Constitutional Issues: Pennsylvania NOL deduction; Maryland different interest rates
By: Karen T. Syrylo, CPA
1) Pennsylvania — U.S. Supreme Court refuses to hear appeal of Nextel’s denied refunds in state NOL issue: On June 11, 2018, the U.S. Supreme Court denied cert in Nextel Communications’ appeal of Pennsylvania’s refusal to pay refunds of taxes Nextel paid under the NOL carryforward limit provision that had been invalidated by the state supreme court. The Pennsylvania supreme court in Nextel Communications of the Mid-Atlantic, Inc., v. Commonwealth of Pennsylvania (6 EAP 2016) had ruled that the fixed $3 million cap on net operating loss carryover deductions violated the Uniformity Clause of the Pennsylvania Constitution; the court, however, allowed the statute’s 12.5% percentage limitation (12.5% of taxable income) on NOLs to remain in force. The state’s Uniformity Clause requires that all taxes be uniform upon the same class of subjects. Nextel had argued that the NOL limit allowed corporations with $3 million or less in taxable income plus carryforward NOLs exceeding that amount to reduce their tax liability to zero, while companies with over $3 million in income paid tax even after NOL deductions.
In its decision, the state supreme court ruled that Nextel was not entitled to a refund of any of the $3.9 million in tax the company had paid, noting that under the now severed rule, i.e. after removing only the $3 million limit, the company’s tax liability was the same amount that the Department of Revenue had assessed. Nextel had argued that the proper remedy was to retroactively apply the remaining 12.5% limit to all corporations that had paid no tax under the $3 million limit, but the company recognized that this was not possible due to the statute of limitations period for assessment. Therefore, the company argued, the only remedy was for Nextel to be refunded all the taxes it had paid under the now unconstitutional statute. The Company had asked the U.S. Supreme Court to rule that the denial of refund violated the Due Process Clause of the U.S. Constitution.
NOTE that the Department of Revenue issued Corporate Tax Bulletin 2018-02 http://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/TaxBulletins/CT/Documents/ct_bulletin_2018-02.pdf. The Bulletin states the DOR position that the Nextel decision will not be applied to tax years beginning prior to January 1, 2017 (thus, for 2017 and later years only the 12.5% limit applies); for years 2007 through 2016, taxpayers are allowed the greater of the flat dollar cap or the percentage cap in place for those years; and for years prior to 2007 the flat dollar cap that was required applies.
2) Maryland – Wynne wins again: The state’s Tax Court ruled that Maryland’s 3% reduced interest rate paid only on refunds owed under the U.S. Supreme Court’s decision in the Wynne case is unconstitutional: On May 23, 2018 the Maryland Tax Court ruled that “following the exact same logic [as used by the Supreme Court], granting interest at a lower rate must also be unconstitutional.” Maryland’s normal interest rate for income tax refunds applicable for the years at issue was 13%. In anticipation of an adverse ruling from the Supreme Court in Wynne (which ultimately did come in May of 2015), in 2014 the legislature had enacted a 3% interest rate on only refunds resulting from such a decision. The Supreme Court’s holding was that Maryland’s statute disallowing credit against part of the state’s income tax for tax paid to other states was unconstitutional under a dormant Commerce Clause analysis because the tax discriminated against interstate commerce. By definition the 3% interest rate applied only to Wynne refunds and therefore only to taxpayers involved in interstate commerce, while the 13% interest rate applied to other refunds. It is expected that the State will appeal. The case is Wynne v. Comptroller of Maryland, No. 16-IN-OO-0216. This issue is near and dear to yours truly, as I formulated in the early stages of Mr. Wynne’s audit proceedings the taxpayer’s Constitutional argument that Maryland’s highest court and the U.S. Supreme Court ultimately validated. It is expected that if/when Mr. Wynne’s case is won at the completion of the appellate process, the Comptroller would pay additional interest amounts to all taxpayers who had filed claims for the additional interest (those claims are currently on hold in the Comptroller’s Office) – stay tuned, the appeals may take a while.
Separate from Mr. Wyyne’s administrative appeal discussed above, a class action suit was filed against the state for the same issue. That case is currently on appeal by the taxpayers to the Maryland Court of Special Appeals after the January 16, 2018 ruling by the Baltimore City Circuit Court that dismissed the suit because the taxpayers had not exhausted their administrative remedies, i.e. the refund claims and Tax Court petition process as Mr. Wynne had done, see above. Notably, in the dismissal order the judge included the statements: “…it would appear that the same rationale [applied by the U.S. Supreme Court in its Wynne ruling] regarding the dormant Commerce Clause of the United States Constitution would apply to the interest rate…” [page 4] and “… this court, in absence of dismissal, … would have found that applying a different rate to any interest owed to Plaintiffs would violate the dormant Commerce Clause” [page 18]. We are following that case too: Michael J. Holzheid et al v. Comptroller of Maryland et al, No. 24-C-15-005700 (Baltimore City Cir. Ct.)
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Ed BenBenbu-state-local-tax transaction-taxvirginia-bpol-tax-serviceshunt-valleySenior Director
Last updated on September 4th, 2019 at 03:41 pm