Reed Smith Client Alerts

Taxpayers that have paid tax because of Pennsylvania's now-invalid dollar-based NOL cap should evaluate whether their refund rights are preserved in light of the Commonwealth Court’s November 2019 ruling that refunds must be paid to remedy the discrimination caused by the NOL cap. For calendar-year taxpayers, the deadline to file a refund claim for the 2016 tax year is coming up on April 15. This alert provides a quick and easy way to file a claim on this issue.

In 2017, in the Nextel case, the Pennsylvania Supreme Court invalidated Pennsylvania's dollar-based NOL cap because it created two classes of "similarly situated taxpayers solely on the basis of their income" in violation of the Uniformity Clause of the state constitution.1 However, the Court did not provide any remedy to Nextel and did not address the question of whether federal due process - including the U.S. Supreme Court’s decision in McKesson2 - requires backward-looking relief to remedy the discrimination caused by the unconstitutional cap. There is ongoing litigation involving these remedy issues.

In November 2019, the Commonwealth Court ruled in favor of the taxpayer in the lead case on these remedy issues, and held that the tax must be recomputed without any cap on the NOL deduction and that "a full refund" is required under McKesson "to satisfy due process and provide ... a meaningful remedy for unlawful tax collection."3 In February 2020, the state filed an appeal to the Pennsylvania Supreme Court. Reed Smith represents the taxpayer in this case.