Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Department of Revenue

[J-3-2017]

IN THE SUPREME COURT OF PENNSYLVANIA

EASTERN DISTRICT

SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

NEXTEL COMMUNICATIONS OF THE : No. 6 EAP 2016

MID-ATLANTIC, INC., :

: Appeal from the Judgment of the

Appellee : Commonwealth Court entered on

: December 30, 2015 at No. 98 F.R. 2012

:

v. : ARGUED: April 5, 2017

:

:

COMMONWEALTH OF PENNSYLVANIA, :

DEPARTMENT OF REVENUE :

:

Appellant :

OPINION

JUSTICE TODD DECIDED: October 18, 2017

In this direct appeal, we are called upon to determine whether the “net loss

carryover” provision of the Pennsylvania Revenue Code for tax year 2007 (“NLC”)1 —

which restricted the amount of loss a corporation could carry over from prior years as a

deduction against its 2007 taxable income to whichever is greater, 12.5% of the

corporation’s 2007 taxable income or $3 million — violates Article 8, Section 1 of the

Pennsylvania Constitution (“the Uniformity Clause”).2 We affirm the Commonwealth

Court’s holding that the NLC, as applied to Appellee, Nextel Communications (“Nextel”),

violates the Uniformity Clause. However, we also find that the portion of the NLC which

creates the violation — the $3 million flat deduction — may be severed from the

remainder of the statute, while still enabling the statute to operate as the legislature

1

Act of March 4, 1971, P.L. 6, as amended, 72 P.S. § 7401(3)4.(c)(1)(A)(II).

2

Pa. Const. art. VIII, § 1.

intended. Thus, we reverse the order of the Commonwealth Court eliminating any caps

on net loss deductions for tax year 2007; and, correspondingly, we reverse its direction

to Appellant, the Pennsylvania Department of Revenue (“Department”), to refund

$3,938,220 to Nextel, which was the amount of its 2007 net income tax payment to the

Commonwealth.

I. Procedural History

Nextel, which is incorporated in the state of Delaware, is a provider of various

mobile telecommunication services. In 2007, Nextel earned $45,053,282 in taxable

income on its business activities in the Commonwealth. Under the NLC, Nextel was

entitled to deduct from its 2007 taxable income the net losses it sustained in prior tax

years in the amount of $3 million or 12.5% of its 2007 taxable income, whichever total

was greater. In 2007, Nextel had a cumulative net loss dating from the tax year 1997 of

$150,636,792.3 Because 12.5% of Nextel’s 2007 taxable income amounted to

$5,631,660, and, hence, was greater than $3 million, Nextel claimed the 12.5% amount

as a net loss deduction, thereby reducing its taxable income for 2007 to $39,421,622.

Under the corporate net income tax rate of 9.9%,4 Nextel’s total tax liability to the

Commonwealth on this adjusted income was $3,938,220, which Nextel paid to the

Department.

Thereafter, Nextel filed a refund claim with the Department’s Board of Appeals

for the full amount of its 2007 tax payment, claiming, inter alia, that the NLC violated the

Uniformity Clause of the Pennsylvania Constitution by capping the amount of its prior

net loss that it could carry over into tax year 2007 at 12.5% of its taxable income. This

3

The Revenue Code provides that net losses sustained during tax year 1997 could be

carried over during the following 10 tax years. Beginning in tax year 1998, and for all

tax years thereafter, corporations are permitted to carry over their net losses for 20

years. 72 P.S. § 7401(3)4.(c)(1)(2)(A).

4

See 72 P.S. § 7402(b).

[J-3-2017] - 2

claim was denied by the Board on the basis that it did not have the legal authority to

address a constitutional challenge. Nextel then petitioned the Board of Finance and

Revenue, again claiming its entitlement to a refund and asserting the right to carry over

all prior net losses for use as a deduction without limitation.5 The Board of Finance and

Revenue denied the petition and rejected Nextel’s constitutional argument, noting that it

was not empowered to pass on questions of a taxing statute’s validity under our

constitution, but, rather, could only apply the law as it was written.

Nextel appealed to the Commonwealth Court, which, in a split en banc published

decision, reversed the decision of the Board of Finance and Revenue.6 Nextel

Communications of the Mid-Atlantic, Inc., v. Commonwealth of Pennsylvania,

Department of Revenue, 129 A.3d 1 (Pa. Cmwlth. 2015). The majority first rejected the

Department’s argument that, because all corporations were subject to the same

statutory rate of 9.9% on their taxable income, there was no Uniformity Clause violation.

The majority noted that it is the effect of the application of the particular formula or

method used to calculate a tax which determines whether a Uniformity Clause violation

occurs.

In considering the effect of the NLC on various corporations’ taxable income, the

majority determined that, as written, it allowed some corporate taxpayers — those with

income of $3 million or less — to reduce their tax liability to zero in the tax year 2007, if

they had prior net operating losses of $3 million or more. By contrast, it imposed tax

5

Although not natural persons, our case law recognizes the entitlement of

corporations, as taxpayers obligated to pay the corporate net income tax, to the

protections of the Uniformity Clause. See Turco Paint v. Kalodner, 184 A. 37 (Pa. 1936)

and Commonwealth v. Warner Brothers Theaters, 27 A.2d 62 (Pa. 1942), discussed

infra.

6

This decision was authored by Judge Brobson and joined in full by Judges McGinley,

Cohn Jubelirer, Leavitt, and Covey. Then-President Judge Pellegrini filed a concurring

and dissenting opinion joined by Judge Leadbetter.

[J-3-2017] - 3

liability on other corporations with income in excess of $3 million and prior net operating

losses which equaled or exceeded their taxable income, because those corporations’

net loss deduction was capped (at the greater of $3 million or 12.5% of their taxable

income).

The majority next examined whether the NLC’s application to corporate

taxpayers on the basis of taxable income was reasonable, and rationally related to a

legitimate state purpose. The majority observed that our Court had previously held, in

In re Cope’s Estate, 43 A. 79 (Pa. 1899) (invalidating an inheritance tax provision that

exempted estates worth $5,000 or less from paying that tax), that a tax rate based on

the monetary value of the property taxed, which has the effect of causing different

groups of taxpayers from the same class to bear unequal burdens of taxation, or which

exempts some taxpayers in the class from paying any tax at all, offends the Uniformity

Clause. The majority reasoned that, because the NLC was structured to assess a

corporation’s tax liability on the basis of the value of a corporation’s taxable income, in

operation, the NLC enabled the majority of corporations with taxable income (98.8%) to

avoid paying any taxes at all in 2007; but, because of the limitation on the amount of net

loss carryover which a corporation was permitted to deduct, it forced a minority of those

taxpayers (1.2%) to incur tax liability.7 The majority concluded that, because this

disparate tax treatment was “based solely on asset value,” the NLC was the same type

of taxing statute our Court held to be forbidden under the Uniformity Clause in Cope’s

Estate, and was likewise unconstitutional. Nextel, 129 A.3d at 11.

7

These percentages were derived from data furnished by the Department showing

that, in tax year 2007, 19,537 corporations had net loss carryover deductions which

equaled or exceeded their taxable income. Of these, 234 corporations paid taxes

because their taxable income apportioned to Pennsylvania exceeded the $3,000,000

flat deduction allowed by the NLC. See Exhibit D to Parties’ Stipulation of Facts,

3/17/15, (R.R. at 43a).

[J-3-2017] - 4

The majority was unpersuaded by the Department’s argument that the General

Assembly was justified in limiting the amount of loss from a prior tax year which a

corporation could carry over because of budgetary concerns that an unlimited deduction

would result in too much lost revenue. The majority acknowledged the General

Assembly’s right to limit such deductions, but viewed this right as constrained by the

fundamental requirement that any such limitation comport with the Pennsylvania

Constitution, and, thus, in the majority’s view, this concern could not excuse the NLC’s

violation of the Uniformity Clause.

Having determined that the NLC was unconstitutional, the majority next turned to

the issue of the appropriate remedy. The majority refused to strike the NLC in its

entirety from the Revenue Code as suggested by the Department, reasoning that Nextel

had not made a facial challenge to the constitutionality of the NLC, nor, in reaching its

decision, had the court found the NLC to be facially unconstitutional. Instead, the

majority noted that Nextel had claimed only that the NLC was unconstitutional as

applied to it for the 2007 tax year, and, thus, the majority concluded that the appropriate

relief should be limited to remedying the improper application of the NLC to Nextel’s

taxable income for that tax year.

Observing that the Uniformity Clause and the Equal Protection Clause of the

United States Constitution have generally been analyzed in the same fashion, the

majority found guidance from cases in which a taxpayer successfully established that a

state engaged in discriminatory enforcement of its taxing laws, resulting in the taxpayer

paying more than other similarly situated taxpayers, and, as a remedy, the taxpayer was

afforded relief from the improperly assessed additional tax liability. See Nextel, 129

A.3d at 12-13 (citing Commonwealth v. Molycorp, 392 A.2d 321 (Pa. 1978) (after

successful challenge by corporation under the Uniformity Clause to the Department’s

[J-3-2017] - 5

selective imposition of tax penalties for underpayment of corporate taxes against one

group of corporate taxpayers, our Court determined that the proper remedy was to

reverse the Department’s assessment of a penalty against the corporation); Iowa-Des

Moines National Bank v. Bennett, 284 U.S. 239 (1931) (bank which was successful in

its equal protection challenge to county taxing authority’s assessment of taxes on it at a

higher rate than its competitors was entitled to a refund of the extra taxes it had paid,

and it was not a sufficient remedy to require the bank to seek to compel the collection of

additional taxes against its competitors, or to wait for the taxing authority to collect the

additional taxes of its own volition); Tredyffrin-Easttown School District v. Valley Forge

Music Fair, Inc., 627 A.2d 814 (Pa. Cmwlth. 1993) (business that successfully

challenged enforcement of amusement tax ordinance which resulted in it paying more in

taxes than other similarly situated businesses was entitled to a refund of the excess

taxes it paid)).

The majority reasoned that, like the taxpayers in those cases, Nextel established

that it was subject to unequal treatment vis-a-vis other corporate taxpayers and was

entitled to a similar remedy. While acknowledging that it could strike the flat $3 million

deduction for the 2007 tax year, which would then make the 12.5% deduction uniformly

apply to all corporate taxpayers, it rejected that alternative as, in its view, this would not

correct the constitutional violation suffered by Nextel and “would only serve to highlight

the fact that, while Nextel paid what it was supposed to pay, many corporate net income

taxpayers in the 2007 Tax Year benefitted from the discriminatory cap and thus

underpaid their corporate net income taxes — i.e., benefitted from the unconstitutional

provision.” Nextel, 129 A.3d at 13 (emphasis original). The majority thus viewed the

“only practical solution” to be to allow Nextel to use its prior operating losses to reduce

its corporate taxable income to zero in the 2007 tax year, and, thus, pay no taxes, just

[J-3-2017] - 6

as did 98.8% of corporations in that tax year — i.e., those with $3 million or less of

taxable income and an equivalent or greater amount of prior net loss deductions for that

tax year. Id.

The majority, perceiving there would possibly be significant deleterious revenue

consequences to the Commonwealth of its decision, attempted to limit its scope “to the

[Department], Nextel and the 2007 Tax Year.” Id. The majority further opined that, “[t]o

the extent our decision in this as-applied challenge calls into question the validity of the

NLC deduction provision in any other or even every other context, the General

Assembly should be guided appropriately.” Id. In accordance with its decision, the

Commonwealth Court entered an order directing the Department to refund to Nextel the

$3,938,230 it had paid in corporate net income tax for tax year 2007.

Then-President Judge, now-Judge, Pellegrini authored a concurring and

dissenting opinion which was joined by Judge Leadbetter. While agreeing with the

majority that the NLC violated the Uniformity Clause, Judge Pellegrini dissented from

the majority’s proposed remedy. Judge Pellegrini disagreed that the majority’s decision

could be restricted in its effect only to a determination of the amount of tax Nextel owed

for tax year 2007. By contrast, he viewed the majority’s characterization of Nextel’s

challenge as being an “as applied” one to be irrelevant to the impact of its holding,

inasmuch as he viewed the practical effect of the court’s decision as allowing all

corporate taxpayers to, henceforth, take an unlimited net loss carryover deduction.

Judge Pellegrini opined that he would, instead, apply Section 1925 of the

Statutory Construction Act of 1972 (“SCA”), 1 Pa.C.S. § 1925, which allows courts to

sever unconstitutional provisions of a statute from the remaining constitutional portions

“unless the court finds that the valid provisions . . . are so essentially and inseparably

connected with, and so depend upon, the void provision . . . that it cannot be presumed

[J-3-2017] - 7

the General Assembly would have enacted the remaining valid provisions without the

void one; or . . . that the remaining valid provisions, standing alone, are incomplete and

are incapable of being executed in accordance with the legislative intent.” 1 Pa.C.S. §

1925. Judge Pellegrini noted that the structure of the NLC, and similar net loss

carryover provisions in the Revenue Code for subsequent tax years 2009, 2010, 2014

and 2015,8 reflected the General Assembly’s intent to limit the net loss carryover

deduction a corporation could utilize in each tax year by capping it. Consequently, in

8

These sections provide, in full:

(c)(1) The net loss deduction shall be the lesser of:

(A)(I) For taxable years beginning before January 1, 2007,

two million dollars ($2,000,000);

(II) For taxable years beginning after December 31, 2006,

the greater of twelve and one-half per cent of taxable income

as determined under subclause 1 or, if applicable, subclause

2 or three million dollars ($3,000,000);

(III) For taxable years beginning after December 31, 2008,

the greater of fifteen per cent of taxable income as

determined under subclause 1 or, if applicable, subclause 2

or three million dollars ($3,000,000);

(IV) For taxable years beginning after December 31, 2009,

the greater of twenty per cent of taxable income as

determined under subclause 1 or, if applicable, subclause 2

or three million dollars ($3,000,000);

(V) For taxable years beginning after December 31, 2013,

the greater of twenty-five per cent of taxable income as

determined under subclause 1 or, if applicable, subclause 2

or four million dollars ($4,000,000);

(VI) For taxable years beginning after December 31, 2014,

the greater of thirty per cent of taxable income as

determined under subclause 1 or, if applicable, subclause 2

or five million dollars ($5,000,000).

72 P.S. § 7401(3)4.(c)(1)(A)(1)-(VI).

[J-3-2017] - 8

Judge Pellegrini’s view, the majority’s decision to eliminate all caps on the amount of

net loss a corporation could carry over was directly contrary to this legislative intent.

Judge Pellegrini pointed out, however, that in each of these net loss carryover

provisions of the Revenue Code, the flat dollar deduction could be severed from the

percentage deduction, thereby leaving the percentage deduction available to all

taxpayers. Judge Pellegrini deemed this to be the most appropriate course of action as

it would carry out the legislative intent to limit net loss carryover deductions for a given

tax year, while also protecting the public purse.

The Department filed a direct appeal with our Court, raising two issues: (1)

whether the NLC violates the Uniformity Clause by capping the amount of net loss

deduction a corporation can take based on its income, and (2) if so, whether severance

of the $3 million flat deduction cap is the appropriate remedy, rather than allowing an

unlimited net loss deduction as did the Commonwealth Court.9 In our order granting

oral argument, we also directed the parties to further brief the effect, if any, of our

Court’s recent opinion in Mount Airy #1, LLC v. Pennsylvania Department of Revenue,

154 A.3d 268 (Pa. 2016) (“Mt. Airy”), which declared portions of the local tax

assessment on casino revenue in the Gaming Act violative of the Uniformity Clause.

Nextel v. Pennsylvania Department of Revenue, 6 EAP 2016 (Pa. filed Oct. 16, 2016)

(order).

II. Analysis

A. Uniformity Clause Challenge

The Department argues that the Commonwealth Court incorrectly held that the

NLC violates the Uniformity Clause by erroneously measuring uniformity based on the

9

As these are questions of law, our standard of review is de novo, and our scope of

review is plenary. Wirth v. Commonwealth, 95 A.3d 822, 836 (Pa. 2014).

[J-3-2017] - 9

effective corporate income tax rate, i.e., the actual rate of tax the corporate taxpayer

paid on its income,10 rather than the statutory corporate net income tax rate of 9.9%.

The Department asserts that our Court has held that a corporate income tax statute

does not violate the Uniformity Clause if it applies the same rate of taxation to the same

tax base, even if certain income is excluded from that tax base for some corporations

because of their individual circumstances. In support of this proposition, the

Department relies on Turco Paint, supra (holding that, even though a Pennsylvania

corporate excise tax calculated based on 3 factors — the corporation’s gross receipts

from Pennsylvania, its Pennsylvania payroll, and the physical property it owned in

Pennsylvania — resulted in different tax liabilities for different corporations due to the

fact these three factors were dissimilar for each corporation, this variance did not violate

the Uniformity Clause, because the taxing statute imposed the same rate — 6% — on

the same tax base for each corporation), and Warner Brothers, supra (holding that 10%

excise tax applied to all corporations based on the corporation’s net income under the

federal tax code did not violate the Uniformity Clause, even though, under the federal

tax code, the amount of capital deductions which a corporation could claim was limited

and would vary from year to year, inasmuch as the tax base for all corporations was the

same, and subject to the same 10% tax rate).11 Thus, in the Department’s view, these

10

The effective tax rate, generally, is computed by taking the actual amount of income

tax the corporate taxpayer paid in a tax year and dividing it by the amount of the

corporation’s taxable income for that year. Black's Law Dictionary 1691 (10th ed. 2014).

11

The current corporate net income tax statute, like these predecessor statutes,

characterizes the nature of the tax imposed as an excise tax, see 72 P.S. § 7402(a), but

this designation is merely semantical, as we have subsequently endorsed the

proposition that, despite this description, the true nature of the tax is “a direct tax on

corporate net income.” C.C. Collings & Company, Inc. v. Commonwealth, 488 A.2d

1187, 1193 (Pa. Cmwlth. 1985), aff'd on the basis of the Commonwealth Court opinion,

Commonwealth Securities and Investments, Inc. v. Commonwealth, 514 A.2d 1373 (Pa.

1986).

[J-3-2017] - 10

cases establish that, where, as here, a uniform tax rate is applied to the same tax base

— which for a corporation it considers to be its net taxable income — there is no

Uniformity Clause violation.

The Department recognizes that our Court has found other types of taxes which

exclude from their tax base varying amounts of property to be violative of the Uniformity

Clause, because their operation resulted in members of the same class of taxpayers

paying unequal amounts of taxes. Department Brief at 18-20 (citing Amidon v. Kane,

279 A.2d 53 (Pa. 1971) (personal income tax which was levied on a taxpayer’s taxable

income, as defined under the Internal Revenue Code, which resulted in individual

taxpayers having various portions of their income exempted from taxation, violated the

Uniformity Clause), and Clifton v. Allegheny County, 969 A.2d 1197 (Pa. 2009)

(property tax assessment scheme that used an outdated base year valuation method,

which undervalued some properties not reassessed since that base year, while

assigning a higher market value to similar properties assessed after the base year,

thereby resulting in the more recently assessed homeowners paying higher amounts of

property taxes than those with base year assessments, contravened the Uniformity

Clause)).

However, the Department views those cases as distinguishable from the case at

bar, contending that our Court, in Turco and Warner Brothers, has explicitly sanctioned

the use of a different uniformity analysis with respect to corporate taxes, as opposed to

income taxes, due to the way corporations operate. The Department notes that

corporations are created for the purposes of producing profits, and deductions from

corporate income, which are costs associated with producing that income, are applied

first to establish the tax base before any uniformity analysis is conducted. The

Department avers that, in those situations, the uniformity analysis merely considers

[J-3-2017] - 11

whether the tax is imposed on that base at a fixed statutory rate, and, if so, the

uniformity analysis comes to an end. However, the Department contends that

individuals behave differently, and there is no necessity of determining their tax base by

considering the costs of producing their income; rather, the deductions or exemptions

are applied to compute the tax owed.

The Department avers that the corporate income tax structure is also distinct

from the estate tax at issue in Cope’s Estate, as all corporate taxpayers pay the same

rate, while in that case the tax at issue was what it characterizes as a “classically

graduated” tax where the rate of taxation increased based on the value of an estate.

Department Brief at 22. The Department also notes that a number of other taxes, such

as excise or occupation taxes, have uniform tax rates for all taxpayers, yet, when

applied, produce unequal tax burdens for taxpayers who pay them, because they

produce an effective rate of taxation which varies by income, since people with lower

incomes pay a greater proportion of their income as the result of these taxes. The

Department contends that the effect of the Commonwealth Court decision calls into

question the constitutionality of these taxes, as well as other income taxes that utilize

deductions in the federal tax code as a basis to compute taxable income, which again

results in a variable tax rate for taxpayers dependent on which deductions they claim.

Alternatively, the Department argues that, even if the $3 million flat deduction

implicates uniformity, it nevertheless is constitutional because the Uniformity Clause

requires only substantial, not perfect, uniformity. The Department claims that, because

only 234 out of 19,537 corporations (1.2%) were unable to reduce their taxable income

to $0 since their income was above $3 million, and because those corporations were

still able to take a net loss deduction, the NLC deduction provision was “as nearly

[J-3-2017] - 12

uniform as practicable,” and thus satisfied the constitutional requirement of “rough

uniformity.” Department Brief at 24.

With respect to Mt. Airy, the Department argues that the issue in this case is

fundamentally different from the question presented in that case, which concerned a

challenge under the Uniformity Clause to the statutory tax rate, rather than a uniformity

challenge to the calculation of the tax base, as in this case. Thus, the Department

maintains that Mt. Airy did not address any issue involving a calculation of the tax base,

noting that our Court specifically avoided opining on whether a uniformity violation could

arise out of disparate effective tax rates. The Department also points out that our Court

recognized in Mt. Airy that the Uniformity Clause allows “a bit more flexibility in the

context of corporate taxation,” which the Department suggests counsels against finding

a uniformity violation in this instance. Department Supplemental Brief at 7 (quoting

Mount Airy, 154 A.3d at 277).12

In response, Nextel maintains that, as the Commonwealth Court determined, the

NLC violates the Uniformity Clause because it allows corporations with net loss

carryover in excess of their 2007 income to deduct their losses without limitation if they

have $3 million or less in taxable income, and thereby reduce their taxable income to

12

The Majority Caucus of the Pennsylvania House of Representatives has filed an

amicus brief which largely tracks the arguments of the Department on this issue. The

Majority Caucus additionally criticizes the Commonwealth Court for focusing on the

“divergent tax burdens” on corporations which application of the tax will produce,

Majority Caucus Brief at 12 (quoting Nextel, 129 A.3d at 9), rather than the statutorily

imposed rates of taxation and the statutorily provided amount of the NLC deduction,

both of which it contends are uniform. The Majority Caucus echoes the Department’s

concerns regarding the impact of the Commonwealth Court decision on a number of

other taxes which, although having uniform tax rates, result in unequal tax burdens for

taxpayers in application based on the taxpayers’ income. The Majority Caucus agrees

with the Department that the effect of the Commonwealth Court decision calls into

question the constitutionality of these taxes, and other income taxes which utilize

deductions in the federal tax code as a basis to compute taxable income.

[J-3-2017] - 13

$0, while limiting the amount of loss that corporations with over $3 million in taxable

income may deduct, obligating those corporations to pay some income tax. Nextel

notes that our Court has held tax laws which, although imposing a uniform rate of tax,

provide “dollar-value thresholds for exemptions and deductions” from the tax, to be

violative of the Uniformity Clause because they resulted in similarly situated taxpayers

shouldering unequal burdens of taxation. Nextel Brief at 9-12 (citing Cope’s Estate,

supra, and Kelley v. Kalodner, 181 A. 598 (Pa. 1935) (personal income tax which

provided for a flat exemption from taxation for single taxpayers with taxable income

below $1,000, and below $1,500 for married taxpayers, violated the Uniformity Clause).

Nextel asserts that the NLC’s $3 million limitation operates the same as this type of

dollar value threshold.

Addressing the Department’s contention that there is no Uniformity Clause

violation because the same statutory rate of 9.9% is applied to the same tax base,

Nextel disputes that the tax base — what it considers to be a corporation’s taxable

income — is the same for it and all other corporate taxpayers, because the $3 million

limit on net loss carryover deductions led to it and 26 other corporate taxpayers having

taxable incomes, whereas 19,303 other corporate taxpayers with income falling under

the $3 million limit and net loss carryovers in excess of their income had no taxable

income.

Nextel also disputes the Department’s assertion that the NLC is constitutional

under our holding in Turco Paint, reasoning that, under the taxing statute in that case,

every corporate taxpayer was taxed on the same tax base, namely, the amount of its

income which could be apportioned to Pennsylvania. Nextel also discounts the

applicability of Warner Brothers on the grounds that the constitutional issue in that case

was whether the legislature unconstitutionally delegated its taxing authority to Congress

[J-3-2017] - 14

by using corporate net income as determined by the federal tax code, with all allowable

deductions, as the tax base for the corporate income tax.

Nextel proffers that our Court recognized in Amidon that, even though a taxing

statute imposes a flat rate of taxation on income, it may nevertheless operate in a

manner which causes a disparity in the effective tax rate paid by various groups of

taxpayers subject to the tax, and that the difference in effective tax rates may trigger a

Uniformity Clause violation. Nextel notes that, in Amidon, the personal income tax

statute at issue in that case, which used taxable income as the tax base, defined such

income in the same manner as the federal tax code that allowed various exemptions

and deductions. Because the amount of a person’s taxable income varied widely from

taxpayer to taxpayer, depending on which deductions he or she elected to take because

of his or her lifestyle, the effective rate of taxation he or she was subject to also varied

widely, thereby violating uniformity. Nextel contends that the NLC likewise operates to

subject it and the 26 other corporations which paid corporate income taxes to a higher

effective rate of taxation — 8.74% — whereas 19,303 other corporations paid an

effective tax rate of 0%.

Nextel also argues that the NLC deduction provision does not satisfy “rough

uniformity” due to the disparity between its effective tax rate and the effective tax rate of

the majority of other Pennsylvania corporations. Specifically, Nextel maintains that

rough uniformity means that immaterial deviations are permitted, but asserts that the

difference between a tax rate of 8.74% and a tax rate of zero cannot be considered an

immaterial deviation.

Regarding our Mt. Airy decision, Nextel asserts that its holding is directly

applicable to this case, as Mt. Airy involved a tax which classified casinos based solely

on the quantity of their receipts, inasmuch as casinos with receipts over $500 million

[J-3-2017] - 15

paid a 2% tax, while casinos with receipts of $500 million or less paid a flat $10 million

tax; Nextel avers this framework is similar to the tax in the instant case which classifies

corporations based upon the quantity of their income. Nextel notes that, in Mt. Airy, our

Court concluded that “such quantitative distinctions lack uniformity because any

‘classification that is based solely on a difference in quantity . . . is necessarily unjust,

arbitrary, and illegal.’” Nextel’s Supplemental Brief at 6 (quoting Mt. Airy, 154 A.3d at

277). Nextel maintains that we should reach the same conclusion in this case,

emphasizing that, although we have recognized that the Uniformity Clause allows more

flexibility in the corporate context, we have never permitted tax classifications between

corporations based on the quantity of their property.13

13

A variety of amici have filed briefs in support of Nextel’s position on this issue,

respectively: the Council on State Taxation; the Institute for Professionals in Taxation;

the Pennsylvania Business Council; the Greater Philadelphia Chamber of Commerce;

the Greater Pittsburgh Chamber of Commerce; and the Pennsylvania Chamber of

Business and Industry. All amici express agreement with Nextel’s legal analysis as to

why the NLC violates the Uniformity Clause, and the Council on State Taxation echoes

Nextel’s contention that our decisions in Kelley and Amidon established that the

Uniformity Clause applies both to the rate of taxation imposed by a taxing statute, as

well as to the tax base as determined by measuring the effective tax rates for various

taxpayers within the same class.

Amici from the various Chambers of Commerce and the Chamber of Business

and Industry also advance the policy argument that restrictions on deductions for net

losses which target only large companies discourage those companies from making

expensive capital investments and undertaking costly research, contending they are

usually the only ones fully capable of funding such research. Amici argue that such

endeavors often cause those companies to sustain significant losses, and amici

contend those companies should be able to fully deduct such losses against their

income over a longer period of time than just one tax year, particularly if they are

operating in industries susceptible to highly cyclical profit variability, which can abruptly

reduce a corporation’s income for a particular tax year. Amici assert that the imposition

of a cap on how much loss can be carried over from year to year by large companies

interferes with their ability to more readily absorb these losses as part of their long-term

operations, as it restricts them from fully using those losses for years when they are

more profitable.

[J-3-2017] - 16

Having discussed the arguments of the parties, we begin our analysis of this

issue. The relevant constitutional provision at issue in this appeal — better known by its

colloquial description, “the Uniformity Clause”— is Article 8, Section 1 of the

Pennsylvania Constitution, which provides:

All taxes shall be uniform, upon the same class of subjects,

within the territorial limits of the authority levying the tax, and

shall be levied and collected under general laws.

Pa. Const. art. 8, § 1.

This provision was part of a larger package of constitutional provisions the

people of the Commonwealth approved in adopting the “Reform Constitution” of 1874

for the purpose of altering certain legislative practices which had become commonplace

during the 19th century, but which, by the latter part of that century, had fallen into

serious disfavor with the populace, who rightly perceived that these practices were

intended to advance private or personal interests at the expense of the public’s

welfare.14 Pennsylvania State Association of Jury Commissioners, 64 A.3d 611, 615

n.9 (Pa. 2013). The Uniformity Clause, the language of which has remained unchanged

since its initial ratification by the voters, was a direct response to the legislative use of

special tax laws applicable only to particular industries or individuals.15 16

Robert E.

Woodside, Pennsylvania Constitutional Law 576 (1985).

14

These practices included: the passage of local and special laws to confer special

benefits or legal rights to particular individuals, corporations, or groups, benefits which

were not afforded the general public; deceptive titling of legislation to mask its true

purpose; the mixing together of various disparate subjects into one omnibus piece of

legislation; and holding quick votes on legislation which had been changed at the last

minute such that its provisions had not been fully considered by members of both

houses.

15

At the time of its enactment, the Uniformity Clause was located in Article 9, Section 1

of the Constitution.

16

There have been two proposals to amend the Uniformity Clause since its inclusion in

the Constitution in order to allow progressive rates of taxation, one in 1913 and one in

(continued…)

[J-3-2017] - 17

The use of such special tax laws in Pennsylvania to favor particular industries

began in the early part of the 19th century as part of a broader effort underway at the

time by many state governments to foster “internal improvements” within their borders,

i.e., the construction of large physical transportation infrastructures such as canals,

locks, dams, and ports on rivers to support the development of industries such as

agriculture, coal mining, and timbering, and, later, as the Industrial Revolution came to

America, iron and steel production. 1 Wade G. Newhouse, Constitutional Uniformity

and Equality in State Taxation, 1731-32, 1735-37 (2d. ed. 1984). Although the

Pennsylvania legislature directly financed many of these ventures for the benefit of

private industries through bond issues which were repaid through tax dollars, it also

provided indirect subsidies by bestowing upon these industries preferential tax

treatment. Id. at 1203-04.

Most notably, a primary beneficiary of support from our Commonwealth’s public

fisc was the railroad industry, which received generous assistance from the General

Assembly through the appropriation of funds for the construction of railroad lines, and

the direct award of charters to individuals for the creation and exclusive operation of

railroad companies in certain geographic areas. Harold E. Cox and John F. Myers, The

Philadelphia Traction Monopoly and The Pennsylvania Constitution of 1874: The

Prostitution of an Ideal, Journal of Pennsylvania History vol. 35, no. 4, 1 (1968). By the

era of the Civil War, the railroad companies had acquired such influence over the

Pennsylvania legislature that they routinely obtained the passage of special legislation

(…continued)

1928, but both were rejected by the voters of the Commonwealth. The voters did,

however, approve constitutional amendments allowing the legislature to grant special

tax treatment for forest and agricultural preserves, as well as for individuals in need of

special tax treatment due to their “age, disability, infirmity or poverty.” Pa. Const. art. 8,

§2

[J-3-2017] - 18

advancing their interests. The Railroad in Pennsylvania, Explore Pa. History, at

http://explorepahistory.com/story.php?storyId=1-9-10&chapter=1.17 In the field of

taxation, the railroads were particularly successful at securing special tax legislation

through the efforts of their lobbyist Simon Cameron, who later became President

Lincoln’s Secretary of War, such that, in 1861, the legislature voted to exempt them

entirely from taxation. Simon Cameron Historical Marker, Explore Pa. History, at

http://explorepahistory.com/hmarker.php?markerId=1-A-3ADExplore.

There was considerable popular anger generated by such preferential tax

treatment, as it was perceived that the burdens of taxation, and its benefits, were not

being equally shared. This anger fueled the clamor for a constitutional convention

dedicated to constraining the power of the legislature to enact preferential local and

special legislation, which the legislature ultimately acquiesced to by authorizing the

constitutional convention of 1872-1873. Donald Marritz, Making Equality Matter (Again):

The Prohibition Against Special Laws in the Pennsylvania Constitution, 3 Widener J. of

Pub. L. 161, 191 (1993). The Uniformity Clause was, thus, the specific remedy

fashioned by the delegates to that convention to eliminate the power of the legislature to

enact special tax legislation, and its paramount purpose in requiring uniformity of

taxation “was to prevent certain groups from having to shoulder the burden of progress

from which all would benefit.” Kristen E. Hickman, The More Things Change, The More

They Stay the Same: Interpreting the Pennsylvania Uniformity Clause, 62 Alb. L. Rev.

1965, 1704 (1999); see also Fox's Appeal, 4 A. 149, 153 (Pa. 1886) (“[The Uniformity

Clause] was intended to and does sweep away forever the power of the legislature to

17

Explorepahistory.com, an online resource for information about Pennsylvania history,

was cooperatively created, and is currently maintained, by the Pennsylvania Historical

and Museum Commission, various academic bodies — including the Pennsylvania

State University — Pennsylvania historical associations, and the Pennsylvania Public

Television Network.

[J-3-2017] - 19

impose unequal burdens upon the people under the form of taxation. The evils which

led up to its incorporation into the organic law are well known. The burden of

maintaining the state had been, in repeated instances, lifted from the shoulders of

favored classes, and thrown upon the remainder of the community.”).

The language of the Uniformity Clause chosen by the framers of the 1874

Constitution requires uniformity of taxation on “the same class of subjects.” Pa. Const.

art. 8, § 1. It was unique in that it was the first such clause of any state constitution to

require uniformity within classes of the subjects of taxation. Newhouse, supra, at 1713.

Accordingly, the Uniformity Clause does not deprive the General Assembly of its power

to create reasonable classifications of subjects of taxation:

Classification for the purpose of taxation may be based on

the existence of differences recognized in the business

world, on the want of adaptability of the subjects to the same

method of taxation, upon the impracticability of applying to

them the same methods so as to produce justice and

reasonably uniform results, or upon well grounded

considerations of public policy.

Appeal of Borough of Aliquippa, 175 A.2d 856, 863 (Pa. 1961). However, consistent

with the framers’ intent to ensure that future tax obligations would be borne equally by

all those who are required to meet them, the Uniformity Clause mandates that “there

must be no lack of uniformity within the class, either on the given subject of the tax or

the persons affected as payers.” Saulsbury v. Bethlehem Steel Co., 196 A.2d 664, 666

(Pa. 1964).18

18

The Uniformity Clause does not, however, require that each taxpayer in a particular

class pay the same dollar amount in taxes, only that the tax obligation imposed by a

particular tax be borne evenly by each member of the class. The actual amounts paid

by each taxpayer will, of course, vary based on the actual value of his or her income or

property subject to the tax. See Turco Paint, 184 A. at 40 (“[T]he same [tax], when

applied to the same subject-matter, does not make the tax graded [in violation of the

Uniformity Clause] simply because of the fact that one association, owning more of the

(continued…)

[J-3-2017] - 20

Although the paramount purpose of the Uniformity Clause is to ensure that all tax

laws produce equality in the assignment of the tax burden within a particular class, it

does not require absolute equality or perfect uniformity in this regard. Rather, if there is

“substantial uniformity, which means as nearly uniform as practicable in view of the

instrumentalities with which and subjects upon which tax laws operate,” the

constitutional requirement has been met. Clifton, 969 A.2d at 1210 (quoting Delaware,

L. & W. R. Co.'s Tax Assessment, 73 A. 429, 430 (Pa. 1909)). All courts have a duty “in

dealing with this subject to enforce as nearly as may be equality of burden and

uniformity of method in determining what share of the burden each taxable subject must

bear.” Id. Consequently, when “a tax law directly, necessarily, and intentionally creates

an inequality of burden, it . . . becomes imperative to inquire whether this inequality,

thus intentionally created, can find any constitutional justification.” Cope’s Estate, 43 A.

at 81.

When such inequality is created by a law which, by its structure, divides the

subjects of a particular tax into various classes, the standard to be used in determining

whether the law violates the Uniformity Clause is “whether the classification is based

upon some legitimate distinction between the classes that provides a non-arbitrary,

reasonable, and just basis for the disparate treatment.” Mount Airy, 154 A.3d at 274. In

light of the presumption that the legislature does not intend to violate the Constitution of

the United States or Pennsylvania in enacting legislation, 1 Pa.C.S. § 1922(3), the

burden of proof is on the taxpayer to show that the tax clearly, palpably, and plainly

violates the Constitution by demonstrating that no reasonable distinction exists between

(…continued)

particular taxable subject-matter than another, pays, on this account, a greater sum total

of tax.”).

[J-3-2017] - 21

the classes. Allegheny County v. Monzo, 500 A.2d 1096, 1101 (Pa. 1995); Clifton, 969

A.2d at 1211.

For over a century, our Court has steadfastly adhered to an interpretation of the

Uniformity Clause that classifications based solely upon the quantity or value of the

property being taxed are arbitrary and unreasonable, and, hence, forbidden. See

Cope’s Estate, 43 A. at 81 (“A pretended classification, that is based solely on a

difference in quantity of precisely the same kind of property, is necessarily unjust,

arbitrary, and illegal.”); Kelley, 181 A. at 602 (“[A] tax which is imposed at different rates

upon the same kind of property, solely on the basis of the quantity involved, offends the

uniformity clause.”); Mt. Airy, 154 A.3d at 275 (“The basic principle that ‘[t]he money

value of any given kind of property . . . can never be made a legal basis of subdivision

or classification for the purpose of imposing unequal burdens on [similarly situated

classes,’ has endured through the years.” (citation omitted and alteration original)).

In accordance with this principle, our Court has consistently viewed as

unconstitutional tax laws which, although applicable to an entire class of taxpayers,

wholly exempt some of those taxpayers from paying the tax. Such statutes are

generally structured so that some taxpayers whose total income or value of their

property falls below the maximum value of the exemption are required to pay no taxes

at all, whereas other taxpayers with income or property value in excess of the exempted

amount are required to pay taxes on the value of the non-exempted income or property,

thus shouldering the entire tax burden. This contravenes the Uniformity Clause’s

paramount tenet that the tax burden should be borne equally by all those who are

obligated to pay a tax. See Cope’s Estate, 43 A. at 81 (The limitations on the

legislature’s ability to exempt property from taxation under the Uniformity Clause “are

plainly intended to secure, as far as possible, uniformity and relative equality of taxation,

[J-3-2017] - 22

by prohibiting, generally, the exemption of a certain part of any recognized class of

property, and subjecting the residue to a tax that should be borne uniformly by the entire

class.”).

Thus, in Cope’s Estate, we determined that an express exemption from

inheritance tax for estates worth $5,000 or less was prohibited by the Uniformity Clause,

due to the fact that taxpayers with estates below $5,000 in value paid no inheritance

tax, while the remainder of taxpayers with estates with value in excess of that amount,

90-95% of taxpayers were required to pay the tax. Likewise, in Kelley, we determined

that, because the personal income tax statute at issue in that case provided for a flat

exemption from taxation for those with income under a certain threshold ($1,000 for

single taxpayers and $1,500 for married taxpayers), it was violative of the Uniformity

Clause, as those taxpayers whose incomes fell below those threshold amounts paid no

tax, while the rest of taxpayers who earned greater than those amounts were required

to pay the tax. Our Court further opined therein that the General Assembly’s purpose in

providing the exemptions may have been laudable as a matter of public policy;

however, salutary policy objectives did not excuse the constitutional violation:

There can be no doubt that these exemptions were inserted

for the purpose of putting the burden of the tax upon those

most able to bear it, but it results in taxing those whose

incomes arise above a stated figure merely for the reason

that in the discretion of the Legislature their incomes are

sufficiently great to be taxed. It is obvious that the

application of the tax is not uniform. Although in the present

case the exemption appears to be reasonable, the principle

of inequality involved, if once established, might lead to

grossly unfair results in the future.

Kelley, 181 A. at 602.

In more recent decisions, our Court has continued to adhere to the view that the

Uniformity Clause prohibits taxes which, by their language, specifically exempt certain

[J-3-2017] - 23

individuals subject to a tax from the obligation to pay it based on the taxpayer’s income.

See, e.g., Saulsbury (occupational tax ordinance which imposed a flat fee of $10 on all

taxpayers earning over $600 violated the Uniformity Clause by exempting those making

less than that amount from the obligation to pay the tax). Indeed, even in a situation

where the statute imposing the tax did not explicitly exempt certain individuals from

paying it, but, through its structure and operation, effectively guaranteed that some

individuals would be entirely excused from paying any share of the tax burden, our

Court has also found the tax to be in violation of the Uniformity Clause. See Amidon,

279 A.2d at 60 (holding that the Pennsylvania personal income tax statute, which

imposed a flat 3-1/2% tax on taxable income, but also incorporated the definition of an

individual’s taxable income used by the United States Internal Revenue Code, violated

the Uniformity Clause because the federal definition of taxable income “already reflects

the federal personal exemptions for the taxpayer and his qualified dependents. Thus,

built-in to the [Pennsylvania Income Tax] are [e]xactly the same elements of

nonuniformity as were condemned in both Kelley and Saulsbury.” (emphasis original

and citation omitted)).19

With these principles in mind, we turn to the statute at issue in this case. The

NLC establishes the following limits on the monetary value of a corporation’s net loss

deduction from its income for tax year 2007:

(A)(II) For taxable years beginning after December 31, 2006,

the greater of twelve and one-half per cent of taxable income

19

As further noted by Justice Pomeroy in his concurrence in Amidon, these personal

exemptions were available only to individuals under the federal tax code which that

version of the Pennsylvania personal income tax statute utilized, but not to corporations;

in his view this distinguished the matter from the Pennsylvania corporate net income tax

at issue in Turco Paint and Warner Brothers which allowed all corporations to take the

same deductions permitted them under the federal tax code. See Amidon, 279 A.2d at

67-69 (Pomeroy, J., concurring).

[J-3-2017] - 24

as determined under subclause 1 or, if applicable, subclause

2 or three million dollars ($3,000,000);

72 P.S. § 7401(3)4.(c)(1)(A)(II).

In determining whether this statute violates the Uniformity Clause, we do not look

at its language in a vacuum; rather, we also examine how it functions when applied to

establish a corporation’s net income tax liability. See Mount Airy, 154 A.3d at 277 (“The

Pennsylvania Constitution prohibits any ‘method or formula for computing a tax’ that will,

‘in its operation or effect, produce arbitrary, unjust, or unreasonably discriminatory

results.’” (quoting Clifton, 969 A.2d at 1211) (emphasis added)). Consequently,

although the NLC is not worded in the same fashion as the taxing provisions at issue in

Cope’s Estate, Kelley, and Saulsbury, in that it does not explicitly exempt income below

a certain threshold from taxation like the taxing statutes in those cases, nonetheless it

operates in a manner that creates the very same type of exemption from taxation solely

on the basis of income, a scheme we determined in those decisions to be violative of

the Uniformity Clause.

Under its terms, the NLC allows any corporation with taxable income of $3 million

or less in 2007 to fully deduct all net losses carried over from prior years up to the entire

amount of its taxable income. As a result, such corporations pay no corporate net

income taxes, given that the statutory tax rate of 9.9% is ultimately applied only to a

corporation’s net income. 72 P.S. § 7402(b). Thus, the NLC gives corporations with $3

million or less in taxable income, and carryover losses equaling or exceeding their

taxable income, a de facto total exemption from paying the corporate net income tax.

By contrast, corporations with taxable income over $3 million are not permitted to

exempt their entire income from taxes, even if, like Nextel, they have sufficient net

losses from prior years to offset it. Instead, such corporations are limited in the amount

of prior net losses they can claim to the greater of 12.5% of their taxable income or $3

[J-3-2017] - 25

million, thereby requiring them to pay the corporate net income tax of 9.9% on the

remaining portion of their taxable income.

It is clear, then, that the NLC, by allowing corporations to take a flat $3 million net

loss carryover deduction against their taxable income, has effectively created two

classes of taxpayers among corporations which have net loss carryover deductions

equal to or exceeding their taxable income. The first and larger class, comprising

98.8% of all corporate taxpayers for tax year 2007, was exempted from paying any

corporate net income tax simply because their income was $3 million or less, and a

much smaller class of corporate taxpayers, 1.2%, was required to shoulder the entire

corporate net income tax burden for that tax year due only to the fact that each of those

class members had income in excess of $3 million. Because the NLC has created

disparate tax obligations between these two classes of similarly situated taxpayers

based solely on the value of the property involved — i.e., the amount of each class

member’s taxable income — it is, as the Commonwealth Court determined, an arbitrary

and unreasonable classification which is prohibited by the Uniformity Clause. See

Cope’s Estate, 43 A. at 81 (inheritance tax exemption which created two classes of

individuals who inherited property — those who acquired estates with value less than

$5,000 and were exempt from paying taxes, and those taxpayers whose estates were

valued in excess of $5,000 who were required to pay inheritance tax — violated the

Uniformity Clause, as this “pretended classification” was “based solely on a difference in

quantity of precisely the same kind of property [and was] necessarily unjust, arbitrary

and illegal.”); Kelley, 181 A. 602 (personal income tax which exempted two groups of

individuals whose income fell below certain levels from paying any personal income tax,

and required all other individuals with income above those levels to pay this tax, violated

the Uniformity Clause due to the fact that the individuals obligated to pay the tax were

[J-3-2017] - 26

chosen by the legislature “merely for the reason that [the legislature determined] their

incomes are sufficiently great to be taxed.”); Saulsbury, 196 A.2d at 666 (because the

Uniformity Clause requires strict uniformity within a class of individuals subject to a

particular tax, such that all members of the class are obligated to pay the tax, “[p]art of

the class may not be excused, regardless of the motive behind the action.”).

Our recent decision in Mt. Airy reaffirmed the principles set forth in these cases.

The taxing statute at issue therein imposed two different levels of municipal taxation on

the yearly gross slot machine revenues of casinos operating outside of the city of

Philadelphia: those with yearly gross revenues of $500 million or less paid a flat

assessment of $10 million to the municipality in which they operated, while those with

yearly gross revenues of more than $500 million paid the municipality 2% of its gross

revenues. This resulted in casinos with less than $500 million in gross revenues paying

a flat amount of $10 million, while casinos with gross revenues in excess of $500

million, because of the 2% tax rate, were required to pay more than $10 million.

Reiterating the principles articulated in Cope’s Estate and its progeny, our Court held

that this taxing scheme violated the Uniformity Clause since it divided casinos into two

groups of taxpayers based only upon their income, which resulted in one group with

income above a certain level paying a higher tax rate than the other group with income

below that level. We reemphasized that “the Uniformity Clause prohibits the General

Assembly from imposing disparate tax rates upon income that exceeds a particular

threshold.” Mt. Airy, 154 A.3d at 276 (quoting Kelley, 181 A. at 602). Thus, our holding

in Mt. Airy reaffirmed the central tenet of our Court’s Uniformity Clause jurisprudence: a

taxing statute which classifies similarly situated taxpayers solely on the basis of their

income, and thereby places differing tax burdens on each class as a result, is forbidden.

[J-3-2017] - 27

Turco Paint and Warner Brothers, cited by the Department, do not compel a

different result. In Turco Paint, the corporate net income tax statute at issue did not

exempt portions of a corporation’s net income from taxation, as the NLC does here;

rather, the corporate net income tax statute imposed the same tax rate on all of a

corporation’s net income derived from its activities in Pennsylvania, which was

determined for each corporation using the same three factors: the corporation’s gross

receipts from Pennsylvania, its Pennsylvania payroll, and the physical property it owned

in Pennsylvania. Turco Paint, 184 A. at 41. Thus, although this taxation method

produced some variance in the amount of a corporation’s net income subject to

taxation, due to the degree to which a corporation derived its income from Pennsylvania

through its normal business activities, our Court did not find this variance constitutionally

offensive, as it was not the product of purposeful legislative differentiation among

groups of corporate taxpayers. See id. at 40 (“Where different rates are legislatively

imposed on varying amounts or quantities of the same tax base, then you have a

graded tax that lacks uniformity under our Constitution.” (emphasis added)). By

contrast, the NLC’s disparate tax treatment of corporations based on the value of their

net losses and their taxable income was the product of the General Assembly’s

deliberate choice of statutory language.

In Warner Brothers, the primary constitutional challenge concerned whether the

General Assembly unlawfully delegated its power to impose income taxes to the federal

government by using the federal income tax code’s definition of a corporation’s taxable

income, which limited the amount of capital losses a corporation could take against its

income to $2,000. We ruled that there was no such unlawful delegation. Although the

appellant in that case had also raised a Uniformity Clause challenge, we cursorily

[J-3-2017] - 28

dismissed it with minimal analysis. 27 A.2d at 64. Indeed, we did not cite to or discuss

Cope’s Estate or any of its progeny.

We also reject the Department’s argument that a different uniformity analysis is,

as a general matter, appropriate when analyzing whether corporate taxes comport with

the Uniformity Clause. The Department bases this contention on our Court’s

recognition in Amidon that the underlying purpose of corporate income tax deductions

and personal income tax deductions is fundamentally different in nature, as corporate

tax deductions are all directly related to the costs of the corporation incurred in

performing its primary function of generating income and profit, whereas personal

deductions cover a wide panoply of life activities, many of which are wholly unrelated to

the production of income. Amidon, 279 A.2d at 63. While our Court has recognized

critical differences between the corporate and personal tax codes, this recognition

should not be interpreted as an endorsement of a wholly separate uniformity analysis

for corporate and personal taxes. The Uniformity Clause, and our caselaw interpreting

it, is equally applicable to both types of taxes. See Saulsbury (the language of the

Uniformity Clause “must necessarily be construed to include . . . all other kinds of tax.”);

American Stores Company v. Boardman, 6 A.2d 826, 829 (Pa. 1939) (holding that the

nature of the tax imposed “makes no difference in determining its uniformity under [the

Uniformity Clause] of the Pennsylvania Constitution”).

We, therefore, affirm the Commonwealth Court’s decision that the NLC is

unconstitutional as applied to Nextel.20

B. Severability

20

Nextel has not previously argued, and does not presently allege, that the NLC is

facially unconstitutional. However, as Judge Pellegrini noted in his dissent below, the

distinction in this case is arguably a meaningless one, given that our decision has

precedential value in future challenges to similar statutes.

[J-3-2017] - 29

Our conclusion that the NLC is unconstitutional as applied to Nextel does not end

the matter. Section 1925 of the SCA` requires that a severability analysis be

undertaken whenever a statute has been invalidated as the result of an as-applied

constitutional challenge. See 1 Pa.C.S. § 1925 (requiring courts, in the event that “any

provision of any statute or the application thereof to any person or circumstance is held

invalid” to determine if the void provision may be severed from the remaining valid

portions of the statute (emphasis added)); Commonwealth v. Qu'eed Batts, 163 A.3d

410, 441 (Pa. 2017) (noting that a severability analysis is required if a provision of a

statute is invalidated “as applied to any situation or person.”). Consequently, since we

have determined that the NLC, as written, is unconstitutional as applied to Nextel, due

to its inclusion of the $3 million flat deduction, we must determine whether this portion of

the NLC is severable from its remaining provisions.

The Department argues the NLC, like any other deduction or exemption, was

established as a matter of legislative grace, and, thus, can be taken away at any time.

The Department highlights the legislative history of the NLC, proffering that its purpose

was to encourage companies such as Nextel to make investments in new enterprises

and technologies by allowing them to deduct the initial heavy costs of those investments

in years in which they were more profitable. However, the Department points out that

this same legislative history shows that our legislature reacted to the deleterious effects

on the state budget of the costs of this deduction and that, in response, the General

Assembly first eliminated it entirely in 1991, and then, when it reinstated it, included

limits or “caps” on the amount of the deduction, which have been in place ever since.

According to the Department, the inclusion of such caps evidences the legislature’s

recognition that the state budget “could not sustain an unlimited deduction.”

Department Brief at 26. The Department contends that the Commonwealth Court

[J-3-2017] - 30

ignored the legislative intent to cap this deduction when it deemed the remedy for its

finding that the NLC is unconstitutional to be the allowance of an unlimited net loss

deduction for all corporations. The Department asserts that Judge Pellegrini’s

severability analysis in his concurring and dissenting opinion below, in which he would

strike the $3 million flat deduction limit but leave intact the 12.5% deduction limit, which

would then be equally available to all corporations, was an application of well settled

legal principles governing severability, and the Department maintains that our Court

should follow suit and adopt this particular remedy.

Nextel responds by contending that the only proper remedy, procedurally, is the

removal of the net loss limitation for Nextel in 2007, placing it in the same position as

the other 19,303 taxpayers which paid no taxes at all. The only alternative, in Nextel’s

view, would be to apply the 12.5% limitation to the other taxpayers who paid no tax, and

to assess them for the amount of tax owed on the remainder of their taxable income

after they take the 12.5% deduction; however, Nextel recognizes this is not possible

since there is a three-year statute of limitations under which the Department may order

an additional assessment, and this time period expired in 2011 — three years from the

last possible date for a corporate taxpayer to file a return for tax year 2007.21 Nextel

contends that the only remedy for a Uniformity Clause violation is to grant the

disfavored taxpayer relief by refunding all the taxes it paid under the unconstitutional

statute; any lesser remedy it contends would have “a chilling effect” on taxpayers who

wish to make such challenges. Nextel Brief at 34. In support, Nextel cites the cases

relied upon by the Commonwealth Court majority, Molycorp, Iowa-Des Moines National

21

According to the Department, it has not granted any waiver of this statute of

limitations and is aware of no taxpayer which took the net loss deduction in 2007 that is

still subject to assessment. Commonwealth’s Response to Nextel’s Interrogatories,

6/27/14, at 7 (R.R. at 128a).

[J-3-2017] - 31

Bank, and Tredyffrin-Easttown School District, reasoning that it overpaid its taxes

because of the Uniformity Clause violation and, thus, like the litigants in those cases, is

entitled to the same remedy — a full refund of the excess amount of taxes paid.

Nextel further argues that the General Assembly would not have adopted the

NLC without the $3 million flat deduction since it would deny the 19,000 plus “small

businesses an important deduction, resulting in a significant burden on them.” Id. at 40.

Hence, Nextel maintains that the General Assembly, given a choice between this

outcome and having no cap on the deduction at all, would have chosen the latter option

as that would be beneficial to small businesses. In support, Nextel notes that the

legislature eliminated net loss deduction caps entirely from 1981 to 1990, and that,

when it reimposed the cap, it has always allowed small corporations to deduct the

entirety of their losses for each tax year.22

As a general matter, “[t]he public policy of this Commonwealth favors

severability.” PPG Industries v. Commonwealth Board of Finance and Revenue, 790

A.2d 261, 267 (Pa. 2001). Section 1925 of the SCA23 furnishes the specific guiding

22

Amici, the Council on State Taxation; the Institute for Professionals in Taxation; the

Pennsylvania Business Council; the Greater Philadelphia Chamber of Commerce; the

Greater Pittsburgh Chamber of Commerce; and the Pennsylvania Chamber of Business

and Industry, have endorsed the Commonwealth Court’s remedy of eliminating the cap

on net loss deductions entirely for 2007, and thereby awarding Nextel a refund of all

taxes it paid that year. Amici aver that it is preferable as a matter of policy to allow

every corporate taxpayer to fully deduct all of their net losses in 2007, as such a remedy

provides uniformity and would make Pennsylvania’s business climate competitive with

other states that impose no cap on this deduction. Amici contend that the alternative,

striking the $3 million flat cap and leaving the 12.5% cap, would result in a broad tax

increase for small businesses who have relied on the flat cap to eliminate their tax

burden.

23

This section provides:

§ 1925. Constitutional construction of statutes

The provisions of every statute shall be severable. If any

provision of any statute or the application thereof to any

person or circumstance is held invalid, the remainder of the

(continued…)

[J-3-2017] - 32

principles for our severability analysis. By its terms, Section 1925 creates a general

presumption of severability for every statute, subject to two exceptions:

(1) if the valid provisions are so essentially and inseparably

connected with, and so depend upon, the void provision or

application, that it cannot be presumed the General

Assembly would have enacted the remaining valid provisions

without the void one, or (2) if the remaining valid provisions,

standing alone, are incomplete and incapable of being

executed in accordance with the legislative intent.

Robinson Township v. Commonwealth, 147 A.3d 536, 559 (Pa. 2016). In determining

whether either of these two exceptions are applicable to a particular statute, legislative

intent is our Court's guiding consideration. Id.; see also Saulsbury, 196 A.2d at 667 (“In

determining the severability of a statute . . . the legislative intent is of primary

significance.”). The “touchstone” for determining legislative intent in this regard is to

answer the question of whether, after severing the unconstitutional provisions of a

statute, “the legislature [would] have preferred what is left of its statute to no statute at

all.” D.P. v. G.J.P., 146 A.3d 204, 216 (Pa. 2016).

Having determined that the NLC is unconstitutional as written because of its

inclusion of the $3 million flat deduction, we perceive three available options: (1) sever

the flat $3 million deduction from the remainder of the NLC; (2) sever both the $3 million

(…continued)

statute, and the application of such provision to other

persons or circumstances, shall not be affected thereby,

unless the court finds that the valid provisions of the statute

are so essentially and inseparably connected with, and so

depend upon, the void provision or application, that it cannot

be presumed the General Assembly would have enacted the

remaining valid provisions without the void one; or unless the

court finds that the remaining valid provisions, standing

alone, are incomplete and are incapable of being executed

in accordance with the legislative intent.

1 Pa.C.S. § 1925.

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and 12.5% deduction caps and allow corporations to claim an unlimited net loss — the

remedy chosen by the Commonwealth Court majority; or (3) strike down the entire NLC

and, thus, disallow any net loss carryover. Our task, therefore, is to determine which of

these actions would be most consistent with the legislature’s intent in enacting the NLC.

An examination of the legislative history of this provision is therefore necessary to

ascertain that intent. See, e.g., Robinson Township, (legislative history indicated that

the paramount intent of the General Assembly was to have PUC exercise enforcement

authority over uniform statewide siting requirements for oil and gas wells in

municipalities, and, absent those uniform requirements, the legislature would not have

intended the PUC to possess such power). Our independent review of the legislative

history of the various incarnations of the net loss carryover provision as it has existed in

Pennsylvania law yields the conclusion that the General Assembly has, over time,

employed different approaches to the allowance and scope of this deduction.

Prior to 1980, the Pennsylvania Revenue Code permitted no such deduction. Act

195 of 198024 introduced this deduction into the Revenue Code for the first time to, in

the words of its proponents, assist new “high technology” businesses that were focused

on the rapid development of new products, as well as to assist existing construction and

farming enterprises which had been harmed by a recent recession. House Legislative

Journal, at 2579, Remarks by Representative Pott (November 18, 1980). From its

inception, and for the next 11 years, the amount of this deduction was uncapped.

However, as a result of another recession which severely impacted the state’s

budgetary health, this deduction was wholly eliminated by Act 22 of 199125 as part of a

broader effort to raise revenue. Senate Legislative Journal, at 2318, Remarks by

24

Act of December 8, 1980, P.L. 1117, No. 195, § 2.

25

Act of August 4, 1991, P.L. 97, No. 22, § 16.

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Senator Mellow (June 14, 1994). Then the legislature reinstated the deduction three

years later, see Act 48 of 1994;26 the reinstated version, however, which was the

product of significant compromise and negotiations, included a dollar cap of $500,000

on the deduction for all corporate taxpayers. Id. Thereafter, for the next twelve years,

subsequent versions of this deduction enacted by the General Assembly steadily

increased the amount of the deduction’s cap, such that by tax year 2006 it stood at $2

million. See 72 P.S. § 7401 (effective 12/23/03-7/6/05) (repealed). In 2006, the NLC

was enacted, which was the legislature’s first utilization of this type of alternative cap

structure which combined a flat dollar cap with a percentage cap. At present, for tax

year 2015 and beyond, the cap stands at the greater of $5 million or 30% of a

corporation’s taxable income. Id. § 7401(3)4.(c)(1)(A)(VI).

This legislative history establishes that the General Assembly first granted the

deduction without any cap at all, but abandoned this approach based on its

determination that such an uncapped deduction had significant deleterious

consequences for our Commonwealth’s fiscal health. However, our legislature

perceived that the deduction provided some public benefit by encouraging investment in

the development of new technologies, as well as the acquisition of the physical

infrastructure necessary to implement those technologies. Thus, the legislature

reintroduced the deduction in 1994, but attempted to avert the excessive drain on the

public fisc the prior unlimited deduction had caused by imposing a cap on the amount of

this deduction which a corporation could take in a given tax year, and the legislature has

steadfastly maintained this cap in various forms for the last 23 years. See Majority

Caucus Brief at 2-4 (discussing evolving history of corporate net loss carryover

deduction and highlighting that, since its reinstitution in 1994, it “has contained a dollar

26

Act of June 16, 1994, P.L. 279, No. 48, § 10,

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cap of some stripe”). Thus, the overall structure of the NLC reflects the legislature’s

intent to balance the twin policy objectives of encouraging investment (by allowing

corporations to deduct some of the losses they sustain when making such investments

against their future revenues), and ensuring that the Commonwealth’s financial health is

maintained (through the capping of the amount of this deduction).

Consequently, of the aforementioned three options available to us enumerated

supra, we determine that the legislature’s intent to have the NLC jointly further both of

these policy objectives can best be effectuated by severing from the NLC the $3 million

flat deduction. By striking this provision, all corporations for the tax year 2007 would be

limited to taking a net loss carryover deduction of 12.5% of their taxable income for that

year. Thus, each corporation will be entitled to avail itself of a net loss carryover

deduction, as the legislature intended, but such deduction will be equally available to all

corporations during that year, no matter what their taxable income. This fulfills the

central tenet of the Uniformity Clause that the tax burden be borne equally by the class

of taxpayers subject to paying it, inasmuch as it assures that all corporations will equally

share in the obligation to pay corporate net income tax for tax year 2007.27

By contrast, we find the Commonwealth Court’s chosen remedy, striking all caps

in the NLC, contravenes the legislature’s intent to limit this deduction. In order to avoid

a repeat of the budgetary damage caused by the unlimited net loss deduction which

was in effect from 1980-1991, the legislature has, since the reinstatement of this

deduction in 1994, consistently required that it be capped. To remove all caps and

27

The Revenue Department has indicated that it is not seeking the right to make

additional assessments against any other taxpayer beyond the period of the statute of

limitations, Department Reply Brief at 12 n.4, and our decision today does not confer

such a right upon it.

[J-3-2017] - 36

allow unlimited net loss deductions would be clearly contrary to the wishes of the

General Assembly.

Alternatively, if we were to strike the NLC in its entirety, it would eliminate all net

loss deductions for corporations in tax year 2007, which, ironically, would leave Nextel

owing more corporate taxes than it paid. This is also contrary to the General

Assembly’s intent to promote investment by allowing every corporation doing business

in Pennsylvania an opportunity to benefit from this deduction.

Accordingly, we sever only the $3 million flat deduction from the NLC. As a

result, Nextel is not entitled to have its 2007 tax assessment forgiven as, even with the

offending provision of the NLC stricken, it is subject to the same tax liability for tax year

2007 as previously assessed by the Department. It is for this reason that Nextel is also

not entitled to the relief granted the taxpayers in Molycorp, Iowa-Des Moines National

Bank, and Tredyffrin-Easttown School District. Those cases did not involve a

constitutional challenge to the structure of a taxing statute; rather, they all involved

discriminatory application of an otherwise valid taxing statute to the parties by the taxing

authority, and, thus, the only suitable remedy for such discrimination was to make whole

the taxpayer who was overcharged through a refund of the overpaid taxes. Here, under

the NLC, as severed, there was no overpayment of corporate income taxes by Nextel,

as it owes exactly what the Revenue Department previously assessed.

Additionally, we reject Nextel’s argument that failure to reward its challenge with

a refund will somehow chill the bringing of future such actions to contest the

constitutionality of taxing statutes. As our Court has noted previously, in dismissing a

similar argument, “there is always an incentive, in the avoidance of liability for payment

of taxes or fees in the future, to challenge the validity of a statute.” Oz Gas v. Warren

Area School District, 938 A.2d 275, 284 (Pa. 2007) (quoting American Trucking

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Association v. McNulty, 596 A.2d 784, 790 (Pa. 1991)). Because Nextel is not entitled

to a refund under the NLC, as severed, we reverse that portion of the Commonwealth

Court order directing the Department to refund Nextel $3,938,220.

Order of the Commonwealth Court is affirmed in part and reversed in part.

Jurisdiction is relinquished.

Chief Justice Saylor and Justices Donohue, Dougherty, Wecht and Mundy join

the opinion.

Justice Baer files a concurring opinion in which Justices Donohue and Wecht

join.

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