United States: PA Supreme Court Declares Portion Of Slot Machine Tax Unconstitutional; Provides Possible Preview Of Pending NOL Cap Case

The Pennsylvania Supreme Court finds municipal share assessment unconstitutional. The Court held that the municipal share assessment, imposed on slot machine revenue, is a non-uniform progressive rate structure that violates the Uniformity Clause of Pennsylvania's Constitution. This decision suggests that the Court may also find that Pennsylvania's corporate net income tax NOL cap presents a uniformity violation when it considers the pending appeal in Nextel.

Yesterday, in a 4-2 decision, the Pennsylvania Supreme Court issued a decision in Mount Airy #1, LLC v. Department of Revenue holding that the so-called "municipal local share assessment"―a portion of the tax on slot machine "gross terminal revenue"―violates the Uniformity Clause of the Pennsylvania Constitution, and severed the unconstitutional provision from Pennsylvania's Gaming Act.1 This puts the Court in prime position to decide whether Pennsylvania's corporate net income tax NOL cap similarly violates the Uniformity Clause. The lead NOL cap case, Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, is still pending before the Court. Reed Smith is representing the taxpayer in that case (see our November 23, 2015 Alert for more about the lower court's NOL cap decision).

The Mount Airy case involved the county and municipal share assessments imposed by Pennsylvania on slot machine licensees located outside the City of Philadelphia.2 The municipal share assessment for those casinos is the greater of $10 million or 2% of gross terminal revenue ("GTR") from the licensees' slot machines.3 As the Court noted, this revenue-based classification "essentially created a variable-rate tax, fashioning one rate for non-Philadelphia casinos with GTR below $500 million, and another for non-Philadelphia casinos with GTR greater than $500 million."

The Court found this revenue-based classification impermissible because it results in "grossly unequal local share assessments upon similarly situated slot machine licensees." As such, the Court found this "non-uniform," progressive rate structure unconstitutional.

With respect to the remedy, the majority held that the local share assessment provisions (both county and municipal) could be severed from the Gaming Act and granted declaratory relief. The Court did, however, stay its decision for 120 days due to the impact on counties and municipalities, whose budgets include anticipated revenue from these slot machine assessments. The 120 days is intended to give the legislature "an opportunity to evaluate potential remedial measures."

The Court's decision in Mount Airy is consistent with Nextel's claim that the cap on the deductibility of NOLs in the corporate net income tax statute violates the Uniformity Clause of the Pennsylvania Constitution. Like the $10 million threshold in Mount Airy, the $3 million NOL cap classifies taxpayers based on the amount of their income, which the Mount Airy Court determined was impermissible. The Nextel case is pending before the Court and argument may be scheduled this coming winter or spring.

If you paid corporate net income tax because your NOL deduction was limited by the cap, you should consider filing protective refund claims pending the outcome of Nextel. Our view (and the view of the Commonwealth Court) is that the 2012 tax year is likely still open for a refund claim because the deadline is the third-anniversary of when the 2012 return was filed on extension. There is also ongoing litigation on this issue, and Reed Smith is also representing the taxpayer in that case, Mission Funding Alpha v. Commonwealth.4 The Commonwealth Court ruled in favor of the taxpayer in that case, and the state has appealed to the Pennsylvania Supreme Court. The state's position is that the deadline is three years from the original due date, April 15. Regardless, it is important to emphasize that, even under the lower court's decision in Mission Funding, the deadline to file a claim for 2012 could be coming up in the next few weeks.

With respect to refund claims on the NOL issue, it is important to point out a procedural difference between those refund claims and the Mount Airy case. The Court in Mount Airy did not grant the taxpayer's request for monetary damages. In a footnote, the Court noted that a violation of the Pennsylvania Constitution does not provide a direct right to damages. It is important to note that the taxpayer in Mount Airy did not pursue its claim through the statutory process for seeking a tax refund. If the taxpayer had been seeking a refund pursuant to a timely filed claim under the statutory refund process, it seems unlikely that the Court would have denied the taxpayer a refund for the payment of the unconstitutional local share assessment. Thus, the Court's denial of monetary damages in Mount Airy should not preclude the granting of corporate net income tax refunds to Nextel and other taxpayers that have filed timely refund claims on the NOL cap issue.

If you have questions about the Mount Airy decision or its potential impact on your company's pending tax refund claims, please contact one of the authors of this Alert or the Reed Smith attorney with whom you usually work. For more information on Reed Smith's Pennsylvania tax practice, visit http://www.reedsmith.com/patax/.


1. Mount Airy #1 v. Pa. Dept. of Rev., 34 EM 2015 (September 28, 2016).

2. Conversely, Philadelphia casinos, pay only a local assessment, which is a fixed 4% of slot machine revenue.

3. 4 P.S. § 1101, et seq. This is in addition to the 34% tax on all slot machine revenue. § 1403(b).

4. For more information on the Mission Funding Alpha case, see our December 11, 2015 alert.

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

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