United States: Who's Blowing Up Pennsylvania's "Marketplace Seller" Law And The Nextel NOL Fix?

A group of fireworks retailers have brought a constitutional challenge to Pennsylvania's Act 43 of 2017. The retailers are specifically challenging provisions of Act 43 dealing with Pennsylvania's regulation of fireworks sales. If the retailers are successful, it could result in the invalidation of the whole of Act 43, which included a number of important Pennsylvania tax changes. This makes this suit an important one for Pennsylvania taxpayers to watch.

Fulfilling a prediction made by Reed Smith's State Tax Group, Phantom Fireworks Showrooms and a group of other fireworks companies have sued the state in Pennsylvania's Commonwealth Court arguing that Act 43 of 2017 is unconstitutional.1 Act 43 made several changes to Pennsylvania's tax law.2 In our view, the four most important tax changes in Act 43 are:

  • Online platforms. Act 43 imposed collection and reporting requirements on marketplace facilitators and sellers3
  • Nextel NOL fix. Act 43 adopted the "Nextel fix," which increased the net loss cap to 35% (in 2018) and 40% (in 2019)4
  • Non-employee withholding. Act 43 imposed withholding requirements on certain non-employee payments to nonresidents5
  • Help desk sales tax fix. Act 43 fixed the sales tax to make clear that help-desk services are generally not taxable6

But Phantom Fireworks' lawsuit has nothing to do with taxes. (And that's the problem.) Instead, it has to do with the regulation of fireworks. So the tax provisions in Act 43 are caught in the middle.

Specifically, in addition to the various tax-related changes, Act 43 also made changes to the regulation of consumer fireworks by repealing Pennsylvania's Fireworks Law,7 and replacing it with a new fireworks law contained within the tax code.8 The new fireworks law allows the sale of fireworks from "temporary structures" and makes other changes to the regulation of fireworks. Phantom Fireworks, which sells fireworks from permanent structures, dislikes Act 43 because of these regulatory changes.9

Phantom Fireworks' legal argument is that by combining the fireworks regulation with the tax changes, Act 43 "clearly addresses disparate subjects."10 The problem with that, Phantom argues, is that it violates the single-subject rule in Article III, § 3, of the Pennsylvania Constitution, which provides that "no bill shall be passed containing more than one subject." Phantom relies on case law that has held that a law is invalid if it "does not possess a single, unifying subject."11

If Phantom is successful, all of Act 43 may be invalid – including the tax changes. That is because, when courts find a violation of the single-subject rule, they can invalidate the entire legislation because "it would be arbitrary to preserve one set of provisions germane to one topic, and invalidate the remainder of the bill."12

Thus, if Phantom is successful, the other tax-related provisions of Act 43 may be invalidated, and the General Assembly and the governor may have to return to negotiations over a new tax code bill.


1 Phantom Fireworks et al. v. Wolf et al., 21 M.D. 2018 (filed January 19, 2018). The lawsuit was predicted by our alert " Pennsylvania Enacts Tax Bill" (October 30, 2017). In our alert we noted that "in addition to the tax changes, [Act 43] regulates consumer fireworks. This is ... noteworthy because the ... firework-related provisions could render the entirety of [Act 43] unconstitutional under the 'single subject' rule."

2 " Pennsylvania Enacts Tax Bill," Reed Smith Client Alert (October 30, 2017).

3 Act 43 of 2017, § 4 adding new 72 P.S. §§ 7213–7213.6.

4 Act 43, § 27 amending 72 P.S. § 7401(3)4.(C)(1)–(2).

5 Act 43, §§ 23–25 amending 72 P.S. § 7324.1–324.5, 335 and 352.

6 Act 43, § 1 amending 72 P.S. § 7201(m)(2).

7 Act 43, § 48 repealing 35 P.S. § 1271–1278.

8 Act 43, § 43 adding Article XXIV to the Tax Reform Code of 1971.

9 Phantom Fireworks Petition for Review in the Nature of a Complaint in Equity Seeking Declaratory and Injunctive Relief at ¶ 26 ("Under Act 43, retail consumer fireworks sales are now permitted to Pennsylvania residents, including from temporary sites ... than can be opened inexpensively and without regard to construction or safety standards").

10 Phantom Fireworks Petition for Review at ¶ 51.

11 City of Philadelphia v. Commonwealth, 838 A.2d 266 (Pa. 2003).

12 Leach v. Commonwealth, 141 A.3d 426, 433–435 (Pa. 2016) (quoting Commonwealth v. Neiman, 84 A.3d 603, 615 (Pa. 2013)) cf. Sernovitz v. Dershaw, 57 A.3d 1254, 1265 (Pa. Super. Ct. 2012) (severing portions of bill violating Single Subject Rule after acknowledging "there is no indication that the remaining provisions would not have been passed without the offending amendments").

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

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