Gen. Motors Corp. v. Commonwealth

• Decision Date: 22 December 2021
• Docket Number: No. 12 MAP 2020,12 MAP 2020
• Citation: 265 A.3d 353
• Parties: GENERAL MOTORS CORPORATION, Appellee v. COMMONWEALTH of Pennsylvania, Appellant
• Court: Pennsylvania Supreme Court

265 A.3d 353

GENERAL MOTORS CORPORATION, Appellee

v.COMMONWEALTH of Pennsylvania, Appellant

No. 12 MAP 2020

Supreme Court of Pennsylvania.

Argued: March 10, 2021

Decided: December 22, 2021

John Bartley Delone, Esq., Neil Patrick McConnell, Esq., Joshua D. Shapiro, Esq., Pennsylvania Office of Attorney General, Karen Marie Gard, Esq., Christopher Mauk Kazmaier, Esq., for Appellant.

Kenneth Levine, Esq., Kyle Oliver Sollie, Esq., Reed Smith LLP, Yoni Fix, Esq., for Appellee.

Alice L. Stewart, Esq., Pitt law Legal Clinics, for Amici Curiae Alice L. Stewart and University of Pittsburgh School of Law Low-Income Taxpayer Clinic.

BAER, C.J., SAYLOR, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

OPINION

CHIEF JUSTICE BAER

Pennsylvania's Tax Reform Code of 1971 ("Tax Code"), as amended, permits corporate taxpayers to deduct losses suffered in prior years from the current year's taxable income to reduce their tax liability. The General Assembly in the years since 1991 has placed various caps on the so-called "net loss carryover," ("NLC") that a corporate taxpayer can deduct each year. In recent years, corporate taxpayers have challenged the caps as creating unequal tax burdens on classes of taxpayers based upon the quantity of their income in violation of the Uniformity Clause of the Pennsylvania Constitution, Article VIII, Section 1.¹

In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Department of Revenue , 642 Pa. 729, 171 A.3d 682 (2017), this Court held that the NLC deduction applicable to corporate income tax for the tax year ending December 31, 2007 ("2007 Tax Year"), discussed infra, violated the Uniformity Clause. In the case at bar, we apply Nextel and consider General Motors Corporation's ("GM's") constitutional challenges to the NLC provisions applicable to corporate income tax in the tax year ending December 31, 2001 ("2001 Tax Year").

As explained below, we agree with the Commonwealth Court that Nextel applies retroactively to the case before us; however, we reverse the Commonwealth Court to the extent it remedied the violation of the Uniformity Clause by severing the $2 million NLC deduction cap, which would result in an unlimited NLC deduction; for the reasons set forth below, we instead sever the NLC deduction provision in its entirety, which will result in no NLC deduction for the 2001 Tax Year. We, nevertheless, affirm the Commonwealth Court's order to the extent it directs the Department to recalculate GM's corporate income tax without capping the NLC deduction and issue a refund for the 2001 Tax Year, which we conclude is required to remedy the due process violation of GM's rights pursuant to McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Department of Business Regulation of Florida , 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990).

I. Factual Background

GM is a Delaware corporation engaged in the sale of motor vehicles in Pennsylvania and subject to Pennsylvania's corporate income tax.² In the case at bar, GM is contesting the calculation of its 2001 Tax Year corporate income tax, after filing a report of change in its federal taxable income in March 2010. GM asserted that it had $9,394,999.00 in taxable income apportioned to Pennsylvania for 2001 and $202,276,343.00 in available net losses that had accumulated since 1995 and could be applied to the 2001 Tax Year. Under the applicable provisions of the Tax Code, 72 P.S. § 7401(3) 4.(c)(1)(A)(I), GM could deduct net losses only up to a $2 million cap, resulting in $7,394,999.00 of taxable income.³ After applying the 9.99 percent corporate tax rate to its taxable income, GM computed and paid $738,760.00 in 2001 Tax Year corporate income taxes. See 72 P.S. § 7402(b) (setting the "annual rate of tax on corporate net income" at 9.99 percent). Had it not been subject to the $2 million statutory NLC deduction cap, it could have deducted losses equal to its income and thereby reduced its corporate income tax liability to zero.

In February 2012, GM timely filed a petition for refund with the Department of Revenue's ("Department") Board of Appeals. It claimed, inter alia , that the cap on the NLC resulted in a "progressive effective tax rate" which violated the Uniformity Clause. It explained that "a taxpayer conducting business on a larger scale in Pennsylvania pays a higher effective tax rate than a similarly situated taxpayer conducting business on a smaller scale." Petition for Refund (attached rider). GM contended that the $2 million cap violates the Uniformity Clause by imposing a 9.99 percent tax on corporate defendants with greater income while smaller corporations with less than $2 million in taxable income can utilize an unlimited NLC deduction, and potentially reduce their tax liabilities to zero, as would have occurred if GM had been able to utilize all its available NLC.

The Board of Appeals denied relief to GM because it does not have authority to declare statutory provisions unconstitutional. GM appealed to the Board of Finance and Review on June 26, 2012, which sustained the decision of the Board of Appeals, observing that it also did not have authority to adjudicate the constitutionality of the statute. GM then filed a Petition for Review in Commonwealth Court in December 2012, reasserting its arguments challenging the constitutionality of the flat $2 million cap on the NLC deduction. The Commonwealth Court initially held this case pending completion of the litigation in Nextel , which raised similar challenges to the subparagraph of Section 7401(3) 4.(c)(1)(A) relevant to the 2007 Tax Year. As the instant case involves the application of this Court's recent decision in Nextel , we turn first to that case.

II. Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Department of Revenue , 642 Pa. 729, 171 A.3d 682 (2017)

Nextel Communications of the Mid-Atlantic, Inc. ("Nextel") challenged the subparagraph of Section 7401, set forth supra at note 3, applicable to the 2007 Tax Year. Unlike the 2001 Tax Year provisions applicable to GM, which included only a flat $2 million cap, the 2007 Tax Year provisions challenged by Nextel limited the potential NLC deduction to the "greater of twelve and one-half per cent of taxable income ... or three million dollars." 72 P.S. § 7401(3) 4.(c)(1)(A)(II). Under this statute, the majority (98.8 percent) of corporations, specifically those with $3 million or less in taxable income, could "reduce their tax liability to zero in the 2007 Tax Year, if they had prior net operating losses of $3 million or more." Nextel , 171 A.3d at 686-87. In contrast, the few corporations (1.2 percent) with income in excess of $3 million could not reduce their tax liability to zero even if their carryover losses exceeded their income for the 2007 Tax Year because the NLC deduction was capped at the greater of $3 million or 12.5 percent of their taxable income. Id. at 687. Nextel asserted that the 2007 Tax Year NLC deduction cap provision violated Pennsylvania's Uniformity Clause in that it imposed "tax classifications between corporations based on the quantity of their property," in violation of our prior caselaw invalidating "dollar-value thresholds for exemptions and deductions." Id. at 693, 692.

In addressing Nextel's argument, this Court provided a thorough and erudite history of the Uniformity Clause, which we reference but do not reproduce here. Id. at 694-698. It emphasized that the "paramount tenant" of the Uniformity Clause is that the "burden should be borne equally by all those who are obligated to pay a tax." Id. at 697. Where a classification is made between groups of taxpayers, "the standard to be used in determining whether the law violates the Uniformity Clause is whether the classification is based upon some legitimate distinction between the classes that provides a non-arbitrary, reasonable, and just basis for the disparate treatment." Id. at 696 (internal quotation marks and citation omitted). Critical to our ultimate holding in Nextel , we opined that "classifications based solely upon the quantity or value of the property being taxed are arbitrary and unreasonable, and hence, forbidden." Id. at 696.

In support of this statement, the opinion identified In re Cope's Estate , 191 Pa. 1, 43 A. 79 (1899) in which this Court deemed unconstitutional a provision that exempted all estates valued at $5,000 or less from inheritance tax. Similarly, we highlighted Kelley v. Kalodner , 320 Pa. 180, 181 A. 598 (1935), in which this Court found the Uniformity Clause violated by a statute that, inter alia, provided a flat deduction from taxable income, specifically $1,000 for single taxpayers, $1,500 for married taxpayers, and $400 for each dependent under eighteen. Nextel , 171 A.3d at 697. Likewise, the Court cited to our prior rejection in Saulsbury v. Bethlehem Steel Co ., 413 Pa. 316, 196 A.2d 664 (1964), of a $10 occupational privilege tax imposed solely on taxpayers earning in excess of $600. Nextel , 171 A.3d at 697-98.

We additionally looked to Amidon v. Kane , 444 Pa. 38, 279 A.2d 53, 60 (1971), where this Court found a Uniformity Clause violation despite the utilization of a flat 3.5 percent tax rate. In that case, the personal income tax was calculated by applying the flat tax rate to the taxpayer's net personal income as reported on their federal tax return. The Court in Amidon deemed this unconstitutional due to the personal exemptions used to calculate each taxpayer's federal taxable income, which resulted in a lack of uniformity, similar to the overt exemptions in Kelley and Saulsbury .

In addition to relying upon long-standing caselaw, we also looked to our then recent decision in Mount Airy # 1, LLC v. Pennsylvania Department of Revenue , 638 Pa. 140, 154 A.3d 268 (2016), addressing a challenge to municipal taxation of casinos outside of Philadelphia. In relevant part, the statute at issue in Mount Airy "resulted in casinos with less than $500 million in gross revenues paying...