In a 5-2 decision, the Pennsylvania Supreme Court affirmed the Commonwealth Court’s decision to apply Nextel retroactively, such that the state’s net loss carryover (NLC) $2 million limitation violated the state’s Uniformity Clause regarding the taxpayer’s 2001 tax year. To remedy the violation, the Court struck down the NLC deduction in its entirety for the 2001 tax year.
However, the Court also found that the US Constitution’s Due Process Clause requires “meaningful backward looking relief” to rectify the unconstitutional deprivation of property. Accordingly, to remedy the due process violation, the Court required the state to refund General Motors the tax paid as a result of the NLC deduction cap.
Observation: Both General Motors and Nextel (the taxpayer in a similar 2017 Pennsylvania Supreme Court decision) challenged the state’s NLC limitation. The limitation was found to be unconstitutional in both challenges; however, only General Motors received a refund. There are two primary differences between the two cases. First, Nextel challenged the limitation as it existed in 2007, which allowed for an alternative percentage-based limitation, whereas the 2001 limitation provided for only a flat $2 million limitation. This left the Court in GM with fewer options to remedy the Uniformity Clause violation. The GM refund is predicated on curing a due process violation, which was not addressed in the Nextel decision. Taxpayers with open tax years may want to consider whether due process considerations would support filing refund claims.
The state has the right to request reconsideration from the Pennsylvania Supreme Court. Additionally, the state may also file a petition for review with the US Supreme Court since the case involves a federal due process issue.
If the state exercises both of these options, a final decision may not be rendered until late 2022.