By Zachary Atkins and Andrew Appleby
The Pennsylvania Supreme Court held that treating a merger between two in-state banks differently than a merger between an in-state bank and an out-of-state bank did not violate the Uniformity Clause of the Pennsylvania Constitution. If two in-state banks merged, Pennsylvania law formerly required the combination of the banks’ book values and deductions for purposes of calculating a six-year moving average used to determine the tax base for Bank Shares Tax purposes. For calendar years prior to January 1, 2014, this “combination” provision applied only to mergers between in-state banks. First Union Nat’l Bank v. Commonwealth, 867 A.2d 711, 716 (Pa. Commw. Ct.), exceptions dismissed, 885 A.2d 112 (Pa. Commw. Ct. 2005), aff’d, 901 A.2d 981 (Pa. 2006). The taxpayer, an in-state bank that merged with another in-state bank, claimed that the combination provision violated the Uniformity Clause by favoring mergers with out-of-state banks over mergers with in-state banks. Since the combination provision did not apply to mergers with out-of-state banks, the pre-merger book values and deductions of an out-of-state bank would not be combined with pre-merger book values and deductions of the surviving in-state bank. Thus, all else being equal, the six-year average share value of an in-state bank that merged with an out-of-state bank was lower than the six-year average share value of an in-state bank that merged with another in-state bank. The Pennsylvania Supreme Court held that this differential tax treatment did not violate the Uniformity Clause. The court reasoned that a merger between an in-state bank and an out-of-state bank brings previously untaxed assets into the Commonwealth’s taxing jurisdiction for the first time and “enriches the public coffers,” whereas a merger between two in-state banks does not. This distinction was sufficient for the court to conclude that the two scenarios were materially different and that the differential tax treatment did not violate the Pennsylvania Constitution. A law change effective January 1, 2014, made significant changes to the Bank Shares Tax, including adopting a reporting and payment standard based on whether a bank is “doing business” in the state and replacing the six-year moving average calculation with a one-year valuation formula. Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011, 2013 WL 6823061 (Pa. Dec. 27, 2013).