On October 18, 2017, the Pennsylvania Supreme Court issued its decision in Nextel Communications of the Mid-Atlantic, Inc. v. Pennsylvania Department of Revenue, in which the court held that the state’s flat $3 million cap on net operating loss carryforwards violates the state constitution’s Uniformity Clause. Key considerations from the case include:

  • The $3 million cap granted a “de facto” exemption to taxpayers with taxable income of $3 million or less, while taxpayers with taxable income of greater than $3 million could not exempt their entire income from tax.
  • While the court struck the $3 million cap, it retained the alternative cap on net operating loss carryforwards of 12.5% of taxable income, which the lower court had also struck.
  • In the court’s view, leaving the percentage cap intact cures the Uniformity Clause violation by treating all taxpayers equally, and ensures that large taxpayers with taxable incomes over $3 million do not bear a disproportionately large tax burden.

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