacting the substantive provisions of the 2017 Tax Act in separate acts. The Pennsylvania Supreme Court has held that tax acts may apply retroactively. However, there is a limit and the court has held that a tax law may not be retroactively applied beyond the legislative session immediately preceding its enactment. Under this construction, the General Assembly would have until the end of the next legislative session (i.e., the end of 2020) to properly enact separate, potentially retroactive acts that would reenact all of the provisions of the 2017 Tax Act without necessarily waiting until the suit makes its way through the courts.

We will continue to monitor this matter and make clients aware of developments in this case.