United States: Pennsylvania Tax Developments - July 2015

This is a brief update on recent Pennsylvania tax developments. For more information, contact one of the authors or the Reed Smith attorney with whom you usually work.

Amended Return "Trap"—Court Holds That Amended Return Was Not a Petition for Refund; Possible Legislative Fix?

On June 9, the Commonwealth Court issued a decision holding that the taxpayer's amended return did not qualify as a "petition for refund" and, therefore, the taxpayer did not timely request a refund of overpaid taxes.1

Under Pennsylvania law, a petition for refund of corporate tax must be filed within three years after payment of the tax.2 In this case, it was undisputed that the taxpayer filed an amended return claiming a refund before the expiration of that three-year period, and then the taxpayer filed a petition for refund (on the Department of Revenue's petition form) after the expiration of that period.

The taxpayer argued that its amended return "should be treated as a timely filed petition for refund" because it "contained substantial information required for a petition for refund."3 For the court, however, "substantial" was not enough.4 The statute and regulations specify the requirements for a "petition for refund," and because the taxpayer's amended return was missing some of the required information, the court concluded that the taxpayer's amended return was not a petition for refund.5 Because the taxpayer didn't file a "complete" petition for refund (following the Department's regulations) until after three years of payment of the tax,6 the court held that the taxpayer was statutorily barred from obtaining a refund.7 The court did not address the fact that the Department's own regulations give the taxpayer an opportunity to cure any deficiency in the form of a filing.

On July 6, the taxpayer filed exceptions to the Commonwealth Court's decision.

Meanwhile, legislation is pending in the General Assembly—HB 1198—that seeks to fix the problem that led to the situation that was before the court in this case. According to a memo published by the primary sponsor of HB 1198, the "Department of Revenue's current policy is a trap for the unwary ... result[ing] in a loss of appeal and refund rights." This bill would generally require the Department to review an amended return and issue a written decision within one year of filing, and a taxpayer who disagrees with the Department's decision would then have 90 days to file an appeal with the Board of Appeals.8 (As of the date of this publication, HB 1198 had been passed by the House and was currently pending in the Senate.)

Finally, litigation is pending in the Commonwealth Court regarding whether a refund petition must be filed by the third anniversary of the original due date of a tax return, or the third anniversary of when the return was filed on extension.9 Reed Smith represents the taxpayer in that matter. Briefing is expected to be complete this summer and argument is scheduled for the fall.

Pa. Supreme Court to Decide if Localities May Tax Rental Income

On April 8, the Pennsylvania Supreme Court agreed to hear Lower Merion Township's appeal in Fish, et al. v. Township of Lower Merion, 100 A.3d 746 (Commw. Ct. 2014), in which the Commonwealth Court held that the Township was statutorily prohibited from imposing its business privilege tax on gross receipts from leases or rentals.

The Township's tax is authorized by state law,10 which excludes from that authority the power to impose tax on "leases or lease transactions."11 The Commonwealth Court held that the state law's exclusion for "leases or lease transactions" means that the Township may not impose its tax on receipts from rental property. According to the Commonwealth Court, the prior case law is clear that the state law exclusion "must be interpreted in a manner 'that most restricts the taxing authority—that is, the broadest interpretation of the lease exception; an unqualified prohibition on the taxation of leases.'"12

The Township requested review by the Pennsylvania Supreme Court, the Supreme Court agreed, and briefing is now complete. The Township, in its main brief filed with the Supreme Court in May, is making the same primary argument that it made to the Commonwealth Court—that is, the state law prohibits only direct transactional taxes on leases, but it does not prohibit privilege taxes on the business of being a lessor.13

Any taxpayer that earns revenue from leases or rentals of any property (real or personal) and pays local tax in Pennsylvania (not including Philadelphia taxes) should consider filing refund claims to preserve its rights pending the outcome of this litigation.

Pa. Counties File Suit Against Telecom Companies for Alleged Underreporting of "e911 Fees"

Both Delaware County and Allegheny County filed lawsuits alleging that 19 telecommunications providers underreported the amount of e911 fees owed to the respective county. The counties are alleging that, because of technological improvements, the telecommunications providers were able to provide multiple calls per line and, as a result, did not pay sufficient e911 fees. The counties also don't appear to distinguish between lines that cannot make outgoing calls and those that can.

While it is certainly true that technology has changed and advanced, it is unclear whether the law in each county can support such a claim. But still, the counties are alleging more than $200 million in damages.

Suits raising similar arguments are being filed around the country (often through third-party investigators, like this one or via a qui tam action), and these Pennsylvania counties are just some of the latest jurisdictions to join the trend. Generally, the information cited in support of the claims appears sparse, at best, from the face of the complaints. It also remains unclear whether the counties have appropriate standing to bring the claims at all, and whether "lumping" these different companies together is factually supportable or appropriate.

E911 Fee Increase

On June 30, Governor Wolf signed House Bill 911 into law (as Act 12). The law set a new uniform fee at $1.65 a month per device. The Pennsylvania Emergency Management Agency estimates the $1.65 fee will generate $314 million a year, up from the approximately $190 million generated last year. The new law also now specifically addresses the e911 fee for outbound voice-over-Internet lines.

Governor Wolf's Budget Proposal—Will Anything Pass?

Three weeks after the deadline, and still no budget. As discussed in our previous quarterly update, Governor Wolf presented a budget proposal that included numerous, significant, tax proposals. Wolf's tax proposals included:14

  • Mandatory combined reporting
  • Reduced NOL cap
  • Reduced corporate net income tax rate
  • Expanded sales and use tax base
  • Increased sales and use tax rate
  • Severance tax on natural gas drilling
  • Increased personal income tax rate
  • Increased bank shares tax rate
  • Property tax reform

However, on June 1, Governor Wolf's tax reform package as a whole was unanimously defeated on the House floor (193-0). This vote made it clear that the governor's tax proposals (and budget) will not survive without changes. Similarly, on July 1, Governor Wolf vetoed the Republican Caucus's budget proposal, which included no new taxes. Suffice it to say, this left Governor Wolf and the Republican Caucus with no budget and a need to compromise. Yet, while Governor Wolf and Republican leaders continue to meet to discuss the budget, their competing tax proposals have created a stalemate.

For example, while the enactment of a severance tax is at the forefront of the heated debate, and both parties introduced proposals on the issue, the recent rhetoric would suggest there is little room for compromise. Likewise, both parties presented property tax reform proposals (in addition to Governor Wolf's own proposal). The big sticking point with property tax reform remains what other taxes would be increased to offset the loss of major revenue from property taxes. We expect to see more movement on tax reform proposals over the next few weeks as the legislature moves toward a much-needed budget.

The Latest in Pennsylvania Tax Controversy:

Pending Cases to Watch:

  • NOL Litigation – Oral argument is tentatively scheduled for this fall on whether Pennsylvania's cap on net operating loss deductions is unconstitutional.
  • Refund on Extended Return Filing – As mentioned above, briefing is underway on the issue of whether a refund claim is due within three years from the return filing date or three years from the original return due date. We expect argument to be scheduled for the fall.

Settlements to Note:

  • Costs of Performance – After months of uncertainty regarding whether the case would proceed to litigation, the lead sales-factor-sourcing case reached a resolution with a favorable settlement for the taxpayer, who had been asserting the right to use a sourcing method for its receipts based on the location of its costs of performance, rather than on the market-based-sourcing approach being advocated by the Commonwealth.
  • Affiliate Nexus – Another affiliate nexus case settled favorably for an online retailer whose affiliates maintained retail locations in the state where customers could return online purchases.

Interesting Board of Finance & Revenue Decision:

  • Untimely Audit Assessment – The Board disagreed with the Department and found an audit assessment untimely, even though the Department argued that the auditor general approved the assessment within the time frame.

More Things You Should Know:

  • New Acting Chief Counsel. On May 6, Gretchen Wisehart resigned as Chief Counsel at the Department of Revenue. Jeff Snavely is now Acting Chief Counsel for Revenue.
  • Secretary of Revenue Confirmed. On June 10, the legislature confirmed Eileen McNulty as Secretary of Revenue.
  • Board of Finance and Revenue Regulations. On May 16, the Board posted draft regulations for Board procedure. On July 16, the Independent Regulatory Revenue Commission released its comments. In addition, the Board received several comments from the public during the public comment period. The Board must now respond to all comments from the IRRC and the public before proposing the final-form regulation to the IRRC.
  • Market-Sourcing Regulations. The Department of Revenue is currently drafting market-sourcing regulations; however, we would not expect a formal publication in the immediate future.


1. Quest Diagnostics Venture LLC v. Commonwealth, 782 F.R. 2012

2. 72 P.S. § 10003.1(a).

3. Quest Diagnostics Venture, at p. 6.

4. 72 P.S. § 9703; 61 Pa. Code § 7.14. See also 61 Pa. Code § 151.14 (discussing amended returns).

5. Quest Diagnostics Venture, at p. 7.

6. The parties in Quest stipulated that the payment of tax occurred April 15, 2008.

7. Quest also argued that (i) the Department's regulations were invalid, (ii) equitable principles should preclude the Department from raising the issue of timeliness of the claim, and (iii) the Taxpayers' Bill of Rights should preclude the Department from denying the timeliness of the claim. The court rejected these arguments as well. Id. at p. 9-14.

8. HB 1198 would establish different appeal procedures for specific situations. For example, if a taxpayer files an amended return in lieu of a petition for reassessment and the taxpayer disagrees with the Department's action, the taxpayer may pay the assessed deficiency and file a petition for refund in accordance with 72 P.S. § 10003.1.

9. Mission Funding Alpha v. Commonwealth, 313 F.R. 2012.

10. 53 P.S. § 6924.301.1

11. The state law at issue applies to most local jurisdictions (including Pittsburgh, but excluding Philadelphia).

12. Fish, 100 A.3d at 751.

13. Brief of Appellant, Fish, et al. v. Township of Lower Merion, 29 MAP 2015 (filed May 20, 2015).

14. The House and Senate have held hearings on increasing the personal income tax rate, increasing the sales tax rate and base, imposing a severance tax, and combined reporting.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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