The Pennsylvania the Department of Revenue has announced that, for years before 2017, it will allow taxpayers “the greater of the flat dollar cap or the percentage cap as authorized by statute.”1 This development, in the wake of the pending U.S. Supreme Court cert. petition by Nextel, means that Pennsylvania’s only option for “backward-looking relief” under McKesson is to provide a refund to taxpayers for years before 2017.
In October 2017, the Pennsylvania Supreme Court determined that the cap on Pennsylvania’s net loss deduction violated the Uniformity Clause of the Pennsylvania Constitution because it applied only to taxpayers with income greater than $3 million. Yet, that court refused to grant a refund to Nextel. Instead, the court simply articulated a severability analysis, hypothesizing what type of net loss carryover deduction the Pennsylvania legislature would have allowed if it had followed the Uniformity Clause. The court, thus, “sever[ed]…the $3 million flat deduction” from the statute. The court then reasoned that if that if a hypothetical regime in which only the percentage cap had been enacted applied from the beginning, the corporations that had paid zero tax as a result of the flat dollar cap would have paid more – hypothetically – because they would have, instead, been subject to the lower percentage cap. Because Nextel was already subject to the percentage cap, its actual tax was the same as the tax that would have been imposed in this hypothetical scenario.