Pennsylvania Supreme Court Issues Decision on NOL Cap

On October 18, 2017, the Supreme Court of Pennsylvania issued its decision in the case of Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania Department of Revenue.  At issue was whether or not the Commonwealth’s statutory cap on the amount of net loss carryover (“NLC”) that could be utilized in a given tax year violated the Uniformity Clause of the Pennsylvania Constitution.

For taxable years beginning after December 31, 2006, Pennsylvania imposed a percentage of taxable income cap on the amount of NLC that a taxpayer could utilize to reduce its taxable income, in addition to a fixed dollar amount cap.  Nextel argued that the fixed dollar amount cap violated the Commonwealth’s Uniformity Clause because it created two classes of taxpayers and treated them differently based on their levels of taxable income: one class consisting of taxpayers with taxable income less than $3 million (for the 2007 through 2013 tax years) that could effectively reduce their taxable income to zero provided they had sufficient NLC available, and a second class with taxable income in excess of $3 million that would be required to pay some amount of corporate net income tax because the amount of NLC available could not reduce their taxable income to zero.

The Supreme Court agreed with and decided in favor of the taxpayer, holding that the NLC is unconstitutional as applied to Nextel.  It is uncertain as to whether or not the Court ultimately found the fixed dollar amount cap to be unconstitutional in all instances, or if all taxpayers could rely up the Court’s decision.  Similarly, taxpayers that previously benefited from the fixed dollar amount cap are faced with uncertainty as to how the Department will respond.

Subsequent to the Nextel decision, Governor Wolf signed into law H.B. 542 on October 30, 2017.  The new law increases the percentage of taxable income cap to 35% in 2018 and 40% in 2019 and thereafter, and also removes the fixed dollar amount cap.

Please contact a member of our State and Local Tax team if you would like to discuss the applicability of the Nextel decision to your specific situation.