When paying corporate income tax in Pennsylvania, a corporation is permitted to carry over a net loss from the previous year to reduce the current tax year’s taxable income. However, the amount of deduction the corporation may receive—the amount of “net loss” it may carry over from the prior year—is capped at the greater of 12.5% of its current tax year income, or a flat cap of $3 million.
Nextel’s 2007 deduction from its 2006 net losses was capped at 12.5% of its 2007 income because this was greater than the $3 million flat fee cap. Nextel then brought a refund claim, and subsequently brought suit arguing that the $3 million cap that they did not use in tax year 2007 violated the Uniformity Clause in Pennsylvania Constitution, Article VIII, § 1, and—here’s where it gets tricky—that both caps on net loss deductions must be stricken because the statute was inseverable. Because the calculation they did not use was unconstitutional, the entire statute had to be stricken.
Majority by Todd: The flat cap on carryover funds violates the Uniformity Clause, but is severable from the rest of the statute
The Court agreed with the first, but not the second of Nextel’s arguments, and so Nextel wins, but really loses. Justice Todd’s majority opinion comprehensively considers the Uniformity Clause, discussing its background as a popularly-demanded addition to the “Reform Constitution” of 1874, a reaction to the abusive political power of railroads which allowed them to maneuver the General Assembly to exempt the railroads and their allies from taxes, and incrementally placing larger taxing burdens on the rest of the population to make up for the shortfall.
The Uniformity Clause, which comes into the modern 1968 Constitution unchanged, requires “substantial uniformity, which means as nearly uniform as practicable in view of the instrumentalities with which and subjects upon which tax laws operate.”
Todd wrote that Nextel’s “as-applied” argument against the flat cap is strong because of the numbers: 98.8% of all companies were exempt under the $3 million flat cap, while Nextel and a small handful of other corporate taxpayers were “required to shoulder the entire corporate net income tax burden” because of their greater income. In this respect, Nextel bears a larger burden of the corporate taxation burden in the Commonwealth than other companies. The Court found, therefore, that the tax statute “has created disparate tax obligations between these two classes of similarly situated taxpayers based solely on the value of the property involved.” This disparate treatment violates the Uniformity Clause, and the flat cap must be stricken.
However, the Court did not agree that the statute was inseverable. Severability is the doctrine that determines when a statute may be left standing even without a portion of the statute stricken as unconstitutional. In other words, if a statute says you may not drive red, blue or green cars on the highway, and the Court finds that the prohibition of red cars is unconstitutional, must the whole statute be stricken, or are blue and green cars still prohibited?
Noting the general policy of Pennsylvania that all statutes are severable, codified by 1 Pa.C.S. § 1925, the Court explored two statutory exceptions to severability, which can both be phrased simply: where the legislature would not have passed the remaining statute in its remaining form, or where the statute simply doesn’t make sense without the stricken provision, the whole statute must fail.
Here, there was no reason to think the two legislative goals served by the corporate “net loss” taxation construct were completely defeated by striking one version of measure. Because the percentage cap was valid, and would likely have been passed by the legislature even if they had known the “flat cap” would be stricken down.
Concurrence by Baer: Nextel’s Challenge should be viewed as both Facial and As-Applied
Justice Baer’s concurrence, joined by Justices Donohue and Wecht, argues that Nextel’s challenge should have been considered as both an “as-applied” challenge to the statute (which is how Nextel characterized the lawsuit), and a “facial” challenge to the validity of the statute (which Nextel disavowed). “[Nextel’s] challenge necessarily implicates the facial validity” of the statute, and the Court should have considered these implications in its majority opinion. “I write separately to clarify that, in my view, our holding declares the NLC unconstitutional on its face.”
Justice Baer appears to be correct that the majority opinion treats the statute as stricken as to all parties, not just Nextel.
Conclusion: Assorted Thoughts
A few scattered notes on this case.
First, the majority notes that Pennsylvania was the first state to include a uniform taxation requirement in its constitution. Thus, Pennsylvania’s continued grappling with this provision provides some guidance for other courts on this issue, and for other states considering adopting such a provision.
Second, although the reasons for the delay are not totally clear, this case is being adjudicated ten years after the tax year in question.
Third, the opinion doesn’t discuss Nextel’s standing, or the lack thereof. Nextel sued over a provision that didn’t apply to it in an attempt to strike down the provision that did apply. Another way of dealing with this case might have been to say that Nextel could not prove the whole statute was unconstitutional, and to decline to reach the merits of the issue of flat tax provisions. Alternatively, the Court may have considered that Nextel was burdened by the dichotomy, and that the lighter tax burden of other companies was harming Nextel directly. Regardless, this issue wasn’t discussed.
Finally, Nextel raises an interesting argument that the Court’s refusal to knock down the whole statute disincentivizes others to challenge tax statutes under the constitutional provision. This argument was rejected by the Court—obviously, they can’t just give you a better judgment than the law requires to “incentivize” lawsuits. But the argument offers a practical insight into a major hurdle to Uniformity Clause legislation—who wants to pay to bring these suits? Most individual taxpayers don’t stand to gain enough, and companies under the $3 million threshold certainly wouldn’t bring one. That leaves it to companies like Nextel or major casinos to take up the fight—and if they don’t think it benefits their bottom line, we may be stuck with unconstitutional taxes.Read More