Pennsylvania Tax Developments: Fall 2024

I. Legislative Updates

1. H.B. 2541: On August 21, 2024, Rep. Dave Madsen introduced a bill that would create tax incentives for the redevelopment of underused and deteriorating churches, hospitals, and schools. Under the bill, local governments could offer a real estate tax exemption for redevelopment costs.
   1. A similar bill, H.B. 1799, was passed by the PA House of Representatives and aids municipalities in redeveloping former shopping malls.
2. SB 654: On July 11, 2024, Governor Shapiro signed SB 654, which doubles the NOL limitation that can be used to offset PA taxes. The bill provides for a gradual increase in the amount of state net income that can be offset by an NOL from 40% of net income to 80%. The bill gradually increases the NOL deduction limitation from 40% of taxable income to 80%for NOLs incurred in a tax year beginning after 12/31/2024. However, the 40% limitation still applies to NOLs generated prior to 1/1/2025.

II. Select Administrative and Case Updates

Montgomery v. Commonwealth of Pennsylvania (No. 336 F.R. 2020) (April 23, 2024) (sales tax)

1. A Pennsylvania taxpayer sought a refund of sales tax it paid on the purchase of Perrier, a brand of carbonated mineral water, and argued that it should exempt from sales tax. The central issue in the case revolved around whether Perrier, a brand of carbonated mineral water, should be classified as a “soft drink” under Pennsylvania’s Tax Reform Code and, therefore, be subject to sales tax. The resolution of this issue hinged on the interpretation of the relevant statutory provisions, specifically how “soft drink” and “carbonated water” are defined within the Code.
2. Under PA’s Tax Code, a “soft drink” is defined as a non-alcoholic beverage that is carbonated, excluding beverages that contain milk or milk substitutes and those marketed as a food substitute or nutritional supplement (72 P.S. §7201(a)). Additionally, Pennsylvania regulations under 61 Pa. Code §31.28 include “carbonated water” in the definition of a “soft drink,” making it subject to sales tax.
3. The Taxpayer argued that Perrier, as a natural mineral water, should be exempt from sales tax under the Code. Her reasoning was that the definition of “soft drink” under the Coad is overly broad and does not account for beverages like Perrier, which are carbonated but not manufactured or processed in the same way as typical soft drinks like soda. She continued that the law is aimed at sugary beverages and not intended to tax all carbonated beverages.
4. The Commonwealth Court of Pennsylvania examined how Perrier should be classified for tax purposes – either as “water” and exempt from sales tax under Section 204(24) of the Code, or as “carbonated water” and therefore taxable under Section 204(29)(i) as a “soft drink.” After examining the facts surrounding the production process of Perrier, the court found that while Perrier originates from mineral water, it undergoes a process that strips its natural carbonation and reintroduces carbonic gas in a manner akin to the production of a soft drink like Coca-Cola. The court based its findings on:
   1. Perrier’s production process: natural carbonation was removed and later reintroduced artificially at bottling;
   2. Statutory interpretation: the Code does not distinguish between natural and artificial carbonation in water or soft drinks; and
   3. Based on the Code, any water with carbonation, whether natural or processed, falls within “carbonated water,” which is taxable.
5. The Commonwealth Court concluded that Perrier qualifies as “carbonated water” under the Code and subject to sales tax as a soft drink.

National Hockey League vs. Pittsburgh, 308 A.3d 318 (Pa. Commw. Ct. 2024)

1. At issue was whether the City of Pittsburgh’s (“Pittsburgh”) attempt to charge a Facility Tax to nonresident athletes and entertainers performing in the city to subject them to a local tax rate equal to that of residents violates the Uniformity Clause of the Pennsylvania Constitution, which requires that the method used to compute tax not create arbitrary, unjust, or discriminatory results.
2. Pittsburgh’s Facility Tax is authorized under Section 304 of the Local Tax Enabling Act, which allows second-class cities with publicly funded sports venues to impose a Facility Tax on nonresidents that earn income from athletic events or performances at the venues. The tax can be imposed up to 3% of the income earned from these activities. Such nonresidents that pay the Facility Tax are exempt from Pittsburgh’s earned income tax.
3. Pittsburgh enacted the Facility Tax and imposed it on nonresidents earning income from activities at select athletic and performance venues. Residents are exempt from the Facility Tax but pay the 1% earned income tax and a 2% school tax. The different leagues (NFL, MLB, and NHL) calculated the tax differently, but generally applied to any exhibition, preseason, regular season, and postseason games (NFL also included practice sessions). The Facility Tax for nonresident entertainers is based on income that is attributable to a performance held in a city facility.
4. The Plaintiffs, all active or retired professional athletes, filed a declaratory action against the City of Pittsburgh concerning the constitutionality of the Facility Tax, arguing that it violated the U.S. Constitution’s Dormant Commerce Clause. The Court of Common Pleas granted summary judgment in favor of the Plaintiff’s. The City of Pittsburgh appealed, arguing, that the Facility Tax does not violate the Pennsylvania Constitution’s Uniformity Clause. Pittsburgh argued that the Facility Tax, which applies a 3% tax on nonresidents who earn income at sports facilities, was uniform, because it equalized the overall tax burden between residents and nonresidents. Specifically, residents pay a 1% earned income tax and a 2% school tax, while nonresidents pay the 3% Facility Tax.
5. The Appellee’s argued the Facility Tax unfairly discriminates against nonresidents, violating the Uniformity Clause because: (i) nonresidents cannot offset the Facility Tax with any other taxes they pay, while residents’ school taxes serve different purposes; (ii) the tax only targets nonresident athletes, not other nonresident taxpayers; and (iii) different methods of calculating the tax for NFL, NHL, and MLB players lead to inconsistencies in tax burdens.
6. The Commonwealth Court ruled that the Facility Tax violated the Uniformity Clause because the city failed to justify the distinction between residents and nonresidents. The court determined that nonresidents were unfairly burdened by the tax, as it was not equivalent to the tax structure imposed on residents. Moreover, attempts to “fix” the tax by expanding it to residents would violate legislative intent, as the enabling law only authorized the tax on nonresidents. Consequently, the court affirmed the trial court’s ruling to strike down the tax.
7. The Supreme Court of Pennsylvania granted the athletes’ appeal to determine whether the Commonwealth Court incorrectly interpreted the Pennsylvania Uniformity Clause.

September 11, 2024