Nextel Commc'ns of the Mid-Atl., Inc. v. Commonwealth

• Citation: 171 A.3d 682
• Decision Date: 18 October 2017
• Docket Number: No. 6 EAP 2016,6 EAP 2016
• Parties: NEXTEL COMMUNICATIONS OF the MID–ATLANTIC, INC., Appellee v. COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Appellant
• Court: Pennsylvania Supreme Court

171 A.3d 682

NEXTEL COMMUNICATIONS OF the MID–ATLANTIC, INC., Appellee

v.COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Appellant

No. 6 EAP 2016

Supreme Court of Pennsylvania.

ARGUED: April 5, 2017

DECIDED: October 18, 2017

Bruce Lee Castor Jr, Esq., John Bartley Delone, Esq., John G. Knorr III, Esq., Neil Patrick McConnell, Esq., Carol L. Weitzel, Esq., PA Office of Attorney General, for Appellant.

Rodney A. Corey, Esq., James Guthrie Mann, Esq., for Appellant Amicus Curiae.

Paul Evan Melniczak, Esq., Kyle Oliver Sollie, Esq., Reed Smith LLP, for Appellee.

Thomas Allan Bowen, Esq., Tamara Lynn Fox, Esq., Stevens & Lee, Kathy Lee Pape, Esq., David J. Shipley, Esq., McCarter & English, LLP, Randy Lee Varner, Esq., for Appellee Amicus Curiae.

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

OPINION

JUSTICE TODD

In this direct appeal, we are called upon to determine whether the "net loss carryover" provision of the Pennsylvania Revenue Code for tax year 2007 ("NLC")¹ —which restricted the amount of loss a corporation could carry over from prior years as a deduction against its 2007 taxable income to whichever is greater, 12.5% of the corporation's 2007 taxable income or $3 million—violates Article 8, Section 1 of the Pennsylvania Constitution ("the Uniformity Clause").² We affirm the Commonwealth Court's holding that the NLC, as applied to Appellee, Nextel Communications ("Nextel"), violates the Uniformity Clause. However, we also find that the portion of the NLC which creates the violation—the $3 million flat deduction—may be severed from the remainder of the statute, while still enabling the statute to operate as the legislature intended. Thus, we reverse the order of the Commonwealth Court eliminating any caps on net loss deductions for tax year 2007; and, correspondingly, we reverse its direction to Appellant, the Pennsylvania Department of Revenue ("Department"), to refund $3,938,220 to Nextel, which was the amount of its 2007 net income tax payment to the Commonwealth.

I. Procedural History

Nextel, which is incorporated in the state of Delaware, is a provider of various mobile telecommunication services. In 2007, Nextel earned $45,053,282 in taxable income on its business activities in the Commonwealth. Under the NLC, Nextel was entitled to deduct from its 2007 taxable income the net losses it sustained in prior tax years in the amount of $3 million or 12.5% of its 2007 taxable income, whichever total was greater. In 2007, Nextel had a cumulative net loss dating from the tax year 1997 of $150,636,792.³ Because 12.5% of Nextel's 2007 taxable income amounted to $5,631,660, and, hence, was greater than $3 million, Nextel claimed the 12.5% amount as a net loss deduction, thereby reducing its taxable income for 2007 to $39,421,622. Under the corporate net income tax rate of 9.9%,⁴ Nextel's total tax liability to the Commonwealth on this adjusted income was $3,938,220, which Nextel paid to the Department.

Thereafter, Nextel filed a refund claim with the Department's Board of Appeals for the full amount of its 2007 tax payment, claiming, inter alia, that the NLC violated the Uniformity Clause of the Pennsylvania Constitution by capping the amount of its prior net loss that it could carry over into tax year 2007 at 12.5% of its taxable income. This claim was denied by the Board on the basis that it did not have the legal authority to address a constitutional challenge. Nextel then petitioned the Board of Finance and Revenue, again claiming its entitlement to a refund and asserting the right to carry over all prior net losses for use as a deduction without limitation.⁵ The Board of Finance and Revenue denied the petition and rejected Nextel's constitutional argument, noting that it was not empowered to pass on questions of a taxing statute's validity under our constitution, but, rather, could only apply the law as it was written.

Nextel appealed to the Commonwealth Court, which, in a split en banc published decision, reversed the decision of the Board of Finance and Revenue.⁶ Nextel Communications of the Mid–Atlantic, Inc., v. Commonwealth of Pennsylvania, Department of Revenue, 129 A.3d 1 (Pa. Cmwlth. 2015). The majority first rejected the Department's argument that, because all corporations were subject to the same statutory rate of 9.9% on their taxable income, there was no Uniformity Clause violation. The majority noted that it is the effect of the application of the particular formula or method used to calculate a tax which determines whether a Uniformity Clause violation occurs.

In considering the effect of the NLC on various corporations' taxable income, the majority determined that, as written, it allowed some corporate taxpayers—those with income of $3 million or less—to reduce their tax liability to zero in the tax year 2007, if they had prior net operating losses of $3 million or more. By contrast, it imposed tax liability on other corporations with income in excess of $3 million and prior net operating losses which equaled or exceeded their taxable income, because those corporations' net loss deduction was capped (at the greater of $3 million or 12.5% of their taxable income).

The majority next examined whether the NLC's application to corporate taxpayers on the basis of taxable income was reasonable, and rationally related to a legitimate state purpose. The majority observed that our Court had previously held, in In re Cope's Estate, 191 Pa. 1, 43 A. 79 (1899) (invalidating an inheritance tax provision that exempted estates worth $5,000 or less from paying that tax), that a tax rate based on the monetary value of the property taxed, which has the effect of causing different groups of taxpayers from the same class to bear unequal burdens of taxation, or which exempts some taxpayers in the class from paying any tax at all, offends the Uniformity Clause. The majority reasoned that, because the NLC was structured to assess a corporation's tax liability on the basis of the value of a corporation's taxable income, in operation, the NLC enabled the majority of corporations with taxable income (98.8%) to avoid paying any taxes at all in 2007; but, because of the limitation on the amount of net loss carryover which a corporation was permitted to deduct, it forced a minority of those taxpayers (1.2%) to incur tax liability.⁷ The majority concluded that, because this disparate tax treatment was "based solely on asset value," the NLC was the same type of taxing statute our Court held to be forbidden under the Uniformity Clause in Cope's Estate, and was likewise unconstitutional. Nextel, 129 A.3d at 11.

The majority was unpersuaded by the Department's argument that the General Assembly was justified in limiting the amount of loss from a prior tax year which a corporation could carry over because of budgetary concerns that an unlimited deduction would result in too much lost revenue. The majority acknowledged the General Assembly's right to limit such deductions, but viewed this right as constrained by the fundamental requirement that any such limitation comport with the Pennsylvania Constitution, and, thus, in the majority's view, this concern could not excuse the NLC's violation of the Uniformity Clause.

Having determined that the NLC was unconstitutional, the majority next turned to the issue of the appropriate remedy. The majority refused to strike the NLC in its entirety from the Revenue Code as suggested by the Department, reasoning that Nextel had not made a facial challenge to the constitutionality of the NLC, nor, in reaching its decision, had the court found the NLC to be facially unconstitutional. Instead, the majority noted that Nextel had claimed only that the NLC was unconstitutional as applied to it for the 2007 tax year, and, thus, the majority concluded that the appropriate relief should be limited to remedying the improper application of the NLC to Nextel's taxable income for that tax year.

Observing that the Uniformity Clause and the Equal Protection Clause of the United States Constitution have generally been analyzed in the same fashion, the majority found guidance from cases in which a taxpayer successfully established that a state engaged in discriminatory enforcement of its taxing laws, resulting in the taxpayer paying more than other similarly situated taxpayers, and, as a remedy, the taxpayer was afforded relief from the improperly assessed additional tax liability. See Nextel, 129 A.3d at 12–13 (citing Commonwealth v. Molycorp, 481 Pa. 208, 392 A.2d 321 (1978) (after successful challenge by corporation under the Uniformity Clause to the Department's selective imposition of tax penalties for underpayment of corporate taxes against one group of corporate taxpayers, our Court determined that the proper remedy was to reverse the Department's assessment of a penalty against the corporation); Iowa–Des Moines National Bank v. Bennett, 284 U.S. 239, 52 S.Ct. 133, 76 L.Ed. 265 (1931) (bank which was successful in its equal protection challenge to county taxing authority's assessment of taxes on it at a higher rate than its competitors was entitled to a refund of the extra taxes it had paid, and it was not a sufficient remedy to require the bank to seek to compel the collection of additional taxes against its competitors, or to wait for the taxing authority to collect the additional taxes of its own volition); Tredyffrin–Easttown School District v. Valley Forge Music Fair, Inc., 156 Pa.Cmwlth. 178, 627 A.2d 814 (1993) (business that successfully challenged enforcement of amusement tax ordinance which resulted in it paying more in taxes than other similarly situated businesses was entitled to a refund of the excess taxes it paid)).

The majority reasoned that, like the taxpayers in those cases, Nextel established that it was subject to unequal treatment vis-a-vis other corporate taxpayers and was entitled to a similar remedy. While acknowledging that it could strike the flat $3 million deduction...